Document 6588926

THURSDAY, OCTOBER 30, 2014
BUSINESS
IMF calls for sweeping reforms in GCC
KAMCO Investment Research Report
KUWAIT: In its latest regional economic outlook on MENA Region,
IMF has indicated that despite setbacks, an uneven global economic recovery continues. According
to the IMF, the growth forecast for
the world economy has been
revised downward to 3.3 percent
this year, 0.4 percentage point
lower than in the April 2014 World
Economic Outlook largely due to
weaker-than-expected global
activity in the 1H-2014.
Economic developments in
the MENA Region continue to
reflect the diversity of conditions
prevailing across the region. Most
high-income oil exporters, primarily in the GCC, continue to record
steady growth and solid economic
and financial fundamentals, albeit
with medium-term challenges
that need to be addressed. In the
non-GCC countries, improving the
political and business environment, addressing infrastructure
bottlenecks, and enhancing
access to finance are important
prerequisites for raising investment, productivity, and sustained
growth.
GDP growth in the GCC region
is expected to improve in 2014 to
reach 4.4 percent after seeing
healthy growth of 4.1 percent in
2013 as per IMF estimated figures.
Growth remains steady in most of
the GCC countries on the strength
of public spending on infrastructure and private sector credit
expansion in many countries.
Despite the regional issues, in
addition to the huge drop in oil
prices, IMF upgraded its GDP
growth forecast for Saudi Arabia,
the region’s largest economy to
reach 4.6 percent in 2014 compared to the previous estimates of
4.1 percent for the same year in
May 2014. The outlook of Qatar
economy upgraded from a
growth rate of 5.9 percent estimated in May-14 to 6.5 percent in
October for 2014, the highest
Growth among its peers in the
GCC Region. The IMF estimates
Kuwait’s growth rate to be 1.4 percent a sharp decline from the May
estimate of 2.6 percent.
MENA region
According to IMF, Economic
developments in the MENA countries continue to reflect the diversity of conditions prevailing across
the region. Most high-income oil
exporters, primarily in the GCC,
continue to record steady growth
and solid economic and financial
fundamentals, albeit with mediumterm challenges that need to be
addressed. In contrast, other countries — Iraq, Libya, and Syria — are
mired in conflicts. And yet other
countries, mostly oil importers, are
making continued but uneven
progress in advancing their economic agendas, often in tandem
with political transitions and amidst
difficult social conditions. In most
of these countries, without extensive economic and structural
reforms, economic prospects for
the medium term remain insufficient to reduce high unemployment and improve living standards.
Economic activity in the MENA oilimporting countries has remained
lackluster this year at about 3 percent, but growth is expected to
pick up to 4 percent in 2015 (broadly unchanged from the May 2014
Update).
GCC economies need reforms
In the GCC economies, the
need is to strengthen their fiscal
positions by using the current
period of economic strength to
save more of their oil windfall. IMF
has suggested that most oil
exporters also need to adapt their
economic model for more sustained, inclusive, and diversified
growth. The country’s financial fiscal model has been dependent on
the growth of government spending supported by increases in oil
prices. Transitioning to a more
diversified, private sector-driven
model requires significant reform.
In the GCC countries, the business
environment is generally favorable
and infrastructure gaps are small.
So the reform priorities should
center on improving the quality of
education and its relevance for private sector needs; reducing distortions that lead to reliance on foreign labor, thereby increasing private sector job opportunities for
nationals; and encouraging efficient production of tradable
goods and services rather than
activity in non-tradable sectors
with low productivity growth.
We believe that the inflation situation in the GCC economies will
continue to be benign as reflected
from the IMF data and projection.
However, any further decline in oil
prices will have an effect on their
fiscal balance and current account
balance. Although the current oil
prices (above $80 per barrel) are
above the breakeven prices of
most countries, however the high
expenditures especially the current expenditure can be a cause of
concern in future if the oil prices
remain depressed or if the oil
exporters take production cuts.
What GCC requires is more diversification of their economies which
they are looking at seriously
through various projects and
using oil surplus to spur the nonoil sector which is being seen in
the strong growth in the non-oil
sector in these economies albeit
on a lower base and scale.
