Arabian Gulf states have flexibility and resources to surmount economic challenges, says Citibank

LONDON // Citibank, the giant American financial group, believes that Arabian Gulf countries have the resources and flexibility to withstand “headwinds” in the regional and global economies.

The bank, one of the biggest in the world with operations in 101 countries, said at a two-day “summit” at its London headquarters that there were serious challenges facing the world economy as a result of changing trade patterns and concerns about some of the biggest economies, notably China.

Farouk Soussa, Citibank’s chief economist for the Middle East, said there were global worries of recession next year. But he added: “The GCC economies have shown flexibility in the past, and we expect they will be able to do again.”

That view was backed to some degree by Tina Fordham, Citibank’s chief global political analyst. “The economies of Saudi Arabia and the other Gulf states are looking brittle, but they have always muddled through in the past and may be able to do so again,” she said.

David Lubin, Citibank’s head of emerging-market economics, painted a gloomy picture of economic prospects in the light of China’s recent economic and financial volatility. “The period since 1990 saw a boom in global trade and rapid growth in the Chinese economy led by investment. Both these are now dead,” he told the summit.

However, Mr Soussa said the UAE, and Dubai in particular, would not be seriously affected by a Chinese economic downturn. “Even if China slows down, it’s still a relatively healthy and very large economy for the UAE to do business with. China is not going to shut its doors,” he said.

“We’re relatively bullish on Dubai in particular. The prospects still look pretty good in view of regional growth patterns and the possibility of greater trade with Iran. Dubai is a gateway to further penetrating the Chinese market, and that is not going to go away.

“There have been headwinds in tourism, the stock markets and real estate. But we believe the softening of property prices is a good thing. It discourages too much exuberance in construction and property dealings.”

Ms Fordham gave a pessimistic assessment of the world’s political and economic prospects under the heading “Is this the start of the breakdown?”. She said a “more dangerous world faces conflict, terrorism and political risks”.

She said the world was facing the biggest risk since the end of communism in 1989. “But so far quantitative easing, shale oil and a bit of GDP growth have masked the risks and created a false sense of security. The market should be sending the early warning signals of global risk, but so far they have not.”

On the positive side, she said global tensions had been reduced by the deal to end sanctions against Iran over its nuclear ambitions, the end of hostility between America and Cuba, and a reasonably good relationship between America and China.

Mr Soussa said global volatility had left commodity exporters vulnerable, and oil exporters were also in that category. “But is the fall in the oil price the result of falling Chinese demand? We do not think so,” he said.

“The reason for oil-price weakness is the oversupply we have seen in the market as a result of high Saudi production levels, and more oil coming on the market from Iran, Iraq, Libya and shale.

“We thought that Saudi Arabia would cut production by up to 20 per cent, but that hasn’t happened, so the oil price will be an issue for longer.

“We think oil will be depressed for a couple of years at about the US$50 level, but will start to rise around the end of 2017. But the super-cycle in commodity prices is over. Oil will never again get to $90 or $100.

“So there will continue to be fiscal consolidation in the GCC and a continuing trend against energy price subsidies, as we’ve seen in the UAE.

“At Citi we think that some kind of taxation, probably a selective sales tax, is inevitable in the next year or two. We believe it will be a GCC initiative, coordinated between Saudi Arabia and the UAE.”

Mr Soussa also pointed to the “massively flexible” labour market in most GCC countries. “There is no real unemployment, which is the big problem in Europe,” he said.

Saudi Arabia, the biggest economy in the region but with a smaller proportion of foreign labour, faced employment issues if government spending was reduced because of lower oil revenue, said Mr Soussa.

But there could be positive results if the gap between public and private sector employment became more narrow as public sector pay levels declined, he said.

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