The steep fall in oil prices from their peak last summer, output contraction across other key economic sectors, tight liquidity conditions and the fall in asset prices will make 2009 a challenging year for the GCC, it said.
However, the current environment is also creating attractive buy opportunities for cash-rich investors looking for gains over the medium to long term, says the latest issue of the GCC Economics and Strategy report.
Oil prices remain key to GCC governments' ability to spend their way out of a severe slowdown, says the report, which also raises the possibility of Kuwait reverting to the dollar peg to unclog its money markets and to rejoin the GCC exchange rate mechanism.
"As we anticipated in our previous report, the GCC has now firmly joined the last group of countries to be impacted by the financial crisis," said Dr Ala'a Al Yousuf, Chief Economist at GFH, in comments to coincide with the release of the report.
The report provides analysis of the most important global and regional economic developments and their implications for the GCC.
"While the GCC would be able to manage the challenges of lower oil prices, the region cannot stave off the effects of a protracted, global financial turmoil. Nevertheless, in a worst-case scenario, the GCC's substantial public and private wealth will enable it to cope better than many large economies," Al Yousuf said.
The fallout from the global financial crisis, coupled with the plunge in oil prices, has effectively ended the six-year economic boom which began in 2003 on the back of high oil prices that allowed strong government and private spending.
"Against the backdrop of distressed financial markets and an extremely weak outlook for the global economy, the GCC macro picture for 2009 is going to be disappointing compared to recent years," Al Yousuf said.
Hany Genena, Senior Economist at GFH, said the average aggregate GCC crude oil production levels are expected to post their largest annual percentage decline in at least a decade, while hydrocarbons export revenues are likely to fall by about 60 per cent to $200 billion (Dh734bn).
The report also outlines a sector allocation strategy for the 2009 investment environment, which will be marked by bottom line contractions across a wide range of key GCC sectors/industries.
Banking: Most GCC banks will see profit contractions as a result of slower growth in business volumes. Some banks will need to recapitalise or merge, and, in the process, cut back on credit expansion to improve capital adequacy metrics.
Petrochemicals: Downside risks remain high in the petrochemicals sector due to the build up of excess global production capacity, declining global demand, lower prices and higher financing costs.
Real estate: Anecdotal evidence suggests that speculators are unable to exit long positions except after a long period and at significant discounts. In this environment, property flippers will be obliged to hold on to property and meet payment obligations, raising the likelihood of an increase in default rates in 2009.
Construction: The weakness in the GCC construction sector is a natural outcome of the weakness in the real estate sector, which will suffer from delays or cancellations and tighter access to credit.
Telecoms: Although profitability growth of telecom companies will likely decelerate in 2009 due to already-high penetration rates, slower growth in subscription and intensifying competition relatively strong profitability and cash flow metrics present a buffer.