Credit, confidence and corporate distress major challenges for GCC

Slowing credit growth, loss of confidence, corporate distress and weaker global recovery are the major challenges faced by the Gulf economies despite an improved environment, according to an analysis by Dubai Chamber of Commerce & Industry.

“Despite the positive outlook for the GCC economies and their robust fundamentals, some downside risks remain. Slow recovery of the global economy might reduce oil prices and consequently worsen the fiscal and the external balance. Persistence of weak private demand and tight financial conditions might lead to an increase in corporate distress and loss of confidence. Continued slowdown in private credit growth might constrain further loan supply,” Dubai Chamber said.

The study projected real GDP growth of four per cent and 4.6 per cent in 2010 and 2011 following overall GDP growth of less than one per cent in 2009.

In response to rebound in oil prices and oil production levels, GCC countries’ fiscal and external balances are expected to improve significantly during 2010 and 2011. Oil production is expected to increase to 14.7 million barrel per day in 2010 and reaching 15 million barrels a day in 2011. Therefore, GCC current account balance, following surplus of 23.1 per cent of GDP in 2008 fell to 7.1 per cent in 2009 and projected to increase to 11.8 per cent of GDP in 2010 and 12.3 per cent of GDP in 2011.

According to the analysis, this will result in large buildup of net foreign assets of about 110 per cent of GDP in 2010 and 113 per cent in 2011. Again, with the rebound in oil prices and non-oil sector activity, GCC fiscal balances are expected to improve significantly by almost seven percentage points of GDP between 2009 and 2011.

The analysis further revealed that the GCC countries have fiscal space to maintain additional stimulus in 2010 and 2011 that will be capable of strengthening private sector demand. With inflationary pressures remaining subdued, the short-term challenge for the GCC monetary policy is to balance the revival of credit growth while mitigating a potential resurgence of inflationary pressures. Also, with the divergence in the global macroeconomic policy directions, emerging economies including GCC need to reconsider developing domestic resources of growth to sustain economic recovery.

Dubai Chamber said sustaining global recovery seems to oblige advanced economies to withdraw from the globally coordinated macroeconomic policy agreed upon after the onset of the global economic downturn. According to the IMF’s World Economic Outlook, recovery in advanced economies requires strengthening of private domestic demand by adopting two acts; the first is internal which requires abandoning fiscal stimulus.

Such act entails shifting the burden of stimulating advanced economies domestic demand to other economies. The second act is external which is aiming to increase net exports of advanced economies. Both acts by advanced economies are expected to jeopardise economic recovery outlook for emerging economies.

Outlining the international scene, the analysis indicated a short-term growth outlook for the global economy which is projected to expand by 4.8 per cent in 2010 and 4.2 per cent in 2011, with slowdown during the second half of 2010 and the first half of 2011. On the other hand, economic recovery outlook in 2010 for advanced economies are expected to be around 2.5 per cent and 6.8 per cent for emerging economies. In 2011, advanced economies are expected to grow by 1.8 per cent whereas emerging economies are expected to enjoy higher rate of economic growth of about 6.2 per cent.

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