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Brace yourselves: GCC prepares for the worst

Brace yourselves: GCC prepares for the worst

Analysts say the GCC's financial systems are stronger than they were during the first economic crash. But can it withstand a second wave of crisis?

September 28, 2011 3:43 by

…a technological change, he added — a recession in the developed world would not be serious enough.

Fitch Ratings reached a similar conclusion when it affirmed Abu Dhabi’s AA debt ratings last week.

“The 2008-2009 global financial crisis was a severe stress test for Abu Dhabi, but one which left its balance sheet largely undented. Any future stress would have to have harsher consequences than this to trigger negative rating action,” said senior Fitch analyst Richard Fox.


A major blow to the Gulf during the last crisis was a plunge of equity and real estate prices, culminating in the discovery of a gaping hole in the balance sheet of corporate Dubai. This triggered capital flight from some economies in the region, putting commercial banks’ liquidity under pressure.

Repairing Dubai companies’ balance sheets is expected to take much of this decade, and a new global crisis would complicate that process, perhaps shutting the firms out of issuing debt in jittery international markets.

But analysts think the financial support of Abu Dhabi would help to compensate for any lack of access to market funding, through the medium term at least. And with asset price bubbles in the Gulf already deflated, there is much less risk of damaging capital outflows.

That helps to explain why Dubai and other Gulf stock markets have outperformed many other markets over the last several months as the global picture has worsened. Dubai stocks are down 14 percent from this year’s peak; global stocks, as measured by the MSCI All-Country index , are about 23 percent lower.

The Oman fund’s Scacciavillani noted that authorities had more tools to protect financial systems than they did at the start of the last crisis. Gulf central banks have developed new facilities to keep money markets liquid, and countries have at least started to develop deposit insurance systems. The regional bond market has become more active and liquid, giving commercial banks a new channel to obtain funds.

In its latest economic outlook published last week, the IMF said the Gulf oil exporters needed to reform and diversify their economies, and predicted slower growth next year for many of them. But it does not expect the slowdown to be nearly as serious as the 2008-2009 slump; Saudi Arabia is expected to slow to 3.6 percent in 2012 from 6.5 percent this year.

The IMF initially underestimated the seriousness of the last crisis, and it may well be doing so for this crisis. But its forecasts recognise the role of government spending in maintaining growth in the Gulf.

“We are part of the global economy; we cannot escape the effects of a slowdown,” said the chief economist of a major regional bank. “But nobody is talking of recessions in the Gulf.” (By Andrew Torchia)

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