Oil-dependent Arab states will be hurt as the global economy slides into recession, but a huge windfall accumulated over the past few years from oil sales will help them minimise the impact. Undoubtedly, the Gulf economies will be affected, but the impact will be much less than in the industrial world. The main impact will be a drop in demand for oil, and consequently revenues.
The six-nation Gulf Cooperation Council (GCC), grouping Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE), is estimated to have sold oil worth around $3 trillion over the past six years.
The GCC governments had foreign assets of $1.8 trillion at the end of last year. This is expected to top $2 trillion by the end of 2008. Despite the sharp drop in oil prices, GCC states will end up this year with a good surplus. However, projects still in the pipeline are likely to be affected by delays.
The region’s stock markets have been severely affected by the global crisis, plunging 20 per cent, or close to $200 billion in value. The impact of the global financial meltdown on Gulf economies could spread much wider and deeper. Financing for Gulf mega-projects will become scarce and its cost higher. The region’s markets for large-scale project finance and real estate will be particularly affected by this credit crunch.
Some Gulf projects are already facing finance problems. The main impact will be on the real estate sector, mainly in the UAE and Qatar because they have been growing at a fast pace. Petrochemicals and other industries will remain safe, but petrochemicals and aluminum exports, the main Gulf products other than oil, will also be affected. The estimated $2.5 trillion value of foreign investments held by Gulf governments and the private sector is also expected to be reduced by a slump in asset prices worldwide. Some economists say Gulf investments may have already lost hundreds of billions of dollars of their book value.
Finance ministers and central bankers from Gulf on the other hand expect their economies to continue to grow despite the global financial crisis and a sharp drop in oil prices. The officials underscored the “strength and solvency” of the financial sector and stressed that the region can weather any impact from the global financial crisis. They have voiced satisfaction over measures taken to deal with any impact from the world economic crisis and expressed readiness to take any additional measures.
Although the region is not much dependent on the international economy, Middle Eastern agriculture and manufacturing, the main providers of job opportunities, have still become less competitive because of the increasing pressure to export goods to the global markets at lower prices. At the same time, inflation is running above 10 per cent in much of the region due to rising commodity prices. Inflation is also being driven upward because the currencies of many of the Gulf countries are pegged to the US dollar.
A prolonged slowdown in the international economy will also cause remittances, job creation, tourism and foreign aid to decline and unemployment to increase, particularly among the youth. The economic downturn will also slow the flow of educated Arab workers into jobs in the oil sector. Before the global financial crisis, the region benefited whether oil prices were high or low, since the region has both oil producers and consumers. But Middle East producers and consumers are now likely to suffer from either higher or lower oil prices as the financial crisis spreads because of the sustained drop in foreign investment coming into the region.
The 2009 GDP forecast for GCC as a region has been revised from 6.2 per cent to 4.5 per cent in 2009 due to the weakening global backdrop and lower oil prices. In Saudi Arabia, the world’s largest oil producer, oil output is likely to decrease in 2009, pulling down GDP growth to 4 per cent. Inflation will continue to rise in 2008 to 9.8 per cent and start coming down in 2009 to 9 per cent. In the UAE, the GCC’s most diversified and open economy, credit crunch and global downturn will hit open economy and growth will slow down in 2009 to 4.5 per cent. Inflation is likely to increase this year to 11.8 per cent before coming down next year to 10.5 per cent.
Qatar, with both its oil and non-oil sectors growing at double-digit speed, will remain one of the fastest-growing markets in 2008 with 14.5 per cent real GDP growth. However, supply bottlenecks and deeply negative policy rates will push inflation higher in 2008 to 15.6 per cent. Qatar’s investment driven, capital-intensive growth will face headwinds in 2009.
In Oman, with declining oil output, the economy is being propelled by services and gas-based industries in 2008 with expected GDP growth of 6.8 per cent. Despite a $15 billion investment plan for the oil and gas sectors, the outlook is less than rosy with high recovery costs and limited reserves. Inflation at 12 per cent is pushed up by food and rent prices, along with negative real interest rates that boost bank lending.
