$60 oil 'key to GCC economies' amid global crisis

The global financial turmoil is impacting GCC economies on three critical fronts but they will remain strong as long as oil stays above $60 a barrel, an economic research report issued by Bahrain's Gulf Finance House (GFH) has claimed.

Lower crude oil prices, the drying up of foreign capital flows and declining demand for the region’s energy-intensive industrial and building materials will likely put a damper on the fast pace of economic growth seen in the region in recent years.

However, continued robust government spending will help stave off the more severe effects of the global financial crisis as long as oil stays above the $60 per barrel mark, said the GCC Economics and Strategy 4Q08 report.

From the July high of $147 a barrel, the oil price has plummeted but OPEC leaders hope their decision last month for member countries to cut output will help to stabilise the market.

The GCC banking system, in general, remains resilient with the exposure of domestic banks to toxic assets low across most countries of the region, the report added.

“We are reasonably optimistic that GCC economies have weathered the global financial crisis without systemic threats,” said Dr Ala’a Al-Yousuf, chief economist at GFH.

The GCC Economics and Strategy report, which is produced quarterly by the Economic Research Department of GFH, provides an in-depth analysis of the most important global and regional economic developments and their implications for the GCC region.

The GCC has been managing the challenges and the outlook is still positive, the report said.

After several years of very high oil prices that allowed strong government spending growth and a broad-based economic boom, the GCC economies have been among the most resilient in the world.

“Over the next two years, we expect the pace of economic activity to moderate somewhat to about 4-5 percent and inflation should come down,” added Al-Yousuf.

“Barring a protracted fall in oil prices, the six GCC economies will not be exposed to systemic shocks due to solid macro and banking system fundamentals. However, the correction in real estate prices, particularly in the UAE, remains a concern.”

Hany Genena, senior economist at GFH, added: “Despite our baseline scenario of a cyclical slowdown in 2009, GCC economies will remain exceptionally resilient due to sizable accumulation of savings during the bull years.”

“GCC banks are, generally, sound. One year into the global financial crisis, 3Q08 results of the largest GCC banks suggest that these banks continue to be sound and profitable,” he added.

“It is also worth noting that a large share of the banks’ foreign assets, which amount to an estimated $200 billion, is in high quality securities,” said Genena.

In addition, foreign assets of central banks and sovereign wealth funds of the region are estimated at nearly $2 trillion, in case these are needed to support the banking system.