GCC urged to tackle inflation head on

MARKET UNCERTAINTY: Experts say pegging to the dollar is further accelerating inflation and making it a difficult environment for commercial banks.

GCC governments have been urged by economic experts to make tackling inflation a core target of monetary policy - a move that could call into question the continued pegging of their currencies to the US dollar.

In spite of positive indications that Middle East markets are avoiding serious impact from a global slowdown so far, “there is uncertainty in the markets that needs to be addressed one way or the other,” said Christian Mouchbahani, Middle East and North Africa CEO of investment bank Jefferies.

“Inflation needs to be tackled and it is not clear that channelling liquidity into real estate and stock markets will be enough,” he said at the Middle East IPO Summit in Abu Dhabi, during a panel discussion on the state of the regional equity capital markets.

The remarks came before markets across the Gulf suffered their worst losses in months on Monday after a surprise US rate cut sent stocks tumbling on concerns that regional markets could be hit by the global slowdown.

The US Federal Reserve cut its discount rate - the rate at which it lends to banks - by 25 basis points on Sunday, and is expected to slash interest rates by up to 75 basis points when it meets on Tuesday.

The anticipated cut is expected to further intensify debate about the pegging of currencies to the tumbling dollar. All Gulf states, bar Kuwait, peg their currency to the dollar.

Most Gulf governments have, in effect, delegated monetary policy to the US Federal Reserve, Mouchbahani added.

“It is a very sensitive situation and that’s why the central banks are hesitant. But pegging to the dollar is further accelerating inflation and making it a difficult environment for commercial banks,” he said.

Speakers said many positive factors favoured the regional economies, including higher oil prices, liquidity and investment levels, but that the immediate need was for careful management.

“Like our panelists, most regional analysts have a bullish outlook for the IPO (initial public offering) market. Additionally, in the UAE, upcoming changes in regulations are expected to bring more floats of family-owned businesses,” said Deep Marwaha, head of capital markets and investment for IIR Middle East, organisers of the IPO Summit.

“In the meantime, market momentum is expected to be sustained by improving corporate profits, robust growth in regional economies, increasing revenue from higher oil prices and an inflow of foreign funds seeking returns unavailable elsewhere.

“Global events that have nothing to do with the region impact performance here as the doors are opened to foreign investors. Above all there is a need for reduced volatility. In the current environment people want to know what the risks are.”

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