The financial crisis and its legacy continue to pervade the senses of all those caught up in it (pretty much everyone), and it would be easy to plough another furrow here along those lines.
Bond and sukuk markets in the Gulf, for instance, reflect the yields of US Treasuries being suppressed by the Federal Reserve, the reduced premia associated with the ‘risk-on’ trade that is characteristic of the schizophrenic, globalised market mood, and the enhanced liquidity that results from elevated oil prices which themselves result partly from the Fed’s determined easing programme.
In other words, the threat of a market bubble exists again.
It is difficult to fathom what the Fed hopes to achieve by even further bouts of money creation, which have been shown to feed more into commodity price inflation than regenerative real growth. That boosts the Gulf’s financial balances, no doubt, but it doesn’t help the poorer corners of this world, exacerbating their inability to feed themselves and power their economies.
Saudi Arabia oil minister Ali Al Naimi was bound to take issue with the notion that the oil producers need to raise output even further to offset those price impulses. There’s no underlying market imbalance to correct, he declared last week.
Endless stimulus not necessary
Where will it all end? Avoiding the slight temptation to view that as a rhetorical question, the answer might be (you guessed): in tears. Not, anyway, with the non-inflationary growth that might be wished for. That would depend on a well-functioning supply side in the developed world. But if that were the case, rather than simply the predictable reaction to prior overindulgence by excess demand, then the endless stimulus wouldn’t be necessary, unless you believe in the tooth-fairy, Ponzi scheme-like world of the Keynesian consensus and the nirvana of its perpetual free lunch.
Better to step away from that rekindled fray and view some thoughtful research indicating brighter prospects for the Gulf nations that don’t depend on surging liquidity and indefinitely low interest rates.
Recent research by Arabia Monitor, a London consultancy, laid out a positive future based on the GCC’s imitation of the newly industrialised economies of Asia (NIA), which have posted an impressive record of performance in the past two decades.
The countries concerned are Hong Kong, South Korea, Singapore and Taiwan, almost bywords for rapid growth and rising prosperity.
The authors identified pre-existing similarities between the two groups in terms of the political command structures, export dependence and industrial policies that aim to utilise accumulated foreign reserves.
Similarities
They also show that the precedent set by NIA has already been matched in respect of the incremental capital output ratios (ICOR) of the GCC, meaning that high investment rates relative to GDP have been used relatively efficiently in local projects.
It means the Gulf is well set. Whereas per capita GDP among the NIA countries rose from $10,037 (Dh36,863) in 1990 to $18,494 in 2000, the GCC average is projected to rise from $37,658 in 2010 to $46,339 by 2020 (see table).
An inviting scenario, then, but with a critical difference to the preceding period.
Dr Florence Eid, Arabia Monitor’s CEO and chief economist, advised this week, “It is important to note that though the GCC’s economic fundamentals are at a similar level or stronger than their Asian counterparts during their emergence, NIA economies essentially prospered at a time when global conditions were less volatile.”
As the report itself observes, “economic slowdown in the US and Europe, still accounting for almost 50 per cent of global GDP, will be a challenging factor”, and the outlook may still be “tumultuous”.
Rising asset reserves
Yet, climbing asset reserves will permit increasing domestic investment, and population growth, monetary union, customs union and growing private sector dynamism should boost export-led momentum.
Simple enough, but nonetheless with caveats. Arabia Monitor notes the impact liable to come from the shale gas revolution in the US, and the eventual demise of any boom arising, as “macroeconomic variables often do not grow in a linear fashion”. Furthermore, commodity export-dependent economies are prone to suffer terms of trade shocks, i.e. the intervention of oil price slumps.
“The key will be to improve investment efficiency, in order to compensate for slowing global growth,” Eid affirms, in summary.
That pleasing detachment from the ups and downs of the moment in favour of lasting trends is reinforced by the report’s touch of quasi-poetic licence. It refers to the ‘cognitive bias’ that is the human mind’s tendency to weigh recent events more than history. In the GCC’s case, that may have led to the “illusion of stability”.
While having warned against complacency here only a few weeks ago, here’s a dedicated study that says the Gulf’s per capita GDP dropped substantially in the past, by 30 per cent in fact during the 1980s and 1990s, and that domestic-led economic renewal will have to be responsible for ensuring against that happening again.
