For over a year now the hottest topics in many cities of the GCC have been the rising cost of living and the depreciating value and purchasing power of the local currency, both of which link directly to the issue of inflation. But why is any one surprised? This is a most natural phenomenon in a region know for its artificiality. Did we not want double digit growth? Did we not want to populate our cities faster than we can say “Who needs to think of macroeconomic policies when you can ignore them for another decade or two?”
This is a direct result of being not only complacent but very much ignorant of the simplest economic truths. When there is excessive demand for a certain commodity, the price goes up; when there is a monopolistic scenario where greedy traders control the market and don’t allow competition the prices will go up; when the local governments outsource their monetary policy to 20th Street and Constitution Avenue, Washington DC in a country that is experiencing a recession and is cutting interest rate to boost demand, the prices here will naturally go up. When there is no liaising between the local governments in the GCC and especially within the UAE on a fiscal policy (how much to spend, where to spend it) the prices will naturally go up. The truth is that the GCC has dug such a big hole for itself that there is nothing that it can do to break loose of this cycle of rising demand and rising inflation. In a vicious circle, the trillion riyal GCC building frenzy will need millions of people to populate the offices and the residential units, this will in turn increase demand exponentially for basic commodities, seats in schools, hospital charges, airplane tickets and other factors that go into the monthly expenditure of individuals. The truth is inflation and frantic paces of development go hand in hand. The only way to slow inflation is to slow demand and as one can see with the fantastical projects being announced on a daily basis throughout the Gulf this day will not be too far away.
In the UAE a UBS report found that the real estate sector that currently contributes about a quarter of the county’s GDP will swing into oversupply at around 2010 and that a crash will significantly affect not only the real estate sector but that of banks, investors and households as well. This is the same bank that has taken a $38 Billion write down recently, which is roughly the size of the booming economy of
Another factor influencing inflation is the several fold increase in oil prices. Former Federal Reserve Governor Alan Greenspan’s insightful autobiography “The Age of Turbulence” hits the nail on the head with the issue known as Dutch Disease. In the 1960’s
Basically, the one dozen fold increase in oil prices from $9 a barrel to $110 in under a decade created a “Super Dutch Disease” scenario that the GCC will be unable to shake off. The irony is that at this present time if the GCC decides to break the currency peg then the value of the local currencies will increase so much that it will paralyze the non-oil economy as it will drive exports down and make it much more expensive to sell property.
Keep in mid that if 3,400 credit risk professionals failed to detect a problem, this author could as well be mistaken.
What was the best case scenario again?