The Middle East is set to grow 6.1 per cent both this year and next, while the world is forecast to grow just 3.7 per cent this year – close to the three per cent level accepted as a recession.
As a result, for most of the 184 finance ministers who returned home from the weekend’s International Monetary Fund meetings with warnings ringing in their ears, the outlook was bleak. But for the Middle East, this year should mark its moment in sun. “If you want one word to describe the region right now at the macro level, it’s ‘booming’,” Mohsin Khan, the IMF’s Middle East director, told Emirates Business in an exclusive interview.
The IMF does not publish its detailed regional assessment until May but it is likely to laud the economic achievement and give approval to countries’ fiscal and monetary policies as well as hail the positive impact of sovereign wealth funds.
And it will provide a positive precursor to the annual World Economic Forum on the Middle East in Sharm Al Sheikh that also falls in May.
The Middle East attracted little of the negative headlines from the gathering in Washington, DC – and for good reason. Growth in the region is predicted to top six per cent, up from 5.8 per cent in the past two years.
This compared with an anaemic 0.5 per cent this year in the United States – a figure that sparked the howls of outrage from the US Treasury usually heard from emerging economies.
The Middle East grew by six to 6.5 per cent a year since 2002, double the rate of the previous four years. “That has been a very noticeable jump and it is not a one-time spike – they have been doing this year after year,” Khan said. He said the region’s relative economic success is not based on oil, as many critics claim, but on the exact opposite – policies to move away from reliance on black gold.
Strip oil out from GDP and growth rates are even higher. Tight Opec quotas have meant production has stagnated, which for a country such as Saudi Arabia, where oil is half of GDP, takes out a serious chunk of activity.
Non-oil GDP is in high single-digit figures. “They are not in the Chinese league but they are getting into the Indian league,” said Khan. The secret has been the successful diversification of both the economic base and sources of revenue.
Firstly, countries in the region have successfully exploited knowledge acquired from oil extraction to move into sectors such as pharmaceuticals, chemicals, petrochemicals, fertilisers and foodstuffs. Saudi Arabia is well on track to becoming the largest petrochemical producer in the world.
Secondly, it has moved into services, specifically financial services, tourism, and educational centres. These have been key in creating jobs for the young. The Dubai International Financial Exchange is a prime example. In addition, the Middle East has diversified its income stream away from oil. Countries increasingly hold assets abroad, meaning they are less dependent on oil to generate income. For example Kuwait imported $20 billion (Dh73.44bn) last year but its investment income totalled $16bn, meaning it paid the majority of its import bill from investment income.
Khan said other countries are looking to tread that path. “If oil prices were to tumble they would have a steady stream of income coming from their assets so you would not have these boom/bust cycles.” And this is where sovereign wealth funds (SWF) come into the equation for their hosts, for whom they are ideal vehicles for overseas investment.
For the West, however, SWFs are a threat that must be neutralised with demands for standards of disclosure that would be unacceptable to a Wall Street hedge fund.
It was clear in Washington the mood music has changed from two years ago when political opposition scuppered DP Ports’ bid for US facilities. Fast forward to 2008 and SWFs, including key Middle Eastern ones, have contributed about $41bn of the $105bn of capital injected into major financial institutions since November 2007. The IMF gave heartfelt approval of the role they have played in stabilising the economy. Jaime Caruana, its director of monetary and capital markets, was, by IMF standards, effusive.
“They play a very important stability role, for example the infusion of capital into some financial institutions,” he told Emirates Business, adding they had helped keep markets “open and competitive”.
However, he said SWFs’ growing size was causing concern in the West. “It is important to be really transparent and we would like to work with them to develop codes of best practice, which in our view could help to keep the global financial system open.” The fact is, as the IMF itself made clear, banks are going to need additional capital injections to maintain their balance sheets. Its forecasts show total potential losses related to assets backed by sub-prime, commercial property and credit card loans may reach $945bn.
With the credit markets still closed and sentiment fragile, SWFs and other sovereign-owned institutions are the only funding in town.
The one cloud on this sunny horizon is inflation, which is set to hit 11.5 per cent across the region this year, up from 10.4 per cent last year and just seven per cent in 2006, the IMF said.
In Iran it will breach 20 per cent this year and is almost 14 per cent in Qatar and at a 19-year high of more than nine per cent in the UAE. Even in Saudi, where inflation has traditionally averaged one to two per cent, prices are forecast to grow 6.2 per cent this year.
For members of the GCC, this presents a particular problem as the majority has tied their currency to the dollar, meaning they have to track interest rate cuts by the Federal Reserve.
It is this logic that has led speculators to mount repeated attacks on GCC currencies. Those expecting the IMF to add fuel to the fire will be deeply disappointed.
Khan said the IMF was not pushing for a revaluation of the peg or a shift to a new basket as a policy solution. “I don’t think imported inflation is driving it for oil producers, so revaluation might give temporary help but imposes some costs. One cost is that it will set off more speculation that you will revalue again so you will get inundated with capital moving in.”
All in all, 2008 may prove to be the year when the Middle East was the one safe haven from the storms that have engulfed the global economy. It is up to its political leaders to take full advantage.
- Phil Thornton is lead consultant at Clarity Economics in London
Middle East to buck the trend and grow 6.1%