As US suffers, Gulf states and Israel's neighbors feel less pain

While region is in-tune with uncertainty, impact to be more subdued than what the US, Europe, Japan face.

By BRENDA GAZZAR
Saudi Oil 88 224 (photo credit: )
Saudi Oil 88 224
(photo credit: )
Despite the current US financial crisis and global turmoil, the economies of the oil-rich Persian Gulf states are expected to remain resilient and continue to experience significant growth, experts say. "There is still a lot of growth that the region is going to witness in the coming months and the coming years," John Sfakianakis, chief economist at The Saudi British Bank, a subsidiary of HSBC Holdings, told The Jerusalem Post by telephone from Saudi Arabia this week. The economic turmoil "has an impact but it's not forcing the region to slow down in a substantial way," Sfakianakis said. While the region was very much in-tune with the uncertainty, the impact would be more subdued than what the US, Europe and Japan were facing right now. "The Gulf is quite robust," he said. Only if there was a global economic recession that significantly affected every region would the Persian Gulf states fall into recession with the rest of the world, he added. On the other hand, individuals who invested in the US companies that have recently faltered, such as investment banks Lehman Brothers and Morgan Stanley, may be counting their losses, he said. But experts warn that the US financial crisis will have an impact on the amount of revenue the Gulf states generate. As the economic slowdown is encouraging people in the US and Europe to sell their SUVs and use less gasoline, oil prices continue to dip; they are now around $90 a barrel. However, "it should not create problems for the state of the health of these economies," Sfakianakis said. The Gulf states are also being affected by a lack of available credit. Since international banks are less willing to lend, both governments and the private sector may be unable to finance all the projects they have in the pipeline, which could slow down major real estate projects. In addition, because of the credit crunch facing the world, it is becoming more costly to borrow on the international market, and thus more expensive to fund projects. But even in the worse case scenario, if the Gulf states have to slow their spending in the near future, they are still well cushioned and have ample foreign assets to tap into. "Over the years, they have accumulated money [from oil], and they use it pretty smartly in investing in additional industries in the Gulf States and also all over the world," said finance professor Dan Gala of the Hebrew University's Business School. In addition to investing in US and European government bonds, they have diversified their economies by investing in tourism, petrol chemical derivatives and financial institutions, he said. Tourism revenue could also be hurt as the global slowdown discourages travel and affects the airline industry. However, Galai expects any such impact to be marginal since the Gulf states depend more on visitors from Europe and Asia than from America. Finally, the economic uncertainty - along with corruption scandals that have come to light this year, particularly in Dubai - is also prompting international investors to withdraw their investments from Gulf stock markets, Sfakianakis said. Despite the recent instability at some American banking institutions, Sfakianakis and Galai said they did not foresee clients transferring their business from American banks to Gulf institutions. "It takes time to build a reputation, and most of those [Gulf] banks have not been global players so far," Galai said. There should not be a major economic crisis in the Middle East as long as governments in the region handled the situation appropriately, Galai added. Egypt, Jordan and Syria, for example, were not major exporters to the United States and their financial markets were not very integrated with America's, which reduced the impact, he said. Israel's economy was more resilient than American's and Israel has a less risky mortgage system, which made it less vulnerable to the kind of economic crisis facing the United States. But regional governments, Galai said, should continue to monitor the situation carefully and make sure prices did not climb too high, something that could help destabilize economies if not stopped in time.