Overall picture is rosy despite dollar strength in 2017, El Erian tells Dubai forum

The economist said that the global economy and higher oil prices would be supportive for the Mena region next year despite a strengthening US dollar.

Mohamed El Erian says that the global economy should be supportive for the region. Arab Strategy Forum

Donald Trump’s “pro-growth” economic policies will benefit regional economies even if they also pose challenges to states with dollar-pegged currencies, says Mohamed El Erian.

The chief economic adviser at insurer Allianz and chairman of the US President’s Global Development Council told the Arab Strategy Forum in Dubai that higher oil prices and a stable global economy would also be positive for the region. But the prospect of rising interest rates in the US could hurt dollar-pegged regional economies because of the likelihood of a stronger greenback.

Low, stable growth is on the cards for next year as markets adjust to new realities such as a Donald Trump presidency defined by corporate tax reforms and infrastructure spending, a soft and slow Brexit and stabilisation in China, said Mr El Erian.

The agreement between Opec and non-Opec members to cut production will help boost oil prices to range between US$50 a barrel and $60 a barrel, which is a boon to energy-exporting countries and the global economy.

The US is projected to grow by 2.5 per cent next year, Europe and Japan will range between growth of 1 and 1.5 per cent, China will have a soft landing with growth of between 6 and 7 per cent and Russia and Brazil will get out of recession, he said.

Global growth is expected to be around 3 per cent next year, compared with 2.5 per cent this year.

“That is good news for the region,” said Mr El Erian. “It means that the global economy will be generally supportive. It means good returns on assets that the region holds and it means favourable capital markets.”

Opec agreed to cut production by about 1.2 million barrels per day, the first such reduction since 2008. Non-Opec members have also agreed with Opec to cull a further 558,000 bpd from the market, the first such deal between the two sides since 2001.

Oil prices have risen by more than 19 per cent since November 30, when the Opec deal was announced.

This Opec agreement is different from previous ones and has higher chances of success, he said.

“First within Opec there is a lot more differentiation. There is no attempt to treat everybody the same,” said Mr El Erian. “There is a lot more bite to the non-Opec side. Having Mr [Vladimir] Putin himself involved in this and having Russia anchor over half of the non-Opec production cut is really important.”

While the oil agreements are good for the Arabian Gulf economics, the expected hike in US interest rates poses a dilemma for them, especially since five of the six GCC states peg their currencies to the strong dollar. Kuwait is the only Gulf state that links its currency to a basket of currencies.

A strong greenback has hurt Gulf economies, making foreign property purchases to non-US dollar buyers expensive and dissuading tourists from countries with weak currencies from visiting the region.

“Don’t fight the Fed if you want a currency peg with the dollar,” said Mr El Erian, who is predicting at least two interest rate hikes next year, besides the one expected today. “Your reality is that you are going to have a stronger currency and that makes it even more important that you progress on your reforms.”

Gulf countries such as the UAE and Saudi Arabia, which have announced multiyear visions for their economies, should focus on implementing these reforms.

“When I look at the region, the potential of unleashing both domestic activity and foreign capital is massive compared to what an impact of 75 basis points does,” said Mr El Erian, referring to the expected increase in US interest rates.

Interest rates, which hover between 0.25 and 0.5 per cent, were raised in December last year, the first increase since 2006.

The increase in US interest rates is one plank of US policies that is expected to help nudge global economic growth. Three important factors that will fuel US growth next year is Mr Trump’s pivot on corporate tax reforms, infrastructure spending and deregulation, the republicans control of both houses, which allow bills such as budgets to be passed smoothly, and the rapprochement between Mr Trump and “the establishment” in the US. All of these factors have already helped stock markets flourish post US elections.

“So if you get a small bank of policies out of Washington, you attract a lot of money back into the market place, first into financial markets and hopefully into real economic activity and that is what is critical,” said Mr El Erian. “There is a lot of money on the sidelines. The irony of this low growth world we have been in is that there has not been a lack of capital. There has been a lack of confidence.”

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