How will China’s economic slowdown impact the GCC?
China’s sluggish December trade data followed by weakening economic growth reports have prompted concerns of a slowdown in the global economy in 2019. While global stock markets took a beating, questions have been raised about how the hydro-carbon rich economic block of the GCC will be impacted.
China’s economy: as it stands
The world’s largest importer of crude reported a 7.6 percent year-on-year drop in imports along with a 4.4 percent year-on-year drop in exports in December. China also announced a 6.6 percent growth in gross domestic product, which is its lowest growth rate in 28 years. Add to this the growing list of economic data showing a downward trend in the world’s second largest economy. Car sales in the country have slipped for the first time in 20 years, with property sales, construction, and the job market showing unsteadiness. Although China’s lackluster domestic demand and the tightening of credit after a debt binge may have caused the slowdown, the cooling effects of its trade war with the United States isn’t helping.
“The global economy is suffering, global markets are shaken after a terrible 2018, and China will do all it can for stability. The hunt for a solution is fully engaged, and the odds of one appearing are rising fast. In our view, a solution needs to show itself before February 5, the Chinese New Year – this is a top priority for both sides in the U.S.-China trade dispute. The alternative is simply too dire,” said Steen Jakobsen, Chief Economist and CIO, Saxo Bank.
“Beware of incoming turbulence as the policy response everywhere is reactive rather than predictive and may come a bit too late. This means that Q1 is the riskiest period, and this is where the cyclical low in assets and the economic cycle will come. Q1 may see a significant market low for this part of the cycle,” Jakobsen added.
The World Bank in its latest global economic report “Darkening Skies” predicted that global growth would slow lower-than-expected to 2.9 percent in 2019. Citing weakening global trade growth and tighter external financing conditions, it projected growth of 1.9 percent in the Middle East and North Africa region in 2019.
The International Monetary Fund (IMF) in its World Economic Update released on January 21 advised caution, cutting its growth outlook for the Middle East, North Africa, Afghanistan and Pakistan by 0.3 percent to 2.4 percent. The fund warned the oil-rich Middle East region to focus on the real issues at hand – to carefully weigh the repercussions of the oil supply glut and offsets in the forecast pickup of non-oil activity.
“China will not be a major factor in the GCC economic cycle in 2019. The real danger is that U.S. shale oil output will increase by an extra million barrels a day each until 2025, this makes a secular bear market in crude oil inevitable,” said Matein Khalid, Chief Investment Officer and Partner, Asas Capital.
Experts have called for the GCC to focus more on the oil market rather than fret about the fallout of a Chinese economic slowdown, which has been seen coming for a while and – as some market analysts indicate – could even be orchestrated.
“The Chinese authorities and policymakers have a strong grip and demonstrated prudent policy measures during bouts of stress in the past. The economics and firepower available by China to actively stimulate have been underestimated,” said Syed Yahya Sultan, Head of Fixed Income Strategy, EmiratesNBD.
The UAE GDP growth is still very oil-dependent and non-oil sectors are being pinched as well. This is what the GCC needs to focus on at a time when its own economic growth forecasts are being lowered.
“Oil and gas is still at least 35% of the UAE GDP, admittedly concentrated in Abu Dhabi. Construction, long haul aviation logistics, retail, services etc. are all played by debt deflation, over capacity and a 30% price rise in U.S. dollar since 2013,” Matein Khalid said.
Graphic: UAE’s real GDP dependence on oil GDP
The IMF in its latest report cut Saudi Arabia’s growth expectations to 1.8 percent, down 0.6 percent from its previous forecast in Oct. 2018. A Reuters poll of 22 economists released on January 23, 2019 also lowered the Gulf Arab economy’s GDP growth expectations – down to 2.1 percent in 2019 compared to a forecast of 2.5 percent three months ago. Signs of fatigue in global growth and concerns of oversupply have pulled oil price assumption down from a forecast of $69 per barrel to an average of $60 per barrel.
At the start of 2019, the GCC is contending with oil output cuts, currency fluctuations, and lower-than-expected growth in the non-oil sectors. The U.S.-China trade standoff and China’s receding economy is not among its main concerns.
China-GCC: Trade and investment
On the flip side, there are benefits to the GCC region being less vulnerable to international trade risks. Asian bond investors are now seeking sanctuary in highly-rated dollar bonds from the Middle East. “Increasing awareness of better credit quality in the Middle East region, coupled with the fact that Saudi Arabia was the biggest issuer of dollar bonds among emerging markets in 2018 and 2017, have lured investors back,” Bloomberg reported.
China’s investment under the Belt and Road Initiative continues to grow – with majority of the regional opportunities projected in Saudi Arabia, UAE and Kuwait. The GCC region with its strategic partnerships and reciprocal investments with China in infrastructure, manufacturing and financial services, is expected to have an allocation of $2 trillion in the long run. This also fits well into the GCC efforts to diversify and move away from oil, complementing the UAE’s construction boom leading up to the Expo 2020 as well as Saudi Arabia’s Vision 2030 plan. In the first-half of 2018 alone, China marked itself as Dubai’s greatest trade partner with trade volumes totalling $18.8 billion.
President Xi Jinping’s visit to the UAE in 2018 – the first visit by a Chinese leader to the UAE in 29 years – paved the way for the deal between DP World and Zhejiang China Commodities City Group to develop a new traders market at the Jebel Ali Port and Free Zone.
China has also increased its investment in the GCC energy sector. In July 2018, China’s CNPC signed an agreement with ADNOC to explore oil and gas prospects in the UAE. Chinese banks are also providing $2.47 billion in funding for the development of the Hassyan clean coal plant in Dubai. The Kuwait Petroleum Corporation (KPC) is developing a $9 billion oil refinery and a $9 billion petrochemical complex in China’s Guangdong region.