Thursday, July 22, 2010IMF urges Gulf states to strengthen financial industries
Gulf states need to strengthen regulation of their financial industries without tightening credit conditions and damping economic growth, the International Monetary Fund has said.
“This requires a continued forward-looking approach to monitoring bank capital adequacy through periodic reviews of bank asset quality and regular stress testing,” economists at the Washington-based IMF said in a report released yesterday.
Companies across the GCC struggled during the financial crisis as banks curtailed lending and debt markets dried up, leading to defaults and restructurings.
GCC countries have taken important steps to address the fallout from the global financial crisis with significant progress having been achieved in restructuring the debts of Dubai World, the Dubai government-owned conglomerate, as well as the restructuring of some of the largest investment companies’ debt in Kuwait, the economists wrote in a paper prepared by the Middle East and Central Asia department of the IMF.
Two Saudi businesses, Saad Group and Ahmad Hamad Algosaibi & Brothers Company, owe banks at least $15.7bn, according to documents provided by lenders, after defaulting on loans last year.
Growth in the GCC will accelerate this year, supported by strong fiscal spending and the global recovery, the IMF said. The region’s non-oil economy will expand by 4.3% this year, supported by fiscal stimulus in Saudi Arabia, the UAE and more recently Kuwait the fund said.
Non-performing loans are expected to rise more slowly this year than in 2009, according to the fund. Kuwait had the highest percentage of non-performing loans, at 9.7%, while Qatar had the lowest at 1.7%, according to IMF data.
Policymakers must create a framework to guide future intervention in the banking industry, the IMF said. Countries should also find ways to reduce spending without hurting growth, the fund said.
Most Gulf countries slashed interest rates while some embarked on fiscal stimulus measures to boost their economies. Saudi Arabia, the Arab world’s largest economy, announced a $400bn spending programme in 2008, the largest in the Group of 20 nations as a percentage of gross domestic product.
Four of the six GCC states are working toward a single currency to harmonise their economies and allow for a more independent monetary policy. The euro crisis has led policy makers to evaluate the process of monetary union, though this won’t necessarily translate into a delay, according to the IMF.
The IMF economists also warned that the single biggest threat to the GCC economies remains a protracted period of low oil prices arising from a sluggish global recovery.
The IMF economists said fiscal stimulus in the GCC has been successful in damping the impact of the global crisis on non-oil growth, but countries should prepare an exit strategy from current high spending levels, to ensure long-term fiscal sustainability, which would need to be implemented once conditions allow.
On top of this, corporate governance and transparency need to be enhanced, they added.
“To maintain and enhance access of private sector companies to domestic and external financing, the incentive structure to improve disclosure and governance should be strengthened,” the economists said.
Countries in the GCC should also improve the governance of state-related enterprises, with greater attention given to transparency and management of leverage and balance sheet risks.
The IMF economists said the ratification of the GCC Monetary Council charter is a major step toward monetary union.
Only four GCC states – Saudi Arabia, Kuwait, Qatar and Bahrain – are moving ahead with plans for a common currency.
“GCC policymakers have noted the need to evaluate lessons, at the same time stating that this does not necessarily imply a delay in the establishment of the GCC monetary union,” they added.
Gulf Times
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