Gulf can cope with US slowdown

Dubai: With oil prices expected to remain firm in the medium term and sectoral diversification continuing, the Gulf Cooperation Council (GCC) countries are in good shape to cope with slower American growth, according to a top global bank official.

"Growth is becoming more balanced between the oil and non oil sectors and potential of growth is higher," said Guy Long-ueville, head of country risk and emerging countries at BNP Paribas, in Dubai yesterday.

"The economic growth should remain sustained with sectoral diversification, though at a slower pace, given the large investment needs in energy and utilities. The current role of Gulf countries as a commercial, mainly tourism, and financial hub will continue to support that growth."

The international environment, he said, is also favourable for GCC economies for 2007 and also 2008. With monetary policies in the United States, European Union and Japan largely accommodative or neutral and monetary expansion outside these three continuing to be structurally strong, he believes both emerging and GCC econ-omies to be in a much better position to cope with when compared to the previous periods of the US recession of early 1990s and later again of 2001 and also the East Asian financial crisis of 1997.

Looking back at the last two years, Longueville pointed out that oil rent has more than doubled from the previous period of 2000-2004, when it was used mainly for restoration of macroeconomic imbalances. Between 2005-2007, it was mainly used for accelerated development, but it also led to asset bubble formation and then a correction.

"Such stock market corrections usually reduce moderately domestic demand and deteriorate banks' assets quality, but the macroeconomic impact was reduced because of limited financing role of the stock markets for banks and corporates in Gulf economies. Most of stock market correction is probably over," he said.

However, medium term challenges remain, he said.

He lists three: improving growth quality in Saudi Arabia by opening up the economy more, and enhancing human capital; acceleration of diversification where oil rent is small or decreasing, such as in Oman and Bahrain; face overheating risks reflected in high inflation in the UAE and Qatar. In fact, real estate, which contributes to the high inflationary pressures, corrections are still expected in some market segments like the residential one in Dubai, Long-ueville said.

Regional political situation is always a factor to be taken into account, he added. "But despite a tense regional situation, domestic political situation remains stable."