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Eye of the storm
While some Arab governments appear to have successfully fought off the worst effects of the global economic crisis, long-term challenges loom.
May 12, 2009 3:06 by Ed Blanche
“Oman is down a fifth, and Kuwait has lost nearly 15 percent following record losses last year,” the FT reported. “Interventions could also do lasting damage to the Gulf’s capital markets by continuing to foster an expectation of government rescues whenever losses mount.”
Local experts disagree. The fiscal stimulus packages have been “very effective in averting a major financial collapse in the region,” says John Sfakianakis, chief economist with the Saudi Arabian British Bank (SABB). “They injected liquidity into the region,” he adds. “The impact of that we’ll see in the coming months.”
The key indicator, says Sfakianakis, will be how Saudi Arabia, the dominant power in the region, fares. “If its economy declines and starts showing a loss of confidence about its financial stability, that will have a major effect within the region in a negative way.”
Nevertheless, Saudi Arabia “is still spending the money, and the strength of the financial system is still pretty solid.”
That’s in spite of the damage being done by low oil prices, which put the brakes on the GCC’s booming economies, and have since heightened the effects of the crisis on the region. Revenue from energy exports is the backbone of these eco-nomies, and low oil prices could have a significant impact on GCC efforts to restore financial equilibrium.
Analysts say the next two quarters will be critical, with no sign that oil prices will be going up anytime soon. Oil prices plunged from $147 a barrel in July 2008, to around $47 today. This has cost the GCC states, along with Iran, Libya and Algeria, an estimated $700 billion in lost revenues.
According to a March update on global economic prospects, “Current projections call for crude oil to average near $47 per barrel in 2009, some $27 per barrel below expectations.” Gulf producers would like to see prices at the $75 level, but that seems a remote prospect right now.
“Lower oil prices are taking their toll on confidence,” reads a report by SABB published on February 28. “World oil demand is contracting more than expected this year.”
In addition to low oil prices and the effects of the financial crisis, however, Kuwait has political turbulence to contend with, and failed to take cohesive action to counter the economic turmoil. This was largely due to political paralysis caused by disputes between the ruling Al Sabah dynasty and a troublesome parliament (it hosts the only democratically elected legislature in the GCC, where absolute monarchies are the norm).