x Abu Dhabi, UAEMonday 22 January 2018

Buckle up, Flight 2009 is expected to hit turbulence

Economies in the Gulf and Asia are going to get a lot worse than most people fear, but end the year in better shape than most expect.

Hello and welcome aboard 2009. This is your columnist speaking. If you're arriving from 2008 you already know that we've been through some turbulent economic weather and that it looks like a pretty rough ride from here. (If you're arriving from another year, you've turned to the wrong column. Please identify yourself to someone nearby immediately.) It's always a privilege, of course, to pilot the first business column of the year and it was no mean feat arranging the calendar so that this regular Thursday column would land on Jan 1. It therefore seems fitting that this year's commentary takes flight with something rarely seen in financial columns at this time of year. Let's call it "bold predictions for 2009".

First piece of advice: buckle up. This year is going to offer gut-wrenching surprises. Economies in the Gulf and Asia are going to get a lot worse than most people fear, but end the year in better shape than most expect. In Abu Dhabi, sporadic scuffles will break out between frantic housewives and desperate workers prowling the streets for taxis. Some of this angst will eventually be directed at taxi drivers themselves, who will continue to drive empty cabs past furious gangs of waving would-be passengers, complaining all the while how low fares and heavy traffic prevent them from making enough money. City officials will remain at a loss as to how to resolve the riddle of how to meet such heavy demand when cabs are so cheap and so scarce.

A wealthy, unnamed investor will meanwhile pay millions for the UAE's last remaining parking space. Developers will unveil proposals to convert Dubai Mall into a vast covered car park and capitalise on this hot new market to offset weak prices for offices and homes. GCC officials, meanwhile, will push ahead with plans to impose an income tax so they can afford to build more roads to accommodate the rising number of vehicles powered by subsidised petrol.

The Central Bank will steadfastly maintain the dirham's peg to the US dollar, despite mounting evidence that doing so is whipsawing the nation's oil-dominated economy. As global investors flee risky emerging markets for the safety of US treasuries, the dollar continues its modest rise. Cash continues to drain from the UAE's banks, making loans harder to come by. The stronger dollar pushes up the value of the dirham against the British pound, devastating demand in the UK for package tours to Dubai and trade services out of Jebel Ali. The credit crunch also puts the bite on trade financing, deepening the impact of the global recession on otherwise healthy economies in the Gulf.

As the US issues hundreds of billions of dollars in new debt to fight the recession and pay for newly inaugurated President Barack Obama's "Spare Change You Can Believe In" economic stimulus package, the dollar begins a swan dive, pushing down the dirham and pushing up prices for food and other imports. British tourists are back on Dubai's beaches, but expatriate workers, already decimated by job losses and pay cuts, continue to stream out. To those leaving, please remember to leave your keys in the Porsche at the airport. Parking is already a prized commodity and some of us would be happy to pick up a bargain Boxster.

Tightening credit revives a phenomenon not heard of much in the past decade: triangular debt. As borrowers fall behind on payments, even creditors face impossible cash flow. Companies start missing payments to banks, to each other and to employees, who in turn are forced to miss payments of their own. As this problem piles up at banks, there is another correlated symptom - the strategic default. This is when an otherwise healthy borrower stops paying a loan because he deems it unnecessary to stay current when competitors and/or colleagues are defaulting and both banks and courts are too busy or too weak to come after him. Why pay if no one else is?

The good news is that oil prices will then recover on the dollar's weakness and as markets recover from the great deleveraging in commodities markets of 2008. Much of oil's ascent to record highs in 2008 was the result of speculation by hedge funds and other investors using borrowed money. When the credit crisis hit, they were forced to pull out of oil, forcing prices artificially low. But production cuts by Opec, combined with surprisingly high car usage by American job seekers and from China and other emerging markets, help oil make an unexpected recovery.

The bad news: lower production means lower revenues for Opec members. Governments in Saudi Arabia, Bahrain and the UAE remain in fiscal deficit to help pay for economic stimulus packages of their own and to keep key infrastructure projects going through the global recession. Thus the Gulf and Asia - particularly China - will end up surprising people by year's end with their resilient growth. Despite a collapse in exports to the West, domestic demand in the most populous countries will prove surprisingly strong. You really can't keep 'em down on the farm once they've seen Beijing.

With government spending keeping them beating, growth in the Gulf's non-oil economies will revive as small, nimble private equity firms and local investment banks gradually harness the region's vast reservoirs of private wealth. After being widely discredited, newspaper articles by the end of the year will resurrect the concept of "decoupling" economies. Columnists will say they told us so. Maybe even this one.

So welcome to 2009. We know you have a choice of columns, so we do appreciate your patronage. If you're in transit on your way to another destination, have an excellent journey. If this is your final destination, please enjoy your stay. warnold@thenational.ae