Efforts by the Gulf Cooperation Council (GCC) authorities to restore market confidence were strongly backed by Mohsin Khan, director of the IMF’s Middle East and Central Asia department, yesterday.
“The GCC is critical, the epicentre of the region,” Khan told Emerging Markets. “Countries across the region are waiting to see what happens there.”
After heavy losses, Gulf stock markets rallied on Thursday, the week’s last trading day, following cuts in interest rates and measures to improve banking liquidity.
“They are playing it well,” said Khan. “The only pressure you see is pressure on the stock market. There is no major cancellation of projects, although of course it’s early days.”
Delegates arriving from the GCC for the IMF/World Bank annual meetings are certainly relieved, said Khan. “One central bank governor told me – ‘If we’d left it up to you, Mohsin, we’d have let the foreigners in and they would now be running away with their money’.”
The GCC countries are pleased, in other words, that they have not gone as far as the IMF once recommended in opening up to the world.
“Yes, the Gulf economies are not so exposed – and so their banks are not experiencing a sharp cut off of credit from the rest of the world,” said Khan. “We are revising downwards our growth projections for 2008 and 2009, but we are talking about removing 0.5% from 5.5%-6%.”
Khan is unruffled that, with the world in such flux, old orthodoxies are tumbling.
“If the Kuwait Investment Authority – which is worth $250 billion – props up a bourse with a market capitalisation of $80bn, then no-one is going to criticise,” he said. “The banks in the GCC are very strong, and the people behind them have deep pockets.”
Neither are falling oil prices likely to lead to fiscal imbalances in the GCC. The IMF will next week present in Dubai a Regional Economic Outlook with country-by-country calculations of the “break-even” oil price, the level each government needs to ensure revenue covers expenditure.
In Saudi Arabia it is $50/barrel, in UAE $23/barrel, in Qatar $24/barrel, and in Oman, where oil is a far less important part of the economy, $75/barrel.
For Iran, by contrast, the break-even is as high as $90/barrel, which could constrain the government of Mahmoud Ahmadinejad as it pursues expansionary policies in the run up to next year’s presidential election.
Other regional countries vulnerable to global slowdown, Khan said, were those at financial risk because they have high international borrowing – like Egypt – and those at economic risk because of high trade with Europe – like Morocco and Tunisia.
But Khan stressed that for most of the region, ties to the GCC were crucial. “As an [annual] average 2007-08, Egypt receives $8.5 billion in remittances [mainly money sent home by migrant workers], Lebanon $5 billion, and Pakistan $6 billion. About half to three-quarters comes from the Gulf.”
And even in the GCC, there are vulnerable sectors, including real estate. Khan expressed particular concern over rising Gulf unemployment, with economies falling behind the 7% growth required to ensure jobs for the rising numbers of young people entering the labour market.