By Amy Glass and Dylan Bowman
UPDATE 2: EFG-Hermes also says it does not expect credit crunch to spill over into region.
High oil prices will help shield the Gulf from the fallout of the US financial crisis and liquidity constraints in the region will not impact economic growth, EFG-Hermes said on Tuesday.
The Egyptian investment bank said in a research note that while the region is not isolated from recent global financial turmoil, high oil prices will provide some protection.
“While the region will not be isolated from the deteriorating global financial and economic conditions, the GCC will have some protection: the oil price will remain historically high despite its recent sharp weakening," EFG-Hermes said.
Global Financial markets were shaken to their core last week after US investment bank Lehman Brothers filed for bankruptcy protection and rival Merrill Lynch agreed to be taken over. Gulf stock markets tumbled on the news as foreign investors pulled out money from the region.
EFG-Hermes also said it did not expect the credit crunch to spill over into the Gulf despite the recent rise in interbank lending rates, predicting that central banks will step in if money supply becomes a problem.
“We forecast a slight moderation in credit and money supply growth rates in H2 2008 and in 2009 from peak levels - although these will still be high - following recent increases in interbank rates. Interbank rates are still below 2007 levels, and funding rates are still attractive," it said.
“We believe liquidity constraints will not hamper the investment programme or growth outlook. Regional central banks will intervene to maintain liquidity in the banking sector if it becomes too constrained.”
Banks in the Gulf have been suffering from a liquidity shortage caused in part by an exodus of foreign money after Gulf states said they would keep their dollar pegs, quashing market bets their currencies could be revalued to fight inflation.
The UAE central bank said on Monday it is to pump 50 billion dirhams ($13.6 billion) into the banking sector to prevent the credit crunch that has hit global markets spreading, and bankers have called on other Gulf states to follow suit.
EFG-Hermes forecast that 2008 will be a record year for GCC economies thanks to soaring oil prices, despite the sharp fall from their peak of $147 a barrel in July.
EFG-Hermes said it is "positive that the region’s macroeconomic outlook will remain solid going forward despite the global economic slowdown".
The bank said the key risk to its outlook for Gulf economies was a “substantially sharper-than-expected” fall in oil prices, but said as long as prices remained above $55 a barrel Gulf budgets will remain in surplus.
"...we emphasize that the weighted budget breakeven oil price for the region is around $55 per barrel for Brent crude, with higher levels resulting in the budgets remaining in surplus," it said.
“We believe that as long as Brent crude remains above $60-$65 per barrel, government spending will remain expansionary and the investment programs will stay on track."