• Slumping Growth Rates: The biggest challenge for the entire region that has traditionally relied on energy production revenues for growing its reserves and financing its development is the drop in the oil prices. With the crude oil trading at 1/3 of last year’s peak prices and global demand for energy continuing to fall, dropping oil prices are cutting directly into the growth of the Gulf Arab countries. Coupled with the global tightening of credit conditions and reduction in the capital inflows, the region’s growth is further crippled. IMF has estimated the region’s average growth to halve to about 3.5% in 2009 from the 6.8% reached in 2008, with majority of the analysts not seeing a start of the recovery before 2010.
• Overreliance on Energy Exports: While all of the Gulf countries have, to varying degrees, have embarked on economic diversification, too great of a reliance on oil exports continue to pose challenges, especially to Kuwait and Saudi Arabia. Qatar stands out as one economy that has perhaps best succeeded in its diversification efforts and is likely to become the model for the rest of the region.
• Shrinking Surpluses: While many of the oil exporting countries of this region continue to boost positive current account balances, these balances are rapidly falling, with projections pointing to small CA deficits in a year’s time.
• Property market correction: Countries that have seen large real estate growth from foreign investors, especially UAE, are now faced with severely dropping real estate prices and property markets that have in some places come to virtual stand- still due to low transaction numbers.
Opportunities & the Way Forward
• Free Trade Zones & Business Friendly Tax and Regulatory Structures: While many of the traditionally tax friendly, banking nations are coming under pressure from other industrialized nations, Gulf countries stand to gain the wealth that now seeks new, tax friendly destinations. Dubai International Financial Centre is a prime example of this sort of an attractive framework where the obvious taxation advantages combine with the highly advanced regulatory foundation.
• Large Reserves: Despite the shrinking current account balances, the region holds very significant reserves that both give it the necessary buffer against poor liquidity conditions elsewhere and also provide it with the necessary resources to secure strategic investments and holdings in international markets.
• Domestic Demand: Notwithstanding the dropping international demand for Gulf products and services, countries such as Saudi Arabia continue to see growing domestic demand.
• M&A Business Driven by Consolidation: Especially in Bahrain and UAE, the two financially oriented Gulf countries where banks have been battered by the global credit crisis, a whole new spectrum of M&A business opportunities have arisen. This not only creates for a new economic activity in and out of itself, but also allows for the necessary condition of consolidation and “healing” process of the finance sector.
• Strong layers of Equity financing: Unlike in the rest of industrialized world, debt securities make up only 5% of the capital markets, with the rest 95% being dominated by equities and banking assets. One significant reason for this is the lack of depth and development of bond markets as idiosyncratic and closed-circle ownership structures have built a bias towards bank lending, away from corporate bonds. However, in a time of equity starved world capital markets, high equity capitalization ratios across Gulf corporations give the region a definitive advantage and potentially attract future investments.
For further comments please contact Equity Market Strategist Christian Blaabjerg on: +45 3977 4669