A demographic imperative

Simon Williams, HSBC MENA Chief Economist argues for systemic structural reforms in the Middle East to face the demographic and growth challenges of the future in a freewheeling chat with Mayank Singh

Dr What has the impact of the Eurozone crisis been on the MENA region?
The impact of the Eurozone crisis has been limited on the MENA region. We have had our own difficulties in 2011 like the political unrest during the first months of the year and this had a major bearing on the private sector’s confidence. Overall, the sentiment is getting more risk averse, so when the Eurozone crisis came about we were already coming off a muted base. When I compare the Eurozone crisis of 2008 and 2011, I am more confident this time around, because the region feels less vulnerable. There were a lot of bubbles in 2008, but now there are few excesses and that gives me a lot of confidence; governments understand the necessity of spending aggressively where they can in the changed environment and that is a healthy sign. Nonetheless, the slowdown in the West is having an impact as they are our trade partners; the demand for oil and non oil goods has weakened and I am particularly concerned about access to capital, because we depend upon international capital, whether it is from the international bond market, loan market or funding from European banks, and such funding is going to get more difficult and costly in future.

You spoke about the higher cost of funding in the wake of the Eurozone crisis. Have interest rates started moving up?
Not really. Policy rates are almost zero, though I do not think that anyone can borrow at zero interest rates. There is a degree of risk aversion running across the banking sector. In Oman the banking sector has performed reasonably well and there has been some growth in the volume of credit; the same is true for Saudi Arabia and Qatar. I am more anxious about places like the UAE, where there has always been a higher dependence on foreign funding in the banking sector. This comes on the back of a scenario where liquidity looks stretched and rates are under pressure and this may rise further in 2012.

The global economic slowdown predicates the fact that the demand for oil may go down in these parts of the world. Is that a real threat or will the enhanced demand from emerging countries offset that threat?
When I look around I am a bit confused as to why the prices of every other commodity such as copper, food etc have fallen but oil prices have remained rock solid at $105-$110 per barrel. I can see these prices weakening in 2012. If oil prices have remained high despite Europe and the US being in trouble, it makes it abundantly clear that it’s Asia and the emerging markets that have kept energy prices high.

What has been the economic fallout of the events that have taken place in the MENA region?
The impact varies in different parts of the region. In Egypt and Libya the consequences have been severe and we are quite some way from a return to normal economic activity. In the GCC the impact has been less marked because the unrest has been contained, institutions have held up better, but even here the private sector has looked nervous. International investors that are not committed to the region have been deterred by the problems that they have seen elsewhere. My real worry is the impact of the unrest in deterring governments from economic reforms; there is much less appetite for economic change now than what I saw five or 10 years ago. The decision to increase public spending and salaries run contrary to the goal of increasing the national participation of the private sector, encouraging diversification and that troubles me. This is particularly disturbing because the experience of the last one year shows that the economic models being practiced in the region are simply not delivering the growth, employment opportunities or welfare to meet the demographic pressures that the region faces. The case for economic change is much more stronger than it has ever been.

If you were to do a country wise analysis where do you they stand in terms of economic challenges? Are countries in the GCC region not in the same boat as the other in the MENA region?
The wealth at their disposal makes it easier for countries in the GCC to keep their economic models going on for longer, but even in the GCC smaller oil producers like Oman and Bahrain there are strains that are showing. There is strong unemployment despite a good run of three digit oil prices, which clearly shows that there is something that is clearly not working.

What are the changes in economic policy that you would like to see in these countries?
I have a long shopping list of changes to recommend. There needs to be capital market reforms across the region as there is an over dependence on banking credit. Our equity markets are limited and there is no credit market, there is no domestic debt market and we have a very limited dollar market. So when bank credit is difficult to get as now, then it is very difficult for the private sector to access funding. In many cases we have the laws that are needed but transparency is very limited; confidence in the legal and judicial system (not here in Oman) across the region is limited and there are concerns around implementation, adherence and transparency issues. In the labour market there is talk about developing the private sector as a source of employment, about nationalising the work forces; but then we increase public sector salaries dramatically, making it difficult for the private sector to attract people and creating a disincentive for nationals to acquire the skills that they need to work successfully in the private sector. We say we want to encourage entrepreneurialism but then we make it a criminal offence to go bankrupt. If you bounce a cheque and go to jail then you may not go out and take the kind of risks as you may in the US or Europe, because the consequences are too severe. In fiscal reforms we are reliant on oil revenues, and we need to diversify from oil revenues to encourage more stable public finances and probably we need to introduce more accountable public spending. Our monetary policy is tied to the US. The US is broken, but we are letting Washington set interest rates and the list goes on, but none of these issues are new and policy makers are aware of this, but the experience of the past year makes it imperative to focus on these areas of structural reforms.

You believe that the economic structures created in the 1970s are not capable of taking on the challenges of the 21st century. This is quite a admonition, what makes you so critical of these institutions and structures?
The growth in the GCC in the last 10 years has averaged 4-4.5 per cent even though the price of our core commodity – oil has increased five-fold. The region has been the biggest beneficiary of the revaluation of commodities but our growth rates are running 2.5 per cent below emerging markets average. Why is this so? Why do we have substantial youth employment? Big commodity states which should have been beneficiaries of high oil prices and their failure to generate rapid economic growth clearly reflects a need for structural changes in economic structures of the past.

Can you do some crystal gazing on 2012 and what it holds in store for the region and businesses?
My growth rates for most of the region hover between 3.5-4.5 per cent. That is a good number, if one were sitting in the US or UK one would be delighted by these statistics, but this is below potential for the GCC as a whole including Oman. These economies are six to seven percentage growth stories and there is massive catch up growth potential that needs to be realised. My big worry is that the primary driver of growth continues to be public sector spending and the private sectors activity is far more muted.
 

Top^