Saudi Arabia, the United Arab Emirates and Kuwaiti economies are set to contract this year amid an oil price slump before economic growth resumes in 2010, Banc of America Securities-Merrill Lynch said.

The decline in gross domestic product (GDP) for the three largest economies in the world's top oil-exporting region follows a combined Gulf growth rate of almost 43 percent in the last six years, the investment firm said in a research note.

"The credit crunch and deepening global recession in the fourth quarter have brought about a sea change in the underlying emerging markets macro story," Banc of America said in the note.

"Against this `survival of the fittest' backdrop, focus has shifted to fundamentals, financing needs and the ability to smooth the sharp global downturn by running counter-cyclical policies."    

If oil prices average $45 a barrel for 2009, all Gulf economies except Kuwait will post budget deficits this year, the bank said.

Oil prices fell towards $38 a barrel on Tuesday, virtually a quarter of record levels last July, which is drastically undercutting state revenues of Gulf oil producers after a six-year rally in oil prices spurred an economic boom.

"Gulf governments have saved 70 percent of the oil windfall since 2002, giving them deep pockets to support spending plans if need be," the bank said.

"Given the potentially serious effects in the region and the reversal of previous years' favourable trends, we believe Gulf governments are well justified in taking bolder action going forward via both strengthening of the banking sector and the introduction of fiscal stimulus."    

Top global oil exporter Saudi Arabia's GDP would contract 0.2 percent in real terms this year, while UAE GDP would decline 0.6 percent and Kuwait's 1.8 percent, Banc of America said.

The three economies would resume economic growth rates of 2.8 percent, 1.9 percent and 2 percent in 2010, respectively, it added.

Gulf governments have introduced a string of policy responses to address the global financial crisis and support their banks, including interest rate cuts, deposit guarantees, emergency funding facilities, and funds to support stocks.

In the latest move, the Dubai government said it was selling $10 billion in bonds to the UAE central bank to help it meet financial commitments, easing concerns in the Gulf Arab emirate would default on debts maturing this year. - Reuters