By: Haroon Ismail
For those of you that thought the Gulf Cooperation Council nations were swimming in wealth, think again. The phenomenal oil revenues of the region, the outrageous construction forecasts, and the booming real estate markets are all coming into question as the economies of countries across the world have begun to change drastically. What is known as one of the most resource-rich regions in the world is slowly beginning to lose its appeal to investors.
The Gulf countries are presently in good shape as cash surpluses may compensate for lower oil revenues, but a steady drop in oil prices will more than likely have a negative impact on investor confidence. This has already become evident across the globe as investor confidence itself has been one of the principle causes of the plunging stock market and property values.
When confronted with the issue of the global crisis, Gulf ministers of finance have reassuringly stated that their policies of strict monetary oversight have protected and will continue to protect their countries. The governments of the countries have constantly been reassuring abundant liquidity in the financial sector, underlining their confidence in their economic strength and stability. Unlike the rest of the world, the GCC leaders seem to keep their heads up high with pride in their laws of oversight. Even they are beginning to realize, however, that the recessionary signs in developing countries could indirectly impact the GCC economies, as stated by the Saudi finance minister, Ibrahim al-Assaf. Oil-fueled cash surpluses indubitably put the GCC nations in a better position than other countries, but there is no way we can state that there will be no overall effect on the economies of the GCC, especially with investor uncertainty and concern. At a meeting held in Jeddah, the participants came to the conclusion that the adverse impact of the global crisis would reach the thriving GCC economies, particularly the business sector.
According to data from Zawya, a Middle East business information website, Saudi Arabia’s Tawadul index is down by more than 44 percent and the Dubai Financial Market is off 45 percent since January. There is no doubt that the credit crisis is impacting the Gulf nations. They have demonstrated their retaliation by unifying and coordinating with each other to act against that which is impeding the smooth operation of banks and stock markets in the region. These “emergency meetings” have been called to discuss their response to the global downturn that threatens their renowned six-year economic boom.
At this point, the GCC states have decided to increase confidence in their financial sectors by injecting large amounts of liquidity into their banking systems, a tactic that many countries across continents have been attempting to use. Fortunately for them, the economies are showing strong indications of relatively higher growth rates and lower inflationary levels. However, they should remain cognizant of liquidity shortages of Gulf banks as a result of the credit crisis, especially with their limited ability to borrow on the international debt market.
So what are the decided solutions? The plan to have the entire gulf nations unified under a single currency in 2010 will more than likely ease the economic tension, as a single central bank will be a supervisory body that can help in potential crisis hours. As an example, to secure the economy, the UAE led the way in making $32.7 billion available for its financial sector and guaranteed all deposits in UAE-based banks. The unification under a central bank will facilitate a similar availability of funds for all of the countries. Ideas of having a special department designated to plan out rescue packages and solutions to these problems are currently proposed, but the efficacy of such solutions still remains questionable.