Gulf Central banks need to revise their exchange rates as part of a new monetary policy aimed at controlling prices and preventing bubbles that hurt the economy and consumer confidence, a key Saudi bank said on Wednesday.
The measures should include stronger supervision of the financial sector, the creation of credit data centres and regulations to prevent real estate speculation, the Saudi American Bank Group (Samba) said in a study.
The 13-page study about prospects of consumption in the six-nation Gulf Cooperation Council (GCC) showed they are stifled in the UAE but strong in Saudi Arabia, the largest Arab economy and the world’s top oil exporter.
“Perhaps the most pressing concern in the GCC is the need to avoid a build-up in price bubbles. Laws on real estate activities that deter excessive speculation are an important factor. Saudi Arabia has already tightened regulations surrounding off-plan sales,” the study said.
“But an equally large burden falls on central banks and their pursuit of appropriate monetary policies, particularly in the context of large inflows of hydrocarbon revenues,” Samba added.
Recalling what it described as the loose monetary policy adopted by GCC central banks during 2007-2008, the study said it played a significant role in fuelling the unsustainable credit boom in the region as the exchange rate peg to the US dollar impelled central banks to cut interest rates in line with the US Federal Reserve, despite their then booming economies and soaring inflation rates.
It said the resultant negative real interest rates distorted both banks’ and their customers’ incentives and helped fuel asset bubbles – particularly real estate in Dubai - which have since crashed leaving consumers and banks badly exposed, particularly those that relied heavily on wholesale funding.
“Looking ahead, monetary authorities will obviously need to consider carefully their exchange rate regimes and monetary policy needs,” Samba said. “Strengthened bank supervision will also be important to identify any potential build up of risks, while the development of credit bureaux in the region would allow banks to make more informed lending decisions. Longer term mortgage finance will require careful management of any maturity mismatches in banks, and is another reason for accelerating the development of local bond markets as a source of long term financing.”
Samba presented bright prospects for consumer spending in Saudi Arabia, a mixed outlook for Qatar and a stifled one for the UAE. It gave no forecasts for the remaining members — Kuwait, Bahrain and Oman — for lack of data. It said consumers in the UAE appear most constrained as they confront the aftermath of an excessive build up in credit and sharp real estate correction.
“Past evidence from around the world suggests that countries experiencing the largest increase in household leverage before a housing crisis tend to experience more severe and long lasting downturns. Certainly efforts by UAE households to reduce their elevated debt levels via higher savings are expected to result in a sluggish recovery in consumer spending, which is likely to be accentuated by continued corporate restructuring and deleveraging in Dubai with its adverse implications for employment and incomes,” the study said.
“However, there are grounds for cautious optimism that UAE consumers will pull through more quickly than past trends would suggest.” In addition to the strong finances of Abu Dhabi, the trade, tourism, and services sectors are picking up in line with a revival on global activity, it said.
“As a result, the UAE economy as a whole is expected to start growing again this year, accelerating to around three per cent real GDP growth in 2011. Not all UAE households will be highly leveraged, and real disposable incomes throughout the emirates will benefit from the sharp drop in inflation, especially rental costs.”
Samba added that further progress with restructuring of Dubai’s debt and greater transparency over the Emirate’s finances would also go some way to helping restore confidence. “However, as in the rest of the GCC, until a durable global recovery is seen to be underway, fear of a double dip global recession will continue to dampen sentiment and stunt consumer spending.”
Turning Saudi Arabia, Samba said the Kingdom has the healthiest consumers outlook because household debt levels are relatively modest, credit conditions are more favourable, the Saudi stock market is likely to be the best performing in the region and government fiscal support is considerable.
“Importantly, consumers are not widely exposed to declining real estate, and population dynamics remain positive. Large scale public investment programs are helping provide jobs and restore confidence and survey data suggest private sector pay raises will exceed inflation in 2010,” it said.
“Lingering uncertainty over oil prices and global developments will remain a drag, but consumer spending is likely to continue to pick up over the next 12 months helping underpin the expected rebound in GDP growth to 4.5 per cent by 2011.”
In Qatar, which controls the world’s third largest deposits and is recording one of the highest growth rates, the situation is more mixed, according to Samba.
“On the down side, consumer debt levels are probably higher than the data show as it does not include real estate finance, and Qatar has also suffered a sharp real estate correction, with prices unlikely to recover until 2011,” it said.
“Consumer sentiment also started the year weakly. Some consumer deleveraging is thus likely to be taking place, particularly given the extremely rapid credit growth of the last few years. However, this is countered by the fact that the economy continues to grow strongly on the back of large scale public investment and growing hydrocarbons exports, with real GDP projected at nearly 18 per cent in 2010 and 14 percent in 2011.”
In addition, the report added, Qatar’s public finances are very strong and are being used to support the banking system and help bolster asset prices, and this is restoring consumer confidence. Private sector job losses during the global downturn are also thought to have been modest and population dynamics remain positive, albeit less robust than in the past.
“Moreover, the combination of deflation and sustained public and private wage increases should raise consumers’ real purchasing power. We thus expect to see an increasingly strong contribution to real economic growth from private consumption as the year progresses and into 2011.”