Gulf economies to put the pedal to the metal

News headlines for business in the Gulf seem markedly more positive right now, and a mood of optimism has descended, notably on Dubai.

Whether it’s the revealed ambition to build a new mega-city, or the numbers for airline traffic and duty-free receipts, or rediscovered buoyancy in the real estate sector, there’s a distinct sense that the page of austerity has been turned and another confident chapter is coming into view.

For liquidity in the region as a whole — where Dubai has even taken on relative safe-haven status — the year just gone of Brent oil prices exceeding $100 (Dh367) has naturally helped.

It may, though, be remarked in passing that regional political tensions have not just boosted those revenues but also provoked local state spending in reaction, meaning that the margin for error in Gulf finances has not widened so much.

Even so, in the past week regional stock markets have perked up in line with the international response to the apparent resolution of immediate fiscal crisis in the US — for the moment anyway.

There is the backing also of the world’s key central banks, which seemingly intend to flood the global economic engine with (monetary) fuel until it sparks into life.

That doesn’t work very well with motor vehicles, but maybe it will be different with business activity. Does a lot of money flying around give genuine reassurance about the future, or does it merely suggest there’s a quick buck to be made, and the thought “haven’t we been here already”? In the Gulf too some voices have raised the possibility of deja vu all over again.

Banking system

Even without labouring the enduring point on the merits of structural change, however, there’s increasingly a third dimension to the interplay between supply and demand functions these days, and that’s the health of the banking system, and its willingness and ability to prompt or support recovery.

The global financial crisis has made quite a difference in that respect, as banks have not only had to deal with impaired balance sheets, but also enhanced regulatory requirements pertaining to capital standards, as well as their own reactive caution.

All of which is why central banks (and sympathetic commentators) are gearing up for what’s called nominal GDP targeting, a euphemism for trying to generate higher inflation without actually targeting it as such. Savers and investors have to take precautionary note, just as equity markets already have, and bond markets presumably will.

As to the Gulf in particular, two years ago the IMF’s departmental director for the Middle East, Masoud Ahmad, referred to private sector credit “barely growing”, clouding the prospect for economic turnaround.

Although applying a brake to replaying the experience of boom and bust might in fact be useful, it was still a warning that the next upturn would be “different this time”, as the expression has it, but now because of this negative aspect, of funding restraint from the private sector.

So where do we stand at this point, somewhat further down the road?

In the latest edition of Middle East Watch by research firm Capital Economics the presently moderate, upward incline of private sector credit among GCC states is clearly visible (see chart). It prompts the question of whether that is reviving, merely reflecting or actually restraining the economy, besides the issue of whether the banking system will be leading or following the return of faster growth.

Pronounced exposure

Replying to my enquiries, Jason Tuvey, analyst, said, “There is quite a good relationship between credit and GDP growth in the region. At first sight, it would appear that the former follows the latter, although these things are always hard to discern.”

Looking at both sides of the credit equation, demand has been subdued by corporations deleveraging, he noted, while supply has been facilitated by banks in the region being “in fairly good shape, particularly in Saudi Arabia”. The UAE’s pronounced exposure to real estate prior to 2008 means its banking experience will take that bit longer to unwind.

“Nonetheless, there have been signs, tentatively, that banks are beginning to reduce their provisions, freeing up funds for lending.” Moreover, very loose monetary policy means “households and corporations may take advantage of cheap credit in order to bring forward purchases and investments.”

While the UAE central bank has been contemplating introducing a limit on commercial banks’ exposures to government-related debt, fiscal policy itself around the Gulf has a “strong connection” with credit growth because much of state spending goes through private contractors, Tuvey explained.

Hence, the expansionary budgetary investment plans for 2013 means “we would not be surprised to see private sector credit growth accelerate [this] year”, besides the separate boost to consumption in wages and salaries, “providing households with the opportunity to purchase durable goods such as cars”.

It could be, therefore, that the region really is moving into a different gear.