Gulf Economies

The global financial crisis has brought an end to a prolonged oil boom in the Gulf and reversed years of strong economic performance and massive fiscal surpluses. While the economies of the GCC countries are not expected to shrink in 2009, they will slow down sharply in real terms and their budgets and current accounts could record minimal surpluses or even deficits. Economic growth of Gulf Arab oil exporters is set to slow by almost half to 3.5 per cent this year as the Middle East earns about $300 billion less from crude oil exports, according to the International Monetary Fund.

Saudi Arabia and five of its neighbours in the world’s biggest oil-exporting region are likely to post fiscal deficits amounting to 3.1 per cent of gross domestic product, compared with surpluses of 22.8 per cent of GDP in 2008. Real GDP growth in 2009 for the Gulf -- including the United Arab Emirates, Kuwait, Qatar, Oman and Bahrain -- would fall from 6.8 per cent last year. The global slowdown will clearly have a significant impact on growth through lower exports, tourism, remittances and higher cost of credit.

Gulf inflation is set to fall to 6.3 in 2009 from 10.6 per cent in 2008, while government revenues from oil could drop to $257 billion this year from $460 billion last. Oil prices have tumbled by more than two thirds since hitting record levels above $147 a barrel last July. The entire GCC experienced a liquidity-fuelled boom in recent years. The problem was the central banks did not have enough tools to drain liquidity out of the system. Middle East oil exporters -- which also include Algeria, Iran, Iraq, Libya, Sudan and Yemen -- are likely to turn current account deficits amounting to $30 billion in 2009 after posting $400 billion in surpluses last year.

Many regional countries are willing to turn fiscal deficits this year to help their economies weather the crisis. Saudi Arabia, the UAE, Oman, Bahrain, Algeria, Iraq and Iran would run budget deficits if oil prices average $50 a barrel. The slump in oil prices has slowed an explosive phase of regional growth, battered investor confidence and strained budgets. By continuing to spend, oil-exporting countries are contributing substantially to supporting global demand and are acting as stabilisers during the global downturn. For most countries, this deterioration is from a position of significant strength, and thus can comfortably be sustained by the large stock of reserves that these economies have built up.

The meeting of Arab foreign ministers and economic ministers held in mid- January stressed that the global economic crisis made Arab countries suffer a great loss. There was a preliminary estimate that the total losses amounted to $2.5 trillion. As the capital chain and trade chain blocked, there were about 60% of the construction projects only in the Gulf region being forced to delay. The continuing significant downturn in international oil prices make the income falls short of the expenditure for Arab oil producers, thus, the regional investments have been impacted and dragged down the entire Arab economic growth.

It also calls on Arab countries to work together to tackle the impact of the global financial crisis on the region and to take part in global efforts to restore stability to the financial system. It urges financial institutions to facilitate credit. Western governments have also asked cash-rich Arab oil exporters to contribute to efforts to ease the crisis. Arab central bankers and finance ministers meeting also urged their governments to keep state spending high to shore up domestic economies amid a collapse in oil prices and recession in the industrialised world. The global credit crisis offers potential opportunities for growth to GCC companies that respond early and positively.

Gulf governments’ investment funds have shed billions of dollars despite record oil prices because of losses in stocks and other investments. The six members of the GCC saw their holdings shrink by $82 billion in 2008, to $1.2tn. According to credit rating agency Moody’s, Dubai’s corporate refinancing requirements in 2009 are expected to hit $15billion, Gulf News has cited. Total refinancing requirements for the Gulf Cooperation Council is estimated at $33bn while UAE’s total refinancing requirements are approximately $19 billion.

UAE

The UAE is ranked 31st in the world in terms of global competitiveness, out of 134 countries and is the second highest ranked economy in the Arabian Gulf after the Kingdom of Saudi Arabia, according to the World Economic Forum’s Global Competitiveness Report for 2008/09. In terms of government surplus, the UAE ranks 3rd in the world and 2nd in the region after Kuwait. According to a study by EFG Hermes, UAE will attain a growth rate of 3.1 per cent in 2009. However, this will not curb a ‘necessary correction’ in its real estate sector.

The UAE emirate of Dubai, which in boom years built itself as the Gulf’s trade and commerce hub, is now facing a sharp property sector downturn that has led to scores of job cuts and concerns that banks’ could suffer from defaults on home loans. Dubai’s economy, which relies on oil for about three to four per cent of GDP, would still grow “slightly less” than 2.5 per cent this year down from about 8 per cent in 2009, according to the Dubai government’s chief economists. Amidst the crisis shaking the global financial system, Abu-Dhabi economy has shown a good deal of resilience coupled with swift government response that was aimed at containing the fallout and allowing the local market to continue its normal course.

Although the worldwide crisis will call for a review of development priorities and the pacing of large projects, the fundamental strength of the Abu Dhabi economy will allow that to happen without disruption of the economic activity or any significant change in the country’s vision and economic objectives. Abu Dhabi will continue its strategy of building a full scale partnership with world leading companies with view of developing an efficient knowledge based economy, world class education and social progress, though investors and home buyers in the UAE may default on payments for properties that have yet to be completed, creating a liability for developers of as much as $25 billion over the next two years.

The governments at the federal and local levels have recognised the impact of the global slowdown on the UAE economy. The UAE economy is expected to grow about three per cent this year. The IMF did not make any specific projection on the economic growth of the UAE and appears comfortable with the growth forecasts of about three per cent made by the government. Dubai’s real GDP growth was more than eight per cent last year. However, sectors such as real estate, construction and tourism have been challenged by the global economic crisis. Despite these challenges, growth will remain in positive territory this year.

