Slowdown in the Gulf reverberates in the Middle East

Posted in Broader Middle East | 30-Oct-08 | Author: Michael Slackman| Source: International Herald Tribune

A man fed a camel as he awaited tourists in front of the Giza pyramids near Cairo. Egypt's economy depends heavily on tourism from the Gulf region.

CAIRO: For many of the financially strapped nations of the Middle East, the oil-rich countries of the Gulf have served for years as an economic lifeline, providing jobs for their citizens, who in turn sent millions of dollars back home; tourists, who filled their hotels when Westerners were reluctant to visit; direct investment; and the kind of checkbook diplomacy that has helped stabilize an often volatile region.

Suddenly, that lifeline appears frayed, dangerously so for countries like Egypt and Jordan, as the energy-rich nations find themselves pulled into the global financial crisis and undermined by dropping oil prices. Across the Gulf, stock markets are down, causing panic among investors. Even in the boomtown of Dubai, United Arab Emirates, the once-mighty real estate market has cooled as access to credit has tightened.

Governments across the region have intervened.

The United Arab Emirates injected $32 billion into its banking system and guaranteed bank deposits. Saudi Arabia has offered billions of dollars to make loans available to its citizens. And Kuwait, which had already cut its benchmark rate, this week moved to prop up its second largest bank.

But the era of sky-high oil prices, while now a memory, left most of the region's capitals with enough cash reserves to cushion the blow, economists and financial experts in the region said. And as long as oil sells for more than $55 a barrel, most of the governments will take in more than they have allocated in their budgets, regional analysts said.

"We are not calling for a recession in the Gulf," said Marios Maratheftis, regional head of research for Standard Chartered Bank in Dubai. "We are looking at a slowdown."

But a slowdown in the Gulf might feel like a crash landing in places like Egypt, Jordan and Syria, where Gulf money has helped prop up strained economies.

"When there is growth in the Gulf, there will be growth in the whole Arab world," said Rashad Abdou, a professor of economics and international finance at Cairo University. "There would be more tourism, more money in the stock market, more investments. And the opposite is true. With a shrinking or recession, they will not come for tourism, they will not put their money in the stock market, they will not invest and they will not be able to hire Egyptian workers."

Egypt receives about half of its $6 billion in annual remittances from more than two million citizens living and working in the Gulf area, while about 60 percent of its tourists come from that region, Egyptian economists estimated. Syria has benefited from Gulf investments in large real estate projects, helping offset some of the isolation imposed by United States sanctions. Jordan receives about $2 billion annually in remittances from workers in the Gulf and takes in about $500 million in financial aid from Saudi Arabia alone.

"I expect investments from the Gulf to slow down or stop because they have to deal with their own problems before they invest in other countries," said Nabil Samman, an economist who runs the Damascus-based Center for Research and Documentation. "Syria will be affected in terms of the Syrian people who send money from the Gulf. There are close to a million Syrians in the Gulf area."

Extravagant oil wealth has helped transform not only the Gulf nations on which it was bestowed but also the greater Arab world. Egypt, once the cultural and political capital of a region that stretched from Morocco to Iraq, has taken a back seat to the petro-fueled economies and politics of places like Qatar and Saudi Arabia.

The Gulf states took on an aura of invincibility, especially as oil prices crested this summer near $150 a barrel. And even as the financial crisis spread from the United States to Europe and into Asia, there was a feeling in the Middle East that oil-rich nations would be spared. But then the price of oil began to drop, precipitously, revealing a financial anatomy in many nations that was far from invincible.

Sparkling Dubai was powered by the greatest construction boom in Middle Eastern history. But it was a dream built on a promissory note. Debt increased 49 percent from 2007 to 2008, so when the credit crisis came it hit Dubai hard, financial experts there said.

Dubai had to turn to the government of the United Arab Emirates for an injection of capital to keep its banks afloat. Optimists are hoping that the cooling of Dubai's overheated real estate market will ultimately have a positive effect on the emirate, though they recognized it would not be without pain.

"The subprime crisis, which started in the U.S. in 2007, has developed into a full-blown international crisis with potentially severe consequences for the GCC countries and their growth models," Eckart Woertz, an economist at the Gulf Research Center, wrote in a report issued this month. The GCC, or Gulf Cooperation Council, is a regional association that includes Saudi Arabia, the United Arab Emirates, Qatar, Oman, Kuwait and Bahrain.

On Sunday, Kuwait suspended trading in shares of its second largest bank, Gulf Bank, after a customer defaulted on a derivatives contract costing the bank hundreds of millions of dollars. That further spooked the equities market in Kuwait, where the main index has dropped 19 percent for the year.

"Every single person who has $100,000, which is to say, 20,000 dinars, is really involved in this," Suleiman al-Mutawa, a former planning minister in Kuwait, said of those invested in stocks. "It adds up to family budgets, to family expenditures, to vacations, hence people are upset."

But Kuwait has done well compared with Saudi Arabia, where the main stock index has lost half its value since the start of the year.

While the GCC wrestles with its growing problems, its neighbors anxiously await the potential fallout from next door. There are signs that the pain is spreading.

In Cairo, Karim Hussein, 27, has worked for the last three years in offices that arrange work visas for Egyptians looking for employment in the Emirates. He said in the past they would get requests for up to 70 visas a month. Now they get 10, he said, "if we get anything at all."

In Amman, Jordan, Manal Saleh, 35, works for a company that sends skilled workers to the Gulf. She said opportunities there have dropped by about half since the start of the year. "In light of the financial situation, demand has shrunk," she said.