Gulf economies could be hit by withdrawals of foreign cash as the mounting debt turmoil gripping Europe prompts euro-zone banks to cut their overseas loan books. A worsening of the crisis may also threaten inflows of long-term investment to the region, say economists. "A liquidity crunch in the euro area risks not only [a situation] leading to a capital flight from the GCC, but may also temper longer-term foreign capital inflows," Jarmo Kotilaine, the chief economist of NCB Capital of Saudi Arabia, said in a research note released yesterday.
Euro-zone banks had a net exposure of about US$174 billion (Dh639.1bn) to Gulf economies at the end of last year, significantly higher than the $83bn net exposure UK banks had to the region, says the Bank for International Settlements. US banks had an exposure of $34bn to the GCC. Before the global financial crisis, levels of foreign direct investment (FDI) from the EU to the GCC were rising. In 2007 the GCC received ?3.8bn (Dh16.9bn) of FDI from the EU, which was 11 per cent of the regional total. That was up from the 2006 figure of ?2.4bn, or 8 per cent of total FDI, according to NCB Capital.
Governments in the euro zone are pushing through stringent cost-cutting measures in a bid to reduce bloated budget deficits and contain the sovereign debt crisis. Concern has hit financial markets in recent weeks that countries such as Spain and Portugal could follow Greece into debt payment problems. "The appetite for future investment to emerging markets could be impacted if the situation in Europe deteriorates significantly, which would presumably include investments to the Middle East," said Tim Fox, the chief economist of Emirates NBD.
GCC markets were previously hit by the exit of foreign capital on the eve of the global slowdown, when an estimated Dh180bn in speculative money was withdrawn, leaving the local economy starved of cash. Much of that money had flowed in on the misguided expectation that the dirham would be revalued. Analysts say there have been signs emerging that some of these investment flows were slowly starting to return as foreign investors hedge against a strengthening oil price.
Mr Kotilaine said the EU crisis also posed a threat to the Gulf through a possible reduction in trade with one of the region's biggest international trading partners. Last year, the EU imported $40bn from the Gulf and exported $86bn to GCC economies. In 2008, oil accounted for about 76 per cent of GCC exports to the EU. "The more uncertain demand outlook in turn has at least short-term implications for the oil price which, as seen in 2008 and 2009, remains critical for setting the overall tone for economic activity in the Gulf," said Mr Kotilaine.
Due to a renewed weakness in the EU and global economies, NCB Capital reduced its GDP forecast for Saudi Arabia this year to 3.8 per cent from 4 per cent, based on an average oil price of about $76. tarnold@thenational.ae
