We noticed you're blocking ads.

Keep supporting great journalism by turning off your ad blocker.

Questions about why you are seeing this? Contact us

Font Size

- Aa +

Sun 1 Nov 2009 04:00 AM

Font Size

- Aa +

It ain't over yet

Dr Eckart Woertz, one of the Gulf’s most influential economists, is predicting a ‘nasty surprise’ in 2010.

It ain't over yet
It ain't over yet
Dr Woertz doesn’t see a recovery for Dubai’s property market in 2010, but predicts eventual stabilisation. He also fears the GCC’s planned unified currency might never happen.
It ain't over yet

Dr Eckart Woertz was right about the credit crunch and the price of gold. Now one of the Gulf’s most influential economists is predicting a ‘nasty surprise’ for the global economy in 2010.

Dr Eckart Woertz, one of the Gulf’s leading economists, leans forwards as he says it. “I guess this is the problem with economists. They tell their bosses what they want to hear.”

I’ve just asked him why so many of them seem to be saying the global recession will be over by the beginning of next year. “Everybody wants things to get better. But you don’t turn to a priest to tell you the church is wrong. He would not be the right person to ask for a critical assessment of his institution.

“Today the economy is somehow a religion to society, everything turns around it. In the Middle Ages the scholars debated how many angels could find space on the head of a pin. Today there is debate on whether the economy picks up in the first or second quarter.” He’s laughing now.

Woertz, who is the Economics Programme Manager at think tank Gulf Research Centre (GRC), does not have a track record of telling people what they want to hear. Almost three years ago, as the Western world was unknowingly enjoying the last months of a near three-decade-long economic boom Woertz confidently predicted to me that it wouldn’t be long before banks “started collapsing.”

At the time, I thought he was being absurd. Currently on sabbatical, lecturing at Princeton University on Gulf economies and food security, it is clear he was being anything but absurd. His track record on gold is also worth considering. In 2005, Woertz published a report entitled ‘The Role of Gold in the Unified GCC Currency’ which strongly advised central banks to buy the precious metal.

At the time, gold was trading at around $400 an ounce. Today, it is worth some $1,050 an ounce.

Last time we spoke, about eight months ago, he told me that, financially at least, “it was the end of the world as we know it.” But today, many economists say we are about to turn the corner and that things will be back to normal in 2010. Is he convinced?

He smiles. “I am a bit hesitant. 80 percent of economists believe the global recession is over and there are some green shoots. Sure, we have some stabilisation going on, but the problem is this is mainly attributable to government spending and stimulus. But what happens when that stimulus peters out? Because the job market looks awful. So the spending cannot come from private households under such conditions. Companies are still laying people off, and so on.

“I could imagine that, for the real economy, we are in for a nasty surprise in 2010. We could see several consecutive bottoms, rather than some kind of miraculous recovery. Where is demand supposed to come from? And inventories are high, anyway. For example, I just spoke to the representative of a global car brand in Dubai, they have huge inventories, and they don’t see demand picking up. Even if it did, the inventories would satisfy demand for the time being. It really would take a very strong impetus for the factories to start saying ‘ok, let’s hire some people.’ I am a bit hesitant about these green shoots.”

Woertz says he believes that debate about whether or not the recession will be over by the summer of 2010 is fatuous, to put it mildly. It is his opinion that this is a crisis that will take a decade or so to work through and will unravel the whole fabric of global imbalances that emerged over the last three decades. He is not even sure that the trillions of dollars of state money injected into the economic systems of countries is money well spent.“The question is, is the stimulus really working in the sense that it is stimulating self sustaining growth, or is it basically like giving a blood transfusion to someone who has been shot several times — does the blood simply run out of the holes? You know what I mean?”

And his prediction for gold against this backdrop of more bad news? Unsurprisingly, he believes the price will continue to go north, buoyed by massive printing of money in America and the metal’s reputation as the “anti-dollar.” He says he expects it to go to between $1,300 and $1,600 an ounce over the next fourteen months, as distrust of the dollar intensifies.

Woertz is based in Dubai, his glass-walled office in an eyrie looking over the Sheikh Zayed Road and various construction sites, some of which appear to be in stasis. A further downturn in the global economy in 2010 would be very bad news for this most globalised of cities. What does he predict for Dubai’s property prices?

“There has been some recovery over the summer months. Many feared a lot of people would leave, when school was over, so prices fell ahead of the summer and recovered a bit when people realised it is not that bad. So are we out of the woods? I don’t think so.

