Savings are the key to Gulf region’s rebound

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Gary Dugan, chief investment officer, Merrill Lynch.

Gary Dugan, chief investment officer of global financial house Merrill Lynch, discusses why the Gulf is exposed to the risk of deflation and how savvy spending by local governments could power the region's early recovery from the credit crisis.

You have said deflation will be a major theme in the world economy over the next two years. Does that include the Gulf?

We might see the prospect of deflation by the middle of this year. I think for the first part of this year you're going to see the damage of the global meltdown on the regional growth rates. Secondly, you're going to see the fear factor amongst individuals as they rein in their spending, cut their investment plans and speculate less on housing.

All that may lead to a very significant fall in the price of goods and services as companies try to grab market share by doing major promotions on prices.

Given that prices rose so sharply in Dubai in particular in the previous year, it could unravel those price increases very rapidly. It's an outside risk, but it's something people need to be wary of. The safe forecast at the moment is to say that inflation will come down to three or four percent.

Can prices here really keep rising if they're falling in the rest of the world?

The Gulf is still, in most people's forecasts, a region of the world that will still be growing and there may still be some companies that are able to achieve some price increases.

But if you were to get a detraction in real GDP, you've got to be talking about deflation. I just don't see how you can have a detraction in demand and no fall in prices.

You're currently telling your clients to invest in high-grade corporate bonds. What's your view on Dubai bonds?

From what I see of our credit research at the moment, we believe that a number of the bonds are still well supported by government agencies or government directly.

I can't see the government withdrawing its support for a number of key industrial groups, so I do think that those bonds are attractive. But they clearly carry some kind of risk or they wouldn't be trading at such low levels.

Theorists are suggesting that low oil prices will mean lower investment in the oil sector, which will eventually create a "super spike" in prices when demand picks up. Do you agree?

I'd be surprised. Before this cycle is complete we may have had demand destruction of 10 to 12 percent, and I don't yet see 12 percent of all production being taken out. Also, it would have to be more than that to create the kind of conditions where you see a profound increase in prices again.

Will some economies recover sooner from this crisis than others?

The parts of the world that I think will emerge the quickest are those with savings. The US doesn't have any savings and Europe has limited savings. The Far East has profound amounts of savings. It's about how fast they can get their savings back into the market and can start to engender some confidence again.

Abu Dhabi has significant savings, but is it going to spend that in a way that keeps the confidence in the Dubai economy going? In that case it's going to have to provide support under property prices at some stage, and it's going to have to keep employment at least stable, or growing.

But at least this region has the firepower of the savings to attempt that. The US will have to borrow, forcing up long-term interest rates and creating even more problems in its economy.

Do you agree with those who say that Gulf equity markets are so sentiment driven that they're unlikely to rebound before US stocks do?

I would agree with that. Unfortunately we haven't rebalanced the world away from US spending yet. We're still profoundly based on the strength of the US consumer.

American consumption is still around 30 to 40 percent of the global economy. So if US consumers are still flat on their backs, losing their jobs and retrenching on their spending, there is no way the global economy is going to recover sufficiently to force oil prices higher. Although that would lead to a more positive outlook for the region and a recovery in local stock markets.

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READERS' COMMENTS

Savings are the key to Gulf region’s rebound
Posted by Dr. Eric Trinity, Dubai, UAE on Monday 16 February 2009 at 12:40 UAE time


With all respects, all Gulf Citizen are facing a due payments of huge loans which will not be recovered before minimum ten years !! and the Gulf Governments are facing a huge loss in credit and Oil prices which is going to remain for minimum 10 years also !! talking about new investment in bonds are a big silly dreams !! This is the only reality available for another 10 years for all financial Establishments and banks.....

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