The Economonitor’s QE3 week is perfect timing as we’ve been thinking a lot about the effects of the latest bouts of global monetary stimulus on the Middle East and North Africa – as summarized in part of our omnibus MENA quarterly presentation.
We argue there that even though EMs and to a lesser extent frontier markets as a group may well attract less portfolio (and bank-related) capital inflows than in past bouts of stimulus, due to weaker growth at home and abroad, the stronger MENA markets (read: oil-exporters in the GCC) may finally be riding a (little) wave of global stimulus—at least a little wave that reinforces some of the domestic trends of stronger government-fueled consumption.
MENA lost out on (or was sheltered from, depending on your perspective) the sort of short-term capital that has been whizzing around the global economy and many EM in risk-on episodes since the global financial crisis. Lack of clarity about Dubai debt restructuring, regulatory hoops and a lack of currency appreciation expectations limited capital inflows to the GCC in 2009-10, while the Arab Spring dampened sentiment. At the same time, over-levered regional balance sheets continued a slow process of deleveraging (UAE, faster in Qatar) where banks had to replace costly wholesale finance and reduce high loan/deposit ratios. There are signs that regional markets are reviving due to local and global stimulus. Debt issuance, mergers and local market activity are picking up from a very low base across the GCC (Kuwait is a pretty notable exception). This isn’t just QE related, but the increase in liquidity and reduction of tail risks undoubtedly helps local sentiment.
The previous bouts of QE did of course benefit the MENA region massively through the oil market channel, still the major transmission mechanism between the region and the global economy in both directions. By stopping the free fall of the global economy and credit crunch (both global and in the eurozone), oil prices revived, refilling the coffers of regional governments from oil and their returns on foreign investments. The trade-related inflows helped governments scale up domestic spending, if mostly on social transfers, which in turn revived development activities.
This may reflect locals staying closer to home and seeking out a touch more yield than they can find in the advanced world. It also reflects the deferred effect of local stimulus. GCC governments are spending more, though mostly on short-term measures, pumping liquidity into the local market. Across the board, governments stepped in to provide support, replacing some foreign private actors. Public-sector deposits in turn facilitated loan growth (especially in Qatar and Saudi Arabia). Credit growth is now modestly a support across the GCC, while banks are still having to soak up government debt among oil-importing nations.
Projects have unfrozen in Dubai (as was palpable on a recent RGE visit), rents and sales prices are picking up sharply (too sharply in RGE’s view), while new buildings are going up across the big GCC cities (Doha, Abu Dhabi and across Saudi Arabia, which has benefited from increasing mortgage credit). The stronger regional credits (most solvent governments and government-linked entities are able to take advantage of record low interest rates) are only slightly higher than many of the DM sovereigns. This trend of cheaper capital will help reinforce the growth differential between the GCC and what the IMF calls “Arab Countries in Transition” in North Africa and the Levant who are both more exposed to the shrinking eurozone and facing very rocky political and economic transitions (witness the political costs of moving to a more realistic subsidy regime in Jordan!).
This domestic and global liquidity supports growth in the short term. The risk is that this growth might again be going toward sectors that might not be much help in long-term growth and productivity (more malls and hotels). Moreover, global and regional risks are mounting, with shaky transitions in North Africa, uncertainty about Iranian policy and a civil war in Syria that continues to spill over into its neighbors. Meanwhile, most GCC countries are facing political strains that are unlikely to be quashed by new measures restricting protests (UAE, Kuwait, Bahrain to differing degrees).
More broadly, we don’t see the signs of an asset bubble/inflation spiral or massive pressure on exchange rates in this mini-boom—government price controls are stifling price pressure as part of short-term measures, while the oversupply of property that the boom represents is keeping a check on property prices. Reserve accumulation is picking up, which might reflect some pressure on exchange rates in countries that stash fiscal resources in a dedicated fund of funds, but we don’t see exchange rate pegs likely to budge. Moreover, as RGE’s recent Central Bank Watch noted, in the global economy we see more risk of deflation than inflation. Moreover, our medium-term growth trajectory suggests there are risks to sentiment ahead which risk denting the regional enthusiasm. That suggests this is not the best time for regional leaders to be focused mostly on short-term policies and using up their stimulus capacity. Check out the presentation or our upcoming outlooks for more.