Although expectations of long-term growth rates of the UAE and the GCC economies remain positive, these countries need to accelerate the pace of planned structural reforms and strengthen their macro-financial stability, said an economist.

In an exclusive interview with Emirates Business after participating in a panel discussion at the recently concluded IMF meeting in Turkey, former Lebanese Minister of Finance Dr Jihad Azour discussed the future of oil-rich economies of the region.

Dr Azour said: "Unlike other countries of the world, the GCC was somewhat sheltered from the full impact of the global financial crisis and the effects of the economic downturn on the GCC's real economy have been less pronounced than in developed countries.

"As global economies emerge from recession and oil prices pick up – we are already seeing evidence of this – the GCC countries are expected to undergo a smooth recovery. Forecasts from several sources show that growth in the region could exceed five per cent in 2010. Apart from this, the strong prospects for oil prices in 2010 and the projected recovery in oil demand will also enable GCC countries to rebuild their international reserve positions and strengthen their fiscal and external balances.

"The hard-felt inflation of the pre-crisis years that weakened the economic performance is expected to decline significantly in 2009 to single-digit levels, even in the face of expansionary monetary and fiscal policies implemented by various GCC governments. Inflation will remain tamed at a rate of 3.5 per cent in 2010, thus alleviating some of the pressure on government policies and macroeconomic stability. The UAE's financial markets were affected, like other GCC markets, by the global crisis and major indices fell considerably over the past year.

"The government injected fund into banks to restore confidence in the financial system. The crisis impacted planned real estate and power projects, with some large projects cancelled or put on hold. The economy started to recover since the second half of this year, with increase in confidence among investors, and it is expected to grow at a rate of 2.5 per cent in 2010."

According to Dr Azour, the speed of recovery in the GCC's economies depends a lot on the global recovery, the oil market and the local demand. Until the region's financial markets return to normalcy, this recovery will remain subdued. It will also depend on the return of capital inflows and public spending. Although signs of stability are already emerging, access to financing is difficult, which reveals the need to enhance liquidity in financial markets.

"GCC countries can create a competitive edge in this cash-dry period by investing in promising capital-intensive industries, as well as innovative sectors where GCC countries can leverage competitive advantages – for example, renewable energy and logistics services," said Dr Azour, who is also a senior executive advisor at Booz & Company.

Pointing out the risks for the GCC in the period ahead, Dr Azour said: "Even though the worst of the effects of the economic meltdown were not felt by the GCC, its full economic recovery is far from over. The fact remains that the region's economic prospects in the coming months are weighed down by a number of challenges that will continue to require the attention of policymakers. Right now GCC policymakers are tasked with establishing the right balance between growth and macroeconomic stability. The region's growth will remain dependant on certain number of issues in the near term. These are the evolution of oil markets and prices, the strength of the recovery in global consumer and industrial demand, and the positive outcomes of various stimulus programmes and policy actions implemented by GCC states."

According to Dr Azour, to restore growth in coming years and protect Gulf economies against future financial turmoil, structural changes in public policies for economic management will be needed. To this end, policymakers need to expand and accelerate their efforts towards economic diversification. They will also need to adopt modern fiscal management practices, including more rigorous control over expenditures and stronger governance of state-owned enterprises.

The GCC countries also need to stay on course for social reforms such as pensions, labour markets, subsidy programmes and priority investments. They need to maintain recommended policy actions spread across the short term, medium term and long term to allow them to be better positioned to benefit from the projected recovery.

To that end, GCC governments should improve the business climate by implementing investor-friendly regulations. They could also develop national competitiveness agendas to determine what economic sectors are best suited to their overall growth strategy, and thus should receive the bulk of their efforts.

In addition, policymakers should accelerate the pace of key structural reforms and review public investment priorities in light of the challenges that emerged in the aftermath of the crisis. In particular, they should invest in regional enabling infrastructure – power, highways, railways, education and health – to increase economic integration and benefit from new markets. Continued liberalisation and increased participation from the private sector, for instance, through public-private partnerships will be critical.

Dr Azour said lessons that could be drawn by the UAE from this recession were that although expectations in long-term growth rates remain positive, the UAE, like other GCC countries, needs to accelerate the pace of planned structural reforms and put significant emphasis on strengthening macro-financial stability. "Authorities have to reinvent their growth model to retrieve levels of growth witness during the years that preceded the crisis. The global financial crisis underscored the necessity for the UAE to continue the efforts to further expand its non-oil sectors and to diversify its oil-based industries, so as to reduce vulnerabilities towards the fluctuations in oil price and to benefit from the resurgence of a global growth.

