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The key themes to watch for this year

By Darren Stubing

As what was probably the most tumultuous year the world's financial system has ever seen ended and as 2009 starts, a number of key themes are likely to be prominent this year.


In most major Western economies, such as the United States and the United Kingdom, economic growth continues to fall as the recession bites. Far from being a short sharp economic downturn, recession in these major economies is likely to be deep and lengthy. The UK especially will experience a significant downturn in 2009. Growth in the Eurozone, which has in many countries been reasonable up to now, is expected to weaken considerably in the first half of 2009. The knock-on effect of weaker economic growth and the recession in Western economies is being felt in emerging markets and other regions, from China and India to the Gulf. China has drastically reduced its economic growth forecast for 2009 as demand for its manufacturing products falls. Its latest forecast is growth of around five per cent is still solid but half of what was expected just six months ago.

Overall, Morgan Stanley forecasts that the global economy will grow by just 0.9 per cent in 2009 after 3.6 per cent in 2008. For the industrial world, real GDP will fall by 1.4 per cent following growth of 0.9 per cent in 2008, while the developing world will expand by three per cent after 6.3 per cent growth in 2008.


The oil price has experienced one of the most volatile years on record. From scaling record prices of $150 per barrel in the middle of 2008, it has recently fallen sharply to less than $35 per barrel. The fall has astonished seasoned oil analysts and traders due to the sheer size of the percentage fall.

Few would have predicted the decline in less than six months. However, the price decline succinctly reflects the scale of the global downturn where industry has quickly scaled back operations as demand crashes through the floor. Demand for oil has been strongly correlated with the fall in economic output.

Most notably the fall in the oil price focuses attention on Gulf countries. After benefiting significantly from the high average oil price for some years, which has generated huge budget surpluses and in turn fuelled domestic infrastructure and investment, the weakness has created doubt of the growth outlook for Gulf economies. This in turn has dented confidence in the system for businesses, investors and consumers. Even with the oil price below $35 a barrel, Gulf producers still generate budget surpluses.

However, the flow of funds has obviously fallen and this has a knock-on effect on infrastructure development and investment. A number of important projects in the Gulf have already been postponed.


Most commodity prices have largely followed the trend of oil. Reflecting the downturn in industry output, manufacturing and construction, commodity prices have fallen sharply. Much of the growth in demand for commodities and resources has been driven by large emerging markets in, most noticeably China and India. In particular the former's exponential economic growth has dictated the demand and hence supply of commodity markets.

The soaring prices of commodities such as base metals over the past few years resulted in part to lack of sufficient supply relative to demand. The extractive industries in general were slow in responding to rising demand in the early 2000s. Many large commodity extraction projects were still in the feasibility stage when commodity prices began to fall. Hence, the market has not been hit by over supply but weaker demand. These large scale projects have been postponed under current price scenarios due to viability concerns.

However, when the global economic cycle troughs and starts to move northwards in late 2009 to early 2010, increased demand in large global markets such as the US and China will tighten commodity markets. This is likely to cause a sharp increase in most commodity prices. Some commodity watchers believe the first half of 2009 could represent an ideal buying opportunity in commodities such as copper, nickel and oil ahead of price gains.

Gold looks likely to remain attractive as a safe haven in these uncertain times. Physical demand for gold remains strong from Asia and the Middle East as well as from Europe and the States.

The downturn in the property sector in the US was one of the sparks which lit the initial flame of the credit crunch.

American house prices fell by their fastest rate on record in the final months of 2008 amid deep pessimism over the economy. According to the S&P Case-Shiller index, house prices in the 20 main US cities fell by 18 per cent in the year to October. The long-depressed housing market should bottom in the latter half of 2009. The rebound will however be slow.

The property downturn has spread to other markets, including the UK and Spain for example, and has more recently begun to hit the GCC markets. Property is of course a factor of supply and demand.

In regard to the key property barometer of the GCC market, Dubai, the property sector has begun to suffer as demand falters at the very time supply continues to come on stream. Prices in the Dubai real estate sector have come back over the last few months after registering a phenomenal increase, more than doubling, in less than two years. This year is likely to be a very tough year for the Dubai sector.

A slowdown has been seen in other previously buoyant markets, such as Kuwait. Even the more promising Abu Dhabi real estate sector experienced a fall in property values in the latter part of 2008. A softening of prices across the GCC appears likely in 2009. Currently this is being felt in the residential sector but going forward the commercial property sector will see a fall in demand and values, and lower occupancy rates.

The sudden slump on the UAE market has seen flagship government-backed construction companies postponing major developments, including a $95 billion real estate project two months after it was launched. Nakheel and Leighton Construction are other companies delaying major projects in the region.


Corporate debt will remain an important variable for company survival in 2009.

Those companies with higher than average debt will face more difficulties. This is especially so for corporates seeking to renew or rollover financing facilities in 2009. Funding and credit will remain a scarce resource throughout the year.

Some problems have recently occurred at a few of the key Gulf corporate and investment houses as they seek liquidity and fresh funding to support their business.

For the GCC, more may face difficulties in 2009 as the bank credit and financing tap will largely remain closed for at least the first half of the year. Strong cashflow will be an important survival driver as management look to reduce debt where they can in the face of weak trading conditions.


Except for isolated cases, corporate earnings will be weaker in 2009 although the reporting period may improve from the lower base from fourth quarter 2009 onwards.

In regard to corporate bonds, there remains a schism between those who believe yields are currently highly attractive and are pricing in too high default levels. However, with weaker cash flows and lower earnings, more downgrades for corporate bonds will occur thus suggesting that that current bonds are not so cheap. In respect to the bond market, treasuries and gilts should continue to perform well in 2009.


For global markets as a whole, 2008 was the worst year for equity markets in history.

The Dow Jones in the US fell by 33.8 per cent for its weakest year since 1931; the S&P slid 38.5 per cent; and the Nasdaq posted its worst year ever, with a 40.5 per cent decline.

The UK's FTSE 100 index recorded its worst performance on record, falling by 31 per cent. Japan's Nikkei 225, down 42 per cent, also recorded its biggest loss on record last year. The impact of the global financial crisis on the Gulf economies was much deeper than initially thought. Gulf stocks slumped on the back of the global financial crisis. The Saudi Tadawul All-Shares Index declined 56.5 per cent. The Kuwait Stock Exchange dropped 38 per cent. The Dubai Financial Market slid 72.4 per cent and its sister bourse, the Abu Dhabi Securities Exchange, declined 47.5 per cent. The two UAE markets felt the pressure of the correction in the leading real estate market as well as in banking stocks. For 2009, volatility will be the main theme.


Banking has been at the centre of the financial storm with huge asset write-downs at a wide cross section of banks followed by a severe liquidity shortage on the wholesale markets, which led to significant numbers of banks becoming insolvent and or taken over. Liquidity and interbank funding still remain the main issues as financial institutions refrain from funding other banks.

There are signs of a slight revival in liquidity and money growth but the market remains weak and sensitive. Capital will be an important issue in 2009 together with asset quality. This year will certainly be a period of rising defaults and non-performing loans.