Open up the Taps
John Keynes is not a household name. If there is any confusion, he is not being talked about for a record transfer in football, nor is he someone caught up in a Wall Street scandal. But just adding his middle name -- Maynard -- offers more clarity and, probably reminds us of his seminal work.
John Maynard Keynes is perhaps looking down upon us with a big grin upon his face. The 20th century economist was an advocate of big intervention, specifically the role of government to use the economic toolbox to mitigate the impact of downturns. These days we have different labels for what we are witnessing: prolonged recession, depression, or even repression. Keynes' theory utilized many times over the past seven decades, was later coined "Keynesian economics." It is being practiced with full force today.
A year ago, this writer and a long list of economic specialists were supporting the concept of decoupling. That is, the fast growing countries from Latin America to Asia -- with the Middle East, of course, included -- would continue their economic march while the United States and other industrialized economies cratered.
As Fred Bergsten, Director of the Peterson Institute for International Economics rightly pointed out we would witness the opposite. His argument was that the world will re-couple due to the interdependency of trade, capital and energy flows.
As a result, it is not only finance ministers in Washington, London, Brussels, Paris and Berlin dusting off their books and reading the works of Keynes, but those from Beijing, Delhi and Riyadh too. Big spending is in, budget deficits are a necessity and debt is not a worry.
Hold on a second -- not everyone is taking on water in their economic boats. The big savers of the world like China, Japan and Germany can breathe a little easier as can their counterparts in the Middle East.
“The region was saving for a rainy day,” says Middle East economist Marios Maratheftis of Standard Chartered Bank, “Gulf countries have the surpluses they can use, the ammunition to use now to cushion their economies.”
Since the rapid global growth days of 2004 when China revved up demand for oil and the U.S. was humming along, the region has been stockpiling reserves. During this window, an estimated $1 trillion was transferred to the region in terms of surplus oil and gas revenues. That sum is providing a nice cushion today, so regional governments are going into the red in terms of their annual budgets to insure their economies don’t do the same.
Maratheftis admits there are many unknowns in the region. He and many of his counterparts are predicting economic recovery in 2010. After talking to a number of leading bankers on background, I would -- excuse the pun -- not bank on this recovery.
Kuwait and the United Arab Emirates, according to Standard Chartered, seem the most vulnerable in terms of a potential recession with forecasts of zero growth and a half percent growth respectively.
At this juncture, governments are planning prudently with budgets based on oil prices of between $30-$60 a barrel. For example, the world’s largest producer, Saudi Arabia built its plan on a price of $37 for their local crude according to SABB, a division of HSBC. Seeing the growth tapering off, the Kingdom increased spending by nearly 25 percent in 2008.
Dubai recently unveiled their first official budget deficit of 1.3 percent of GDP -- a luxury in comparison to the West -- and increased spending by 42 percent.
Maratheftis believes the “budget deficits are fully justified; they are manageable and if anything they could be even larger.”
This may mean that they are probably written in pencil and not pen this fiscal year. If the economic smoke signals are worsening as many anticipate, regional leaders will go back to their monetary taps, make a few counter clockwise turns, and put more money into their budgets.
To date, the focus of that spending is similar to the stimulus package being finalized by the incoming occupant of the White House. Regional budgets have been big on infrastructure (perhaps too big), healthcare and education. These are the pillars of diversification, and they reduce over-dependency on energy.
It is difficult to get reliable numbers on actual surpluses in the region. Some are in foreign exchange reserves, others in general accounts and even more tucked away in a variety of sovereign wealth funds. While the world got used to seeing the initials SWF over the past year, they may begin to look for SDF instead, as in sovereign development funds.
The Chief Economist and Group Global Head of Research for Standard Chartered was an early mover tracking the shifts in these capital flows. Gerard Lyons says: “One actually saw a significant shift and therefore over the last year we’ve seen a greater demand within countries for the sovereign funds to spend more of their money at home.
“The next few months will reinforce that trend, namely sovereign funds, still wealthy, will be required to keep more of their money at home and spend more of their investment income at home.”
Governments are already re-deploying assets as is evidenced by these budgets. We don’t hear nearly as much about Middle East bargain hunting in London or New York for banks or trophy hotels and office buildings.
It is an evolving strategy with a domestic tilt and one that would have John Maynard Keynes smiling.
ABOUT THIS BLOGJohn Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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