Slowdown in emerging markets threatens Gulf economies

Recent economic data point towards a bumpy growth in China, the world’s second biggest economy and one of the biggest markets for GCC oil. Above, a securities exchange house in Shanghai. EPA

A sustained slowdown in emerging markets would shave as much as 2 per cent off GCC GDP, Standard & Poor’s said in a report yesterday.

The warning comes as recent gloomy economic data point towards rocky growth in China, the world's second biggest economy and one of the biggest markets for GCC oil. Wobbles have also hit the economies of India, Brazil, Russia and Turkey, although the former appears to be now picking up.

The credit ratings agency said it did not anticipate a sustained pullback in emerging markets in its principal forecast. But the threat of a further capital markets sell-off remained “significant”, it warned.

“We think that GCC countries would be hit mainly through the falling oil market price rather than through capital outflows as experienced by some other emerging markets,” said Sophie Tahiri, S&P’s economist and one of the authors of the report, in an emailed response to questions.

Trade between the GCC and emerging markets, particularly those in Asia, has intensified in recent years at the expense of Europe, the US and Japan. GCC exports of goods to the US, EU and Japan slipped to less than 30 per cent of total exports in 2012, from 51 per cent in 1995, according to the report. Over the same period, exports to China swelled from 1 to 9 per cent, with exports to India growing from 5 to 11 per cent.

Investment ties are also growing, with a clutch of GCC investors active in a range of sectors in Asia, spanning financial services to telecoms.

But investor worries have focused on China’s growth path in recent months. The country’s exports unexpectedly slumped in February and other economic data and business sentiment surveys have also consistently fallen below expectations.

At the same time, GDP growth also edged down across the rest of the Brics (Brazil, Russia, India, China and South Africa) at the start of the year. Many emerging markets outside the GCC have also been hit by a capital market sell-off, hastened by the US Federal Reserve's decision in January to begin tapering its asset purchases programme.

S&P estimated that under a scenario involving an intensification of a capital flight along with a 2.4 per cent dip in GDP in the Brics nations between next year and 2016, oil prices would be dented by US$12 per barrel by 2016 to $90 per barrel.

The oil price drop would cut GCC GDP by 0.8 per cent next year and 1.2 per cent in 2016 compared with S&P’s baseline forecast, it said. North Sea Brent crude was trading at $107.88 per barrel yesterday.

“In Saudi Arabia, we would expect the government fiscal balance to fall into deficit, declining significantly by five percentage points,” said Ms Tahiri. “This is because most of government’s revenues come from the oil sector. The UAE fiscal balance, by contrast, would stay in positive territory, only falling by 1 percentage point to about 5 per cent due to more diversified government revenues.”

Many analysts are forecasting a slight climbdown in oil prices in the coming years as growth demand ebbs in China and as the US and other markets ramp up domestic energy output.

“What happens in China will affect the Middle East through demand for oil,” said William Jackson, an emerging markets economist at Capital Economics. “We think that growth in demand will slow in China over the next few years and with the rise in energy production in the US, it means we’re not likely to see the same sort of growth in the GCC we did in the past.”

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