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GCC economies vulnerable to emerging markets slowdown

Dubai: The strong economic linkages that have been developed between Gulf Cooperation Council (GCC) countries and Asian emerging markets over the last decade makes the GCC vulnerable to economic slowdown in Asia, according to Standard & Poor’s economists.

During the last decade the trade relations between the GCC countries and Asia (excluding Japan), grew substantially at the expense of Europe, the US, and Japan. This is mainly because of the big surge in emerging Asian countries’ demand for oil.

“GCC exports of goods to the EU, the US, and Japan fell to less than 30 per cent in 2012 from 51 per cent in 1995. Meanwhile, Asia is now the GCC’s largest export destination, accounting for 57 per cent of total foreign sales,” said Sophie Tahiri, an economist at S&P.

Oil and gas dominate GCC exports to developing Asian economies, accounting for nearly 80 per cent of the total. Meanwhile, 60 per cent of GCC oil exports are channeled to the Asian continent (excluding Japan), with India and China alone taking about 20 per cent of its total hydrocarbon exports.

Similarly, the Gulf States’ pattern of imports has also reversed. In 1995, the GCC imported 63 per cent of goods from advanced economies, while importing only about 37 per cent from emerging countries.

By 2012, however, advanced economies accounted for just 42 per cent of the region’s imports, while emerging countries accounted for 58 per cent.

“We think this shift is not temporary, and that the share of GCC exports to Asian countries will continue to rise as Asia’s developing infrastructure and rising private consumption increases its demand for energy,” said Jean-Michel Six, Standard Poor’s Chief Economist for Europe Middle East and Africa (Emea).

Despite these growing trade ties, the Gulf states have been largely unaffected by the recent capital outflows and declining asset values that emerging markets have experienced since the US Federal Reserve signalled it would start tapering.

One reason for this is that GCC countries’ fiscal and trade surpluses make then largely immune to foreign capital outflows.

“Nevertheless, Gulf States would be vulnerable to a potential slowdown of growth in emerging markets. A sharp slowdown in major emerging economies and an intensification of capital outflows, would affect GCC countries mainly through falling oil prices,” said Tahiri.

Despite a potential fall in oil prices, all Gulf countries except Bahrain have buffers and have the ability to conduct counter cyclical fiscal policies to limit a temporary decline in oil income.

“We estimate that the official assets under management in Qatar’s, Abu Dhabi’s, Saudi Arabia’s, and Kuwait’s national sovereign wealth funds amount to $1.6 trillion, or 105 per cent of the countries’ GDP in 2012. At the same time, total government debt is low, ranging from 3 per cent for Saudi Arabia to approximately 35 per cent for Qatar and Bahrain. As a result, we expect GCC states would implement fiscal expansion to support the national economy in a scenario of falling oil prices,” said Six.

However, Bahrain would be the most vulnerable Gulf country in such a scenario because it’s the only country already running a fiscal deficit, according to S&P economists.