GCC threatened by oil price fall

Gulf oil exporters have remained resilient to global fiscal turbulence but their economies could be stifled by a possible fall in oil prices and poor private investment, Saudi Arabia’s largest bank said on Wednesday.

But the six Gulf Cooperation Council (GCC) countries, which sit atop 40 per cent of the world’s crude deposits, have built up sufficient assets to expand public spending to spur growth and make up for lower private sector activity, National Commercial Bank (NCB) said in a study sent to 'Emirates24|7'.

“The GCC region has been remarkably resilient in the face of the global crisis to date. This has been largely the result of its macroeconomic stability, healthy banking sectors, and large government reserves which were swiftly mobilized in response to uncertainty,” NCB said in its 35-page GCC quarterly review.

“Even though the economic environment in the GCC has continued to improve steadily in the course of the summer, the increasingly alarming global backdrop is fueling risk aversion and reviving fears of a relapse in the global crisis.”

The study said that s the Euro-zone continues to stumble from one inconclusive exercise in crisis management to the next, the situation in the US has taken a turn for the worse with increasingly weak economic data, a political stalemate, and a consequent decision by Standard & Poors downgrade the country. “The GCC remains vulnerable to these risks because of renewed worries about oil demand erosion as well as heightened risk aversion in financial markets.

This has created a paradoxical situation where the regional growth drivers in the GCC are strong but the effects of the global uncertainty on investor sentiment once again risks leaving growth disproportionately dependent on the public sector.”

NCB said it believes the main challenge for the GCC created by the economic turbulence has been “a persistently skewed pattern of growth” where economic activity is critically underpinned by countercyclical government spending, while the mood of private sector investors remains subdued as a result of the global uncertainties and financial market uncertainty.But it stressed that the GCC economies remain well positioned by global standards to deal with the prospect of renewed economic instability.

"The speedy recovery of oil prices from their 2008 lows has restored fiscal balances and replenished reserves. The IMF expects the aggregate budget surplus of the GCC countries to increase from “136bn in 2010 to $304bn this year…..the actions of the authorities earlier during the crisis have underscored their willingness to tap the reserves, with assumptions about the duration of the crisis likely to be the main source of uncertainty.”According to the report, fiscal break-even oil prices, the level needed by the GCC to achieve a balance in their budgets, have risen sharply in recent years and worries about demand erosion risk producing recurrent periods of softness in the oil market even if the market fundamentals remain historically tight.

“Beyond their reserves, the GCC countries are generally well positioned to raiseadditional funding through bond and sukuk issues both directly by the government and by government-related entities,” it said.“The creditworthiness of the regional economies is internationally strong and there is likely to be considerable pent-up demand for quality paper both regionally and internationally….in spite of this underlying strength, the GCC economies have a number of points of vulnerability as the global economy looks likely to enter another period of weakness.”

NCB said the main risks, much as in 2008, remain the financial markets and the oil price, adding that the financial sector has regrouped significantly since the previous dip and is relatively shielded from the weaknesses of the EU economy. “However, major disruptions along the lines of a Lehman Brothers-style exogenous shock would both test investor mood and potentially hit regional institutions through counterparty risk. Oil is vulnerable to short-term corrections due to concerns about demand erosion but the experience of 2008-2009 highlights the underlying resilience and tightness of the market.”