(MENAFN - Khaleej Times) The financial cushion enjoyed by GCC governments will help mitigate any adverse consequence of a more acute shortage of bank liquidity in the likely event of a Greek exit from the European Monetary Union, analysts at Standard Chartered said.
The GCC countries, with 500 billion in annual hydrocarbon revenues, have an accumulated average current account surplus of 20 per cent of the economy and foreign assets to the tune of 1.7 trillion. "This should help the governments promote counter-cyclical policies and alleviate the external shock from Europe," the analysts said.
"Furthermore, sustained euro depreciation would reduce the cost of imports to the Gulf, which sources the majority of its capital and consumer goods from Europe. It would also create new buying opportunities for the region's sovereign funds, something they took advantage of during the global financial crisis," the bank's analysts said in a study on the impact of Greek exit from the euro area.
However, they warned that a Greek exit would trigger a major sell-off in the Asian and GCC credit markets, but the medium-term implications would be more limited since sovereigns in both regions have ample policy tools to address the slowdown and boost local liquidity.
Since the Middle East and North Africa regions are in a significantly stronger position now, the economic implications of such an external shock would also be limited, they said.
"This is particularly true for the six GCC economies, which we expect to show resilience. Key weaknesses have been resolved - asset bubbles in the GCC have already burst, and unsustainable credit booms are long over," they said.
Since the main channel of contagion to the real economy will be via trade/exports, the impact of this on the GCC would be indirect as the EU represents only seven per cent of the region's export market.
However, a collapse in demand from Asia, which is now the GCC's main export market, coupled with already muted growth in the West, would certainly translate into lower oil prices and output, the bank's analysts said.
The analysts said that given that "the possibility of a Greek exit has been well flagged, and owing to the relatively defensive positioning of the market, the extent of widening (in both level and duration terms) could be lower than what the markets saw in September 2008 following the Lehman default. The pace of recovery could be faster - especially on the back of further monetary easing " given that the authorities need to limit the contagion," they argued.
They envisaged that in stage 1 of the crisis, liquidity would tighten and asset managers move into cash, as they turn defensive. In stage 2, funds start suffering cash redemptions on a large scale, leading to drastic price declines - first bringing a small rebound, but then resulting in further declines as a panicking market heads for the exit. In stage 3 (similar to the period immediately after the Lehman bankruptcy), access to cash and funding disappears as markets tumble.
"We are already in stage 1 of the current market downturn, with credit markets having consolidated over the last three weeks. A Greek exit from EMU would lead markets into stage 2 of the consolidation, with flows turning negative and asset managers suffering cash redemptions. We would expect Asian and GCC credit markets to witness an immediate, sharp sell-off. This would likely be followed by an extended period of market weakness in these regions as broader risk markets understood the implications of Greece's exit and contagion to the rest of Europe," the bank's analysts said.
They believe that since growth in the GCC is principally linked to oil prices, a sharp decline in oil prices could put pressure on GCC sovereigns, though the effect is likely to be short-lived, in our view.
"Asset bubbles in the GCC have already burst for the most part, and unsustainable credit booms are long over, so a slowing global economy should have a less of an impact this time around. Tight credit conditions are set to persist, with Saudi Arabia and Qatar being the main exceptions. While tighter credit will not help growth, it will not be as big a drag as it was in 2009, when credit growth in the region went from an uncontrollably rapid pace to a complete halt."
They contend that the exacerbation of European bank deleveraging would have a larger impact on the GCC than on Asia given the higher exposure of European banks to the region. However, the GCC has above-average cross-border claims as a percentage of total foreign claims.
"GCC banks are better positioned going into 2012 than they were in 2009 given their strong oil-price-driven liquidity. They do not face funding pressures on the same scale as 2009, and have been able to regularly tap the market. Their capital bases have also been strengthened."