“There are so many projects coming on stream. I don’t see a recovery, you will see some stabilisation, maybe we will go down a bit further. A lot of the crash has probably happened. I mean it is down 50 percent — so how low can you go? My initial take was a decline of 60-80 percent. Ok, so we have had 50 percent, so maybe we have another 10 to 30 percent to go, measured against the old high.

“A lot of the crash has already happened, but don’t think about the old highs, because that is a price you will not see for a very, very long time.”

Woertz is a Dubai optimist in many ways. He believes that Nakheel’s $3.5bn Islamic bond (sukuk) will be repaid in December, and that the business model that has seen the city flourish in recent times is still viable. He also argues that the decline in property prices is a good thing, preventing the emirate from “pricing itself out of the market.”

He says: “There is still this business model of a trading hub. And it is a trading hub. It does things much better than its neighbours. I have just come from Qatar; you cannot compare it, not to mention Kuwait and Saudi Arabia. Dubai is doing things much more efficiently and better than neighbouring countries. There is a need and demand for business services made in Dubai. But not at the price of yesterday which needed to be high because of ridiculous real estate prices.”

He also believes that in the wake of recent scandals, there will be a drive towards streamlining the UAE’s banking practices with those of the rest of the world.

As he tells it, the days of the phenomenon of ‘name lending’, where banks lend to families on the strength of their family name, are coming to an end, and rightly so.

“Basically, [in the Middle East] the banks lend to the big guys, name lending and so on. That is something that is not good here — there should be better access for small and medium sized enterprises (SMEs) to credit. They are an important part of the economy, providing the majority of the jobs. And also because name lending has not worked. You cannot say it is less risky.

“I think you will see name lending will decrease in importance. You need a level of detailed insights [before you lend money], there needs to be a development towards more normal banking practices. There needs to be assessments of credit risk and of projects, collateral needs to be demanded, and there must be an insight into the books.”He pauses for moment to think, and then adds: “But what is the quality of the books? A major problem with the region is the quality of the books. There is no taxman. The reason we keep books in the West is because of the taxman. Once you don’t have a taxman, the incentive of sanctions that encourage or threaten you to keep good, realistic books… you don’t have that. So maybe you end up having two kinds of books, one set for what’s really happening and another set for what might be happening. So that is an issue.”

Earlier this year, the GCC’s long awaited and much talked about single currency appeared to have been fatally wounded by the UAE’s decision to pull out from it. Originally intended to be in place by 2010, commentators had talked about its implementation being unlikely before 2015. Woertz says he fears it might never happen.

“If the UAE would have been part of it, it could have been something. If Oman had been part of it, even better. But without them, it doesn’t make a whole lot of sense. It is now Saudi Arabia plus three smaller economies. Last week some Kuwaiti officials said this reduced monetary union would be postponed, and the next day they backtracked. It is an extremely unprofessional appearance they are delivering here.

“Even if they would succeed, what would it be? It would be the Saudi Arabia ‘plus’ currency. Why not just have the riyal? I think it will not happen under the current circumstances, and even if it would happen between these four countries, it wouldn’t matter that much. It is just four countries. It is like instead of having a euro — if France withdrew — Germany, Luxembourg and Belgium replacing the deutschmark. So what is the big news? Why not stick with the deutschmark in the first place? But the topic of the currency union is overrated anyway, much more important is the implementation of the already existing GCC customs union. ”

Woertz is quick to point out the dangers of ill-conceived currency union. Last year, he was describing the dollar as “radioactive waste,” but pressed on his view as to whether it could soon be usurped by the euro as the world’s reserve currency, he is derisive.

“The euro has problems of its own. The major problem with the euro is that Europe is not unified. Who owes you that money, you know? The dollar is “I owe you nothing.” The euro is “who owes you nothing?” Who? The European Union? Some guys who cannot agree on a constitution, who have large productivity gaps within the European Union, who do not have a central treasury, who do not have a central pension policy, do not have a central fiscal policy? You can say whatever you want about the dollar, and I certainly do, but it has all of that, and some proven institutions that can react quickly in times of a crisis, like they have done now with quantitative easing. The ECB cannot do that because quantitative easing in Europe is like the surplus countries baling out the Greeces and Italys of this world. The German and Dutch people have made very clear that they would have none of it. The ECB starts buying Greek bonds…? They don’t want to have that.”