"Different paths for recovery are ahead of the UAE economy. While none is claimed to necessarily be the most effective, policymakers in the UAE must travel one that benefits from its visionary leadership, swift planning, bold execution and its vibrant private sector."

Discussing the need for further policy actions to strengthen the balance sheets of financial institutions in the UAE, Dr Azour said: "The UAE has already put in place two support packages worth Dh120 billion to boost liquidity of banks, exceeding 12 per cent of the GDP of 2008. In addition, the UAE Central Bank has also guaranteed bank deposits and allowed lenders to perform dirham-dollar swaps.

"The aim of these programmes is to achieve financial stability through liquidity facilities, guarantee of deposits and by strengthening banking supervision. It is worth noting that significant improvements in financial regulation and supervision are already in progress.

"However, like other GCC decision-makers, UAE authorities should also introduce a comprehensive set of policy measures to strengthen their banking and financial systems and to enhance its governance framework. In the medium term, they can broaden financial markets through the progressive introduction of new instruments, such as corporate bonds, long maturity government bonds and money markets, to increase options for financing and deepen liquidity, thus enabling additional liquidity sources to fund economic development and private sector investments."

Discussing the measures taken in the past year such as deposit guarantees, capital injections and liquidity support to shore up the GCC financial systems, Dr Azour said: "Even though the direct exposure of GCC banks to sub-prime markets and other toxic assets was relatively low, the global financial crisis has revealed existing vulnerabilities in the Gulf banking system and the fact that it required active interventions by monetary authorities.

"In some countries such as Kuwait and the UAE the main vulnerability came from the non-bank financial establishments, that had widely spread their activities over the years using excessive leverage to finance their expansion.

"The monetary authorities in various GCC countries took several measures to enhance banks' liquidity, lower funding cost, boost confidence and mitigate tight credit conditions. These measures included the reduction of reserve requirements on deposits, direct injection of liquidity through government deposits in the banking system, reduction in policy rates, expanded guaranties for bank deposits and bank credit lines, and drew down on reserves at the central bank.

"These measures were effective in shoring up confidence in the banking sector that translated into fast recovery of their stock prices, with a rally of the banking index in major GCC countries since the beginning of the second quarter of 2009. However, these measures did not lead yet to a real recovery in lending to the private sector."

According to Dr Azour, countercyclical stimulus packages were implemented selectively in certain Gulf countries, mainly in Saudi Arabia, the UAE and Kuwait. These plans comprise large components in form of public investments. For example, the Saudi stimulus plan of almost $50 billion (Dh183.6bn) was one of the largest internationally in terms of the relative size of the GDP. In addition, the accumulated reserves over the past years provided a comfortable cushion for GCC governments to finance the long pipeline of large projects.

"In parallel, policymakers should rethink the legislative framework for reviving public-private partnerships in large infrastructure, social or developmental projects, drawing on lessons learned from the global financial crisis."

On the impact on the GCC oil and gas market, Dr Azour said: "The global recession has adversely impacted new investments in the hydrocarbon sector in most GCC countries. The freezing up of credit markets and the volatility of oil prices have tightened financing of new projects in the oil industry.

"As a result, certain large projects have been deferred or cancelled while others are being revised to reflect lower input costs following the decline in inflationary pressures. However, the pace in downstream oil industry development plans was kept with no major cancellation."


The path ahead

- GCC policymakers should rethink the legislative framework for reviving public-private partnerships in large infrastructure, social or developmental projects

- The UAE should accelerate the pace of planned structural reforms

- The UAE should put significant emphasis on strengthening macro-financial stability

- There is a need to deepen liquidity in financial markets 

- Policymakers need to expand and accelerate their efforts towards economic diversification

- Need to progressively adopt modern fiscal management practices, including more rigorous control over expenditures

- Stronger governance of state-owned enterprises need of the hour

- GCC must stay on course for priority investments and social reforms such as pensions, labour markets, and subsidy programmes


The risk factors

In the near term, the region's growth will remain dependant on:

- The evolution of oil markets and prices

- The strength of the recovery in global consumer and industrial demand

- The positive outcomes of various stimulus programmes

- The policy actions implemented by GCC governments

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