Dr. Eckart Woertz Program Manager Economics Gulf Research Center Dubai

Copyright © Gulf Research Center 2009 All rights reserved

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


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


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



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



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

$


Indirect Financial Impact

GCC Corporates (GCCI): Spread above LIBOR, HSBC/ DIFX GBCI Index

Source: HSBC, DIFX


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?


Effects on the Real Economy


Oil as % of Budgetand Export Revenues


-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


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


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


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


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**


Surpluses to Deficits?

Source: IIF


Capital Outflows

Source: IIF


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


Diversification into the Euro?


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


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


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


Thank You

Gulf Research Center P.O. Box: 80758, DubaiUnited Arab Emirates

www.grc.ae Tel: +971 4 3247770Fax: +971 4 3247771

Dr. Eckart Woertz Program Manager Economics Gulf Research Center Dubai

Documents

Transcript of Dr. Eckart Woertz Program Manager Economics Gulf Research Center Dubai