Global recession and the Gulf
The UAE will turn its attention to the United States slowdown and its possible affect on Asia’s emerging markets and the international oil price, a leading bank has said. But the Emirates and Saudi economies will largely remain insulated from the downturn in the US, said an HSBC report.
It said the United States was not a key export market for the UAE – and as the Emirates is a net capital exporter – it is not vulnerable to a fall in global risk appetite.
However, the Gulf countries’ growth prospects largely depend on how the downturn affects emerging markets and oil prices, and the price would have to drop to $50 a barrel to affect the UAE’s domestic demand-led growth and the country’s fiscal balance would remain in surplus until the price reaches $40 a barrel.
The bank said new data has prompted it to revise its projections upwards for the fiscal and current account surpluses since the start of the year. The report said: “The immediate concern of the UAE is not that a slowdown will dampen growth, but that it might cause it to accelerate.”
HSBC estimates the year-on-year growth of the UAE’s gross domestic product (GDP) at seven per cent in 2007, 7.5 per cent in 2008 and 7.3 per cent in 2009. The country’s nominal GDP is expected to grow from $163.1 billion (Dh598.5bn) in 2006 to $186.9bn in 2007, $215bn in 2008 and $235bn in 2009.
But HSBC said because the UAE’s interest rate cuts are in line with the Federal Reserve, 2008 is likely to see credit expansion and acceleration in inflation. The report adds: “The essential problem for the UAE is that although maintenance of high oil prices during a period of US weakness suggests that its economy has, to a large extent, decoupled from the US, its monetary policy remains shackled to the US because of the dollar peg.
The shortcomings of this arrangement were exposed last year by the decline in the value of the dollar, which brought the dirham down at a time when it should have been rising. This led to rising dirham cost for imported goods, services and labour.” The HSBC bank report said the potential threat to a booming economy from falling interest rates may force a medium-term reform of the currency peg.
“Near-term adjustment remains a real possibility and the likelihood will increase if domestic inflation accelerates, oil prices remain strong and/or the dollar weakens.” The UAE financial markets, which have remained independent of global emerging market trends, is now under stress because investors have bought into local assets to gain exposure to the UAE’s oil-driven growth story. “As a consequence, local markets fell sharply in January when foreign investors liquidated UAE positions along with those in other emerging markets,” the report said.
“We remain unconvinced that this greater correlation will prove enduring. The Gulf’s low direct exposure to US import demand and high current account surpluses should position it as an attractive defensive market. The strength of the local investor base should also provide additional support,” it said. Turning to the UAE’s money market trends, the report said: “According to our estimates, real one-year interbank rates stood at minus eight per cent at the end of January and are likely to fall further as 2008 progresses.”
HSBC said the initial experience of a new interbank certificate of deposit market in the UAE has been disappointing. “The results of the auction have not been disclosed, leading to considerable market uncertainty. Furthermore, there has been no demand for the repo facility and no reverse repo is on offer. The introduction of the Ministry of Finance bonds will improve transparency and yield curve,” it said.
HSBC said Saudi Arabia is also relatively insulated from the first-round effects of the US slowdown but interest rates there reached a record high of 6.5 per cent in the second half of 2007.
The government tried to control inflation by increasing subsidies and raising salaries for public employees, but these measures did not address the underlying reasons for inflation – the government’s expansionary fiscal stand and sharp rate cuts that followed US Fed interest rate cuts.
“The inflationary pressure in Saudi Arabia will increase due to further slowdown in the US and weakening of the dollar and Saudi riyal. The commitment to the dollar peg and an open capital account left the Saudi Arabian Monetary Authority [Sama] with no other option but to follow the Fed move.”
HSBC said the Saudi money market remains nervous and the riyal is coming under unprecedented upward pressure. The policy-makers remain committed to the dollar peg and the dollar value of the riyal.
The report projects non-oil sector growth of seven per cent in 2008 and 2009 buoyed by rising levels of public and private investment that will boost domestic demand and create more jobs. The country’s year-on-year growth is estimated at 5.9 per cent in 2008 and 6.3 per cent in 2009.
Nominal GDP is estimated at $377bn (2007), $420.1bn (2008) and $438.7bn (2009).
The report said Saudi Arabia’s creation of a stand-alone sovereign wealth fund will make it an active bidder for a broader range of assets in the international market.
“Unlike its neighbours, Saudi Arabia has relied on the central bank to manage public savings, leading to the accumulation of a large stock of foreign securities under Sama control. Sama will continue to manage the bulk of new and existing public savings, but the new fund – with $6bn to manage – will seek a broader range of assets.”
The Saudi Government’s expected fiscal surpluses in the next two years will be used to pay off public debt.
And HSBC said the private sector is increasingly using commercial bank credit – its share of the total figure has risen to almost 80 per cent from just 55 per cent four years ago.
Will be the gross domestic product in 2008, which is set to fall to 7.3 per cent in 2009
Was the country’s nominal GDP, which is expected to increase to $235bn in 2009
Is the estimated year-on-year growth in Saudi Arabia, which is expected to increase to 6.3 per cent in 2009