KUWAIT CITY, Jan 11: Economies in the Gulf Cooperation Council (GCC) — comprising Saudi Arabia, UAE, Kuwait, Qatar, Oman & Bahrain were adversely impacted by the fallout of the financial crisis in September-08 with all states showing contraction in their economies due to the sharp drop in oil prices, flight of foreign capital, sudden tightness in international credit markets which were used in the pre-crisis period to fuel the growth in some local economies (especially Dubai).
As a result, the combined nominal GDP of the 6 GCC states contracted by 18.2% in 2009 to reach USD 874 billion following a significant growth of 25% in 2008 that was fuelled by rally in oil prices, large fiscal surpluses and ample liquidity in the local and international credit markets.

Substantial contraction of 21% was evident in Saudi Arabia, the largest economy in the GCC region, as well as Kuwait, the third largest economy, with its GDP recording the highest contraction at 24.2%. United Arab Emirates’ economy was also adversely affected by the financial turmoil with a drop of 12% in nominal GDP to reach USD 224 billion while Qatar was less affected with a contraction of 11.2%. In real terms the GCC economy marginally grew at 0.4% in 2009 which was mainly due to the low inflation rate reported during the year at 3.2% following a record high inflation of 10.8% in 2008.

According to the IMF, Real Oil GDP in the GCC region has decreased by 5.4% during 2009, with Kuwait suffering the largest dip of 11.4% followed by the UAE and Saudi Arabia with corresponding drops of 9.7% and 6.7%. Drawing on substantial reserves built up prior to the crisis, GCC governments responded with strong countercyclical policies, which have helped contain the impact on the Non-oil sectors of their economies where non-oil GDP has slowed, but still grew 3.2% during 2009 helping to alleviate some of the adverse impact of the crisis on the region.
Contributing a large portion to GDP, GCC states’ exports saw a 30% decrease from USD 805 billion in 2008 to USD 565 billion in 2009 on the back of the sharp drop in oil prices witnessed over the same period. Given that the drop was only met with a 13% drop in imports, net exports have decreased from USD 289.7 billion in 2008 to USD 117.1 billion during 2009. In addition, broad money growth continued during 2009 but at a slower pace of 11% in comparison with 27.3% and 18.2% during 2007 and 2008, respectively.

Developments in the Oil Market & its Impact on GCC Economies
Over the past few years, the GCC region was able to accumulate vast cash reserves due to the increase in oil prices giving it an advantage over the rest of the world in terms of fiscal flexibility in order to fight the adverse impact of the financial crisis on its economies; primarily through increased spending on infrastructure projects and injecting money into the financial system. Oil prices reached record highs of USD 148 per barrel in July 2008 on the back of a weak US Dollar and an escalation in geopolitical tensions in the Middle East at that time which was intensified by financial markets speculations.
However, the last five months of 2008 were the worst for oil prices dominated by the bleak economy as many nations had moved into recession and the plunge in equity markets to five-year low triggered fears of further oil demand destruction. The OPEC Reference Basket lost around 75% from its peak at USD 148 per barrel to end the year at USD 37.72 per barrel. Oil prices remained weak during the first four months of 2009 with OPEC Reference Basket averaging around USD 44 per barrel. The oil market kicked off the month of May-2009 positively and gained momentum during the last 8 months of 2009 to end the year at USD 75 per barrel, reflecting an increase of 91% from its level recorded at the end of 2008.

Weakness in oil prices and oil demand took a noteworthy toll on the GCC states’ GDP given the significant portion that oil revenues contribute to the economies of the bloc. In order to reverse some of the effects of the crisis on oil prices, members of the GCC reduced their production levels by about 8.6% from 16.2 million b/d to 14.8 million b/d, which along with the price drop, led the real oil GDP of GCC countries to drop by 5.4% during 2009.

MENA Region (Excluding GCC states, Iran, Iraq, Afghanistan & Pakistan)
Looking at the GDP breakdown by type of expenditure in the MENA region, we find that the greatest impact of the crisis on the MENA economies came through a significant drop in ‘Exports of Goods & Services’ which decreased by 15.6% from USD 305.7 billion during 2008 to USD 258 billion during 2009. The decrease came on the back of a significant contraction in global demand for goods and services across all spectrums. With total imports of goods and services remaining almost unchanged at USD 263 billion, the decrease in net exports matches that of total exports.

Contrary to the GCC region, MENA governments did not have access to oil-driven cash reserves and were not able to offset some of the impact by increasing spending. Total government spending for the region decreased during 2009 by 11.6% to USD 84.6 billion from USD 95.6 billion during 2008. On the other hand, household consumption increased by 11% during 2009 with about 90% of that increase coming from Egypt. Furthermore, due to the unfavorable business environment the Gross Capital Formation saw a marginal decline of 2.4% during 2009 in comparison with increases of 31.6% and 27.1% during 2007 and 2008, respectively.