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Monday, July 28, 2008

Inflation pricing Gulf states out of the market for foreign labor

ABU DHABI — Gulf Cooperation Council states are losing their allure to foreigners.

A report by Moody's Investors Service asserted that foreigners were repelled by the rising cost of living in GCC states, Middle East Newsline reported. The report said many foreign workers were experiencing a significant salary erosion.

"Although inflation is seldom a direct driver of Moody's ratings, it can affect ratings indirectly through three main channels — fiscal, political and economic," Moody's said. "We are beginning to observe these in the Middle East."

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GCC states, which significantly increased civil service salaries, have acknowledged rising prices. Most of the six member states have imposed price controls on basic commodities as well as a rent ceiling.

The report attributed inflation to the rapid expansion of private sector, particularly consumer, credit. In the United Arab Emirates, banks in Dubai lenders have been offering loan-to-value ratios of up to 97 percent.

In 2007, the Middle East experienced the highest rate of inflation, with 10.4 percent. Moody's said inflation was expected to exceed this level in 2008.

Moody's acknowledged that GCC states could raise government spending to cushion the cost of inflation. But the report warned that this would make Gulf Arab oil producers dependent on energy revenues.


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