x Abu Dhabi, UAEFriday 21 July 2017

UAE should learn to love its liabilities as well as its assets

Sovereign debt is not always something to shy away from and the days of year-on-year surplus budgets are over.

Sovereign debt is the big issue of the second decade of the 21st century. Mohammed El-Erian, the chief executive of the US investment company Pimco, says the "simultaneous and significant deterioration in the public finances of many advanced economies" is comparable to the re-emergence of China as a factor that will dominate the global economic scene for many years to come. I'm sure he is right. For example, US sovereign debt has gained more than 20 percentage points as a ratio to GDP over the past two years; countries which account for more than 40 per cent of world GDP now have fiscal deficits of 10 per cent or more.

This is a serious shock to the world economy, especially in the developed countries of the Americas, Europe and some parts of Asia. As Mr El-Erian points out, for most of the period since the end of the Second World War, public deficits were in the range of zero to 5 per cent of GDP, and most of the debtors came from emerging markets. There has been a significant shift in the geo-financial landscape: western countries are now the debtors, and Asian countries, especially the biggest economy, China, are more inclined to adopt a more prudent fiscal policy. Increasingly, they fund the West's profligacy via their purchase of western debt instruments, like the US Treasury bonds Beijing accumulates by the hundreds of billions of dollars.

The world is increasingly divided into spenders or savers, with most of the spenders in the West, and the savers in the east. The Middle East has followed two different models, depending on whether the countries are significant oil-producers or not. The big-population countries with few oil reserves, like Egypt, Syria and Jordan, have been debtors in terms of fiscal budgets, or spenders. The oil-rich, low-population countries of the Gulf, meanwhile, have been fiscal-surplus economies, or savers.

Saudi Arabia, with the largest energy reserves in the world but also the biggest population in the region, was for many years a surplus economy. But the demands of a growing population and big infrastructure requirements have made Saudi a debtor in fiscal terms. Other Gulf countries, such as the UAE, are now treading the line between deficit and surplus. The UAE plans for a zero-deficit budget this year; Qatar will probably be still in the black; Kuwait is likely to slip into the red. But the days of year-on-year budget surpluses, funded by high rates of economic growth, booming property markets and an ever-rising oil price, are probably over.

From here on, the Gulf will have to learn to manage its resources, and from time to time slip into overdraft, just like other countries. This prospect shocks financial conservatives in the region used to all those years of surpluses, but it is not the end of the world. There is a basic truism at work here: companies go bust, countries do not. It is worth remembering. When a corporation runs up deficits over a numbers of years, it eventually faces a cash crisis that threatens its corporate life. When companies go bust, they literally cease to exist. Their names remain in the public imagination like tombstone markers - Enron, Pan Am, Robert Maxwell Holdings - but these entities do not exist any more. Years of fiscal deficit eventually mean death for companies, either in the dramatic sense of financial bankruptcy, or takeover.

The same is not true for countries. Germany was bust in the 1920; Argentina had its own fiscal cardiac arrest in the 1990s; Iceland was the great casualty of the last decade; and now Greece is on the operating table, struggling for financial life under the knife of the Brussels surgeon. But the last time I looked at a map, all those countries were still there: they had not ceased to exist. Of course, a financial crisis can change the nature of a country, bringing on a transformation that fundamentally alters its character. This certainly happened to Germany in the 1930s and 1940s, and their respective crises had significant repercussions for Argentina and Iceland, as it will have for Greece. But the basic point is this: countries can survive financial crisis better than companies.

Over the next decades, western politicians and policymakers will have to get used to dealing with deficits. Gulf economies too will have to adapt to life without the annual surplus. But that is not the worst thing. The UAE, like the rest of the world, should stop worrying and learn to love their liabilities. fkane@thenational.ae