Mideast growth may decline by 50 percent

Bloomberg

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Growth in the Middle East will fall by 50 percent this year, the International Monetary Fund, or IMF, forecast, as it encouraged countries in the region to boost government spending to stimulate their economies.

The economies of the world’s three biggest oil producers, Saudi Arabia, the United Arab Emirates and Kuwait, will contract as lower energy prices force production cuts and tighter credit availability squeezes the private sector, the Washington-based lender with 185 member nations said in its Regional Economic Outlook report yesterday.

Middle Eastern countries were hurt by the first simultaneous recession for six decades in the U.S., Japan and Germany as oil prices plummeted around $90 a barrel from a record high in July of $147.47 a barrel and international banks stopped lending to local companies. The region’s oil importers have also been hit by falling foreign investment.

"Our basic point has been that you save for a rainy day," Masood Ahmed, Middle East director for the IMF, said at a conference in Dubai. "It’s certainly raining."

Saudi government continues spending

Saudi Arabia, the biggest Arab economy and world’s largest oil exporter, said it will have a 65 billion-riyal ($17 billion) deficit this year as the kingdom maintains fiscal spending to build infrastructure and create jobs. The Saudi government plans to spend $400 billion over the next five years to stimulate the economy.

For the region as a whole, gross domestic product is projected to grow 2.6 percent this year, down from 5.7 percent in 2008, the IMF said. Saudi Arabia will have a decline in economic growth of 0.9 percent, compared with a 4.6 percent increase last year.

"The drop in oil prices has most directly affected the oil-exporting countries, whose oil revenues in 2009 will be less than half what they were in 2008," the IMF said. "The tightening of international credit markets and lower investor appetite for risk is affecting capital inflows, depressing asset prices and reducing investments in these countries."

The economy of the United Arab Emirates, the Arab world’s second-largest economy, is forecast to contract 0.6 percent after growing 7.4 percent last year, while Kuwait’s economy is projected to contract 1.1 percent after 6.3 percent growth in 2008, the IMF said.

"The short to medium-term outlook for the U.A.E. and the Abu Dhabi economy remains fairly robust," Ahmad Abu Ghaida, acting director of economic planning at the Abu Dhabi Department of Economic Development, told the IMF conference in Dubai yesterday. "We expect to see positive growth in the second half of 2009 and 2010."

Guaranteeing deposits, supporting asset prices

After the global credit crunch started, Gulf central banks moved to protect their banking systems and add liquidity by providing guarantees for deposits at commercial banks. Regional sovereign wealth funds were also asked to support domestic asset prices, the IMF said.

"There is a little bit of a concern because of the contraction of financing in emerging markets," Ahmed said. "You will see in the coming 12 months an increase in the number of corporate defaults."

The U.A.E. central bank in October set up a 50-billion dirham ($13.6-billion) credit facility for lenders and the federal government said it would deposit 70 billion dirham with banks to provide liquidity and lower interest rates after global credit markets froze.

"We think 2009 will be a reality check for the region," Howard Handy, chief economist at Riyadh-based Samba Financial Group, said at the conference. "This will prompt a healthy re-prioritization of the huge project pipeline, a correction in overheated real estate markets and a wakeup call for banks."

Among non-oil producers, Lebanon, with more than 400,000 expatriates in Gulf countries, is set to experience a slowdown because of higher debt-servicing costs and the decline in remittances from workers in the Gulf. The Lebanese economy is forecast to expand by 3 percent, after 8.5 percent growth in 2008.