x Abu Dhabi, UAEFriday 19 January 2018

Central banks need tools to halt bubbles

Gulf central banks should be given greater powers to help avert another asset bubble, says a senior official of the IMF.

Gulf central banks should be given greater powers to help avert another asset bubble, says a senior official of the IMF. The regulators need extra monetary policy tools to allow them greater control within markets, Dr Masood Ahmed, the director of the IMF's Middle East and Central Asia Department, said yesterday. "Central banks need to think not just about price stability but financial stability, that means looking at asset markets," Dr Ahmed said. "That's easier said than done as the tools for doing this are complicated, but that's one of the tasks they need to look at."

Soaring credit growth supported by large inflows of foreign capital and rising oil prices contributed to a property-led boom in the six years before the global financial crisis. But that growth came to an abrupt halt towards the end of last year as the price of oil began to fall and foreign investors withdrew capital from local banks. "In the years running up to the crisis there was an asset-price bubble being built in many - economies of the GCC which made them a little bit vulnerable," Dr Ahmed said.

Governments around the world have taken steps to avoid a repeat of asset-price bubbles. The Hong Kong Monetary Authority, for example, last week raised deposit levels needed to buy luxury apartments. The change targets the surge in home prices there, fuelled by record low interest rates. Dr Nasser Saidi, the chief economist of the Dubai International Financial Centre, agreed the mandate of central banks should be widened in the post-crisis era, with their supervision of commercial banks extended to investment banks.

"If there's a lesson that came out of the financial crisis it's that the non-banking financial sector can have implications for the banking system and systematic risk, as we saw with the emergence of the subprime mortgage crisis," Dr Saidi said. Hani al Hamli, the secretary-general of the Dubai Economic Council, said the emirate planned to diversify its economy away from a reliance on property into new sectors, including energy and health care.

Mr al Hamli said property accounted for about 40 per cent of Dubai's economy last year. Dr Ahmed said the UAE economy would contract by 0.5 per cent this year, then grow by 3 per cent next year. He forecast growth in the non-oil sector next year of 3 per cent, and of 2.7 per cent in the oil sector. The IMF this month said the economy would shrink by about 0.2 per cent this year, with growth next year to be 2.4 per cent.

As the region's sovereign wealth funds become more active again worldwide, they would need to be ready to answer renewed questions by governments about transparency and strategy, Dr Ahmed said. @Email:tarnold@thenational.ae