NICOSIA: Gulf states are bracing for the shakeout in the value of their massive foreign investments and the impact of lower oil revenues as the US financial crisis jolts the global economy, analysts say. But the banking sector in the six-nation Gulf Cooperation Council appears safe, they have told AFP.
GCC states have earned well over $1 trillion from high oil prices in the past six years and are estimated to be holding global investments worth $1.5 trillion run by their sovereign wealth funds (SWFs). “The US banking crisis will further slow global economic growth, dampening demand for oil. This will cause oil prices and revenues to drop sharply,” said Saeed Al-Shaikh, chief economist of Saudi Arabia’s National Commercial Bank.
GCC member states Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates together pump 16 million barrels a day, or about 20 percent of world supplies, and hold 45 percent of proven global oil reserves.
“After this crisis, Gulf states should be prepared for cheaper oil prices and a drop in their oil revenues,” which account for more than 90 percent of public income, Kuwaiti economist Hajjaj Bukhdur said. “I think demand for oil will decline even from China because its exports to the United States are expected to take a dive as a result of the banking crisis,” Bukhdur told AFP.
Global markets were shocked on Monday when Lehman Brothers, the fourth largest US investment bank, filed for bankruptcy and Bank of America bought troubled Merrill Lynch for $50 billion.
Markets were further rattled by the near bankruptcy of insurance and financial services group AIG, one of the largest companies in the world, which was staved off by a US government rescue.
The price of crude oil dropped below $90 on Wednesday losing around $10 a barrel within two days of the US banking crisis. It has now plunged by almost 40 percent since striking record highs above $147 per barrel in July.
On Tuesday, OPEC cut its world oil demand growth forecast for 2008 to 1.02 percent from 1.17 percent in the face of falling demand already occurring in the United States, the world’s biggest consumer of energy.
The Gulf banking system is not expected to be affected but Gulf nations are fretting about their huge foreign investments, estimated by some reports at more than $1.5 trillion.
“I don’t think any Gulf financial institution will be directly affected by the collapse of Lehman Brothers because they hold no key stake in the giant investment bank,” Al-Shaikh told AFP.
GCC central bank governors, meeting in Saudi Arabia, said on Tuesday that their banking system will not be affected by the US financial crunch.
“But certainly there is serious concern over the fate of other major US financial institutions in which Gulf SWFs and private investors hold important stakes,” Al-Shaikh said.
International Monetary Fund chief Dominique Strauss-Kahn, who met with the bankers, said the region’s banking and financial sectors had proven “quite resilient” to the crisis. Bukhdur estimated that the value of Gulf SWFs investments in the United States and Europe was around a trillion dollars a year ago when the US subprime crisis began to unfold. “Gulf SWFs assets in the US and Europe have dropped by 30 percent during the past year, or an estimated book loss of $300 billion,” Bukhdur said, referring to losses incurred as a result of the US subprime and financial crises.
Al-Shaikh said Gulf SWF investments in the United States are not concentrated in the financial or banking system but are well diversified over several sectors and are run in a highly professional way.