Links to Europe may hurt Gulf as euro falls

Europe's debt crisis could spell trouble for Gulf countries given their tight links with the global economy and hefty exports of oil, tourism and investment to the continent, economists said after the euro's slide to a four-year low against the dollar

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Europe's debt crisis could spell trouble for Gulf countries given their tight links with the global economy and hefty exports of oil, tourism and investment to the continent, economists said after the euro's slide to a four-year low against the dollar. Crude oil also dipped below US$70 a barrel for the first time in three months as concerns about Europe's sovereign debt crisis mounted.

The euro traded at $1.22 yesterday, its lowest point since April 2006, before recovering slightly. The currency has fallen by 12 per cent in the past week alone as European leaders and the IMF cobble together a US$1 trillion (Dh3.67tn) bailout for Greece and other deeply indebted European countries. The German chancellor Angela Merkel, who is visiting the Gulf next week to discuss energy security, climate change and the financial crisis, said on Sunday that the $1tn package was no more than a temporary fix that would give the embattled region time to implement much-needed political and structural reforms.

"We've done no more than buy time for ourselves to clear up the differences in competitiveness and in budget deficits of individual euro zone countries," Mrs Merkel said. All Gulf currencies except Kuwait's are pegged at fixed rates to the dollar. That means moves in the dollar's strength directly affect the dirham and most other regional currencies. "The simple answer is it's bad," said Giyas Gokkent, an economist at the National Bank of Abu Dhabi. "One direct reason is when the dollar is strong, asset and commodity prices tend to fall, and you've seen the oil price come down from the mid-$80s about 10 days ago. So that's a direct hit on oil revenues and the value of exports."

The principal effect of a fluctuation in exchange rates like the one seen with the euro in recent weeks is on the balance of trade, economists say. A stronger dollar, and by extension a stronger dirham, means European goods and services become cheaper for people in dollar-based economies. That cheapness tends to encourage imports from Europe. A weaker euro also means Europeans must pay more for goods and services produced in dollar economies, including the UAE and most of the oil-exporting Gulf countries. That tends to discourage exports, though the decline in oil prices to about $72 per barrel has somewhat offset the fall in the amount of oil a euro can buy.

While direct trade between the Gulf and Europe was "pretty modest", Simon Williams, HSBC's chief economist for the Middle East, said the global financial crisis had demonstrated that the region's countries were not immune to external economic shocks. The bigger question, he said, was whether Europe's woes would lead to wider economic turmoil that could envelop the Gulf. "I don't think it's going to have a major bearing on export growth here," he said. "I'm sure that there will be significant local holdings of euro-denominated assets falling in value, but ultimately the real issue is that the problems in the euro zone raise the possibility of a double-dip global recession."

Tourism, another of the UAE's main non-oil exports to Europe, could also suffer under a protracted decline in the currency's value, according to Tim Fox, an economist at Emirates NBD. With renewed strains in Europe, economists also say the continent's banks may be more reluctant to lend to companies in the Gulf as they focus on ridding themselves of the spectre of bad debt back home. That could make raising money from international lenders to finance large property and infrastructure projects more difficult. Fear over the European crisis may also push global investors away from the Gulf's emerging markets and towards such safe assets as US treasuries and gold, economists say.

afitch@thenational.ae