At the same time, economists from Standard Chartered Bank and Emirates NBD predict negative growth for UAE for the first time in years. There is a possibility of getting growth below 0% in the first half. Growth could be -0.5 per cent in the first half before rising to one per cent in the second half of 2009. Many Westerners invested in Dubai’s skyrocketing real estate market, buying and reselling homes before building was even complete. But, as the recession took effect, property and financial companies made thousands of workers redundant and banks tightened lending. Construction companies have delayed or cancelled projects and tourism is slowing.

There are increasing signs that the foreigners who once flocked to Dubai are leaving. Dubai’s real estate sector is facing a sharp price correction and hundreds of billions of dollars of construction projects have been cancelled in the United Arab Emirates as a result of the economic slowdown. The UAE finance ministry and central bank have together launched 120 billion dirhams ($32.67 billion) of funding facilities to help banks cope with the crisis. But concerns are mounting about whether Dubai will be able to refinance debts it accumulated to finance expansion projects during a six-year economic boom spurred by high oil prices.

Abu Dhabi’s move this month to inject 16 billion dirhams into five of its banks has also raised questions about whether Dubai could take similar steps to help its banks face growing loan defaults and investment write downs. The cost of insuring Dubai’s debt with credit default swaps (CDS) has gotten more expensive in past months as investors worry the emirate could default on its debts. Dubai’s mostly government-linked issuers will have to refinance about $15 billion in 2009, compared with $5 billion in the rest of the UAE and $15-20 billion in the rest of the Gulf.

Dubai’s population will shrink over the next two years as the troubled real estate and construction sectors cause the number of immigrants to slow and many expatriates to leave. Over half of Dubai’s population is employed in the real estate and construction industries, which are suffering from a lack of financing. This will cause the number of residents in the emirate to fall by eight in 2009 and two per cent in 2010.

Saudi Arabia

Saudi Arabia, which holds the world’s largest oil reserves, is preparing for a tough year ahead, made worse by oil prices unlikely to match their average of $99 a barrel in the past year. The kingdom’s oil revenue is expected to drop by more than half this year to 410 billion riyals, or $109.3 billion, from 1.1 trillion riyals forecast for 2008. The stock market lost 50 per cent of its value last year. The kingdom expects to run its first budget deficit this year, as it boosts spending on infrastructure and social services in an effort to spur growth in the economy.

The most populous Arab country in the Gulf peninsula now wants to hook foreign partners in education, medical research and petroleum-related industries, as part of an effort to provide more jobs for its young population and add to their skills. The current economic rough patch won’t stop calls from other countries for the kingdom to use more of the vast assets it built up during the oil boom of the past decade to help revive the global financial system. It already pulls its weight in some sectors: Saudi Arabia is one of the top three buyers of U.S. sovereign debt.

The Saudi monetary agency is estimated to hold $500 billion in assets overseas. The Kingdom sees no need to borrow to cover a projected budget deficit this year or any deficit next year. The kingdom’s vast reserves would be its “first line of defence” to meet any deficits. There had been a drastic reduction in the public debt to 12 per cent of gross domestic product from over 100 per cent a few years ago. To help broaden the economy away from dependence on crude revenues, Saudi Arabia needs to attract foreign investment.

Low world oil prices were helping to ease the severity of global recession. But they could endanger energy investment. Saudi budget reports indicate that the Saudi industrial sector’s Gross Domestic Product (GDP) has risen to SR 1753 billion, with a growth rate of 22 per cent in 2008, compared to SR 1430 billion in 2007. In addition, Saudi Arabia has successfully reduced its general debt index to GDP rate to SR 237 billion in 2008, despite the damaging effects of the global financial crisis.

Saudi financial experts anticipate a reduction of seven per cent in the inflation of the public sector due to the variance in dollar exchange with other currencies, the decline of some local product prices, especially construction materials, and the decline of oil prices, which in turn leads to reduced transportation and shipping costs, and ultimately the restoration of reasonable pricing standards. High oil prices have made returns of SR 1100 billion against costs of SR 510 billion, reaping net returns of SR 590 billion.

Banks in Saudi Arabia are a shelter in the financial storm that has hit world markets due to the current global economic crisis. The impact of the global economic crisis on the Kingdom’s financial sector will not affect the banks and their liquidity or ability to achieve profit. Saudi Arabia’s budget for 2009 is generous on spending notwithstanding uncertainties related to the global credit crunch. Projected expenditures amount to $126 billion (Dh463 billion), up by 15 per cent versus the originally planned figure for fiscal year 2008.

Figures by the Saudi Arabia Monetary Agency (Sama, the central bank) showed there were no indications yet that the banks in the world’s oil superpower are cutting their foreign assets as there was a slight increase in the second half of 2008. From around SR153 billion (Dh151.5bn) at the end of June 2008, the combined foreign assets of Saudi Arabia’s banks grew to nearly SR161.6 billion at the end of November, according to Sama. Funds due from banks abroad swelled from SR32.3billion to around SR36.8 billion in the same period. But investments abroad fell from SR76.1billion to SR71.1billion.

In contrast, foreign liabilities plunged from around SR134.5 billion to SR121.8 billion in the same period. The decline in foreign liabilities sharply widened Saudi banks’ net foreign assets, which crashed to only SR45 million at the end of September before rebounding to SR39.7 billion at the end of November. The assets of Saudi banks abroad exceed those inside the Kingdom.

While stressing the Kingdom’s strong financial position because of massive petrodollar surpluses over the past few years, most of its sectors had been affected by the crisis and banks suffered most. The impact of the crisis on the Kingdom’s banking sector would be bigger than on other economic sectors as this sector has been dealing with banks and companies that have gone bankrupt or are on the way to bankruptcy.