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Oiling the meltdown
Published in Al-Ahram Weekly on 27 - 11 - 2008

It is oil that protects the Gulf countries from sliding into a worldwide recession. Sherine Abdel-Razek reports on the slippery road ahead
Less than a year ago, the world was scrutinising and even rejecting investments by the Gulf countries' sovereign wealth funds (SWF) into the West. Last month, by contrast, US and European governments and major companies flirted with sheikhs, emirs and senior officials from the Gulf, in a desperate bid for them to inject more money into their own ailing budgets.
Leaders from the UK to the US have arrived in the Gulf in recent weeks asking oil exporters to pour more cash into their firms and the International Monetary Fund (IMF), which only weeks ago was busy imposing transparency conditions on SWFs. Large investment banks are fishing for opportunities in the region, with Merrill Lynch saying last month it wanted to open an office in Kuwait in addition to its branch in Dubai. Banks such as Morgan Stanley, Deutsche Bank and Credit Suisse are already running or expanding operations in the Gulf. And it doesn't end there. Investment bankers from Wall Street to London are sending their impressive CVs to companies in the Gulf as Western banks make major layoffs to survive the worst financial crisis in 80 years.
This change of heart is justified by the so far oblivious resilience of the oil-rich Gulf economies to the repercussions of the global financial meltdown. But are they really that resilient, and if so, how long can they keep up their stamina? On the face of it, the Gulf countries are better placed than most countries in the world, thanks to the petrodollar surpluses they were able to accumulate through the oil industry's more bullish days. The price of oil skyrocketed to $150 through the year ending July. And knowing that Saudi Arabia, along with the United Arab Emirates, Kuwait and Qatar, account for more than half of OPEC's official production quota of 28.8 million barrels per day (BPD), one can imagine how huge their oil revenues were. However, with oil contributing 80 per cent of their public revenues, the 60 per cent decline in oil prices to reach $55 per barrel earlier this week draws many question marks on the claimed resilience of these economies.
The IMF's quarterly economic Outlook, released at the end of September, expected that most Gulf Cooperation Council (GCC) members would achieve moderate growth next year, with the exception of Qatar with its GDP rising from 16.8 per cent this year to a whooping 21.4 per cent next year, thanks to gas exports. However, these optimistic expectations are outdated as the outlook was prepared before the end of September and is based on an average oil price of $107.25 a barrel for 2008 and $100.5 a barrel for 2009. Oil prices are now moving between $55 and $58. The oil revenues of the six Gulf countries -- namely Saudi Arabia, Kuwait, United Arab of Emirates, Qatar and Bahrain -- reached $700 billion in 2007.
A less optimistic report was the GCC Economic and Strategy Report for the fourth quarter of 2008, released by leading Islamic investment bank Gulf Finance House. It reads that together with the declining oil prices, foreign capital outflows reached $7 billion since the beginning of 2008 in the case of Dubai -- and a retreat in the demand on industrial and building materials in the construction industry, the second main driver of the economy after oil, will slow down the growth of GCC members.
Simon Williams, head of research for emerging markets department of HSBC Dubai, seconds the report, predicting that the average growth rate of the countries in question would decline to under five per cent in 2009, from seven to 7.2 per cent through 2008, provided that oil prices stay put around $60 per barrel, otherwise the rate will be much lower.
Adding to the gravity of the situation are the steep declines in all bourses since the beginning of the year on the back of the break- up of the subprime crisis. The total value of shares listed on stock markets in the Gulf region plummeted by $250 billion in October as indices sank by an average of 25 per cent amid the global financial meltdown. A mild upturn at the end of the month did little to counteract the earlier rout and markets in the oil-rich states ended October worth $720 billion, an enormous $400 billion less than at the start of the year.
What will help mitigate the impact of the crisis, according to the report, is if governments of the region continue their robust spending. According to a Reuters dispatch on the infrastructure spending in the region, there are more than $2 trillion worth of expansion projects under construction in the world's biggest oil-exporting region.
All in all analysts see the crisis as a mixed blessing. Top economists participating in a Reuters summit held in the first week of November agreed that global financial turmoil "could weed out property and bourse speculators looking for a quick buck and help curb spiralling inflation." Inflation in the region has hit the double digits and property prices in Dubai were red hot before the crisis, with residential property prices soaring by 42 per cent in the first quarter alone.
With most Gulf states maintaining their currency pegged to the US dollar, Gulf states and private investors with cash positions have realised gains from the greenback's recent jumps against major international currencies. However, this will not last long, according to Williams, who believes that the dollar will be losing ground against most currencies soon.
Rich with cash, Gulf investors find in the meltdown an opportunity to make good bargains. For example, Kuwait's Noor Financial Investment is looking into equity buys in Asia and the Middle East to take advantage of lower assets prices and wants to set up a $1 billion opportunity fund or special situations funds, to invest in stocks whose current market prices no longer represent the real value and long-term potential of the firms.


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