x Abu Dhabi, UAESunday 23 July 2017

The GCC should put its money where its mouth is

The final analysis Regional officials need to communicate the relative strengths of their economies to the business community and the public to see real growth.

When the financial crisis hit in 2008, many of us in the GCC financial-services industry concluded that the region would outperform the rest of the world (except China) in 2009. We came to this conclusion because GCC government balance sheets were extremely strong, with financial reserves estimated at close to US$1 trillion, and oil prices - even at 50 per cent of their 2008 high - were still expected to cover 2009 budgets.

In addition, government debt was minimal. In 2008, the ratio of debt to GDP for Saudi Arabia, Kuwait and Qatar was 13, 8 and 5 per cent, respectively, compared to 70 per cent for the US, 200 per cent for Japan and 65 per cent for Brazil. Even counting Dubai's substantial debt burden, the UAE's ratio was only 40 per cent. But our optimism turned out to be misplaced. The GCC economies ended 2009 with a negative growth rate, and the region's equity markets substantially underperformed the emerging market index, returning 20 per cent, compared to 60 per cent returns for the emerging market benchmark. This was despite the quick turnaround in oil prices, which briefly dipped to $35 a barrel but ended the year close to $70.

Why did GCC economies underperform when they had such an advantage going into the crisis? The first thing that comes to mind is the liquidity squeeze that hit the region in 2008, after rampant foreign speculation in regional currencies brought substantial global capital into local markets. The sudden reversal of these flows caught the markets by surprise, causing a shortage that was compounded by the advent of the global credit crisis.

This condition, however, was hardly unique to our region. After all, the entire world suffered from the credit crisis, so this factor cannot alone explain GCC underperformance. In my view, an important contributing factor to last year's stumble was a failure by local governments to explain the underlying strength of their balance sheets to the business community and to the investing public. As the slowdown took hold, senior officials armed with detailed numbers should have held press conferences to show how strong they were. This would have boosted confidence and brought more capital into markets and the local economy.

Instead, panicked local investors retrenched and minimised their exposure to what they assumed was an extended crisis. That ended up being a self-fulfilling prophecy. This lack of communication was particularly damaging in an environment that already suffered from virtually zero financial transparency. Economic data was not often available to the public, and what was there was of questionable reliability.

For example, nothing remotely similar to the published minutes of US Federal Reserve or Bank of England meetings are available in the GCC. This results in analysts producing their own estimates of economic indicators, often looking to anecdotal evidence to support these estimates. The oft-quoted example of "3,000 cars abandoned at Dubai airport by absconders" being used as an "indicator" of economic trends is a particularly ridiculous example of this.

Many Arab bureaucrats do not appreciate the importance of government communication in a healthy economy. They believe that template statements such as "everything is fine" or "the economy is strong" are sufficient to inspire confidence. Unlike Western leaders, who have developed the skills and the infrastructure to communicate with an independent and critical press, the Arab bureaucrat has always operated with virtually no regard for the media, since in most cases this media has been an extension, directly or indirectly, of his bureaucracy.

Today, the luxury of ignoring the media and avoiding communication is no longer available. Despite all of the above, one can still be optimistic about the future. The continued strength of GCC oil and gas revenues, massive government financial reserves and the region's position as a hub for the petrochemical industry - all combined with a world-class infrastructure - means that the region's economy will move forward solidly despite any short-term underperformance. This movement, however, will probably have the reliability and speed of a supertanker rather than the excitement and power of a speedboat.

GCC economies will move steadily forward, in any event, but transparency would certainly accelerate this economic growth. Ali al Shihabi is the founder and chairman of Rasmala Investment Bank, based in Dubai.