Business

Monday March 2, 2009

Growth to decelerate

In Perspective - By Baljeet Grewal


The slowdown in Gulf countries could carry a silver lining

THE Gulf Cooperation Council (GCC) countries have been relatively resilient in the face of the present shocks on account of solid fundamentals coupled with financial buffers built up over the years, unlike other emerging economies which have faced sharp growth declines.

Economic growth remained strong in the GCC in 2008. The region continued to expand vigorously at 7.5% in 2008 after a strong performance in 2007. Nominal gross domestic product (GDP) is estimated to rise by about 40% in 2008, largely reflecting the sharp rise in average oil prices in July.

Sharply higher oil revenues underpinned public and private sector investment, leading to growth in expatriate employment, particularly in Qatar and the United Arab Emirates (UAE).

Moving into 2009 and beyond, GCC economies are expected to contract sharply and about 30% in nominal terms. Real GDP growth is expected to slow to 5.5%-6% in 2009, from 7.5% in 2008, due to the weakening global demand and reduced oil production, tighter credit conditions and substantially lower oil prices.

Slowdown in the global economy has sent oil prices tumbling from a peak of US$147 per barrel in July to the US$40 level, casting a shadow over the region and triggering a crash in Gulf real estate.

Even though oil prices have fallen sharply from the highs of the early summer, the record levels reached earlier in 2008 left the Gulf economies with a healthy cushion against the adverse effects of global recession.

The growth in the region continues to be driven by private construction, retail trade and transportation spurred by fiscal stimulus financed by still sizable oil revenues and by improved business environment.

The Middle East still remains the world’s most exciting growth market, and the sudden slowdown provides the region with an opportunity to consolidate its gains of the past few years.

Inflation to Ease – A Silver Lining!

Until mid-2008, the main concern in the GCC was overheating, with headline inflation running as high as 15% in Qatar and the UAE. Factors that have been fuelling inflation in the GCC countries are turning around, most importantly imported inflation which is basically an increase in price levels caused by importing essential products from inflationary economies.

Imported inflation is expected to decrease for two reasons, the US dollar is gaining momentum against major world currencies. The US dollar index (USDX), which tracks the dollar value relative to other major currencies, went up by 87.33 points in mid-November, a gain of more than 11.7% from beginning of September 2008.

Thus, in 2009, most of the GCC countries that had their currencies pegged to the dollar are expected to witness a decrease in non-US imports prices. Second, the decline in commodities will factor into the prices of finished goods.

Depending on the degree of deflation from the exporting countries, finished goods like machinery, textiles and others should experience a fall in prices. Apart from fall in prices of goods and commodities, the rents of dwelling units are also likely to soften in many countries on the back of increased supply.

We expect a notable slowdown in credit growth – from levels that were clearly excessive – in 2009. This, combined with the recent modest strengthening of the dollar and a further decline in commodity prices, is expected to ease off GCC’s inflation in the first half, averaging at 6% in 2009 (2008: 9.1%).

This will not only temper the effects of the decrease in commodity products, but it will re-stimulate consumer spending, which hit a temporary slowdown in 2008. This is important because private consumption has been playing an increasingly important role in stimulating economic activity within the Middle East and North African region, due to the growing middle class.

We believe, if managed skillfully, the slowdown in growth could carry a silver lining as the GCC economies have been overheating with GDP growth above potential and inflation rising rapidly. In a non-financial crisis environment, a moderate slowdown in the GCC would have been welcome.

  • The writer is managing director and vice-chairman of KFH Research Ltd. The company is the research and investment advisory arm of Kuwait Finance House, one of the largest Islamic banks in the world, based in Kuwait.

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