Debt crisis risks growth in GCC economies

Debt challenges in the EU and US risk undermining a resurgence in GCC economic growth this year.

ABU DHABI // Stronger GCC economic growth and a recovery in the private sector are being put at risk by the debt crisis in the US and Europe.

Stalled financial market activity and a correction in oil prices are the most immediate ways the debt troubles would hurt the regional economy, analysts say.

US policymakers were frantically trying to reach an agreement yesterday to raise the government's US$14.3 trillion debt limit before Asian financial markets opened today.

"The fact that the US and EU risks exist at all is a drag on sentiment," said Jarmo Kotilaine, chief economist of National Commercial Bank in Saudi Arabia. "The worry for the GCC is that when people worry they are less likely to spend and issue securities and we would see more of the lopsided growth that occurred during the global financial crisis."

Growth has generally rebounded in the region this year despite disruption to some economies caused by the Arab Spring. Higher government spending underpinned by stronger oil prices has helped to propel economic activity.

But so far activity in the private sector has been less robust, with lending growth to businesses and bond-market activity more sluggish because of greater risk aversion. Persisting debt worries on both sides of the Atlantic could further derail the recovery, analysts say. Policymakers in both the US and EU are grappling with significant debt challenges that create uncertainties about the global economic outlook.

EU officials on Friday announced 159 billion euros (Dh838bn) in new aid for Greece and empowered their 440-billion euro rescue fund to buy the debt of other struggling nations. In the US, Congress must agree on a plan to raise the government's $14.3 trillion debt limit and avert a default by August 2. The US treasury secretary, Timothy Geithner, expressed confidence yesterday that a debt deal would be reached and said it was unthinkable for the US not to meet its debt obligations.

The saga has delayed fund-raising by companies and governments in the Middle East. Tourism Development and Investment Company (TDIC), the master developer of projects in Abu Dhabi, and Dolphin Energy, the gas production and pipeline firm based in Abu Dhabi, recently postponed bond issues until market conditions improve.

Such issues are important, not only to help companies to diversify their sources of finance, but also to increase the depth of local capital markets.

“Going forward, further problems related to the Eurozone or the US debt situation could serve to crimp demand out of Europe and North America for local credits, even highly rated Abu Dhabi entities, making issuance difficult,” said Nick Stadtmiller, fixed income analyst at Emirates NBD.

Regional equity markets have improved since the end of the Arab Spring, with investment sentiment slowly reviving.
GCC financial markets remained vulnerable to a renewed period of elevated global risk aversion which would further delay a return to normality in the private sector, a research report by Mr Kotilaine said.

Analysts also caution that further twists in either the US or EU debt challenge could trigger concerns about oil demand, potentially leading to a short-term price dip.

Oil prices have risen this year, in part due to supply worries linked to the Arab Spring. North Sea Brent crude rose to $118 a barrel on Friday, spurred by fresh hopes of a US debt deal agreement.

“If there’s no agreement reached in the US, the quickest contagion to this region would probably be through pressure on oil prices and financial markets,” said Paul Gamble, head of research at Jadwa Investment in Saudi Arabia.

No breakthrough in the US debt negotiations or a downgrade of the US government's top-notch credit rating could also have an effect on local currencies through dollar weakness, Mr Stadtmiller said. Five of the six GCC currencies, including the dirham, are pegged to the dollar.

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