Conditions for an upturn are finally in place in the GCC economies and it will be Saudi Arabia, Qatar and Abu Dhabi (UAE) leading the way, says the HSBC Global Research in its outlook.

“However, our concerns are focussed on the downside risks to recovery, particularly the possibility that credit growth will be slow,” said David Bloom, global head of FX strategy, and Simon Williams, chief economist, Gulf markets.

As 2010 progresses, however, the risk that regional economies will once again run too hot and that inflation will return may occupy centre-stage, they said.

The economists noted that despite the enormous wealth at its disposal, the Gulf has proved more vulnerable to global recession than many other emerging markets.

“A disappointing policy response, the excesses of the previous boom and an ongoing credit squeeze have also slowed recovery,” they said.

The enormous wealth at the disposal of its governments, the early recovery in oil prices and the importance of domestic demand as a driver of economic growth should have seen the Gulf outperform most other emerging markets over the past year.

“This hasn’t proved to be the case. Although the region has weathered the global recession, the Gulf economies have decelerated more sharply than much of Asia, and have been slower to recover,” they said.

“So far we see no data to suggest that this downswing in economic activity has passed. Our view, however, is that the conditions for recovery are now in place and that a somewhat overdue pick up in activity is about to begin,” the economists said.
“In part this reflects our confidence that fiscal policy is set to gain traction as delayed expansionary spending from 2009 is coupled with increasingly confident expenditure growth in 2010,” they said.

After a 12-month credit squeeze, private and government corporates also look poised to regain access to leverage from local and overseas sources, revitalising capital spending.

“With the dollar peg likely to remain in place, we expect monetary policy to remain highly accommodating. All regional economies are likely to prosper but our expectation is that it is Saudi Arabia, Qatar and Abu Dhabi that will lead the way,” they said.

“Our long term view for the Gulf economy is bullish and unchanged. For us, the regional dynamic derives from the strength of emerging market economic growth that brings with it a sharp rise in demand for energy,” said Williams.

This increase in consumption will tend to push oil prices upward, driving a sustained transfer of wealth into the energy-rich gulf region, and setting in train a wholesale overhaul of its domestic infrastructure, an upgrade of its service sector and a steady increase in employment, he said.

The industrialisation of the region’s hydrocarbon base through the expansion of the Gulf’s energy-intensive, export-orientated manufacturing and industrial sector will also deepen its economic base.

This transformative process came to a halt towards the end of last year as the excesses of overly rapid growth proved impossible to sustain, he observed.

When the onset of global recession deprived the Gulf of access to international funding and the supply of domestic credit was squeezed, the policy response was sufficient to stave off systemic crisis but inadequate to reverse the slowdown in the manner seen in much of Asia, he noted. – TradeArabia News Service