The region needs change in monetary policy and also exchange rate policy, suggested Chief Economist and Head of Global Research Dr Gerard Lyons during a media briefing in Dubai yesterday.
Lyons said: "Ideally the region needs higher interest rates as a lot of liquidity is available here."
He added: "Problem for this region is adding wage pressure as wages are rising and inflation expectation is also high. Inflation pressure will build if you don’t have good monetary policy."
The regional Head of Research Marios Maratheftis said: "We do not see any correction in oil prices as we are quite positive. We expect oil price to remain high this year."
"The average rate of oil for this year is $ 106 and average rate for next year is $ 120. The reason for positive policy in oil prices is heavy demand, especially in China and India. The demand will remain strong."
When asked about the deadline for 2010 monetary union, Maratheftis replied: "We need to see much more progress in monetary policy in 2010."
In response to a question regarding VAT Maratheftis said: "Government needs to diversify sources of income to fund infrastructure. VAT is good and its impact on common man will be negligible."
"There is a need to increase pace of capital markets in this region. So the central bank can draw more liquidity out of the system. It does require a shift away from the dollar."
Housing market
On the housing market Maratheftis said: "Low deposits are leading to increase speculative activities in the housing market. People are buying housing units at very low deposit of just 5 per cent or 10 per cent."
"Fundamentals of housing market are absolutely positive. Dubai is witnessing a population increase of 7 per cent a year for the past 30 years and it will continue. Despite positive fundamentals one should be slightly concern about speculative elements in the housing market. People are taking advantage of excess liquidity in the UAE."
Last year market supply (M1) growth was 51 per cent, M2 was 37 per cent and credit growth was around 44 per cent. It is more difficult to say how this liquidity will not continue for the next couple of years, he added. "More windfall gains are coming from oil prices and absorption is very low here, but absorption is not bad as people think. It is improving."
Education
Measures are being taken by the authorities concerned to improve the quality of education which is not satisfactory at present. UAE has already fixed 28 per cent of its budget for education sector, which is the largest allocation of the budget. Weakness has been identified and will be addressed, but it will take years, informed Maratheftis.
Financial institutions
The quality of financial institutions in this region is world-class, especially in the UAE, Qatar and Saudi Arabia.
Comparison of technology gap between the US and UAE shows it does almost not exist. The ratio to measure quality of financial institutions set by World Economic Forum is from 1 to 7.
We have 5.28 in Qatar, 5.2 in the UAE and 4.76 in the US. So the quality of institutions seems to be better here as compared to the other part of the world.
