2009 AAFF Summit to Build on Strengths of Emerging Economies Both Asia and the Arab world are strong performers in comparison with Europe and the US in the aftermath of the financial crisis
As the US and European financial markets take a severe beating, Arab and Asian economies, especially the rich Arab Gulf States, seem relatively immune from the fallout of the global credit crunch at least for now.
The Arab Asian Financial Forum believes that the Gulf Cooperation Council members have massed huge fortunes when the prices of oil in the international market were trading more than $140 a barrel.
AAFF added that the massive cash that were mainly derived from oil have created a temporary buffer against any unforeseen worldwide economic recession.
However, questions were raised by many experts and analysts about the state of the GCC economies if the prices of oil continued to slide below $70 a barrel.
One analyst said that oil-dependent Arab States in the Gulf will be hurt as the global economy slides into recession, but a huge windfall from oil sales will help them minimize the impact.
“Undoubtedly, the Gulf economies will be affected but the impact here will be much less than in the industrial world,” he added.
“The main impact will be a drop in demand for oil, and consequently revenues. But the huge windfall accumulated over the past few years will help the Gulf weather global recession,” the analyst said.
The GCC (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates), is estimated to have sold oil worth around two trillion dollars over the past six years.
GCC governments had foreign assets of $1.8 trillion at the end of last year and the tally is expected to top two trillion dollars by the end of 2008, the Institute of International Finance (IIF) said.
Faisal Hasan, head of economic research at Kuwait’s Global Investment House, said GCC states have calculated oil price in their budget at less than $50 a barrel.
“Despite the sharp drop in oil prices, GCC states will end up this year with a good surplus. I don’t think any of the mega projects underway will be affected,” Hasan said.
However, another expert said projects still in the pipeline are likely to be affected by delays.
The region’s stock markets have been severely affected by the global crisis, last month plunging 20 percent, or close to $200 billion in value, in a matter of days.
The impact of the financial meltdown on Gulf economies could spread much wider and deeper, the Dubai-based Gulf Research Center (GRC) said in a report.
Financing for Gulf mega projects will become scarce and its cost higher, the GRE said, adding that some Gulf banks, especially in the UAE are exposed to the crisis.
“The region’s markets for large-scale project finance and real estate will be particularly affected by this credit crunch,” GRC said. It cited finance problems already facing some Gulf projects, especially in the real estate sector.
The oil windfall spurred economic development, and tens of billions of dollars are earmarked for major energy projects and similar amounts in the real estate sector, besides huge investments in industry and tourism. Such projects and investment opportunities both in the Arab World and in Asia will be presented at the 4th Annual Summit of the Arab Asian Financial Forum.
Besides mega energy projects and oil powerhouse Saudi Arabia is building six economic cities with over $100 billion of investment.
Saudi Jadwa Investments said projects planned or underway in Saudi Arabia are worth close to $400 billion, some 44 percent of which in real estate and another 40 percent in energy.
UAE, Qatar and Kuwait are also undertaking major development projects. The IIF has estimated domestic investments in the Gulf will reach one trillion dollars over the next few years.
The vast plans have resulted in a massive rise in public spending which has been cited as one of the main reasons for soaring inflation.
Another Leading Saudi economist said he does not see any problem with liquidity as “basically, the region is a net exporter of capital.” “Mega industrial projects (mostly government-funded) are not exposed to the outside world and the impact on them will be minimal,” he added.
The economist expects Gulf investors to repatriate some of their foreign investments to Gulf markets, similar to the aftermath of the September 11, 2001 attacks on the United States.
Analysts said the main impact of the crisis is likely to be centred on privately-owned businesses, which have undertaken huge projects during the past few years.
“The main impact will be on the real estate sector, mainly in UAE and Qatar because they have been growing at a fast pace. Petrochemicals and other industries will remain safe,” he said said.
However, the GRC said petrochemicals and aluminium exports, the main Gulf products other than oil, will be also affected by the global downturn.
The estimated $2.5 trillion value of foreign investments held by Gulf governments and the private sector is also expected to be reduced by a slump in asset prices worldwide.
Some economists say Gulf investments may have already lost hundreds of billions of dollars of their book value.
Meanwhile, the financial market was monitoring the measures of the Central Bank in Lebanon to prevent any panic in the local market.
Central Bank governor Riad Salameh said that lower oil and commodity prices had helped reduce Lebanon’s rate of inflation to 11.8 percent in the year to September from 14 percent in the year to July.
“We are seeing it heading lower, decelerating,” he said, attributing the lower inflation rate to the risk of “recession worldwide and with the drop in commodity prices and oil prices”.
Salameh said he expected Lebanon’s 2009 economic growth to match an IMF estimate of 6 percent real growth for 2008. “We think we can achieve the same rate next year if there is political stability,” he said.
“The Lebanese economy is linked more to security and politics than to worldwide economic developments,” he said. “It is basically an economy based on services and consumption.”
Political stability has improved and security risks have decreased in Lebanon since May when a Qatari-mediated agreement ended the worst political conflict since the 1975-90 civil war.
Salameh reiterated that Lebanon’s financial sector, one of the pillars of the economy, had not been affected by the global financial crisis thanks to regulations which have included restrictions preventing exposure to structured products. “None of the banks in Lebanon are carrying subprime paper,” he said. “The bank, every individual bank in this country, has no problem. Profits are going to increase by around 12 percent this year compared to last year,” he said. “We do not anticipate any negative impact in the future.”
Depositors had signalled confidence in the sector, whose two biggest institutions are BLOM Bank and Bank Audi, by transferring unusually large amounts in the last week of September, Salameh said.
“We saw an increase in deposits of $500 million which is a big amount for Lebanon in one week,” he said. Lebanese bank deposits were expected to increase by an average 12 percent for the year, he added.
“This peak means that some are looking at the sector as being safe and putting their money there,” he said.
“Those who work with the Lebanese banks are mainly Lebanese expatriates,” he said.
Recently, the World Bank named Lebanon as one of 28 countries in Africa, Asia and the Middle East facing financial strains due to high food and fuel costs and the credit crisis.
Lebanon has a gross public debt of some $44.5 billion, much of it incurred from the costs of rebuilding from the civil war. Equivalent to some 170 percent of gross domestic product, half the debt is held in foreign currency.