Monday, November 11, 2019
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Why it’s looking good for the Gulf economy

Still rumbling today like a simmering volcano, the global financial crisis no doubt left a lasting legacy around the world, and the Gulf was not unscathed. With cyclical recovery of some sort well in play, what the region experienced needs duly to be recognised.

Thus, it was especially notable and heartening last week that Dubai, most prominently affected by this earthquake in economic history, went public with an acknowledgement of the faultlines that existed in previous thinking, and the lessons that are there to be learned.

Ironically relatively bereft of the oil resources that so richly sustain the rest of the region, the emirate has acknowledged that its strategic plan has to beware the toxic effects of pure momentum, and ensure the solidity of its productive foundations.

Still substantially buoyed by regional liquidity itself mostly derived from energy-based earnings, Dubai knows that its diversification efforts have to gravitate to a rounded commerciality, respecting the business cycle, which, as its name suggests, is not a straight-line proposition.

Thus, the real estate and construction sectors, still a vehicle for growth as part of the national model, have to be kept under watch, and official checks and balances, so that boom does not veer towards bust again. Official interventions against speculative behaviour, given the inability of conventional monetary policy to provide that restraint (under US dollar pegging), make sense.

Across the rest of the Gulf, meanwhile, the traditional dominance of oil receipts over the workings of the respective economies can only be modestly amended by the interruption of the credit crunch era and its aftermath. That’s particularly so, again, as the GCC states remain in lock-step with US monetary policy: essentially, to try to cope with the results of very low interest rates by sustaining very low interest rates.

With these features, inter alia, the Gulf has its own paradigm for scholars and advisors to address. They are a “unique set of countries”, as the IMF’s regional director Tim Callen told a gathering at the UK’s School of Oriental and African Studies (SOAS) last week, explaining some of the detail behind the Fund’s published outlooks.

There was a time, not a million years ago, when the IMF and its recommendations were not especially welcome among academia and the typical student body, in London as indeed in various parts of the world. Fortunately, policymaking and public debate have grown up a bit since then.

Having just visited Saudi Arabia, Callen outlined the familiar characteristics of the Gulf economy, of which regular readers would need no reminding.

Some of those were revisited here only two weeks ago, in reviewing an IMF paper (at which point it needs to be made clear that breakeven rates for fiscal and current account balances are measured in $ per barrel, not percentage of GDP!). But he offered a number of further insights.

Given a fairly sanguine view of the immediate prospects, based on continuing and accumulated budget and balance of payments surpluses, Callen nevertheless noted that the oil market “presents the biggest risk, going forward”, revealing that the IMF takes its cue on price forecasts from the futures markets, which show a softening towards $90 (Dh330.30) a barrel (Brent), though it applies “confidence ranges” stretching from $60 to $140 in a fan-diagram of possibilities.

With fiscal consolidation actually already in hand, government spending would logically be restrained by that eventuality, curbing GDP growth, although smoothed and upheld by past revenues.

As a critical consideration for the future, moreover, the fact that the Gulf’s authorities are “showing an interest” in medium-term policy frameworks — and delivering upon that concept, with “big improvements” in the provision of economic data, even very recently — gives comfort to scenarios of economic management, mollifying any such concern, even if the issue of job creation beyond the public sector will remain a challenge.

Asked whether the “non-oil” economy could really be distanced from oil itself, being both the driver of government spending and factor input to industries such as petrochemicals, Callen had to concur on oil’s defining relevance, as revealed in its high statistical correlations.

Effectively, then, diversification is only disguising dependence, it could be argued.

Another key concern might be inflation, if the rebound quickens, unchecked by the interest-rate lever or exchange appreciation. Here an optimistic note was struck, the IMF not projecting any notable pick-up, with neither global food prices nor the housing rental component particularly threatening. The implication was that a combination of fiscal policy and macro-prudential measures would take care of it.

As to exchange rates, comment was confined to the impressive workability of the fixed pegs in circumstances, as in the Gulf, where excess demand and supply of labour is so readily catered for by the flexibility of employing expatriates.

It was a small, technical point, but one such nugget of information that can make so much difference to a true understanding of how, and how well, the Gulf economy can tick.