This year opened up with arguably unexpected optimism as a cluster of data suggested that the global economy might finally be turning a corner. After a number of stimulus-fueled rebounds during the past couple of years, this was nothing new but it may have once again helped disguise the uncomfortable reality that the structural challenges facing the global economy have proven frustratingly persistent. The US data has again turned somewhat more wobbly while the European situation highlights the ephemeral benefits of the bail-outs and crisis summits orchestrated by the European Commission. Under the burden of fiscal consolidation, many European economies are facing a double-dip recession. Worries have multiplied even about China. As this global economic recovery, such as it is, once more appears to hit turbulence, the question of Saudi and GCC vulnerability to exogenous shocks presents itself with renewed force. The GCC region has increasingly insulated itself from European risks during the global crisis, partly due to its growing focus on Asia, partly as a result of general de-risking in recent years. Consequently, the main immediate vulnerability is likely to be in the area of market and business confidence. The regional financial markets have shown repeatedly shown themselves sensitive to external shocks and volatility in funding costs. The relative underperformance of the Gulf stock markets during the past several years was to a large extent attributable to external factors, while both bond and sukuk issuance proved volatile as recurrent periods of market stress repeatedly delayed issues. This is a consideration at a time when the total volume of GCC bonds and sukuk maturing in 2012 is estimated by Standard & Poor’s at $25 billion while the corresponding figure for 2013 is $35 billion. The requirements are particularly heavy in Dubai. From a macroeconomic perspective a renewed deterioration in the global backdrop would risk perpetuating the lop-sided pattern of economic growth seen during much of the economic crisis. As private sector confidence has come under pressure, government spending has played a critical important role in supporting economic activity and ensuring continuity. Thankfully, Saudi Arabia’s macroeconomic stability and low leverage have positioned it well for the challenge. Although confidence in the region has improved palpably in recent months, renewed external turbulence, especially should it translate into fears about oil demand erosion and concomitant price weakness, however temporary, risks testing the positive momentum. Renewed global turbulence may also result in new bank provisions, potentially dampening loan growth from its recent rebound. The Gulf region has particular structural vulnerabilities caused by its dependency on European bank credit, notably in the area of large syndications. Even beyond the specific risks created by an economic relapse in the Euro-zone, the financial difficulties and recapitalization requirements of European banks are causing them to retreat from the regional syndications market. European banks, as of September, accounted for some $237 billion, or roughly 40 percent of total foreign financing in the GCC. Even though regional and especially Asian banks are stepping in to fill the void, their ability to do so is constrained and may not prevent a near- to medium-term gap from emerging. At the same time, the cost of funds is likely to edge up. This is a major consideration at a time when the regional economies have a project pipeline estimated at as much as $1.8 trillion. Moody’s Investors Services recently estimated Saudi Arabia, Kuwait, and Oman to be least reliant in the region on European banks with total European financing equal to roughly 10 percent of their GDP. Other estimates put the share of euro zone banks at over 15 percent of total Saudi bank credit. Qatar and the UAE have European bank loans equal to some 25 percent of GDP. For Bahrain, the figure is as much as 75 percent, given the high dependency of the onshore retail banks on European syndications, but Bahraini banks have successfully matched their foreign assets and liabilities. By contrast, European funding accounts for some 40 percent of the $120 billion of liabilities held by Bahraini offshore wholesale banks, constituting a potential significant structural challenge. Any gaps would necessitate reorientation to new funding sources, including the region’s developing capital markets. But overcoming market hits to confidence will involve its own challenges. — Jarmo T. Kotilaine is chief economist at The National Commercial Bank, Saudi Arabia
A curious sense of deja vu
