IMF: Gulf Can cope with Cheap Oil

The Arab energy exporting states of the Gulf can cope comfortably with sliding oil prices, an International Monetary Fund official said on Tuesday, as a plunge in regional stock markets showed some local investors were panicking.

Brent crude oil dropped below $60 a barrel on Tuesday for the first time since 2009, from around $115 as recently as June.

If those levels persist next year, the six rich nations of the Gulf Cooperation Council will face the most dramatic change in their fortunes since the global economic crisis in 2008. All except Qatar would run state budget deficits as oil revenues shrank; Bahrain and Oman would be deep in the red.

Harald Finger, the IMF's head of mission for the United Arab Emirates, told a financial conference in Dubai that because the big GCC economies had built up huge fiscal reserves, they would not have to cut state spending deeply, and could therefore avoid sharp economic slowdowns.

"Most of the GCC countries have quite significant buffers in the form of foreign assets in sovereign wealth funds or central banks, plus most of these countries have a capacity to borrow, so there is no need now for a very steep and quick reduction of spending, which would not necessarily be desirable," he said.

But as he spoke, GCC stock markets were tumbling in a rout which erased about $49 billion of market value on Tuesday alone.

Saudi Arabia's stock market closed 7.3 percent lower, while Dubai also lost 7.3 percent, bringing its losses this month to 28 percent. Qatar sank 3.5 percent.

The collapse over recent weeks suggests the impact of low oil prices on Gulf business and investor sentiment could be greater than the monetary hit to governments' balance sheets.

"We are in panic mode now, there is no more support and investors are not rational any more," said Sebastien Henin, head of asset management at The National Investor in Abu Dhabi.

The slide has been worsened by a lack of regulatory structure that would allow traders to make money from falling markets, as well as heavy leveraged share purchases during a recent rally.

RESERVES

Finger said the UAE might have to tap into its store of foreign assets to sustain government spending if oil prices stayed at current levels or went lower.

Abu Dhabi's largest sovereign wealth fund is believed to have nearly $800 billion of assets, roughly twice the UAE's entire annual gross domestic product, so it could cover many years of budget deficits.

UAE economy minister Sultan bin Saeed al-Mansouri told the conference that the country's fiscal reserves would let it avoid any significant cuts to development projects in coming years.

Senior economic officials from the two biggest emirates in the UAE, forecast on Tuesday their economies would stay strong. Abu Dhabi predicted average growth of 5.5 percent annually between 2014 and 2018; Dubai forecast rates above 4.5 percent.

So far, international investors appear to agree that the big Gulf economies can ride out an era of lower oil prices without facing debt crises or steep reductions in their economic growth.

Bond yields and credit default swap prices in Saudi Arabia, the UAE, Kuwait and Qatar have not risen sharply, suggesting little stress on financial systems. In contrast to 2008, moves in foreign exchange forwards markets do not indicate major pressure on Gulf countries' currency pegs to the dollar.

However, the stock markets' collapse shows the local retail investors who dominate equities trade in the Gulf are unnerved by the speed of oil's decline and worried by the fact that their governments do not appear to have tried to support oil prices.

Mohamad Lahouel, chief economist at the Dubai Department of Economic Development, acknowledged that poor sentiment related to oil prices could slow growth next year.

"Households may anticipate low future oil prices and lower income and start reducing their spending in 2015," he said in a presentation to the conference.

After the markets closed, Mansouri issued a statement intended to reassure stock market investors, saying they should act rationally and that markets tended eventually to resume rising after falls.

By Martin Dokoupil