GCC can deal with fresh global crisis: Suwaidi

Gulf oil producers and other Middle East countries face the risk of a fresh financial crisis resulting from a possible crash in crude prices but they have the ability to deal with it, the UAE Central Bank Governor has said.

Sultan bin Nasser Al Suwaidi said the GCC and other Arab nations had been severely impacted by the global financial distress but are heading for a speedy recovery following a recovery in hydrocarbon prices and massive anti-crisis fiscal measures undertaken by regional governments.

Addressing the IMF's International Monetary and Financial Committee (IMFC) meeting in Washington on Saturday, Suwaidi said prospects for global economic recovery has become better but cautioned of what he described as major risks.

In his address on behalf of the Central Bank governors 13 Arab nations including the UAE, Suwaidi called for reforms in the world's financial system following the 2008 crisis and said the IMF should also develop its role.

"As for the Middle East, the region was acutely affected but is poised for a relatively speedy recovery, supported by public spending and a rebound in commodity prices. Those two factors could sustain activity in the near-term until the recovery in advanced economies takes hold," he said.

Suwaidi said the effects on exports, tourism, remittances, and foreign direct investment were generally milder than had been feared.

He said inflation in the region, after soaring in 2008, has declined as demand pressures abated in both oil-producing and oil-importing countries. While equity markets have recovered to varying degrees, real credit growth has remained sluggish mainly reflecting weak demand as investments are placed on hold due to uncertain global prospects, he said.

In an apparent reference to the GCC nations, Suwaidi said the countries that experienced significant real estate corrections are strengthening their financial sector balance sheets as well as supervision and resolution frameworks.

"We concur with the key risk identified in the World Economic Outlook (WEO) that the global recovery might not be sustained and oil prices could fall sharply, which could have important implications for oil exporters and their regional trading partners," Suwaidi warned.

"Domestic financial conditions could also come under renewed stress if global conditions tighten again, but the region's relatively limited exposures and strong capital positions will mitigate the impact of such eventuality."

Turning to the global economy, Suwaidi said prospects for a recovery are now brighter than when the last IMFC meeting was held, but he warned that considerable risks and uncertainty remain.

He said the crisis, and the related sharp depression, has inflicted tremendous damage across the world in the form of unemployment, loss of wealth, lost growth and a surge in public debt which will take many years to overcome.

"Thanks to bold public interventions, however, the worse scenarios have been prevented. Looking forward, balancing the withdrawal of support against the need to facilitate job creation remains a challenge," Suwaidi said in his address, which represented the UAE, Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Maldives, Oman, Qatar, Yemen and Syria.

"Although global financial conditions have eased, credit remains tight and further reforms are necessary to safeguard financial stability. The crisis has brought into focus major fault lines in policy frameworks, highlighting the role of the IMF in crisis prevention and resolution, and making this an opportune time to reflect on its future role and effectiveness."

Suwaidi said the recession is turning out less severe than anticipated, adding that Asia's resilience significantly contributed to the global recovery.

With the upside surprise in growth for the United States, the WEO forecasts that global output growth will exceed four per cent in 2010 and 2011, he said.

As for Europe, sizeable current account and fiscal deficits are exacerbating funding pressures in some of its countries and are likely to weigh on near-term growth, he said, adding that turbulence in sovereign bond and currency markets is becoming a risk of rising likelihood and potentially high cost.

"Although systemic financial sector risks have receded, the more favourable outlook is susceptible to downside risks related to rising public debt in many advanced economies. Moreover, significant bank exposures to real estate continue to pose risks in many countries," he said.

"Policymakers need to tackle a wide range of issues to safeguard the recovery. A top priority in the short term for the advanced economies is credible fiscal consolidation plans to avoid higher risk premia which have spillover effects on global financial conditions. Financial sector repair is also a short-term priority, as well as further progress in regulatory reforms to avoid the conditions that led to financial crisis. It has thus far proceeded at a slow pace and remains critical to restore healthy credit growth and resumption of securitisation."

Suwaidi said for several emerging market and developing countries (EMDCs), where the recovery is stronger and more firmly established, the case for further fiscal stimulus may have waned.

For some EMDCs, an added challenge is to absorb rising inflows in search of higher yield without triggering a new boom-bust cycle, he said.

Other EMDCs economies will have to compete with the higher financing needs of advanced economies to meet the rollover needs of their corporate and banking sectors in the coming two years, he added.

"Another medium-term priority is to accelerate structural reforms to restore potential growth to earlier levels in an environment of subdued consumer demand and possibly higher savings rate in the US," he said. "In some cases, in addition to reviving credit, greater product and labour market flexibility is necessary to help restore losses to potential output and support employment creation. In some emerging markets with particularly high savings rates, strengthening social safety nets, access to finance, and financial instruments could, over time, help reorient growth toward more domestic demand and gradually facilitate currency adjustments."

But Suwaidi cautioned that a substantial and premature currency adjustment, even if accompanied by strong fiscal stimulus, may depress growth in those economies, with adverse implications for global growth.

"In this regard, we draw attention to the findings of recent fund analysis that higher output performance has not been associated with floating exchange rate regimes, suggesting the need for a more nuanced approach than the Fund's standard call for greater exchange rate flexibility."

Follow Emirates 24|7 on Google News.