Monday, October 27, 2008 Free Headline Alerts
ABU DHABI — The Persian Gulf states are bracing for an economic decline, despite record energy revenues over the last two years.
A report said the six Gulf Cooperation Council countries were vulnerable to high inflation and investment loss amid the global credit crisis.
The report by Standard Chartered Bank, titled "GCC Engineering A Soft Landing," said oil-rich Gulf Arab states have failed to manage their energy windfall.
"The main problem in the GCC is that the liquidity-fuelled boom was left unmanaged," the report said.
"Ultra-loose monetary conditions, which are a direct result of the U.S. dollar pegs, have created serious distortions in these economies, leading to the build-up of some economic excesses and signs of overheating. Because of the pegs to the U.S. dollar, authorities were left without a monetary policy tool. Interest rates, when discounted for inflation, were negative."
The report said GCC countries invested poorly and could be harmed by the global credit crisis. Standard Chartered Bank said GCC states must impose fiscal discipline to avoid a further decline in the economy.
"This distorted economic incentives, encouraging risk-taking behavior," the report said. "Now that the global business and credit cycles have turned, asset price inflation is a concern, and short-term, leveraged investors will have to be unwound. This is likely to have an impact on the market."
All GCC countries with the exception of Qatar have been facing double-digit inflation. Several of the GCC states have raised the prospect of revising their budgets amid the drop in oil prices.
"The estimated budget of 19 billion Kuwaiti dinars [$70.2 billion] will not be affected but the new budget could be affected depending on an increase or decrease of oil prices," Kuwaiti Finance Minister Mustapha Al Shamali said.