Little GCC exposure to global crisis

The global financial distress in 2008 had a relatively little impact on Gulf hydrocarbon exporters as their economies have become more diverse and oil prices quickly rebounded after their collapse in the wake of the crisis, a prominent regional analyst has said.

Mergers among some banks in the region, mainly between two Dubai-based banks, expanded their local market and this contributed to easing their exposure to external markets, said Mohammed Al Asumi, a former adviser at the Dubai Executive Office and ex-head of the economic research division at the government-controlled Emirates Industrial Bank.

In an article published by the Abu Dhabi-based Emirates Centre for Strategic Studies and Research, Asumi said the surge in oil prices largely replenished the coffers of the six-nation Gulf Cooperation Council (GCC), boosted their sovereign wealth funds and allowed them to record massive financial surpluses.

“On top of the factors that helped the GCC states mitigate the adverse impact of the crisis have been developments in the international oil markets…oil prices jumped from $36 per barrel in early 2009, i.e. immediately in the wake of the financial crisis, to over $100 per barrel in 2011,” he said.

“This shored up the GCC states’ financial capabilities, allowing them substantial annual budget surpluses, according to the IMF, the GCC budget surplus is expected to increase to $304 billion in 2011 from $136b in 2010.”

Asumi said GCC countries, which sit atop more than 40 per cent of the world’s proven oil wealthy, had used fiscal surpluses to support their banking and financial institutions, boost spending and stimulate the economy.

He said this has greatly helped them avoid the “trap of bad debts” and overcome the enormous pressure faced by many Gulf banks because of the crisis that had hit some sectors, including real estate sector and equity markets.

“Owing to the speedy recovery of the global trading and logistics sectors, the GCC states have been able to maintain their international status in these two sectors that account for a considerable portion of their GDPs, especially the UAE, which has emerged as a global trading and logistics center,” he said.

“Moreover, among these factors has been the limited exposure of the GCC banking and finance institutions to the hugely indebted countries such as the US, Greece, Italy and Ireland. On the other hand, several world economies—such as Germany, UK and France—have suffered from their being overexposed to countries of the world saddled with huge international debt, which has made them vulnerable to serious economic and social problems.”

Asumi said GCC economies, which account for nearly half the combined Arab economy, have achieved considerable progress in economic diversification in the last two decades, adding that this has given them more power and resilience in the face of global economic fluctuations.
 Besides, recent years have witnessed tangible progress in the performance of the GCC banking and financial institutions, especially the GCC sovereign wealth (SWFs) that have come to take lead among the international sovereign funds in terms of the size of their assets, he said.
“To this end, these funds have bought important shares in well-established and generally profitable institutions. Such measures have in most cases doubled the return on their investments and boosted their share of the local GDP,” he said.

“Simultaneously, the GCC banking and finance sector has taken a quantum leap in its performance; as several local institutions and banks have turned into relatively big institutions, whether by successively increasing their capital and assets, or by going through huge mergers, such as the merger between Dubai National Bank and Emirates Bank International that created one of the biggest banks in the region, re-named as the Emirates NBD Bank.”

Asumi said such mergers had led to increased integration of the banking and financial sector within the GCC economies, making them less dependent on foreign banks and institutions for carrying out financing transactions, trade contracts and gigantic development projects.
“This largely contributed to limiting their exposure to foreign banks and financial institutions mired in crises, particularly external debt crises.”
But Asumi stressed that such developments remain subject to many”variables that necessitate stepping up efforts for greater diversification of the GCC economies”, in order to allow them to withstand future crises.

He said one of the crucial points in this regard is the enhancement of the GCC states’ position and role in the global economy.
“By virtue of their higher growth rates and the higher demand on different commodities and services, GCC states have been classified among the emerging world economies—along with China, India and Brazil—that have contributed, and are still contributing, to efforts of global economic recovery. From this perspective, GCC states can contribute to creating a more favourable atmosphere for global economic growth and in helping the world avoid a new period of recession and in controlling inflation rates,” he said.

“Therefore, the GCC countries’ economic structure, and their dynamic financial and economic policies have not only allowed them to alleviate the impact of global economic and financial crises on their economies, but have also provided them with lucrative investment opportunities that they have used for reducing the costs of development projects at home, and in making important and profitable acquisitions abroad…this will certainly add new momentum to the GCC economies in coming years.”

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