JEDDAH: The rising cost of living is making Gulf countries less attractive for expatriate workers. This could potentially undermine governments’ efforts to develop their non-oil sectors and thereby diversify away from oil, says a report issued by Moody’s Investors Service.
Most governments of the Gulf Cooperation Council (GCC) have imposed price controls on basic commodities and/or rent caps. Many of them have also announced large salary hikes for public sector workers. The United Arab Emirates, for instance, raised federal government employees by 70 percent in November 2007. Many other Gulf governments have since passed similar, albeit less dramatic, public sector wage increases. Besides, most governments in the region are widening their subsidy nets.
Commenting on the situation, Moody’s report covering the whole of the Middle East says that although Gulf oil-exporters can currently afford to raise rates of government expenditure in order to cushion the social cost of inflation for its citizens, such actions are gradually making governments reliant on higher and higher oil prices in order to balance their budgets. This may constrain their ability to adjust to a potential future downturn in oil prices, warns Moody’s.
The rapid expansion of private sector credit, particularly consumer credit, is fueling inflation in some countries in the Middle East. Gulf oil exporters are experiencing the strongest rises in credit as banks, flush with liquidity, compete to expand their loan books.
Some central banks in the region are gradually tightening restrictions on bank lending to consumers. Yet these efforts have not been stringent to date and credit continues to surge in many places.
Moody’s says that it is difficult to calculate the exact proportion of private credit growth that is being channeled into real estate and equities, although it is likely to be sizeable.
Nascent mortgage markets are expanding rapidly in some countries. In Dubai, for example, some lenders are offering loan-to-value ratios as high as 97 percent. This raises concerns that a potential sharp correction in property prices in some Gulf countries could hit banks’ asset quality and raise governments’ contingent liabilities.
Moody’s observes that while accelerating price growth is a global phenomenon, the Middle East has been particularly affected because of a preponderance of fixed or heavily managed exchange rates, an oil-fueled liquidity expansion, widespread infrastructure bottlenecks and a reliance in most countries on food imports.
Of all the IMF’s regional groupings, the Middle East experienced the highest average inflation rate in 2007, at 10.4 percent and this is expected to accelerate in 2008, says the Moody’s report.
“Although inflation is seldom a direct driver of Moody’s ratings, it can affect ratings indirectly through three main channels — fiscal, political and economic. We are beginning to observe these in the Middle East,” adds Moody’s.