GCC Economic Monthly

Reinventing the state

The current global crisis has led to a seeming restoration of governments as a benign economic force. A protracted era of deregulation and privatization has given way to perceptions of the state as a supporter of economic activity and orderly markets. The ability of the authorities to deliver on such expectations differs greatly, however, with the crisis once again underscoring the financial cost of government intervention. Moreover, there are legitimate concerns that excessive reliance on government intervention may sow the seeds of another economic crisis.

The massive global policy response has indeed rescued many economies from a sharp and potentially protracted downturn. However, rising indebtedness can potentially complicate the transition from a fragile stimulus-driven recovery to more sustainable private demand-driven growth. Moreover, excessive deficit spending risks seriously denting fiscal credibility.

While the crisis has underscored the continued vulnerability of the GCC economies to oil-induced cycles, regional governments have been very successful in managing the implications of this vulnerability.

1. GCC central banks quickly followed the US-led monetary loosening while seeking to restore liquidity in interbank money markets. Targeted interventions were made to support the financial sector.

2. Fiscal intervention has helped support aggregate demand while ensuring continuity of long-term economic diversification projects.

3. GCC sovereigns have reinvigorated debt markets with issuance by Abu Dhabi and Qatar helping to generate imputed yield curves, thereby facilitating corporate issuances by government-linked entities.