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Jun 26 2012

How will the Euro crisis affect the GCC?

By Shuchita Kapur

In This Article

Kuwait Financial Centre

The Euro crisis, if it were to worsen, will affect the GCC countries in different ways but is not likely to be severe, according to experts.

The countries within the bloc may escape the direct negative effects of the problems in Europe but the indirect impact will be felt, say economists.

"I feel the impact of the Euro crisis will be moderate but not severe for UAE in terms of incremental pain. A disorderly development (like Greece getting out of Euro, or EU collapsing) will have negative feedback loop for everyone including the GCC. Nobody can be immune to such a black swan event," R. Raghu, Senior Vice-President-Research at Kuwait Financial Centre ( Markaz ) told Emirates 24|7.

Commenting on the various possible impacts, the Markaz expert elaborated: "Having said that, a reasonably strong oil price (say between $80 to $100) should keep the GCC engine moving regardless of the European crisis. Counterparties based in UAE would have already reduced their European exposure in one form or other. Job creation will be more of an internal factor than externally driven. Real Estate will be affected to the extent overall cost of capital may go up as a consequence of European crisis. Stock markets will certainly underperform for a period (especially banking whose spreads will be affected) but should be quick to recover. The learning of Great Financial Crisis (GFC) and its consequent deleveraging has already made institutions prepared for another onslaught. Hence, my assessment is it should be moderate."

Giyas Gokkent, Group Chief Economist at National Bank of Abu Dhabi (NBAD), believes that "there are multiple linkages."

"One linkage is though the price of oil. A global slowdown because of problems in the Euro Area would soften the price of oil and adversely impact GCC budgetary revenues and trade surpluses. In addition, GCC oil producers may be compelled to reduce oil production to support oil prices. Another linkage is through the banking sector. European bank deleveraging can create tighter funding conditions in the GCC adversely affecting consumption and investment expenditures. Moreover, global financial turmoil pushes up the cost of borrowing. Stock market indices are negatively affected by global financial turmoil creating a negative wealth effect again weighing down on domestic demand," he told this website.

According to a recent Standard Chartered bank the regions strong economic base should cushion the negative impact. The bank estimates the GCC's average current account surplus is 20 per cent of GDP. In 2011, the GCC states had combined foreign assets of $1.7 trillion, and hydrocarbon revenues of $500 billion. "This should help the governments promote counter-cyclical policies and alleviate the external shock from Europe," bank experts say.

According to recent media reports, the global markets are taking on shades of the 2008 crisis, with the potential for a collapse in investor confidence. The debt crisis is putting pressure on corporate earnings globally with companies cutting forecasts and signalling profits will fall at more companies this year.

© Emirates 24|7 2012

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