Arab states better placed second-time around to weather the brewing financial storm
Meeting early this month, Gulf finance ministers insisted
their economies could cope comfortably with the looming global slump. During
the world's last economic crisis, their optimism proved mistaken - but this
time, they are on firmer ground.
Big programmes of government spending, launched for
political as well as economic reasons, are likely to support growth. There is
less room for asset price bubbles to burst than there was in the last crisis
three years ago. And in some ways, financial systems are stronger.
"Countries in the region were caught off guard" by
the 2008-2009 global crisis, said Fabio Scacciavillani, chief economist at Oman
Investment Fund. "This time they're better prepared - crisis management
capabilities have improved."
The 2008-2009 slump struck at the heart of the economies of Saudi
Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain and Oman. A 75 percent
slide in Brent oil prices over six months, as far as $36 a barrel, pushed
growth off a cliff.
Gross domestic product shrank in Kuwait and the UAE during
2009; even Saudi Arabia only narrowly escaped recession, growing just 0.6
percent that year. Stock markets tumbled more than 50 percent, and plunging
real estate prices forced Dubai World, one of the Dubai government's flagship
holding companies, into pledging to restructure $25bn of debt.
Now, some investors are starting to hedge against the risk
of a repeat performance in the Gulf as the global economic outlook darkens. The
cost of insuring the debt of Gulf states rose last week with credit default
swaps for Dubai climbing to their highest level in at least six months.
Economies have clearly started to slow considerably in the
Gulf. The SABB HSBC Saudi Arabia Purchasing Managers' Index, which measures
activity in the country's manufacturing and services sectors, hit an 18-month
low in August; the index for the UAE reached a 15-month low. Air freight volume
at Dubai International Airport dropped 7.9 percent from a year earlier in
August, partly because of economic uncertainty in the United States and Europe,
the airport operator said.
This time, however, major Gulf economies are entering the
crisis in a different position. Fiscal policy is more expansionary in many
states; Saudi Arabia announced in February and March that it would spend an
extra $130bn, presumably over several years, on housing, bonuses for state
employees, job creation and other projects.
Such policies were originally adopted to contain the threat
of political unrest during Arab Spring protests around the Middle East. But
they have turned out to be perfectly timed economically, coming on stream just
as global growth slows.
Meanwhile, rich Gulf economies have over the past couple of
years fashioned an informal fiscal safety net for the region; Saudi Arabia and
other wealthy neighbours have pledged billions of dollars to improve housing
and social welfare in Bahrain and Oman, and Abu Dhabi has given emergency
financing to Dubai.
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The safety net is limited in size and depends on political
whim. But a principle of mutual assistance has been established that was less
clear at the start of the last crisis.
Another plunge in the oil price could make it more difficult
for Gulf states to spend their way out of trouble - as the price drops, to
below $104 at the end of last week, markets are fixated on the minimum levels
which countries need to balance their budgets. For Saudi Arabia, analysts
estimate that level has risen to around $90 because of the growth in state
But even a temporary oil price slide to the level hit during
the last crisis would not necessarily spell disaster. Farouk Soussa, Middle
East chief economist for Citi, noted the Saudi government could if it chose
maintain spending by drawing on $280bn of fiscal reserves. That sum is
equivalent to over a year of total government expenditure. In addition, it
could finance part of any budget deficit in domestic capital markets.
"If they decided they needed to, they could finance
deficits for years. There is plenty of liquidity domestically," Soussa
Since Saudi Arabia effectively controls the supply of oil, a
fundamental change in its long-term economic outlook is only likely if there is
a big demand shock, Soussa said. Such a shock would probably have to be a
technological change, he added - a recession in the developed world would not
be serious enough.
Fitch Ratings reached a similar conclusion when it affirmed
Abu Dhabi's AA debt ratings last week.
"The 2008-2009 global financial crisis was a severe
stress test for Abu Dhabi, but one which left its balance sheet largely undented.
Any future stress would have to have harsher consequences than this to trigger
negative rating action," said senior Fitch analyst Richard Fox.
A major blow to the Gulf during the last crisis was a plunge
of equity and real estate prices, culminating in the discovery of a gaping hole
in the balance sheet of corporate Dubai. This triggered capital flight from
some economies in the region, putting commercial banks' liquidity under
Repairing Dubai companies' balance sheets is expected to
take much of this decade, and a new global crisis would complicate that
process, perhaps shutting the firms out of issuing debt in jittery
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But analysts think the financial support of Abu Dhabi would
help to compensate for any lack of access to market funding, through the medium
term at least. And with asset price bubbles in the Gulf already deflated, there
is much less risk of damaging capital outflows.
That helps to explain why Dubai and other Gulf stock markets
have outperformed many other markets over the last several months as the global
picture has worsened. Dubai stocks are down 14 percent from this year's peak;
global stocks, as measured by the MSCI All-Country index, are about 23 percent
The Oman fund's Scacciavillani noted that authorities had
more tools to protect financial systems than they did at the start of the last
crisis. Gulf central banks have developed new facilities to keep money markets
liquid, and countries have at least started to develop deposit insurance
systems. The regional bond market has become more active and liquid, giving
commercial banks a new channel to obtain funds.
In its latest economic outlook published last week, the
International Monetary Fund said the Gulf oil exporters needed to reform and
diversify their economies, and predicted slower growth next year for many of
them. But it does not expect the slowdown to be nearly as serious as the
2008-2009 slump; Saudi Arabia is expected to slow to 3.6 percent in 2012 from
6.5 percent this year.
The IMF initially underestimated the seriousness of the last
crisis, and it may well be doing so for this crisis. But its forecasts
recognise the role of government spending in maintaining growth in the Gulf.
"We are part of the global economy; we cannot escape
the effects of a slowdown," said the chief economist of a major regional
bank. "But nobody is talking of recessions in the Gulf."