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Dubai: The rising inflation in the Gulf is a symptom of economic expansion going on here and the region's growth rates are sustainable in the medium term, even if the US and Europe together should experience a general slowdown and oil prices take a beating, David A. Wyss, chief economist of Standard & Poor's, (S&P) said on Monday.
Under current economic conditions in the Gulf, Wyss said, the currency peg does not make any economic sense.
"Importing US monetary policy at this juncture would mean importing inflation. But the decision on the peg seems to be very political and Saudi Arabia seems to have a big say in the future of the region's currency pegs," he said.
With most of the Gulf economies set to grow at near double-digit rates, inflation will remain a longer-term problem, but rising food prices are likely to worsen the overall situation. Wyss said being import dependent economies, the Gulf countries will have to resort to subsidies to weather inflationary pressures.
The Gulf states are expected to clock more than $400 billion worth of trade surpluses this year. With such surpluses on hand, some subsidies will not make a big dent on the regional governments' balance sheets, he said.
According to Wyss, oil remains a wild card for all global economies and expects it to fall in the short to medium term. "I am not predicting a collapse of oil. But personally, I feel it could decline to $90 a barrel by the fourth quarter. The current oil prices are mostly supported by speculative positions largely due to hedging against the stock market. Any US stock market revival can mean unwinding of a lot of speculative positions on oil, resulting in a decline in oil prices," Wyss said.
The S&P index of stock prices has already dropped 19 per cent, slightly short of 20 per cent cut-off for a bear market and much less than the historical average decline of 36 per cent during a recession.
Stock outlook
"We think the worst is over for stock prices, which normally lead the economy by three to six months," he said.
As for the US economy and the financial system, Wyss believes that the worst is over and the economy should respond to the monetary and fiscal policy stimulus from the third quarter of this year. "About two-thirds of the fiscal stimulus package, which will push more than $160 billion into the economy beginning in May, resulting in higher consumer spending. The business component of the stimulus package will have their impact starting in the fourth quarter."
On monetary policy, Wyss expects another half per cent point Fed cut this month. According to him, lenders have gone from being totally oblivious to risk a year ago to paranoia without stopping at rationality. "We forecast return of rationality, which means that spreads will narrow, but not as tight as they were a year ago," he said.
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