The Kuwaiti macro story continues to be driven by oil. The lack of political determination for diversification has caused Kuwait to lag most of its GCC neighbors so far with GDP growth forecast of 5.6 percent in 2008. Inflation as elsewhere continues to climb to 9.7 percent in 2008. In Bahrain, the non-oil sector remains the main driver of the resource-poor economy. With limited petrodollars, the budget surplus should stay modest at 7 percent of GDP by regional standards, while inflation should continue to rise in 2008 to 5.5 percent, the region’s lowest.
Most Asian economies are in a better position to weather the global financial storm due to significant foreign reserves, and painful lessons gleaned from the 1997 crisis. Growth in the Emerging Asia region is projected to moderate to 7.7 per cent in 2008 and 7 per cent in 2009, from 9.25 per cent last year, according to the World Economic Outlook report released by the International Monetary Fund.
Asia’s projected positive but slower growth will be propelled by the regional twin engines of China and India. Both countries are expected to experience lower demand on weaker exports but should continue to be supported by strong private consumption.
Growth in China eased to 10.5 per cent (year-on-year) in the first half of 2008, 2.5 per cent slower than the same period last year, partly due to slackening exports. However, activity continued to be supported by steady investment growth and accelerating consumption. India is not immune from the global liquidity crunch. India is likely to register GDP growth of 7.9 per cent in 2008, which may slip to 6.9 per cent in 2009, compared to 9.3 per cent last year. Indian growth in the second quarter slipped to 7.9 per cent, having risen by 8.8 per cent in the preceding quarter, on the back of weakening investment while private consumption and export growth have held up well.
IMF projects that the ongoing financial turmoil will have minimal impact on India, which is still largely a closed economy. The relatively high 7 per cent growth forecast reflects India’s strong internal growth dynamics from rapid productive growth and from its process of integration into the global economy that is still continuing. Emerging Asia can anticipate more weakness ahead in response to slowing demand from advanced economies and growing strains in regional financial markets.
The two biggest newly industrialised economies, South Korea and Taiwan, will see growth moderate, with South Korea’s economy expanding 4.1 per cent this year and 3.5 per cent in 2009. Taiwan will see 3.8 per cent growth in 2008 and 2.5 per cent next year. In the newly industrialized Asian economies (NIEs) and the Association of Southeast Asian Nations (ASEAN) economies, activity has also been decelerating. Domestic demand has softened, as rising food and fuel prices have started to weigh on consumption, while declining profit margins and weakening demand have prompted firms to scale back their investment plans.
Asia’s financial system is little affected by the US sub-prime mortgage problems that have triggered a global crisis. The impact on the financial sector in Asia is limited. Still, Asia’s economic growth will lose steam because of the slowdown in the US and Europe, which are main export markets for Asia.
The Asian Development Bank’s projection that overall growth rate in Asia would be 1.5-2.0 percentage points slower this year, but that is not necessarily a problem, as many Asian economies have “overheated.”
According to ADB’s latest outlook, Asia overall will continue to post robust growth, while slashing growth projections for the global economy and predicting that the United States would continue losing traction. But the growth among emerging Asian economies is forecast to moderate to 7.7 per cent in 2008 and 7.1 per cent in 2009, from 9.3 per cent in 2007. Weakening external demand is likely to weigh on exports, but, in some cases, the impact may be mitigated by still-loose macroeconomic policies and currency depreciation.
The Director General of the United Nation’s Conference on Trade and Development has warned the global downturn will continue into 2009. Economists at the UN’s Economic and Social Commission for Asia and the Pacific (UNESCAP) says Asia’s export sector, a key driver of most economies, will be hit by a downturn in the European and US economies. But a downturn will be eased somewhat by the strength in domestic consumption in Asia, with most governments holding substantial foreign exchange reserves.