Copyright © Gulf Research Center 2009 All rights reserved Page 1
Dr. Eckart WoertzProgram Manager Economics
Gulf Research CenterDubai
Economic and Social Commission for Western Asia (ESCWA), Damascus, May 5-7, 2009
Privileged in a Downturn:
GCC Countries and the Global Financial Crisis
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Overview
1) Direct Financial Impact: Losses of Banks and SWFs
2) Indirect Financial Impact: Higher Costs of Lending
3) Effects on the Real Economy
4) Mitigating Measures of Central Banks and Governments
5) Changing GCC Investment Patterns
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Direct Financial Impact
Officially Announced Subprime Losses of GCC Banks
BankWrite-downs in $ million
Abu Dhabi Commercial Bank 272
Gulf Investment Corp. 246 (another 200 expected)
Gulf International Bank 966
Arab Banking Corporation 1200
Gulf Bank, Kuwait 740 (currency derivatives)
Source: Various Newspapers
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Direct Financial Impact
Source: Brad Setser, Rachel Ziemba, Council on Foreign Relations, January 2009, (as share of Dec. 2007 portfolio, excluding new inflows)
SWF Losses 2008, Estimates
-45
-40
-35
-30
-25
-20
-15
-10
-5
0
ADIA KIA QIA SAMA NorwegianOil Fund
Pe
rce
nt
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Direct Financial Impact
Source: Brad Setser, Rachel Ziemba, Council on Foreign Relations January 2009
SWF Assets Dec. 2008, Estimates
0
100
200
300
400
500
600
ADIA KIA QIA SAMA NorwegianOil Fund
Bill
ion
US
$
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Indirect Financial Impact
GCC Corporates (GCCI): Spread above LIBOR, HSBC/ DIFX GBCI Index
Source: HSBC, DIFX
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Irrational Exuberance?
Gulf Construction Projects
0
100
200
300
400
500
UAE SaudiArabia
Qatar Kuwait Bahrain Oman
Billi
on U
S$ Planned
Under Way
2007 1.4
2010 2.5
2017 4
2020 5
Source: MEED
Population Dubai (mn)
Until Oct. 2008: Capacity Constraints, Project Delays and Cost Escalation have become a daily occurrence
Since then: Bubble has burst – how bad will it be?
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Effects on the Real Economy
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Oil as % of Budgetand Export Revenues
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-2000
-1500
-1000
-500
0
500
1000
1500
NorthAmerica
Europe FormersSoviet Union
Middle East Asia LatinAmerica
Africa
2007 2008 2009Source: IEA
Oil Demand Down…,
… but so is investment
Supply constraints in the middle run
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Mitigating Measure Central Banks
• Inflation fears and reluctant following of Fed rate cuts in the first half of 2008 have given way to accommodative stance and successive rate cuts
•Initial UAE AED50 bn facility too passive and too expensive, interbanking rates did not come down Direct deposit of AED 70bn
• Kuwait more aggressive: Direct central bank deposits with banks, and early rate cuts from 5.75 percent to 4.5 percent on September 29
• SAMA equally cut its repo rate in October for the first time since 2007 and reduced reserve requirements from 13 percent to 10 percent
• No coordinated GCC policy Danger of erratic intra-GCC capital flows, which could make capital controls tempting
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Varying Deposit Insurance
• Kuwait: All deposits guaranteed without cap or time limit
•UAE: All existing deposits for three years, no limit, not new ones, all domestic and foreign banks with “significant operations”, regional and Iranian banks excluded
• Saudi Arabia: Announcement of general commitment but no details
• Qatar: No explicit guarantee
• Bahrain: Insurance scheme since 1994 up to BD 15.000. Larger commitments impossible because of deposits/ GDP
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SWF Stepping In?
• West: State is massively buying into the economy
•Russia and China: SWF investing in domestic Markets
•Kuwait Investment Authority (KIA) announces to invest in local capital markets
• Qatar Investment Authority (QIA) has set aside funds of $5.3 bn in order to buy 10-20% stakes of Qatari banks
• Abu Dhabi bailing out Dubai
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Imbalances: Picture changing?
Source: IMF, World Economic Outlook Dataset April 2009*Hong Kong, Taiwan, Singapore, South Korea** Russia, Norway, Venezuela, Algeria, Libya, Iran, Nigeria, Angola, Brunei. Iraq data not available
Current Account Balances
-1000
-800
-600
-400
-200
0
200
400
600
800
1000
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014B
illio
n U
S$
Euro area
Newly industrialized Asianeconomies*
Japan
United States
China
GCC
Other Oil exporters**
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Surpluses to Deficits?
Source: IIF
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Capital Outflows
Source: IIF
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Too much Debt
• Debt worldwide has risen dramatically. US, for example: Total private and public debt = $57 trillion. $187.000 for every man, woman and child
• In 2008, US debt increased 5 times faster than US GDP
• 79% ($45 trillion) of total US debt was created since 1990, a period primarily driven by debt instead of by productive activity
17
Source: Grandfather Economic Report
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Diversification into the Euro?
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Source: WGC
Dollar hedging
Watch this chart in times of quantitative easing:
Gold % of total FX Reserves 2008
0.010.020.030.040.050.060.070.080.090.0
USA
Euro
Area
United
King
dom
All Cou
ntrie
s
China
Japa
nIn
dia
Russia
Saudi
Arabia
Kuwait
Qatar
UAE
Per
cen
t
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GCC Food Security
60% import dependence by 2010 (FAO)
Main GCC food imports from: EU, AUS, Ukraine, Syria, Brazil, India, US
GCC eyes overseas investments: Sudan, Pakistan etc.
GCC Net Food Import
0
2000
4000
6000
8000
10000
12000
14000
16000
18000
1990 1992 1994 1996 1998 2000 2002 2004 2006
US
Millio
n $
Bahrain Kuwait Oman
Qatar Saudi Arabia United Arab Emirates
GCC
20
Source: Trademap
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Key Trends
• Money printing and lack of investments: Oil demand will remain sluggish but oil prices will rise again, possibly dramatically
• Asset management: More domestic, more strategic, more conservative. Less SWFs?
• Lack of institutions: More domestic project finance, a GCC bond market and credit for SMEs necessary
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Thank You
Gulf Research Center P.O. Box: 80758, DubaiUnited Arab Emirates
www.grc.ae Tel: +971 4 3247770Fax: +971 4 3247771