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Why the Gulf could swerve the dreaded global recession

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High expectations of avoiding recession in Dubai and the Gulf
  • UAE economy diversified and policymakers learned from 2008
  • Despite global inflation, GCC countries will benefit from high oil prices 

The UAE and wider Gulf markets will likely avert a recession, experts have said, despite fears of a global slump as the US Federal Reserve announced a 75 basis point hike to interest rates – its largest since 1994.

In early trading, bourses in Dubai, Abu Dhabi and Qatar fell on Thursday after local central banks announced they would follow the US Federal Reserve and up interest rates, in a bid to stymie inflation and rising costs. Saudi Arabia bucked the trend and rose 0.6 percent, cushioned by state oil giant Saudi Aramco rising by the same percentage point on the back of increasing oil prices.

A survey of 49 US macroeconomics experts conducted at the beginning of June by the Financial Times and the Initiative on Global Markets, an economic policy and market research centre at the University of Chicago, said over two thirds of economists believe a recession is likely to hit in 2023. 

A May report by the Institute of International Finance said in a report the global economy is “teetering on the brink of recession” as the war in Ukraine, Covid-19 lockdowns in China and “a hawkish” US Federal Reserve weigh on activity worldwide.

“In the GCC in general, and UAE in particular, I do not see a recession looming on the horizon,” UAE-based economist Kassim M. Dakhlallah told AGBI. 

“The UAE economy is well diversified and policymakers learned a great deal from the 2008 global financial recession and the recent global pandemic. The two events motivated policymakers to initiate macro economic policies that mitigate the impact of internal or external shocks.

“Moreover, the UAE as well as the rest of GCC has sovereign wealth funds that played significantly to the stabilisation of the macroeconomy, particularly during 2008 and 2020. Those funds are instrumental to create a fiscal space for the economy and mitigate the impact of external shocks.”

The UAE has launched a series of regulatory, fiscal and public finance reforms over the past years to drive national economic growth including overhauling its commercial companies law to attract more foreign capital and introducing long-term residency schemes.

Oil price bounty acts as buffer

Dakhlallah added that economic shocks would be buffered by high oil prices which benefit crude producers.

“Although the world economy is suffering from inflation, which could subsequently bring recession, oil-exporting countries – GCC countries – will benefit from high oil prices, [which] means more revenue and an improvement in their primary government budget,” he said.

“However, with the rise in prices, governments in the GCC, and particularly in UAE, should keep the extra oil revenue in their stabilisation funds or as reserves in central banks, and they should slow down on their fiscal spending, or it will create inflationary pressure.”

Gulf economies are projected to receive up to $1.4 trillion in additional revenue in the next four to five years as oil prices remain high and headline inflation stays low, the International Monetary Fund said in its regional outlook last month.

Dakhlallah said the only likelihood of severe economic downturn in the region would come in the shape of “a forced recession” generated by external events beyond the control of policymakers in the UAE and wider Gulf.

The biggest drivers of inflation over the past several months have been rising prices for food and gas, following Western sanctions against Russia – the world’s second-largest energy exporter – since the Kremlin invaded Ukraine in February. 

“Unless the global recession is severe, like the one caused by the pandemic, [I doubt] the GCC will be affected,” Dakhlallah added. 

“But again, the global recession impact on GCC economies will not be the same. It depends on the level of interdependence and openness with the rest of the world. For instance, Saudi and Kuwait will not be as hit as UAE in a global recession.”

Emirati investor Sabah Al-Binali, executive chairman of OurCrowd Arabia, a subsidiary of the world’s largest global venture investing platform, said the region would be cushioned by the rising oil price. 

“With oil prices where they are, this will help mitigate any inflationary pressure as the Gulf economies expand due to government revenues,” he said.

Gulf currencies tied to the dollar

However, with the Gulf’s currencies tied to the dollar, Hussain Al Alawi, International Partner and member of the Global Advisory Board at Zurich headquartered M&A advisory Millenium Associates cautioned that non-oil sectors could still take a hit.

“Obviously this means higher rates for the Gulf, given the dollar pegging,” Al Alawi said.

“While higher rates are good for the banks, we can expect a negative impact on non-oil sectors and investments in these sectors. I would expect this to be balanced in some part through prudent management of the increased inflows from oil revenues by regional governments.”

GCC resilient despite import vulnerabilities

Nigel Green, deVere Group CEO and founder, added: “The GCC region will not be immune to the global broad-based inflation trend. Indeed, it will be a challenge because the region is import-dependent in many respects. However, the current environment will not be as bad with previous inflation spikes. The region is more resilient this time. We expect inflation to ease throughout this year.”

Jamil Naayem, principal economist – Mena Economics & Country Risk, S&P Global Market Intelligence, added that raising interest rates would help contain pressures on consumer prices across the GCC. 

“In our opinion, more aggressive monetary policy normalisation in the GCC would only mildly dampen real fixed investment growth, which is likely to remain favoured by the energy revenue windfall in the near term and result in higher real GDP growth in 2022,” Naayem said. 

“However, while the GCC hydrocarbon economy is likely to get a boost from higher oil and gas receipts this year, higher interest rates might complicate the region’s economic diversification efforts and hence, somehow impact the non-hydrocarbon economy. 

“With GCC currencies tied to the greenback, and the latter appreciating relative to emerging market currencies such as those of China and India, or even Egypt and Turkey, we think that GCC-produced industrial goods would lose some competitiveness vis-à-vis some of these emerging market peers.”

Naayem added that the regional services sectors, mostly tourism and hospitality, could be negatively affected as a result of GCC currency strength versus emerging market peers.

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