Business | Markets
Gulf ambitions scaled back as economic crisis spreads
When the financial crisis hit Wall Street in September, most governments in the Middle East assumed that their economies would remain insulated from the turmoil.
- By Roula Khalaf, Financial Times
- Published: 23:15 November 25, 2008
When the financial crisis hit Wall Street in September, most governments in the Middle East assumed that their economies would remain insulated from the turmoil.
Before long, however, the crisis had widened and the contagion had spread.
Stock markets in the region plummeted and the cost of inter-bank financing soared as international banks withdrew. Foreign investors fled equity markets too, and locals' confidence soured, wiping out half of the MSCI Gulf index's market capitalisation.
With global recession fears gathering, the price of oil, the main driver of the Middle East's economic boom, also went into sharp decline, sinking well below half its July high.
Putting aside their wishful thinking, governments shifted into high gear, with the UAE reacting most aggressively to shield its high-flying economy, particularly Dubai, from the storm.
Governments across the Gulf provided liquidity to the banking sector, guaranteed deposits, and in some cases, as in Kuwait, even intervened (albeit unsuccessfully) to stop a stock market crash.
By mid-November, only one bank in the Gulf had needed to be rescued from collapse, but the mood all over the region had changed.
Tough times
"This is probably the Gulf Cooperation Council's most testing time," says Mushtaq Khan, Citibank analyst, in a recent report, referring to the grouping that includes Saudi Arabia, Qatar, Bahrain, Oman, Kuwait and the UAE.
Headlines about new projects have given way to reports of delays as international sources of financing dry up, and governments are forced to rethink some long-term plans.
The real estate boom that had seen prices rocket in the Gulf is also ending, with residential prices in Dubai falling in October for the first time since 2002.
Although banks in the region produced largely rosy results for the first nine months of the year, with only a few forced to take writedowns from investments in the US subprime mortgage market, analysts predict a more sober outlook next year, particularly for institutions heavily exposed to the real estate sector.
Still, most economists expect the region to suffer less than the western world. While the US and Europe sink into recession, economists say countries in the Middle East and North Africa will have positive but slower growth.
Slower growth
"It's still a good place to be," argues Mukhtar Hussain, HSBC's chief executive officer of global banking and markets for the region.
"They [the economies of the region] were going at 100 miles an hour. Now they will be going at 50 miles an hour when everyone else is going at 10 miles an hour."
Farouk Soussa, head of sovereign ratings at Standard and Poor's, says Gulf states' diversification strategies still make good economic sense.
"No one is immune to current conditions so we'll see a slower beat in the next couple of years but the long-term viability of the Gulf as a powerhouse for growth is very solid. These countries are playing catch-up and they are wealthy."
Gulf states, owners of about 45 per cent of the world's proven oil reserves, have accumulated huge budget surpluses over the past four years, which should allow them to continue funding their economic expansion. They have also, for the most part, used oil windfalls prudently, paying down internal debt (as in Saudi Arabia) and saving for the days when oil prices fall.
True, equity portfolios of Middle Eastern sovereign wealth funds have taken a hit as international markets have tumbled, but they were estimated to hold as much as $1.5 trillion (Dh5.5 trillion) in assets at the beginning of this year.
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