Inflation in the hydrocarbon-rich GCC will ease to around 6.3 per cent in 2009 from 10.6 per cent last year, the International Monetary Fund (IMF) said yesterday.
The Washington-based organisation that oversees the financial policies of member nations said the drop in inflation would come as the region's economies cool due to lower oil prices and as negative forecasts continue to batter consumer confidence in almost all sectors.
Depressed oil prices may show some resilience in the second half of this year, economists attending a Dubai International Financial Centre (DIFC) seminar said. Oil is still tackling downward pressures of $30 a barrel, a senior economist said.
Data released by the IMF yesterday suggested that oil prices may rise 20 per cent in 2009. "We expect oil prices to rise in the second half of this year," said Tim Fox, Chief Economist at Emirates NBD.
Low oil prices have brought down revenues of the GCC by $300 billion (Dh1.1 trillion), the IMF said. This has turned a $400bn surplus last year into a $30bn deficit. However, the same low prices have improved the current account balance of oil importers, said Masood Ahmed, IMF's Director for the Middle East and Central Asia.
The decline in oil production has reduced receipts for oil exporters by about $300bn, Ahmed said. "However, the GCC countries continue to spend. There has not been a substantial impact on their fiscal spending."
For the other countries in the Middle East, the ones that import oil, the low oil prices resulting out of a global economic slowdown have brought a brief level of comfort. "The condition of oil-importing countries in the region has certainly improved their current account balance. They are, however, facing the same situation when it comes to exports," Ahmed said.
Low oil prices come as a transliteration of a global economic slowdown. Ahmed, who gave a grim forecast for the global economy in 2009, cited multiple reasons for confidence remaining stubbornly reluctant to return to the markets: "First, the actions taken so far are inadequate to convince people about the future. There has been an extraordinary collapse in the purchasing power of people and they have refused to purchase. There is a vicious spiral that has developed between the real economy and the financial system."
"Risks to financial crisis have intensified since October 2008. Macroeconomic risks have risen as global growth has fallen precipitously along with a sharp slowdown in global trade. Credit risk has also risen as a deterioration of economic and financial conditions have resulted in rising loan losses," a global financial stability report presented by IMF said.
"The difficulty of keeping up with the increasing size and breadth of risk borne by financial institutions, along with continued high funding pressures have hampered the ability of policymakers to address the crisis. Credit intermediation and confidence are severely impaired, which will weigh heavily on recovery prospects and the ability of institutions to attract the needed capital from private investors," the IMF said.
Ahmed said the crisis, the "worst of its kind" that the IMF has witnessed since it came into being, will substantially change the way the financial system operates across the world. "Maybe the system will operate at a much smaller scale. There will be a substantial change."
An attitude of protectionism and steps designed to invigorate economies without a long-term outlook could prove counter-productive and invigorate a possible "boat-shaped recession", senior economists said.
The GCC, which has been able to relatively cushion itself against the ill impacts of the crisis particularly needs to make its logbooks transparent and mature as a financial powerhouse even as it tackles low oil revenue, they said. "A protectionist attitude will stimulate a depression. That's one tendency that needs to be avoided," Marios Maratheftis, Dubai-based regional head of economic research with Standard Chartered bank, said.
Simply infusing added stimulus and monetary easing will not improve the confidence of investors, Ahmed said.
"The distressed assets need to be identified. It requires a more stressful approach. There needs to be a mechanism to deal with the troubled assets. After the troubled assets have been identified, we need to capitalise on the good assets."
There is a large build up of public debt as a result of fiscal stimulus packages, Ahmed said. "As you infuse the stimulus, you need to give people the understanding how you will exit from the public debt."
According to the IMF: "An assessment of banks' business plans – and deciding which financial institutions will need public money based on their viability – should be done proactively by supervisors, since history suggests that the longer one waits, the higher the fiscal costs."
The IMF called for consistency between immediate short-run policies and actions, establishment of clear rules, and international co-operation.
"No one model of restructuring will be appropriate for every country or every bank, but even if models differ, international co-ordination remains essential," the fund said.
Ahmed reiterated the IMF demand for a global economic stimulus composed of two per cent of the GDP of its member countries. "Those not in a position to pay may pay less. Others can pay more," he said.
The oil-exporting GCC is today a major contributor to the global demand though the feedback has not been the same from other parts of Asia, Ahmed said. "The demand this time needs to come from the GCC and Asia. When we had the Asian crisis, the countries concerned exported their way out of the crisis. However, the same is not possible this time," he said.
Even though the economic crisis has led most of the financial indicators into the red, it has had a few positive fallouts – particularly when it comes to the essential lessons about managing the markets, economists said. One of the important lessons was not to allow "hot money to get into the credit cycle", said Nasser Al Saidi, Chief Economist, Dubai International Financial Centre.
CONSUMER PRICE DECELERATION
The crisis has significantly pulled down inflation, which had been threateningly perched in double-digits.
"Sluggish real activity and lower commodity prices have dampened inflation pressures. In the advanced economies, the headline inflation is expected to decline from 3.5 per cent in 2008 to a record low of 0.25 per cent in 2009, before edging up to 0.75 per cent in 2010," according to the World Economic Outlook released recently by the World Bank.
"Moreover, some advanced economies are expected to experience of very low (or even negative) consumer price increases. In emerging and developing economies, inflation is also expected to subside to 5.75 per cent in 2009 and five per cent in 2010, down from 9.5 per cent in 2008," the report added.
Maratheftis said the recent injections by central banks may prove counter-productive as they will increase the loan-to-deposit ratio. "The banks may begin competing for rates of return on fixed deposits. At a time when we need low interest rates, we will end up getting high interest rates," he said.