The global financial turmoil is impacting GCC economies on three critical fronts, but the region looks strong enough to ride it out, says a key economic research report.

Lower crude oil prices, the drying up of foreign capital flows and declining demand for the region's energy-intensive industrial and building materials will likely put a damper on the fast pace of economic growth seen in the region in recent years, says the report, by Bahrain-based Gulf Finance House.

The report appeared in our sister publication, the Gulf Daily News.

However, continued robust government spending will help stave off the more severe effects of the global financial crisis and as long as Brent crude oil prices remain above the $60 per barrel mark, the GCC growth story will remain intact, says the GCC Economics and Strategy fourth-quarter report.

The GCC banking system, in general, remains resilient with the exposure of domestic banks to toxic assets low across most countries of the region.

"We are reasonably optimistic that GCC economies have weathered the global financial crisis without systemic threats," said GFH chief economist Dr Ala'a Al Yousuf, as the report was released.

The GCC Economics and Strategy report, which is produced quarterly by GFH's economic research department, provides an in-depth analysis of the most important global and regional economic developments and their implications for the GCC region.

The report is available on the GFH website at www.gfh.com

The GCC has been managing the challenges and the outlook is still positive, says the report.

After several years of very high oil prices that allowed strong government spending growth and a broad-based economic boom, the GCC economies have been among the most resilient in the world.

Their substantial public and private-sector surpluses have enabled them to be in the strongest possible position to weather the financial storm.

"Over the next two years, we expect the pace of economic activity to moderate somewhat to about four per cent to five per cent and inflation should come down," said Dr Al Yousuf.

"Barring a protracted fall in oil prices, the six GCC economies will not be exposed to systemic shocks due to solid macro and banking system fundamentals.

"However, the correction in real estate prices, particularly in the UAE, remains a concern."

The forecasted fall in oil export revenues suggests that GCC economies will join the fourth and last group of countries (mainly commodity exporters) impacted by the global economic slowdown next year, the first three being the US, the G7 and net commodity importers, said GFH senior economist Hany Genena.

"The global financial crisis is spilling over to the GCC via three main channels," he said.

These include:

Lower crude prices. The key risk to the GCC growth story is the longer-term outlook of crude oil prices rather than short-term volatilities.

However, the Brent price would have to fall to about $60 per barrel before GCC fiscal surpluses start to erode.

At this price, GCC oil revenues will be marked down by no less than 40pc next year, compared with this, resulting in lower fiscal and current account surpluses.

The exit of foreign capital, which has resulted in a significant fall in bank reserves and rise in interbank rates across the GCC.

This has been most pronounced in the UAE where the ratio of banks' foreign liabilities to total liabilities jumped four-fold, from 6.5 per cent to 25 per cent, between early last year and March this year.

The UAE has also seen sizable withdrawal of capital from equities. For example, Dubai equities saw a cumulative outflow of around $7 billion, about 3 per cent of gross domestic product, from January until the middle of last month.

Faltering demand for energy-intensive industrial and