Business | Banking
Gulf's burden of surplus
Societe General Asset Management estimates that the Gulf countries' international reserves have quadrupled from $90.5 billion in 2003 to $365 billion in 2007, and are forecast to touch $455 billion in 2008.
- By Babu Das Augustine, Banking Editor
- Published: 00:34 April 5, 2008
Faced with a massive credit crunch and the prospects of a protracted recession, the US has embarked on a mission to inject every bit of liquidity it can garner into its financial system. In stark contrast, the booming Gulf economies are facing a liquidity avalanche and are doing precious little to contain the inflationary impact.
The Gulf's liquidity glut has its roots in high oil prices, repatriated Arab wealth and growing domestic investments by regional sovereign wealth funds. Although a surplus in itself sounds great, in the absence of proper monetary management the costs of a surplus can wipe out many of the benefits it brings.
Rising reserves
Societe General Asset Management estimates that the Gulf countries' international reserves have quadrupled from $90.5 billion in 2003 to $365 billion in 2007, and are forecast to touch $455 billion in 2008.
Currently, investors (individuals and institutions together) from the Gulf nations collectively own between $2.5 and $3 trillion in foreign financial assets.
Private bankers say Gulf investors who preferred to invest in offshore heavens are bringing their money back to home markets, adding to the upward liquidity pressure.
The liquidity surge has been a double-edged sword, yielding impressive economic growth while fuelling inflation and asset bubbles. The regional stock markets have already experienced the painful side, with most markets correcting in the range of 30 to 70 per cent from their peak P/Es (price-earning ratios).
Although the real estate sector is supported by strong demand, valuations may appear unrealistic in the medium to long term.
The UAE's consumer loans and money supply shot up by 41 per cent and 37 per cent respectively in 2007.
Economists say that such rates of growth are highly inflationary and alarming. Latest estimates by the International Monetary Fund are that inflation in the UAE and Qatar exceeded 11 per cent and 14 per cent respectively last year, as the overall inflation for the Gulf is revised upwards to eight per cent form the earlier estimate of 6.5 per cent.
Supply shortages
Although supply shortages play a big part in the rising inflation in the Gulf, the role of imported inflation due to the currency peg to the falling dollar and the Fed's cheap money policy cannot be ignored.
On a trade-weighted basis, the dollar has depreciated by more than nine per cent since the beginning of last year and by 20 per cent in real terms since the beginning of 2002.
Clearly, high inflation is hurting local enterprises in the form of high input costs, while the overall cost of living has zoomed, triggering wage-price spirals.
Government subsidies and salary hikes themselves add to the money supply and inflation. Essentially, money is rampant.
It is an unavoidable conclusion that the regional central banks' lack of flexibility on monetary policy, and the absence of sophisticated monetary tools, are making it difficult for the Gulf to cope with its problem of plenty.
Although surplus in itself sounds great, in the absence of proper monetary management, the costs of surplus can wipe out many of the benefits it brings.
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