INTERNATIONAL. With little recourse to monetary tools, all eyes are on the authorities’ fiscal responses to these challenging times, said Global Finance House (GFH) in its report ‘GCC Economic Outlook' for third quarter 2008.

With oil prices expected to remain in the three-digits for the rest of this year, the GCC countries’ oil revenues are slated to cross the US$600 billion level this year as well as in 2009, it said.

“The strong economic and investment boom in the GCC region will continue apace for the medium term,” GFH said, adding that the GCC nominal gross domestic product is estimated to cross the US$1.1 trillion, representing 36% growth over US$810 billion estimated for 2007.

GFH said aggregate GCC government expenditure has been forecast to reach US$300 billion for this year, while private sector projects planned and currently underway are valued at about US$2 trillion.

However, the positives for the region came with a price that the region would have to “live with the paradox of single-digit interest rates and high double-digit inflation”, said Ala’a al-Yousuf, Chief Economist at GFH.

So far, the government response to spiralling inflation has been in the form of higher wages, increased subsidies and other cash incentives, the report said, in the absence of any relief from the currency effect of the dollar peg.

“In our opinion, the GCC is entering a phase of loose monetary-fiscal policy spiral, which, together with a wage-inflation spiral, have trapped the region between two impossible trinities,” said Hany Genena, Senior Economist at GFH.

The convention trinity (fixed exchange rate, free capital mobility and independent monetary policy) suggested that the GCC central banks to adopt an “inappropriately” loose monetary stance amid surging inflation, whereas GFH-designed trinity explained the difficulty of maintaining low inflation amid high commodity prices and low interest rates.

“However, as capacity expansion comes on stream during 2009-2010, there will be a gradual softening of inflationary pressures,” Genena said.

He said the GCC-wide crude oil production will increase to 20 million barrels per day (bpd) by 2010 from about 17.5 million bpd at present; while cement capacity in the region will double to 100 million tonnes per year by 2010.

Similar expansions were on the way in several other industries, including petrochemicals and natural gas, he observed.

“All of this is feeding into significantly higher demand for financing, which will fuel a boom in corporate lending,” GFH said.

Banks would continue to enjoy strong growth in business volumes due to robust growth in consumption and investment, relatively low financial leverage of corporate GCC, high demand for Islamic financial products, access to stable deposits and cheap funding costs, the report said.

GFH was of the view that regional equity markets would weather the global storm, buoyed by the explosive growth in liquidity, negative real interest rates, and reasonable comparable valuation multiples.

“While real estate dynamics continue to vary by country and type of property across the GCC, spiraling construction costs (which have risen nearly 200% in recent years) will inevitably cause project delays,” the report said.

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