The leaders of the world's largest crude producing region meet tomorrow, faced by the worst turnaround in the oil market but shielded by a gigantic overseas investment empire they have built up over the past five years of an oil boom.
The heads of state of the six-nation Gulf Cooperation Council (GCC), which sits atop nearly 45 per cent of the global recoverable crude deposits, hold their summit in Muscat, Oman, just a day before the end of one of the most controversial years in their economies and the start of one of the most challenging years for their fiscal system and oil industry.
Their meeting tomorrow is in sharp contrast with their last summit in Qatar in 2007. That summit was held as oil prices were climbing fast above $100 a barrel and the six members were pumping crude near capacity.
Tomorrow's meeting is held after oil prices collapsed to their lowest level in four years amid fears they could continue their slide in 2009 because of slumping global demand.
Experts and many other sources have presented widely varied scenarios about crude prices in 2009, with some predicting them to average between $70 and $80 a barrel and others forecasting them to dip below $50.
At $50 a barrel and an expected decline of more than one million barrels per day in their oil output, their combined crude export earnings could tumble below half the record income achieved in 2008, estimated at nearly $570 billion (Dh2.09 trillion).
The GCC leaders of the UAE, Saudi Arabia, Kuwait, Qatar, Bahrain and Oman could be enticed by the global financial crisis to give their final approval to a landmark currency union plan, initially set for 2010.
But the move does not mean that 2009 will not be a challenging year for them, as the slide in their oil income will directly impact economic growth, which experts now expect to plunge to nearly half the 2008 levels.
"The situation in the oil market constitutes a serious challenge to the GCC countries in 2009 despite their strong fiscal position," said Adnan Yousuf, Chairman of the Beirut-based Union of Arab Banks (UAB).
"Economic performance is projected to sharply slow down, with growth expected to dip to around three-four per cent next year… given their strong fiscal situation, the GCC states will unlikely suffer from an economic shock, provided oil prices do not remain too low in the long term…yet I think that the financial crisis and the decline in oil prices remain a real challenge to the GCC."
Another expert said the sharp fall in prices would depress GCC economies in nominal terms next year but real GDP would grow at lower rates than in 2008.
"With varying degrees depending on the size of the oil sector in the overall GDP, Gulf economies are expected to register negative growth in nominal terms, due to sharply lower oil prices and falling production," Saeed Al-Shaikh, Chief Economist at the Saudi National Commercial Bank, told
Emirates Business.
"However, Gulf countries announced expansionary fiscal policies in order to stimulate economic growth, thus oil and non-oil sector, government and privates sectors, both will grow in nominal terms at moderating levels compared to 2008's growth, but not sufficient to outweigh the contraction in the oil sector.
"Meanwhile, in real terms, also with varying degrees across Gulf countries, the decline in the oil sector will only partially offset the growth in the non-oil sector, thus we are expecting a positive, yet a lower growth for 2009 compared to 2008."
Another regional private sector leader agreed that the GCC nations enjoy a strong financial position given their massive assets abroad, estimated at more than $1.4trn at the end of June. But he noted that they remain vulnerable unless they merge their economies in a single bloc.
"The financial position of the GCC countries is very strong but this does not mean they are immune… the global crisis has put them to test and it is time for them to resolve all outstanding issues, including the opening up of their markets to each other, full implementation of the Gulf common market and the endorsement of the monetary union," said Abdul Rahim Naqi, Secretary General of the Dammam-based Federation of the GCC Chambers of Commerce and Industry.
Although 2008 was one of the best years for the GCC in terms of economic and fiscal performance, it was also one of the most controversial years.
Just four months ago, oil prices hit their highest level ever and experts were beginning to wonder about a ceiling where they might stop. As the GCC leaders meet tomorrow, oil prices have lost more than $110 and experts are now wondering about a floor where they would stop.
Inflation climbed to record high rates in the first half but is now reversing that trend because of the decline in the prices of oil and other commodities.
In the first nine months of 2008, GCC states were flush with liquidity, which is normally associated with high inflation, and were coming out with an endless series of measures to curb money supply.
