Reasons to be cheerful

The last 12 months proved a year to forget for Gulf economies, their bourses crippled by record losses and their infrastructure ambitions threatened by the oil price collapse. However, as 2009 begins, Arabian Business examines why the region should be well on the path to recovery by this time next year.

Twelve months ago, no one could have predicted the financial carnage that has overshadowed the latter half of 2008: a crisis that has prompted the complete or partial collapse of Wall Street icons including Lehman Brothers, Bear Stearns and AIG, and left the global economy facing its worst recession in almost a century.

The Gulf proved anything but decoupled, its revenues depressed as a result of oil closing out its worst year ever. Crude steadied below $39 on Dec 31, the rapid reversal in the economic climate bringing it crashing down over 60 percent from a record mid-year high of $147.

As we move into 2009, the trillion dollar question on every investor's lips is when we are likely to see the first green shoots of recovery sprout from the scorched earth of Gulf bourses. The short answer is that nobody knows for sure - but it seems that the region is at least better positioned than those US and European economies now facing negative growth.

With attractive bargains to be had across the region's bourses, the financial muscle of Gulf sovereign wealth funds (SWFs), and demand for oil expected to rise, 2009 should be the year in which Gulf economies are able to set themselves on the path to recovery.

"In relative terms, the Middle East is one of the better performers," says Robin Bew, chief economist at the Economist Intelligence Unit (EIU). "While growth will slow very sharply, there are economies around the world that will be shrinking next year and for the most part we don't think that will be the case in the Middle East."

"It's a very difficult question to say when the markets will recover," concedes Nassib Ghobril, head of economic research and analysis at Byblos Bank Group. "I don't think they will recover to the levels of June 2008 anytime soon."

According to Bew, however, predicting the future is particularly difficult as the usual rules of economic policy no longer apply. "The policies we've seen over the last four to five years have come to a screeching halt," he says. "It's an interesting but frightening economic cycle because it's so synchronised. All the world's major economies are turning down at the same time."

Some forecasters warn the full impact of the global economic crisis is still to be felt in the Gulf region, with the downturn capable of sending stocks plummeting further. "First the market has to hit the bottom and we've not seen that here," says Ghobril. "It has to do with confidence and, right now, despite government intervention and stimulus and the recapitalisation of banks, we've still not seen an improvement in risk appetite or confidence. Right now investors are still numb from what's happening."

Faisal Hasan, head of research at Kuwait-based Global Investment House (GIH), sees liquidity seeping into the markets again in the second quarter of 2009 as previously nervous investors, and the region's SWFs, step in from the sidelines to plunder rich pickings amid the turmoil.

"Maybe after the first quarter we will start to see the markets start to come up again. Valuations are looking very attractive and we will see institutional investors entering into the market and expect to see more participation of SWFs in the market," he says. "They can do some really good bargain hunting as there are many blue chip stocks in the region which are a major buy."

In a region where many of the economies are either directly or indirectly dependent on oil revenues, Gulf finance ministers will be quietly hoping the squeeze the financial crisis is putting on crude consumption eases, opening the way for an upturn in price.

However, governments shouldn't expect to be drowning in petrodollars again too soon, with industry experts believing the price of oil will remain low in the first quarter before showing signs of picking up as global demand starts to recover.

"After the first quarter of 2009 we estimate that things will improve and the full price will average around $55 to $60 a barrel, on account of the demand from emerging markets," says Hasan at GIH. "We expect demand for oil to increase, especially from India and China and other emerging markets, and developed markets like the US and UK."

A gloomier outlook comes from Caroline Bain, senior commodities editor at the EIU, who gives a price forecast of $25 a barrel for the first quarter of 2009, before a bounce-back to nearer $40 by the end of the year, as the impact of OPEC production cuts is felt across the globe.

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