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Eurozone and the GCC

As the eurozone crisis contin­ues to rage, seemingly beyond the control of the political and fiscal masters of Europe, the crisis is beginning to have an impact on various parts of the global economy.

July 13, 2012 11:37 by

Crude Impacts

As the eurozone crisis continues, the global economy is getting increasingly involved and impacted. With even China and India slowing down to their lowest growth rates in a decade, it is certain to hit the prices of the crude oil and hence the Gulf economies, which continue to have crude account for 80 to 90 per cent of the local economies and GDP.

The Bank of Sharjah’s Varoujan Ner­guizian believes that the fall in crude oil prices in the recent weeks, largely due to the eurozone crisis, has different im­plications for consumers and producers. “You always have to differentiate be­tween the producers and consumers; for the consumers it is a blessing. The more it goes down the more their economy will be encouraged to be developed to expand and grow. For producers of the Gulf this is not a disaster because prices are still above the budget figures, it is a lower in­come, but they can manage it well. Per­sonally I don’t think it will go for a sharp down correction, the current correction is due to slow down out of China and the Far East, but oil prices have to remain fairly high in the near future,” says Ner­guizian.

Most analysts believe that as long as prices don’t tank significantly below the $80 mark, Gulf economies would be quite well off. “I think everybody has done their budget at around $80s and we are still far away from $80, but $80 is a good price. We have seen in the past even $10 a barrel. Of course, there is a politi­cal will behind this, if the objective is to break Iran, we could see oil prices going further down to such a level that it could really hurt them. But then it would not be in the interest of the bigger econo­mies, because the higher prices distribute the burden of the energy over every­body, and the big producers and big economies will benefit from them,” says one oil expert.

Most analysts tend to believe that even if India and China are slowing down, the rate of growth in these coun­tries still remains interesting enough for the global crude prices to hold well above the $80 to $90 mark for the fore­seeable future and hence very limited impact on the budgetary positions of most of the GCC governments. And even if the price slipped below this mark, most GCC countries are sitting on hundreds of billions of dollars of surpluses accumu­lated over the past decade or so. So the governments are in a position to afford some deficits if the crude prices do in­deed stay below these marks.

The governments would prefer to run their social programmes even more due to the Arab Spring and the fear that social unrest could come to their coun­try if their youth stays unemployed and has no access to social security mea­sures.

Good Bargains

The one positive of the eurozone crisis is the immense bargains that its pres­ents before the cash-rich economies, not only China, but also GCC coun­tries, especially the sovereign funds. A look at the aggressive buying by Qatar in the past four years is a good indication. The gas-rich nation has pur­chased luxury stores, football teams, and bought stakes in several Western companies and also government bonds across the Western world. This trend could intensify as the situation in the eurozone becomes clearer and stabi­lizes later this year.

-By Ranvir Nayar

*First published on Trends


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