Dubai: The Gulf economies are poised to recover faster than many of their global counterparts from the financial crisis.
However, they should be vigilant against potential asset bubbles in the future, said Masoud Ahmad, Director of the Middle East and Central Asia Department of the International Monetary Fund.
Delivering a keynote address at the Dubai Economic Forum organised by the Dubai Economic Council on ‘The Financial Crisis and the GCC Economies'' Masoud said the Gulf countries faced the crisis from a position of strength due to the huge fiscal surpluses they held. But the region''s economies too lost heavily in terms of asset values as financial crisis gripped the world.
"Most of the financial troubles in the region had [their] roots in excess liquidity in the system that inflated asset prices. One important lesson that the region has to learn from this crisis is to manage its surpluses effectively while avoiding liquidity-induced asset price inflation," he said.
According to the latest IMF forecast, the six Gulf economies together are projected to grow 5.2 per cent in 2010 against a projected real growth of 0.7 per cent in their combined gross domestic product in 2009.
While the oil-based GDP is expected to grow 5.5 per cent, the non-oil GDP is forecast to grow at 4.4 per cent with inflation projected at 3.8 per cent in 2010. The forecast for next year is based on an average oil price of $76.50 a barrel in 2010.
While commending the Gulf governments and central banks for their proactive role in supporting the banking sector and the economies through liquidity support programmes and direct capital injections, Masoud urged the governments to continue their active fiscal and monetary policy support for the economies.
Most governments in the region have initiated economic stimulus programmes with Saudi Arabia announcing the biggest package while Kuwait remains at the lower end of the spectrum.
"The Gulf governments are expected to keep up public spending to tide over the impact of global credit contraction, while making adequate liquidity in the financial system," Masoud said.
The IMF expects the non-performing loans (NPLs) in the banking sector to climb in the next few quarters while most banks have capital adequacy above the regulatory norms and overall NPL provisions are above 100 per cent of their exposures.
While most banks have been in the process of restructuring their balance sheets, Masoud urged the Gulf governments and central banks to help banks to do the loss recognitions and rebuild their books in an orderly manner.
Going forward, Masoud urged a revamp of the fin-ancial markets with the focus on creating long-term funding sources.
"The medium-term financial market development should focus on diversification beyond a bank-based system that supports economic diversification and generates employment," he said.
Urging capital market reforms across the region, the IMF regional director said that over the medium to long term, creation of a debt market will provide more stability to the regional financial markets.
For the next few quarters the IMF expects credit to the private sector to remain sluggish in some countries in the region.
Overall the lending conditions are expected to remain tight in the context of the tight liquidity in the banking system and the high-risk perception of the corporate sector.