- Rising trade and investment links with emerging Asian markets increase their economic dependence on global growth
- Despite these growing trade ties, the Gulf states have been largely unaffected by the recent capital outflows
- A sharp slowdown in emerging economies and an intensification of capital outflows would affect Gulf countries mainly through falling oil market prices
- Bahrain, the only country with fiscal deficit, would be the most vulnerable
The Gulf States' rising trade and investment links with emerging Asian markets increase their economic dependence on global growth and exposure to foreign shocks, say Standard & Poor's economists in a report published today "Gulf States Are Increasingly Vulnerable To An Emerging Market Slowdown."
Trade relations between the Gulf Cooperation Council (GCC) countries and Asia (excluding Japan) have grown substantially at the expense of Europe, the U.S., and Japan since 2005. This is mainly because emerging Asian countries' demand for hydrocarbon commodities, the Gulf states' main export, is rising. Meanwhile, growing unconventional energy production and energy efficiency in developed markets are reducing their import needs.
"GCC exports of goods to the EU, the U.S., and Japan fell to less than 30% in 2012 from 51% in 1995. Meanwhile, Asia is now the GCC's largest export destination, accounting for 57% of total foreign sales," said Standard & Poor's economist Sophie Tahiri.
Despite these growing trade ties, the Gulf States have been largely unaffected by the recent capital outflows and declining asset values that emerging markets have experienced since the U.S. Federal Reserve signaled it would start tapering. One reason for this is that GCC countries' fiscal and trade surpluses make then largely immune to foreign capital outflows.
"Nevertheless, Gulf States would be vulnerable to a potential slowdown of growth in emerging markets, the report says. "A sharp slowdown in major emerging economies and an intensification of capital outflows, although not our baseline scenario, would affect GCC countries mainly through falling oil market prices," said Ms. Tahiri.
We nevertheless expect that GCC states would implement fiscal expansion to support the national economy in a scenario of falling oil prices. However, Bahrain would be the most vulnerable Gulf country in such a scenario because it's the only country already running a fiscal deficit, the report concludes.