Europe crisis threatens the Gulf
Europe’s leaders were back in Brussels yesterday to thrash out a viable solution on Greece’s second bailout, the recapitalisation of banks and the retooling of the 440 billion (Dh2.2 trillion) rescue fund.
The International Monetary Fund (IMF) and analysts from the Middle East region said yesterday that regional economies going through political transition and their relatively stronger Gulf counterpart will face down turns if European leaders fail to find a solution to the debt crisis.
The gathering in Brussels yesterday marked a pause to the six days of haggling among finance ministers, central and commercial bankers and heads of states over the shape of the rescue efforts. The cancellation of a finance ministers’ meeting yesterday pointed to further discord among Eurozone nations on the shape of the rescue plan.
Analysts said yesterday the failure of Europe to arrive at a quick solution on the sovereign debt crisis and recapitalisation of banks, and the threat of slow down in emerging markets like China could adversely impact economic growth of Middle East economies.
“The direct linkages of European crisis to Gulf economies are relatively weak. But a decline in oil prices and the absence of European banks in the region’s loan syndication markets could affect financing of a number of projects in the region which could manifest in a slowdown,” said V. Shankar, chief executive for Standard Chartered in Europe, Middle East, Africa and the Americas.
“Nearly 50 percent of cross border loan syndications in the region comes from European banks. Massive deleveraging in Europe could mean these institutions will be virtually absent in the market,” Shankar said.
The IMF said yesterday the downside risks to the region from the external environment have increased sharply in recent months, as concerns have intensified over continuing financial sector weakness and sovereign debt sustainability facing Europe and advanced economies. “Compared to expectations in spring 2011, a significantly higher likelihood is attached to further weakness in advanced economies’ growth and to the unfolding of a tail event in Europe,” said Masoud Ahmad, director of the IMF’s Middle East and Central Asia Department.
Oil prices vital for Gulf
The IMF yesterday warned that the rising breakeven oil prices combined with a potential decline in oil prices could reduce the fiscal manoeuvrability of Gulf states. However, economists and bankers agree that compared to 2008, the region is broadly in a better shape to weather the global slowdown.
“Progress on corporate deleveraging, more robust banking systems, higher but broadly still reasonable budget breakevens, a heavy infrastructure pipeline and sovereign wealth are likely to cushion the downturn,” Turker Hamzaoglu, an economist with Bank of America Merrill Lynch wrote in a recent report.
Analysts said yesterday slowing growth in emerging markets could do more harm to oil exporters than the Eurozone crisis. “Economies like China are projecting single digit growth and economic growth largely driven by domestic economy. Clearly this could mean decline in oil demand and prices,” said Shankar.
According to BoA Merril Lynch, the most relevant global risk to Mena stems not from a possible US recession or the Eurozone debt crisis (barring the crisis evolving into a full blown financial crisis), but from a potential hard landing in China into a slower growth path dampening oil demand prospects over the medium-term. “We believe GCC policy-makers care as much, if not more, about how sustained is an oil price drop, rather than just how low it gets — and lower growth in China could provide just such a shock,” said Jean-Michel Saliba, an economist with BoA Merrill Lynch.
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