Crisis could knock GCC cash surplus

The world's financial troubles could temper plans to diversify economic growth beyond the oil sector.

The global economic crisis could sharply reduce the massive cash surpluses that GCC countries have produced in recent years and temper plans to diversify economic growth beyond the oil sector, a report released by Citigroup says. The UAE and especially the emirate of Dubai could be most vulnerable to the downturn, said Mushtaq Khan, a regional economist at Citigroup, although he predicted Dubai would be able to engineer a soft landing for its economy and an orderly restructuring of its finances.

"We see a much-needed correction in the property market and an equally necessary consolidation of Dubai Inc," he said in the report. "Global conditions are likely to slow Dubai's economic growth, but not knock it out." GCC countries have undergone an unprecedented economic boom in the past five years, as oil prices climbed steadily to US$147 per barrel four months ago. Those countries have poured large sums of that additional revenue into building and infrastructure projects, as well as more speculative investments such as property and stocks, making the region one of the fastest-growing places in the world economy.

With the global credit crisis, however, some of the pillars of that growth are coming under stress. Regional banks, companies, investors and consumers have been cut off from global capital markets, leaving them squeezed for cash. The decline in global economic growth has cut demand for oil, sending prices to below $60 per barrel, a fall of about 60 per cent. GCC surpluses - the amount that revenues exceed government spending - could dwindle more quickly than many realise, even going into deficit within the span of about a year if oil prices were to remain at current levels, said Mr Khan in the report. That is because GCC countries would be likely to cut production in an attempt to bolster prices, cutting even further into revenues.

They are also some of the fastest-growing oil consumers, as well, forcing them to use increasing amounts of oil rather than selling it. Economic growth beyond the oil and gas industries could decline rapidly as well, since much of it was driven by spillover from spending the surplus oil and gas funds themselves. Mr Khan did note a bright spot, predicting the inflationary pressures that were building steadily recently are now likely to begin abating. Still, he said, "this is probably the GCC's most testing time".

The economic downturn could spur important changes, the report said. GCC countries are likely to put plans to create a common currency on hold, and might even be tempted to allow their currencies to depreciate against the dollar eventually. Just months ago, speculation was rampant they would break their long-standing link to the dollar by raising the value of their currencies. Meanwhile, Dubai is likely to undergo an uncomfortable, yet ultimately beneficial, period of consolidating some industries such as property, restructuring the finances of government-controlled entities and reorganising some of the major companies that make up the constellation of enterprises arrayed around the Government and its ambitious growth strategy, the report said.

Dubai's challenges are made more acute by extensive borrowing. Depending on the estimate, Dubai and other UAE entities need as much as US$37 billion (Dh135.9bn) to pay down debt through next year. Dubai officials say they will not have difficulties making those payments. Mr Khan said "strategic mergers", combining heavily indebted firms with better capitalised ones, could be used to reduce debt and generate cash, and the Federal Government - and even Abu Dhabi - could be relied on to provide funds in a pinch.