DUBAI // Gulf economies, hit by the financial crisis and falling oil prices, will lag a nascent global rebound in the short term, hampered by worries about credit quality amid a long summer lull in business activity, analysts said on Thursday. Gulf states did not fall as deeply into recession as other regions, buffered by earnings from energy exports and big sovereign savings, and were expected to rebound more quickly.
But a debt implosion at two Saudi Arabian conglomerates, Saad Group and Ahmad Hamad Algosaibi Bros, has sent shock waves through the region, with widespread concern about the extent of the impact. "I'm seeing strong signs of stability in the Gulf, but not yet of recovery," Simon Williams, regional economist at HSBC said. "Rising oil prices are helping, as is renewed access to global capital markets.
"But the region still has to digest the excesses of the 2003-08 boom." The Gulf enjoyed a credit boom alongside the oil boom that saw crude soar six-fold between 2002 and 2008, peaking at $147 a barrel in July 2008 before dropping to around $32 by December. The rebound in oil prices, hovering at $71 on Thursday, is seen driving the region's recovery in the longer term. Hopes the recession may be easing its grip has propelled global stock markets to their best performance in months in recent weeks. Signs of an incipient recovery emerging in US data have been bolstered by European banking results.
Merrill Lynch emerging markets analyst Turker Hamzaoglu said a pickup in other asset prices, particularly in the battered real estate sector, were also on the horizon for the Gulf. But he said the "low visibility on authorities' policy reaction to the unfolding restructuring in the region" made investors loath to hop on the recovery bandwagon for now. Investors are awaiting more information on several initiatives in the region, including the planned second tranche of a $20 billion Dubai government bond as well as news on the extent of the Saad/Algosaibi damage to the banking sector.
Regional banks have hiked provisions against their exposure to the firms, with Standard & Poor's ratings agency estimating that 30 Gulf Arab banks had a combined exposure of $9.6 billion. "The total scale of the problem is unclear and ... the uncertainty this has created in the market is significant," said Reinhard Cluse, senior economist at UBS Investment Bank in London. "Transparency is limited so the risk assessment is limited," he said.
Adding to the sluggish pace of recovery in the short term, the traditional summer quiet when liquidity levels ease up and many expatriate Gulf workers travel abroad is compounded this year by the start of Ramadan in August. "A good test is going to be to see after the summer holiday, whether people are coming back," Hamzaoglu said. *Reuters