Slowdown In Asian Markets Might Hamper GCC Growth

The GCC countries’ rising trade and investment links with emerging Asian markets are increasing their dependence on global economic growth and exposure to foreign shocks, according to a Standard & Poor report.

Trade relations between the GCC and Asian countries (except Japan) have grown since 2005 due to a burgeoning demand among the latter for hydrocarbon commodities. In addition, growing unconventional energy production and energy efficiency in developed markets have reduced their import needs, fuelling Gulf trade to Asian markets.

“GCC exports of goods to the EU, the U.S., and Japan fell to less than 30 per cent in 2012 from 51 per cent in 1995,” said Sophie Tahiri, Standard & Poor’s economist.

“Meanwhile, Asia is now the GCC’s largest export destination, accounting for 57 per cent of total foreign sales.”

Though the Gulf states are well buffered by their fiscal and trade surpluses, the region could be vulnerable to a potential slowdown of growth in emerging markets, experts warn.

“A sharp slowdown in major emerging economies and an intensification of capital outflows, although not our baseline scenario, would affect GCC countries mainly through falling oil market prices,” said Tahiri.

Standard & Poor estimates that growth in emerging markets would be stifled if private investment in BRICS (Brazil, Russia, India, China and South Africa) falls around six per cent below the forecast in 2015 and 2016.

This decline in investments would reduce the emerging market GDP growth to 3.1 per cent in 2015 and 4.6 per cent in 2016, experts say.

“As growth in emerging Asia is becoming increasingly important in determining oil market fluctuations, our scenario assumes a decline in oil prices of $12 per barrel by 2016, to $90 a barrel from about $102 per barrel in our baseline scenario,” the report said.

“In this environment, we expect that GCC countries would be hit mainly through the falling oil market price. The oil price shock would reduce GCC real GDP by 0.8 per cent in 2015 and 1.2 per cent in 2016 compared to our baseline forecast.”

The report also predicts that the Gulf countries would scale back their oil production to deal with the falling hydrocarbon prices in the event of an emerging markets slowdown.

“We nevertheless expect that GCC states would implement fiscal expansion to support the national economy in a scenario of falling oil prices,” the report said.

“However, Bahrain would be the most vulnerable Gulf country in such a scenario because it’s the only country already running a fiscal deficit.”