Oil price plunge halts GCC boom

by Claire Ferris-LayThis

GCC: Six-year economic boom hits skids after oil price plunge. (GETTY IMAGES)The global economic downturn coupled with the plunge in oil prices has ended the six-year GCC economic boom which sanctioned a surge in government and private spending, according to a report released on Monday...

Tighter liquidity, a drop in asset prices and a steep fall in crude oil, will make 2009 a challenging year for the GCC, said a key economic research report issued by Gulf Finance House (GFH).

“The GCC has now firmly joined the last group of countries to be impacted by the global financial crisis,” said Dr Ala’a Al-Yousuf, chief economist at GFH.

“Against the backdrop of distressed global financial markets and an extremely weak outlook for the global economy, the GCC macro picture for 2009 is going to be disappointing compared to recent years,” he said.

Oil prices will remain key to GCC governments’ ability to spend their way out of a severe slowdown, said the report.

“While the GCC would be able to manage the challenges of lower oil prices, the region cannot stave off the effects of a protracted, global financial turmoil. Nevertheless, in a worse case scenario, the GCC’s substantial public and private wealth will enable it to cope better than many large economies,” said Dr Al-Yousuf.

Average aggregate GCC crude oil production levels are expected to post their largest annual percentage decline in at least a decade, while hydrocarbons export revenues are likely to fall by about 60 percent to $200 billion, said the report.

So, after several years of posting massive surpluses, the combined current accounts of the GCC states will nearly balance in 2009 said the report. Nominal GDP will shrink by about 30 percent, with the possibility of an even bigger fall in aggregate GCC national income in case of a severe cut in government expenditures.

Qatar’s economy is likely to outperform other GCC states in terms of structural resilience and growth momentum in the year ahead, due in large part to a doubling of its liquefied natural gas (LNG) export capacity during this year, noted the report.

The report added that any prospect of GCC states opting out of the fixed peg to the US dollar has firmly receded. Kuwait may also revert back to its peg to unclog its domestic money markets, noted the report.

“The recent experiment of changing a dollar-pegged FX regime has neither helped support the policy bias towards fighting inflation nor is it demonstrating support for the policy shift towards promoting growth,” said Hany Genena, senior economist at GFH.

www.arabianbusiness.com

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