In 2009, at the height of the global financial crisis, The Economist published an article on the local version of that accelerating drama, soon after Dubai World had announced plans for a “standstill” on some of its debt repayments.
In marked contrast to some of the hysterical headlines from the western press, the headline was “Standing still, but still standing”.
It was not written by Simon Williams, then the Dubai-based chief Middle East economist for HSBC, who had left The Economist a few years earlier, but could well have been. His work for the bank in the dark days of 2009-10, when there was a serious threat to the financial well-being of heavily indebted Dubai, was characterised by a readiness to tell the story like it was, negatives and all, but from a fundamental position as a believer in the basic economic story of the Emirates.
Mr Williams is doing that again. He has left Dubai to take charge of HSBC’s economic analysis of the region – as well as Central Europe, Africa and Turkey – from London, but has been producing hard-hitting and succinct analysis of the economic situation in the GCC and beyond. This week, he is back in the UAE at an annual HSBC economists’ roadshow.
His latest take on the situation does not make for comfortable reading for policymakers, but deserves serious consideration because of his track record of calling it right. Back in October, he published a report entitled “Further to Fall”, which said that weak investment and poor policy choices had left the Middle East facing a “cycle of sustained economic decline”.
His basic argument was that, with oil at its current low levels, the economies of the region are facing not merely a cyclical dip, but a structural shift that will present serious challenges to policymakers. It is “the end of an era”, he said.
“The volatility of oil prices prevents us from having strong conviction on how low prices will fall, how long they will be weak for and what the new equilibrium price will prove to be.
However, abundant supply from Opec nations, against a backdrop of rapid deceleration in emerging market economic growth, sluggish developed world activity, US dollar strength and widespread deflationary pressures, all speak to a sustained period of low oil prices.
“If this proves to be the case, then the downturn the region currently faces should not be thought of as the volatility associated with a period of short- term market adjustment, similar to that experienced in 2009, for example, or in 2001. Rather, it should be viewed as something more fundamental – a lasting shift in the commodity cycle,” he wrote in October. In Dubai this week, he said that the outlook was a little more pessimistic now. “If anything, I’m more concerned than I was then. I don’t see it as a crisis, like in 2009, but it cannot be business as usual for the region,” he says.
The oil producers of the Middle East have been here before. In the 1970s, a decade of high oil prices turned into a period of low oil prices, slow growth and weak economies.
Then, he says, between 2002 and 2014 there was another burst of oil-fuelled growth, overcoming even the effects of the global financial crisis, but this ended with the virtual collapse of oil prices a year ago. “We’re still trying to work it all through, but the basic question is whether this is the start of a new longer cycle of subdued economies in the region. This is not just a one-year story.”
The challenges are significant. “There are two kinds of difficulty associated with the change in cycle. The most lasting relates to economic performance and financial stability in an environment where equilibrium oil prices are significantly lower than those of the previous cycle.
“The most acute risks, however, relate to the period of abrupt deceleration as the region unexpectedly transitions from one cycle to the next,” he says. We are in the middle of that phase now, he believes.
However, true to his view that the region has learnt from past crises, there are more positives this time round. “We think that the Gulf states have significant advantages that work in their favour.”
The balance sheets of the GCC countries ended 2014 in “arguably their most robust health ever”, with an aggregate fiscal surplus of $1.3 trillion from the previous boom decade; domestic debt was low and government reserves high.
Perhaps most significant, the 2009 crisis prompted a re-rating of expensive assets to more realistic levels. On the whole, he believes, “the burst bubbles have not reflated”, leaving the Gulf better able than its emerging market peers to face a fresh downturn.
But given the rapid change in the terms of trade, foreign exchange pegs and structural inflexibilities in the regional economies, how long can the GCC countries’ balance sheets hold back the tide?
The outlook is different for individual countries, he says. The UAE, Kuwait and Qatar look pretty resilient; in Saudi Arabia, Bahrain and Oman, prospects are much more difficult. And this analysis is based on “known unknowns” – largely where the oil price will go in the next 18 months – rather than the “unknown unknowns” of regional geopolitical and security challenges.
But, he is quick to insist, “this is not scare-mongering. I don’t see a crisis around the corner. But we have to get used to the idea that it may never be ‘business as usual’ ever again.”
That may be taken as a warning, but Mr Williams is aware of the limitations of his profession. “There are fixed principles to understand and a raft of valuable mathematical tools and models to draw on, but good economists apply them in the real world as an art, not as a science,” he says.
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