Special measures needed for skewed regional economies [Gulf News (United Arab Emirates)]
(Gulf News (United Arab Emirates) Via Acquire Media NewsEdge) Last week's column alluded to the kinds of policy measures that might be necessary in this region to marshal economic recovery, since monetary policy is compromised by US dollar currency pegs and fiscal policy historically has tended not to be an offsetting influence to the business cycle.
It was noted that the system of pegged exchange rates has its merits, trading off external versus internal stability. Further to that observation, even unpegged rates are by no means guaranteed to reflect a country's economic competitiveness (see box), though sooner or later they will probably do so, but even then possibly only in passing.
Focusing on macro-prudential economic strategy, though, last month the IMF published a document detailing those tools.
Its researchers observed that "the experience of 2008-09 demonstrates the vulnerability of the region to credit and asset price cycles", with "underdeveloped fixed-income and derivatives markets ... and shortcomings in crisis resolution frameworks", recommending that the central banks be given a formal mandate to ensure financial stability.
Its suggested actions included the maintenance of adequate capital levels in the banking sector, variable loan-to-deposit and loan-to-value ratios, and sectoral exposure limits. The development of interbank and debt markets would assist liquidity and risk management, and, as ever, structural reforms in the regulatory domain (e.g. modernising insolvency regimes), would enhance policy effectiveness, particularly in an improved framework with legal underpinning.
Of course, the GCC states have already variously applied reserve and provisioning requirements, and ceilings on loans and exposures. Thus, the advice added value only in terms of detail and refinement.
Notably, however, the paper did not pretend that such intrusions can substitute for what would simply be sound policies on both demand and supply sides of the economy, and remarked that, with monetary policy constrained, it is "essential" that fiscal policy provide an offsetting impetus to any excessive, cyclical trend, whereas it has been "insufficient" so far.
The IMF's ministrations over the years have not always been without criticism. Even in the wake of the global financial crisis, its guidance to G7 countries on applying austerity seemed unduly to confuse the need for public sector retrenchment, just one element of aggregate demand, with the prospects for whole economies, whose private sectors should behave (and may recover) somewhat independently of any stimulatory stance of government.
The Fund's forecasts therefore went (pessimistically) awry, as if not recognising the need for such internal economic rebalancing, and that optimism does not depend on the state's pressing of an on/off switch.
Just last week the IMF's latest global stability report warned that the world's escaping from its near-zero interest-rate dependency might not be easy without significant financial turmoil. It's difficult to know whether to credit the supranational entity for that prescience, when it comes so late in the proceedings.
Even so, its ideas on prudential policy in the Gulf, where economies are skewed to hydrocarbons and policies otherwise lopsided by choice, bear equally intuitive credibility. We just have to hope that the generalised international recovery supporting the region remains intact, and that the authorities locally will still have a fulsome resurgence to keep properly in check.
William Jackson, economist at Capital Economics, says that, although Gulf states "haven't been particularly successful" in dampening credit growth in the past following oil-price humps, they "have become increasingly adept at using [macro-prudential measures]" over time. Those taken so far mean that interbank rates are actually higher than official benchmarks, giving useful restraint, and the authorities "may actually need to use them a little less [in future], as the Fed tightens policy in the next year or two".
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