With oil in the second week of January still above $90 a barrel and expected to average this year more than it did in 2007, you don’t have to be a Nobel Prize-winning economist to forecast another good year for the Middle East.
GDP growth before inflation will be about 10 per cent throughout the region. Unless there is a global setback more severe than anyone expects, the GCC will have a current account surplus of more than $200,000 million for the third consecutive year. This will raise the aggregate for the decade ending December to about $850,000 million, more than the GCC’s forecast 2008 GDP.
America worries about the subprime crisis. Practically everyone wonders what its full impact will be. But the Middle East will remain in large part immune. Pessimists will rightly caution against over-exuberance. What if the subprime crisis turns into world recession? What if America, despite everything, attacks Iran? What if Pakistan implodes? These are all fair points. But one month into 2008, the balance of probability is the region’s oil exporters will prosper some more before the year is done.
The contrast with the rest is nowhere more obvious than in banking. Leaders of the world’s biggest financial institutions that have not already retired or been discredited remain bemused by how the subprime crisis happened and what its full implications may be. Almost everyone is to blame: the originators that securitised high-risk future mortgage income flows from low-income American home-buyers, the intermediaries that sold the securities, the banks that bought them, the agencies that over-rated them and the regulators that couldn’t stop the whole sorry mess happening. There is already one obvious subprime victim. That is the idea that lots of capital guarantees solvency. As Northern Rock showed, a bank’s worth less than the paper its logo’s printed on when it has no cash.
For GCC bankers, these are the equivalent of off-stage noises. As the region’s reporting season starts, there has only been one large-scale loss announced that is connected to the subprime crisis. The concerns that exist seem marginal. As a result of the shock delivered by the credit crunch, spreads are rising to make borrowing less enticing. In some GCC countries, inflation is compressing real spending power and reducing loan demand. In the UAE, the consensus is that the real estate price adjustment has not yet started. But the property boom is ending. Assuming no unanticipated subprime blowback, this will lead to a possible reduction in returns on bank assets and equity which will, nonetheless, remain among the world’s highest.
The subprime crisis has slaughtered the last GCC bank canard: that the financial institutions of the region are too small. Now that the global behemoths have bungled away billions of their customers’ cash, small banks have never looked more beautiful. And if, like most Gulf institutions, they are as liquid as the River Nile, there couldn’t be a better place in world banking than running one.
GCC central banks have the biggest headache. They have the unenviable task of convincing lenders and borrowers to take prudent steps now in anticipation of an end to a party that should go on for several more years. In the US and Western Europe, the fun is over and the banks are receptive. In the GCC, where there hasn’t been a significant bank crisis for more than two decades, it’s hard convincing the industry to contain credit and stop paying too much for deposits.
GCC central banks have been distracted by uncertainties about the future of their exchange rate parities. Managing monetary policy is a challenge. But when the region’s leaders express doubts about the viability of the GCC currency union schedule and dollar parity policy they previously said they support, it diverts attention from the year’s most pressing issue.
The priority for GCC central banks is to beef up their capacity to supervise a banking system that has more than doubled in less than a decade. Few things could be worse than a Northern Rock-type setback that could slash GCC banking’s ability to recycle liquidity locally at the very moment when it is needed most. It is unlikely, but not inconceivable.
The Gulf banking tempo remains upbeat. Over the next two months, about 100 GCC institutions will parade their continuing progress with reports that should show yet more asset and profit growth. The rest of the world has never had more reasons to join in.
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