x Abu Dhabi, UAESaturday 22 July 2017

Economist warns of Gulf bubble

Gulf economies face a potentially destabilising influx of capital because of a bubble affecting emerging markets, a senior economist warns.

Gulf economies face a potentially destabilising influx of capital because of a bubble affecting emerging markets and may have to consider further controls on foreign investment, a senior economist warns.

Speaking at the MEED Capital Markets conference in Abu Dhabi yesterday, Jarmo Kotilaine, the chief economist at the Saudi-based bank NCB Capital, said: "The situation right now is quite awkward for many of the regional central banks.

"These economies are attractive as their prospects are good, but they may struggle to absorb the money which is attracted to them."

Mr Kotilaine said capital controls would be one of the few policy tools Gulf economies had available to protect themselves against a fresh bout of inflation.

Saudi Arabia is already experiencing inflation of about 5.5 per cent, the IMF says.

The currency carry trade is "increasingly emerging as one of the great risks and great sources of concern in the global economy", said Mr Kotilaine.

"We [Gulf countries] have had an interest rate differential [with the US] for some time and there's a risk of an emerging markets bubble." Currency carry trade is the strategy in which an investor borrows a certain currency with a relatively low interest rate and uses the funds to invest in a different currency yielding a higher interest rate.

"Investors in the West are moving their money to a place where markets are much more benign," said Mr Kotilaine.

Jeff Singer, the chief executive of NASDAQ Dubai, agreed that overseas investors would be attracted to Gulf countries as long as output growth in western economies remained anaemic.

Pointing to the UAE's predicted GDP growth of more than 3 per cent, Mr Singer said: "That number right there is going to drive a lot of institutional flows into this part of the world. If this is where the growth is, they're going to find out how to get here."

Mr Kotilaine also warned the structural issues behind the previous crisis were still factors because of the fixed currencies of many emerging markets.

"We're not seeing a market-led correction that we should be seeing if these global imbalances are to be corrected," he added.

Without attempts to reduce persistent surpluses among countries such as China, Germany and Japan, the structure of the world economy was still weak, Mr Kotilaine said.