Ahmad Abu Ghaida, Acting Director of Economic Planning for the Abu Dhabi Department of Economic Development (right), and Dubai International Financial Centre (DIFC) economist Dr Nasser Saidi attending a conference on “International Monetary Fund Implications of the Global Turmoil on Economic Outlook for Middle East and Central Asia”, at the DIFC in Dubai, yesterday.

DUBAI: The International Monetary Fund slashed its 2009 economic growth forecast for the Gulf region by more than half to 1.3 percent as the three largest oil-exporting economies, including Saudi Arabia, shrink in a global slowdown.

The IMF, which said in February Gulf states were set to grow 3.5 percent this year, warned yesterday of downside risks from sustained low oil prices and any further deterioration in bank balance sheets due to exposure to weakening real estate markets.

Economic growth across the Middle East and Central Asia would slow to 2.5 percent this year from six percent in 2008, the IMF said n a regional economic outlook. “The region is going to be affected like the rest of the world but much less so,” said Masood Ahmed, director of the IMF’s Middle East and Central Asia Department.

“This is mainly because the oil exporters are using their reserves to protect their economies and this is having a spill-over effect on the rest of the region.”

The Gulf region — which also includes the United Arab Emirates, Kuwait, Qatar, Oman and Bahrain — has been hard hit by a drop in oil prices to the mid-$30 range earlier this year after having peaked at nearly $150 a barrel last summer.

Gulf countries invested heavily during a six-year oil price rally to try to wean their economies away from a reliance on oil export revenues, but most are still prone to price volatility.

The economies, which grew 6.4 percent last year, would struggle to expand again as top global oil exporter Saudi Arabia’s economy contracts 0.9 percent, Kuwait’s shrinks 1.1 percent and the UAE’s economy slows 0.6 percent, the IMF said.

The downturn is pronounced in the UAE, which is suffering from a real estate crash in Dubai that has led to thousands of job cuts and concerns that home loan defaults could rise fast.

Growth in the UAE non-oil sector would slow to just 0.8 percent from 8.6 percent last year, the IMF said. Overall Gulf non-oil sector growth would fall more than half to 3.2 percent.

Central banks and governments in the region have adopted a number of measures to shore up their banks and bolster investor confidence, including slashing interest rates, distributing emergency funds to banks and raising public spending.

While Gulf banks are financially sound, indicators “may not fully capture risks posed by high credit growth and concentration in real estate”, the IMF said, adding any sharp deterioration in bank balance sheets could delay recovery.

“A key driver would include further asset price deflation, particularly in countries whose banks have large direct or indirect exposures to equity and real estate markets,” it said. Along with Middle East oil exporters Algeria, Iran, Iraq, Libya, Sudan and Yemen, the Gulf would earn less than half the oil export revenues they did last year, although lower import costs would help offset some of the slowdown, the IMF said.

As they expand public spending to support their economies, Middle East oil exporters face current account deficits of $9.6 billion this year, versus surpluses of $397.8bn in 2008.

“You save for a rainy day and certainly this is when it is raining,” Ahmed said. Lower real estate and commodity prices, meanwhile, would reduce inflation rates among Middle East oil exporters to 10 percent this year from 15.6 percent in 2008, with UAE inflation recording the lowest rate at 2 percent, the IMF said.

It added that oil-importing countries would be adversely affected by slower growth of their main trading partners. Egypt economic growth would halve to 3.6 percent in 2009, while growth in Pakistan would slow to 2.5 percent from 6 percent.