Woertz’s view on oil

I think the region is happy with the current price, around $75. They can live with it. It is a high price compared with five or six years ago, but it is a low price compared to last year. We certainly won’t go back to the old trading band of $22-$28. Because first of all it is in dollars and the US is printing dollars every day. Second, we are still in recession, but even in a recessionary environment I still see a tight supply scenario.

There are a couple of new projects in the Gulf of Mexico, and there’s new discoveries off the coast of Brazil and West Africa, but I think it will take some time to develop these projects. Iraq is a wildcard. It has a lot of fields, of course.

Demand has come down, but not that much. Especially in northern Europe and America. In emerging markets the growth has slowed. We had very tight spare capacity in the system, now we have larger capacity in the system and that’s good.

Saudi Arabia is the Central Bank of oil, and they don’t see the need to throw extra oil on the market unless the price reaches $100. There is also the possibility to cut Opec quotas and take oil off the market in case there is a cooling of the economy. But they would go only so far with decreases. I don’t see oil prices collapsing well below $50, and even if it did it would be temporary. More likely in the short run is a trend towards $100, but overall everybody is happy with the current price levels, the producers, the consumers and the alternative energy providers.

Arabian Business: why we're going behind a paywall

For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.
His Excellency Dr Paul 10 years ago

Interesting to read the views of Dr Woertz. In these days of real estate and political leaders desperately talking things up, it is refreshing to hear the contrary view - one which I tend to agree with fully (I too bought into gold 2-3 years back and am still holding). I think people should sit up and listen considering this gentleman's track record. Predicting the oil price is rather difficult - last year when it was 140 bucks I said to a friend I felt fair value was around 70-80 bucks. Of course it looked silly when it fell to 35 bucks and I have no idea whether it will hit 100 or 25 first in the short term. Longer term, the oil price will depend heavily on new supply like Brazil's (which I am told by an oilman I met in Brazil are 'huge') but also on attempts to move away from dependence on oil. Oil at 70 bucks will still drive biofuel and electric vehicles for economic reasons, but even if oil is cheaper, the move to reduce CO2 emissions may effectively legislate for electric vehicles in Europe and the US. They would be forced to crack that technology and commercialize it to the point where oil demand could really take a big hit. And that is aside from the political desire for energy independence in north america.

ali akbar 10 years ago

united Arab emirates will come out of downturn they have great leaders with best experience in the world, u a e came from scratch,started with nothing look now what they have best of the world in any aspect,enshalla with great leadership of their Highness god will help them to come back to best of the best,i will promise they will do they best and get back on truck. so be optimistic and have pension,invest reduce risk bring down the cost of living for some times, god is with u a e .... i lived all my life in Dubai i have seen ups and downs. once i lived in tent when i was 7 years old now i am 50 i have 3 houses in different location in u a e ...last word from your brother in Iran live as time gos by live with cost of time don't buy what you don't need if you need consultation call me on 00989171815225 for free (long live U A E

Simon 10 years ago

Ali...From your words and tone you are an optomistic individual and a good patriot of the UAE (even though Iranian). I like the leaders of the UAE also...forthright and strong but they have NEVER been in this position before and neither have they lived through an economic crisis for which they have little 'independant' influence. Unfortunately the outside world will economically influence and effect the return of the UAE's fortunes. Some business leaders in Dubai are ignoring the real issues and pretending in the Media that everything is behind us. Its clearly not. Your wise words to be optomistic and also to recognise and advise that people in the UAE need to save for the future and spend less until the crisis is over are wise words indeed...BUT...and this is a big BUT...if we all save, as we should do, who is going to buy the goods in Dubai/UAE? who are going to fill the Malls of Dubai/UAE? If we cut our spending further then the shops/malls and businesses will definately close down just as in the USA. Dubai is a consumer economy and if we don't consume then the Dubai/UAE economy will falter. That is a fact. Can we rely on the international visitor to support the UAE economy? I don't think so because the world crisis is NOT getting better. Its getting worse...slowly getting worse...but getting worse all the same. Dr Woertz is correct in his economic assessment. It may not be the best of reading but its factual and very relevant. Take away the stimulus packages and vey few countries can stand on their own two feet...especially the USA! I firmly believe the worst is yet to come...but like you i am trying to save and have cut back my spending. That doesn't help Dubai/UAE but it does protect me from a worsening economy...until there is some sort of turn-a-round.