Liquidity in the GCC has Tightened Markedly Since Mid-2008. This is after the region was drowning in liquidity in the first half of the year. In this note we look at the liquidity developments in the four largest economies in the GCC (Saudi Arabia, UAE, Kuwait and Qatar), government responses and the macroeconomic implications.
Various Factors behind the Tightening. The tightening in liquidity was driven by the outflow of speculative funds betting on currency reform, by credit demand outstripping deposit growth and by reduced international appetite for GCC bonds. GCC banking sector liquidity was further constricted by the substantial widening of the global financial crisis in September, which closed other avenues of international wholesale and capital market funding. Interbank rates have risen and concerns increased that the region's investment programs will falter due to the higher cost and reduced availability of funding.The GCC Governments and Central Banks Have Responded Swiftly and Strongly. Providing liquidity is now the main policy focus for the region.
The GCC countries have adopted a multi-pronged approach to compensate for the drying up of foreign funding, including placing deposits in the banking system, making lines of funding available and recapitalizing banks.
The Economic Outlook Has Been Supported as a Result of The Government Responses. We believe these measures are vital for the economic outlook and for providing funding to the corporate sector. We believe central banks will continue to monitor the liquidity situation and provide funding where required. This will continue into 2009, when the need to refinance debt increases. The injections into the banking system are likely to cover a large proportion of the shortfall resulting from the removal of foreign funding. Nevertheless, we see credit growth decelerating in 4Q2008 and in 2009. This will particularly be the case in the UAE.
We Have Reduced our Real Non-oil GDP Growth Forecasts. We now expect to see lower investment growth in 2009 and 2010. The biggest challenge for local banks is to step into the void in foreign funding and aggressively participate in the project finance space given the scarcity of USD and long-term funding. These constraints are very likely to result in a number of new projects being delayed or put on hold. We believe the sharp fall in the oil price will also result in projects being delayed.
Every Cloud Has a Silver Lining. There are, however, some positive macroeconomic aspects to the tightening in liquidity and international funding. With the increased cost of credit, borrowing for speculative purposes will calm down. In addition, the medium- to long-term viability of projects will be examined. The more imaginative projects planned for the region, which became more feasible in 1H2008 with the availability of cheap financing and the soaring oil price, will be put on hold. The global credit crunch is also likely to extend the implementation of the various investment programs, which is positive for the region's medium-term growth outlook and inflation outlook.
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Zeina Abdalla
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Hill & Knowlton
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© Press Release 2008
