Middle east should follow China in trading reforms
With real interest rates in Qatar and the UAE still remaining negative, it is imperative for the Middle East, which has significant non-oil fiscal deficits, to emulate China in gradually reforming the exchange rate regime rather than succumbing to global pressures, according to StandardChartered Bank.Our advice to the (Middle East) region, and to Saudi Arabia as its representative in the International Monetary Fund’s consultative process, is to follow China’s lead and liberalize exchange rate regimes in accordance with domestic fundamentals rather than based on international pressure, StanChart’s regional head of research Steve Brice said in a latest publication.While we would definitely advocate this reform to start sooner rather than later in some countries, given the proof that real interest rates are still negative in the UAE and Qatar, the reality is that the single currency project is likely to mean that a shift in policy ahead of 2010 is unlikely, Brice said.
Real interest rate is the return on assets adjusted for expected changes in rise in order to more accurately reflect the true cost of borrowing.
According to StanChart’s medium-term forecast, Qatar is forecasted to have an average 8% inflation this year, which will then will fall to 7% by next year, 5.5% by 2008 and expected to remain at 5% in 2009 and 2010.
Brice said the region should acknowledge the advantages of currency reform from a local perspective to gain control of local monetary policy settings. It is in the region’s and ultimately the world’s best interest to conduct this objective in a gradual manner.
According to StanChart’s medium-term forecast, Qatar is expected to have $54.2bn nominal gross domestic product (GDP) this year, which will further rise to $62.5bn in 2007, $70.1bn in 2008, $76.8bn in 2009 and $82.1bn by 2010.
However, Qatar’s real GDP is wanted to slowdowns from 12% this year to 8.1% next year, 8% in 2008, 7.4% in 2009 and 6.9% by 2010, the projection said.
Brice said Saudi Arabia’s inclusion in the IMF consultative is a sign of the periods just as China’s involvement in the G8 signaled a greater attention to its behaviors. While China continues very much a focus in the western world, the intensified focus has also shifted to the fuel producing states, including those in the Middle East.
Assuming some sort of inter-generational equity consideration, Brice said any extraction of the country’s hydrocarbon reserves should be viewed as depletion of its wealth.
Therefore, over the long-run, this should be offsetted by an expansion in the country’s financial assets, which will bear investment income over the longer term, Brice said.
In Qatar, where the development of its gas reserves are accelerating at a dramatic pace, the ministry has also set up its own investment agency, which is likely to garner increased attention going forward, he added.
Finding that the Middle East’s fiscal policy too lax, Brice said there is an appropriate level of non-hydrocarbon fiscal deficit.
Brice said if Qatar wants to maintain the per capita hydrocarbon wealth, the appropriate level is 4% of GDP, assuming that oil prices will average $22 a barrel, and 9% if prices average $50 a barrel.
Observing that elsewhere in the region the deficit is much higher, he said it perhaps explains why governments are considering introducing a value added tax. Kuwait is even talking of introducing an income taxes.
This may suggest that fiscal policy is already a little lax in the region as a whole, contrary to the view held in the West that fiscal surpluses are excessive, Brice said.
Noting the huge current account surpluses brought about by the surge in international oil prices, Brice said as oil futures are priced in dollars, a local currency appreciation would have no impact on oil revenues.
Referring to the reviews that oil providing nations are not doing enough to correct global imbalances, he said we believe it is largely unjustified.
IMF recently said as a matter of simple arithmetic, the global imbalances remain on an unsustainable trend over the long run.
This (imbalances), unless returns on US-issued financial instruments continue to substantially under-perform those issued in other countries, thus generating further capital gains for the US would lead to an ever accumulating stock of emerging Asian and oil exporters’ assets and US external liabilities, IMF said.
Written by admin on June 14th, 2006 with
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