De-linking must to control GCC money supply growth


Mary Nicloa, Economist Middle East and North Africa for Global Markets at StanChart, said there has been great imbalance between the US and the GCC economies.

The GCC economies, she said, has been on the path of diversification for the last couple of years and the excess liquidity the region helped it emerge as one of the strong economic blocs.

Mary, who was joined by team of StanChart officials including Sami Mahfouz MD/Head of Global Markets, Daniel Smith Metal Analysys and F Abah Ofon, Softs Analyst, said that despite the strong economic indicators the GCC economies were facing major challenges. “These economies face many challenges like how to deal with the US dollar peg, how to develop a monetary policy and monetary tools.

“With oil prices at an oil time high, surpluses in the GCC are mounting. Both budget and current account surpluses are close to 20% of GDP across the region. Foreign reserves are high and, as a consequence, domestic investment is booming. The GCC is focusing on diversification to become less reliant and vulnerable to fluctuations in oil prices.

“The UAE, for example, is the leader in this respect; in 2007, the hydrocarbon sector made up only one-third of GDP. Sectors such as real estate and the manufacturing sector are expanding. While this paints a very rosy picture of the Middle East there is one particular challenge to these booming economies – inflation. With money supply growth hitting 50 per cent in the UAE and nearly 40 per cent in both Qatar and Saudi Arabia, there is essentially too much money chasing too few goods.

“The US economy is slackening. This has been compounded by the credit crisis which still has to filter through the economy. This slowdown, unlike in 2002, is affecting the consumer through the housing market and will eventually affect the labour markets. The manufacturing sector is weakening and average hourly earnings growth is slowing. With oil prices on the rise, the US consumer has one more thing to worry about as they try rebalancing their balance sheets.”

“At a time, when the US is facing a credit crisis, the Middle East is awash with liquidity,” she said.

“The GCC is unable to control money supply growth because of its peg to the US dollar and lack of monetary policy tools. At a time when the Fed is cutting rates, the GCC must do so also. We expect rates to fall to 1 per cent by Q1, 2009 in the US and the GCC. Monetary loosening is not what this region needs. The other two factors affecting inflation are housing and commodity prices,” she said.



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