The GCC leaders meet tomorrow as their countries reel under a liquidity crunch and their monetary authorities are struggling to secure badly needed funds.
In the first five months of 2008, the GCC stock market recorded unprecedented growth to climb to their highest levels. All of a sudden, that trend took a U-turn in the following months and the aggravation of the global financial crisis in September hastened their losses, which exceeded $600bn.
"It was a controversial year for stocks and other sectors but one of the best years for their finances, if not the best," said Ziad Dabbas, a share-dealing adviser at the government-controlled National Bank of Abu Dhabi.
No matter what the GCC heads of states will decide tomorrow, 2009 will be a tough year for the region.
Although the six members are armed with an immense asset position to deal with unexpected developments, they will unlikely commit the same mistake and drain those assets as they did during the 1990s, when they had to finance persistent fiscal shortfalls because of low oil prices.
They have just worked hard to replenish those assets to a record $1.467trn in June after nearly five years of high oil income, which has piled up to nearly $1.789trn since 2003. The surge allowed them to record massive current account surpluses, which are expected to peak at nearly $342bn to boost the cumulative account surplus to nearly $760bn since 2006.
The surge in revenue is also expected to boost their economies by at least 30 per cent to more than $1.1trn in 2008 to turn them into one of the largest economic blocs in the world. While those assets provide a good cushion for 2009 and even 2010, the GCC countries cannot afford sapping that cushion if oil prices remain weak in the medium term.
But without such assets, their fiscal systems will revert to deficits, forcing them to borrow and pushing them back into massive debt.
It is such a strong asset position that has prompted experts and institutions to believe that the GCC states are well cushioned against the current crisis and the collapsing oil prices, at least in the short term.
"Given the increasing financial integration of the GCC countries with the rest of the world, the region is unlikely to escape the fallout from the global financial turmoil. However, the GCC countries are better prepared to deal with the current global financial turmoil and the decline in oil prices than in the past three decades," said the Institute of International Finance.
"While specific vulnerabilities have been revealed, the overall impact so far has been limited, as these economies are underpinned by solid fundamentals and strengthened financial buffers," the Washington-based institution said this month.
In Saudi Arabia, the largest bank agreed that such a position gives a sort of immunity to the GCC even if oil prices continue to decline. "Beneath the recent market turbulence, the Gulf economies continue to be supported by strong macroeconomic fundamentals and a healthy banking sector. Economic growth will slow down markedly. However, the fiscal and external balances of most of Gulf countries will not be jeopardized even in the event of further deterioration in the oil price," the National Commercial Bank said.
"The room for manoeuvre of GCC policy-makers looks certain to increase as inflationary pressures abate. There is considerable room for using the enormous surpluses accumulated during the oil boom to support economic activity in the event of continued weakness."
In the UAE, a state-controlled bank rebuffed what it called international media reports about possible economic problems in the GCC because of the crisis.
"These reports and warnings are not supported by economic indicators in the GCC countries … Government expenditure, which drives growth in member states, has remained at levels that allow the GCC to maintain good growth rates in their economies," the Emirates Industrial Bank said.
"GCC states have based their budgets on a conservative oil price of $40 a barrel… In case prices reached that level, the GCC nations will not be hurt given their massive financial reserves which they have built up over the past few years… Of course, they can use such reserves in case oil prices fall below that level but even if this happens, it could be a temporary decline.
"Since the wheel of economic activity in the GCC has remained intact and strong, we can say that member states have managed to minimise the impact of the global crisis which nearly caused the collapse of the world financial order and the financial systems of such big countries as the US and Britain."
Oman speaks on union
Oman has decided not to join the planned GCC monetary union because the region is not ready yet for such a landmark scheme, its economy minister said.
Ahmed bin Abdul Nabi Mecki said Oman had outlined its position during several meetings held by the GCC nations over the past two years to discuss the Middle East's first monetary union that will see the birth of a single Gulf currency.
"Oman has made clear its position during several GCC meetings and conferences… We believe that the region is not prepared yet to enter into such a monetary stage," Mecki told the Qatari Al-Sharq Arabic language daily. "The current global crisis and its repercussions on the economies of the Gulf region prove that the Sultanate's position in this regard is sound."
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