Nice article in the FT from a week or so ago by Marios Maratheftis, regional head of research for Middle East North Africa and Pakistan at Standard Chartered Bank, who makes reference to the need for counter-cyclical policies during growth uptrends due to the market’s inherent tendency to underprice risk during uptrends and the subsequent cycle that proceeds whereby overly high credit supplies grow larger by inflating wealth perceptions and further distorting risk ones. The principle is similar, if not exactly defined by George Soros’ ‘reflexivity’ theory detailed in his most recent work. GCC economies fell victim to pro-cyclical measures leading up to the crisis, Maratheftis argues, due largely to the loose monetary standards given their dollar pegs, but responded to, and came away from the shock relatively well compared with developed countries, given a lack of budget constraints and thus an ability to pursue counter-cyclical expansion during 2009 and into this year without added leverage. The lesson?
Pro-cyclicality must be avoided during the next boom and GCC countries should now improve transparency, financial reporting and data availability, by setting much higher standards of governance.