How Gulf states are faring in global turmoil
Apr 16 2009 By Ian Gomes
The emerging economies of the Arabian Gulf states witnessed stellar growth over the last few years when oil prices were riding high.
Some of their sovereign wealth funds made headline acquisitions in Europe and the USA, and western bankers sought and received financial support when the financial turmoil began eroding their balance sheets. The demand for expatriate skills was never higher.
Today, the Gulf economies are suffering alongside other countries across the globe. The sharp drop in the oil price caused by reduced global demand has had a major impact on their GDPs.
The credit crunch has dried up financing affecting daily business and infrastructure spending. New projects are on hold and some existing ones, particularly in the building sector, have been mothballed. In some states, expatriates are being sent home and global players are rethinking their plans for the region.
Saudi Arabia, the largest of the Gulf economies with a population of 25million, is expected to run its first current account deficit in ten years. It is also seeking foreign investment for its ambitious programme to build six economic cities – in the current market conditions this may be optimistic.
Nevertheless, the country has significant reserves built up over the years and it is expected to draw on them to keep investment programmes alive.
The UAE has also witnessed a sharp contraction with the emirate of Dubai, whose growth was partly fuelled by cheap credit, being particularly affected. Dubai is a non-oil economy where the construction sector was dominant and developers embarked on new projects far in excess of foreseeable needs.
The housing bubble has now burst and real estate prices have dropped by 30 per cent. The UAE Central Bank has extended Dubai a $10 billion line of credit to enable it to meet its financial obligations.
Its neighbour, the emirate of Abu Dhabi, is in good financial health but is also dusting off plans to part privatise state assets in the non-oil sector. There are also plans to introduce indirect taxation in the next couple of years.
Despite the general gloom, there is optimism that the Gulf states collectively will see positive growth as government spending drives domestic demand. Inflationary pressures are also easing and, as the US currency recovers, there will be less pressure on the local currency pegs to the US dollar.
Oil prices would have to drop below $40 per barrel for a sustained period for a reassessment of the business case.
* Ian Gomes is chairman of KPMG’s High Growth Markets in the UK.