In the GCC, the business environment is favorable by international standards, infrastructure
gaps are small, and the efficiency
of high capital spending is comparable with that in other countries.
However, IMF suggests some more
measure to build on the progress
which includes improving education quality, restraining growth in
public wage bills and incentivizing
GCC men and women to seek private sector jobs, reducing distortions that lead to excessive
reliance on foreign labor, gradually
reducing energy subsidies and
reorienting incentives toward tradable sectors. It will also help in
tackling another challenge that
the GCC region faces which is to
create jobs for the young population which will be joining the
workforce in the near future.
Oil price decline a
major risk factor
Oil prices needs to be watched
out for as higher-than-expected oil
supply from other regions (for example, the United States) or lower global
oil demand, owing to weaker global
economic growth, could also further
ease oil markets. As per IMF, oil prices,
as well as regional security conditions,
are also important sources of risk for
activity in the non-oil economy.
ECB says banking sector
continuing to heal, slowly
Demand for bank loans pick up
LONDON: BP Group Chief Executive Bob Dudley addresses delegates during
the Oil and Money conference in central London yesterday. —AFP
Gold steadies as investors
expect cautious Fed stance
LONDON: Gold steadied near $1,230 an
ounce yesterday as investors awaited guidance from the US Federal Reserve, widely
expecting it to reaffirm willingness to wait for
an extended period before raising interest
rates. The Fed, which wraps up a two-day policy meeting later yesterday, is widely expected
to end its two-year-old bond-buying stimulus,
known as quantitative easing, as the US economy gathers momentum.
Fed officials have also stressed, however,
that they are in no hurry to take tightening a
step further by raising rates from near zero levels, citing subdued inflation and the poor quality of a recovery in labor markets. Gold has
benefited from the low interest rates and
increased liquidity that have dominated central bank policy in the years after the 2008
financial crisis.
Keeping US interest rates lower for a longer
period bodes well for a non-interest bearing
asset such as gold. Spot gold was unchanged
at $1,228.00 an ounce by 1045 GMT after edging higher on Tuesday. The metal reached a
six-week high of $1,245 last week.
US gold futures were down $2.50 an ounce
at $1,227.00. “This should be the end of QE, but
if some wording is used by the Fed that the
economic recovery doesn’t justify removal of
its monetary stimulus and they have ... to leave
the door open to reinstating some measures
in the future, then that could be interpreted as
fairly positive for gold,” Mitsubishi Corp strate-
gist Jonathan Butler said. “As long as the economic picture still looks fairly unclear, the Fed
will adopt a reasonably cautious stance.” The
dollar was unchanged against a basket of leading currencies, having slipped in the previous
session after weak economic data, which gives
the US central bank reason to hold off from
tightening its monetary policy. Demand for
US-made capital goods fell the most in eight
months in September, while the housing sector also remained largely soft.
China threat
Weakness in demand from China, the
world’s biggest consumer of gold, remains a
key threat to any price upside. “To me the most
important thing is that Chinese buyers have
been absent for most of this year, and that hasn’t supported the price of gold,” said Victor
Thianpiriya, an analyst at Australia and New
Zealand Banking Group.
In 2013, China imported a record
1,158.162 tons of gold from Hong Kong, the
main conduit for gold into the mainland,
spurred by a 28 percent drop in global prices.
But demand has since waned with gold
prices largely steady this year. “Tactically, we
still view gold rallies as short-lived and favor
approaching gold from the short side.
Support is still resilient around $1,180. We
expect physical demand to increase in
strength on approach of this level,” Standard
Bank said in a note. —Reuters
FRANKFURT: Europe’s battered financial sector is showing further signs of healing as conditions for bank loans
ease and demand for loans picks up, a key ECB survey
showed yesterday.
Just a few days after the European Central Bank gave
most euro-zone banks a clean bill of health, its quarterly
bank lending survey showed that banks are easing credit
standards for customers across all loan categories. In
addition, demand for loans is also increasing, the ECB
wrote.
“According to the October bank lending survey (BLS),
credit standards for all loan categories eased in the third
quarter of 2014,” the report said. Looking ahead, banks
expect credit standards to continue to ease in the fourth
quarter, and loan demand also to continue to pick up,
the ECB continued.
