“The turmoil in financial markets has made integration, particularly in the financial sector, harder to achieve,” Daniel Kaye, a senior economic analyst at National Bank of Kuwait, said in an interview. “Policy authorities in the Gulf Cooperation Countries…(will) want to focus on crisis alleviation measures.”
Shielding Gulf economies from the impact of the global economic crisis will be the focus this year instead of meeting the requirements needed for the union.
Convergence criteria like aligning budget deficits are unlikely to be met as each country tackles the downturn differently.
So far Qatar, Oman and Saudi Arabia have officially said they will post budget deficits for 2009. Gulf states are spending more to stimulate their economies as oil prices plunged last year from all time highs of about $ 150 a barrel.
“This year is likely to see a greater divergence in economic performance across the region, which will prevent some countries from attaining the economic convergence criteria,” Jadwa research said in a recent report, pointing to different policy responses across the Gulf.
Saudi Arabia has aggressively cut interest rates to encourage lending. But Qatar, more concerned with inflation, has mostly left rates untouched, and is spending 6.5bn Qatari riyals ($ 1.79bn) to support its banks.
How dedicated Gulf states are to forming a union is also now being questioned.
In March, officials said the 2010 union deadline would be pushed back, without giving another timeline. Last week, Gulf central bank governors met to discuss the union but no concrete decisions were announced. In 2006, Oman dropped out of the union.
“Each time they postpone decisions, it’s harder to believe anything will be achieved at the next meeting,” said Philippe Dauba-Pantanacce, a senior economist at Standard Chartered Bank.
A potential sticking point is the location of the union’s central bank. At last week’s meeting, the Oman Central Bank governor told reporters that the location would be decided by heads of state in May.
Because Saudi Arabia is the region’s largest economy, it may be the location for the central bank. But some economists say the kingdom’s tight business restrictions undermines its attractiveness.
“There could be a compromise for a more central location geographically and the UAE fits that criteria and has the biggest banking system of the GCC,” said Giyas Gokkent, chief economist at National Bank of Abu Dhabi.
The onslaught of the global recession on local economies has highlighted the need for a union, economists argue.
“You can make the case that the impact of crisis could be alleviated if there were a well established, deeper, more liquid monetary system so the region can handle the problems thrown at it,” said NBK’s Kaye.
A union will also boost the Gulf’s competitiveness by opening borders, resulting in consolidation across numerous sectors, particularly banks.
“Establishing a single market is not just about a single currency but to put GCC firms on a single footing and to provide momentum for growth,” National Bank of Abu Dhabi’s Gokkent said, referring to the financial sector. “There are large banks in the region but in terms of asset size they are small compared to world banks.”
But Jadwa argues the need for a Gulf union isn’t as pronounced as in Europe. Unlike Europe, Gulf countries do not trade much with each other, so a union would not help “intra-regional trade.”
As for the timing of the monetary union, most economists see it as years away.
“They aren’t there yet,” Dauba-Pantanacce said. “I don’t see anything substantial until 2015.”