The countries of the Gulf will be affected by the global slowdown, but their economies remain fundamentally sound after record oil revenues this year. That is the finding of a recent study by the Institute of International Finance (IIF), a Washington-based association of financial institutions, which forecasts that GCC economies will experience a sharp drop in oil revenues next year and a decline in growth to 3.6 per cent, down from 5.7 per cent this year.
The institute forecasts an average oil price per barrel of US$56 next year, with a break-even price of $36 for the UAE. "While there is no doubt that the GCC economies are being shaken by global economic developments, they are relatively well prepared to manage the difficulties," said Charles Dallara, the managing director of the IIF. "They are likely to continue to experience relatively solid growth and further substantial domestic development."
The report noted that real non-hydrocarbon growth continued to outpace hydrocarbon growth in every GCC country except Qatar. The total value of the projects in progress or at the planning stage for the next five years is estimated at about $1.9 trillion (Dh7 trillion), with infrastructure accounting for 65 per cent of the total. This is followed by oil and gas at 16 per cent, petrochemicals at 8 per cent and other sectors at 11 per cent. Together, the UAE and Saudi Arabia account for almost 70 per cent of the total value of the GCC project pipeline.
"We expect the GCC external and fiscal surpluses to narrow substantially in 2009 from their record levels in 2008," said George Abed, the director of the Africa-Middle East Department at the IIF. "Soaring oil prices through July 2008 boosted hydrocarbon revenues, contributing to large fiscal and external surpluses, despite strong import and fiscal expansion. In terms of foreign assets of governments and banking institutions, we estimate that for the combined GCC these will reach $1.47 trillion by the end of this year."
The report notes that during this period of financial turmoil and the slowdown of the global economy, lower oil prices will be inevitable. "GCC authorities need to take policy measures to address the expected growth slowdown, financial stress in certain segments of the banking sector and the sharp correction in the property market that has set in," said Mr Abed. The slump in equities and property prices in the US and Europe may have reduced the value of GCC sovereign wealth funds, according to Yusuke Horiguchi, the chief economist at the IIF.
"While GCC growth is slowing somewhat, there is a probable silver lining given that these economies have been overheating with growth above potential and inflation rising rapidly," said Mr Abed. "We expect a notable slowdown of credit growth - from levels that were excessive - during the second half of 2008 and more visibly in 2009. This, combined with the recent strengthening of the dollar and some further decline in commodity prices, would lower average inflation from a peak of 12 per cent in 2008 to about 8 per cent in 2009."
The report added that a major correction in the real estate market was taking place in some GCC countries. House prices in the region had soared in tandem with domestic credit growth, but have begun to decline recently. This correction could cause stress in some localities in the GCC and in some segments of the market, for example, home loan companies, although this does not pose a risk to overall financial stability.
"The region's transformation in recent years - especially greater diversification and the cushion built up in the form of large official reserves and foreign assets - should help it to absorb severe shocks," said Mr Horiguchi. "We remain confident that the impact on banks will be manageable, although some smaller institutions with significant consumer and real estate loans outstanding might face some stress. Banks in the region with higher government participation are likely to be supported by the ample volume of public resources available."