The survey’s findings should provide some encouragement to the ECB, since the chronic weakness of credit activity in the euro area has been blamed for the
absence of any noticeable recovery in the 18 countries
that share the single currency. The ECB complains that
its ultra-easy monetary policy has not been feeding
through into the real economy, because banks are not
passing the money on in loans, particularly to the small
and mid-sized enterprises (SMEs) which are the region’s
economic backbone.
In an attempt to address this, the bank has cut its
interest rates to new all-time lows and also unveiled a
series of programs to pump liquidity into the economy.
For example, it is making cheap funding available to
banks via its TLTRO or targeted long-term refinancing
operation program in the hope the banks will lend the
cash on to businesses. Separately, in a bid to restore confidence in the banking sector, the ECB conducted a yearlong audit-the most in-depth and stringent so far-of 130
euro-zone banks.
The results were published on Sunday and showed
that four out of five banks passed the test.
Lending conditions still tight
The lending survey pre-dates those audit results, but
analysts were cautiously positive about the results of the
latest bank lending survey, even if hurdles remain. The
data “provided further evidence of a slow improvement
in euro-zone credit conditions,” said Capital Economics
economist Jessica Hinds. Nevertheless, “lending standards are still tight and the faltering economic recovery
may discourage banks from easing them further,” she
warned. The ECB survey confirmed this interpretation.
“Banks’ risk perceptions concerning firms’ business
outlook and macroeconomic uncertainty had a slight
net tightening impact on credit standards for loans to
enterprises... this was consistent with the recent coolingoff in economic recovery including in core euro area
countries,” the survey found. So “if the euro-zone economy fails to pick up towards the end of the yea r, then
there is a clear risk that banks may not loosen standards
as much as they currently anticipate,” said Hinds at
Capital Economics.
Bayern LB economist Johannes Mayr said the lending
survey data “support the picture of a gradual stabilization of credit activity.”
Nevertheless, “we remain skeptical and see the structural economic weakness in France and Italy as a braking
effect on credit and economic growth.”
Tom Rogers of EY euro-zone Forecast said the survey
“offers some encouragement that the freeze in bank
lending will continue to thaw, albeit very gradually and
unevenly across economies.”
The rebound in loan demand “suggests that the ECB’s
efforts to push more liquidity into banks in the coming
months should help fuel a recovery in investment
spending from 2015 and beyond,” he said. —AFP
UK lenders cut back
on new mortgages
LONDON: British lenders approved the fewest
mortgages in more than a year last month,
adding to signs that previously rapid growth in
Britain’s housing market and the broader economy is slowing.
The Bank of England said yesterday that mortgage approvals for house purchase fell to 61,267
in September from 64,054 in August-a bigger
drop than economists had expected and the lowest total since July 2013. Earlier this year BoE
Governor Mark Carney said a potential build-up
in household debt due to rising house prices
pose the biggest domestic threat to Britain’s economic recovery. But now the housing market
seems to be slowing faster than the BoE had
been banking on. Its forecast in August that
mortgage approvals would average 75,000 a
month in the last three months of 2014 looks
implausible, economists say.
“As well as the downside risk from euro area
weakness, these data confirm housing activity is
another area where the BoE’s August forecasts
are now starting to look too optimistic,” said Sam
Hill, an economist at RBC. On Tuesday night, BoE
deputy governor Jon Cunliffe became the latest
in a series of policymakers to say a rise in interest
rates was less pressing than before, due to weak
inflation, low pay growth and signs of a slowdown overseas.
Earlier yesterday the Confederation of British
Industry said that private-sector growth had fallen to its lowest since March, as the pace of
expansion returned to more normal rates after a
period of catching up over the past year. Britain
economy still looks set to be the fastest-expanding major advanced economy this year, with
growth of more than 3 percent, but for next year
the CBI said quarterly growth rates of 0.6-0.7 percent looked more likely.
Cooling the market
The BoE and other regulators have taken a
series of steps this year to cool Britain’s housing
market, which until recently was showing annual
price growth of more than 10 percent, and twice
that in London. Since April, lenders have been
required to make more detailed checks on borrowers’ ability to pay back loans, and later the BoE
limited how many mortgages banks can issue at
high multiples of a borrower’s income. —Reuters