GCC economic recovery is fragile

Strong crude prices have allied with massive public spending to put the economic of Gulf oil producers back on track after they were jolted by the global fiscal crisis but recovery remains fragile, a key Saudi investment firm said on Sunday.

Although the private sector in the six-nation Gulf Cooperation Council (GCC) has generally remained sluggish in the absence of normal bank lending, investor’s confidence is gradually returning and several indicators point to regional recovery, said NCB Capital, an affiliate of National Commercial Bank.

“The improvement in the macroeconomic environment in the region has been above all driven by a combination of an oil price recovery and active government involvement. By contrast, the private sector has remained fairly sluggish,” NCBC said in its weekly report sent to Emirates 24/7.

“Now, however, indications appear to be fairly consistently multiplying that a turnaround may be on its way. A tentative turnaround is underway. The growing number of surveys of business and consumer confidence in the GCC region fairly consistently paints a picture of gradual improvement in the mood….however, the improvement is far from uniform across the region and remains clearly fragile in the face of external and internal discontinuities. While the overall trend is positive, it has not been fully continuous or particularly robust.”

The study said Saudi Arabia and Qatar have significantly outperformed the other GCC members in economic performance over the past period.

It said Investors now increasingly view Saudi Arabia, the world’s dominant oil power, as the leading investment destination with “perceptions of its prospects effectively matching its size and demographic potential.”

It noted that the recent economic and financial data for Saudi Arabia suggest that pockets of growth have emerged in the private sector and that there are areas where a fairly significant positive momentum is developing.

Both the point of sale transactions and letters of credit data released by the Saudi Arabian Monetary Authority on a monthly basis point to a remarkably consistent improvement in recent months, it said.

Its figures showed the letters of credit issued by Saudi banks rose by a robust 18.5 per cent YoY during the first half of the year.

Consumer loans in the second quarter grew by an annual 9.2 per cent, led by long-term credit for housing and cars, which in increased by an annualized 30 per cent and 6.2 per cent, respectively, the figures showed.

The annual rate of growth of bank credit to the private sector in Saudi Arabia edged up slightly from three to 3.4 per cent in July. The report said that while the direction is positive, the pace is far from compelling by historical standards.

Even lending for public sector projects – a source of resilience last year – has been highly volatile in recent months and is now slightly down year-on-year.

“Even as most indicators pointing in the right direction, however marginally, the recovery in the GCC remains vulnerable to the unusual cluster of risks in the regional economy and especially externally,” NCBC said.

“The experience of last year demonstrates the ways in which such risk can dampen and delay the economic turnaround. The main risks at this point appear to be external with the global economic situation marked by elevated risks and considerable uncertainty. No significant near-term improvement is likely and there are growing concerns of a W-shaped recession.”

The report noted that the leading Western economies are faced with record levels of unemployment and asset market weakness, while government stimulus measures are becoming increasingly difficult to sustain.

Growing pressures for fiscal consolidation have effectively left unconventional monetary policy measures as the sole source of additional flexibility.

“The global currency system, with a small number of moving parts, is experiencing considerable volatility where the safe-have currencies pose a potential risk to the recovery in their economies,” the report said.

“Renewed global weakness would inevitably be at least somewhat reflected in the oil price, one of the main pillars of the GCC recovery to date. Renewed financial market stress would hit the regional equity and debt markets, while also complicating the efforts of the more vulnerable regional corporates to overcome the crisis. This could result in new default-types situations, not least because of the continued vulnerability of some regional real estate markets.”

Turning to the US dollar, to which most GCC currencies are pegged, the study said the peg now risks creating what it described as a situation where the low interest rate stance has to continue for an extended period even though the domestic environment would benefit from a gradual tightening.

Due to risk aversion, Saudi banks have held large reserves at SAMA but the low returns are increasingly causing some of that money to exit the country with foreign investments once gain edging up, it said.

“At the same time, the aggressive government fiscal interventions, while welcome in many ways, create risks of crowding out,” it said.

“The public sector will claim resources from the private sector and may prove slow, or in some cases unable, to retreat as the situation improves, thereby potentially holding back the private sector.”