by Suad Hamada
– Bahrain –
“Arab and Gulf Banks will be completely safe from the global financial crisis.” That is what many Arab officials are announcing these days, but ordinary people are not reassured and fail to understand how the Arab World, with its average economies, can possibly be insulated from such catastrophe. They expect that the global financial crisis will eventually add new worries to their daily hardships.
Thirty-five year old Bahraini Ali Hassan doesn’t know much about economics but he understands that the world’s financial markets are not stable and is concerned that the instability will affect him and his family. “I don’t have a large savings but the idea of the banks losing their financial credibility or going bankrupt makes me insecure.”
The government is assuring that the global financial crises wouldn’t affect Bahrain, but Hassan asks, “What would happen if its calculations were wrong and the country has to face the same fate of large countries?”
In a recent statement in the Bahrain News Agency, Chairman of the Union of Arab Banks Adnan Ahmed Yousif said that Arab banks in general do not face the problem of surplus in foreign currencies, which proved to be the base of the crisis in the west. In spite of that, a number of Gulf Central Banks showed readiness to pump money into markets if needed. He remains very optimistic that Gulf and Arab states will record an increase in their cumulative budgets by as much as 20% by the end of the year.
Interest rates in Arab banks dropped by 50% last week (from 7-8% to 4%) indicating the abundance of liquidity and cash surplus at a time when global markets face a serious crisis. Though a few Arab banks were invested in affected western banks, their investments were diversified and conservative. When I spoke with Yousif this week, he explained that banks in the Arab world are divided to three categories: those that are banned from investing outside their countries, those that are allowed to invest with restrictions and those that can invest freely. At the moment, only banks in the Gulf regions are allowed to invest around the globe. Yousif says that those banks might suffer losses if the global financial crisis deteriorates.
But overall, Yousif says it’s unlikely that Arab markets will face any significant consequences of the financial crisis in the banking sector. He does not think that the crisis is the beginning of the end for capitalism. Instead he says the global meltdown is not a failure for capitalism as much as it was a misuse of gaps in this system that allowed foreign banks to give huge loans. He considers the rescue plan proposed to the U.S. Congress as no more than a sedative for a crisis that many expect will affect the global markets for at least five years to come.
Although the government of Bahrain is confident in its strong economy, Prime Minister Shaikh Khalifa bin Salman called upon Gulf countries to combine efforts, asserting that it is crucial for these states to develop a unified stance to effectively cooperate and protect their economies from the crisis.
“The world is interconnected as never before, and this gives us the opportunity to be more balanced than we have been in generations, perhaps more than at any other time in our history,” said Bahrain’s Crown Prince Shaikh Salman bin Hamad Al Khalifa in a speech this month at Waseda University in Japan. “So, I would like to see us work together to build on our individual strengths and successes – bringing out the best in one other,” he said. “Remember, we all have the collective responsibility to make this a better world.”
The Deputy Supreme Commander and Economic Development Board chairman points out that what began last year as the sub-prime crisis, then became the “credit crunch,” has now developed into a situation that many are calling “the biggest financial meltdown in American history.”
“We should not forget that the world is not in the same place it was 80 years ago, when the Wall Street crash led to the Great Depression. Nor is it in the same place as it was 12 years ago when the Asian financial crisis hit closer to home.”
He points out that the global economy is evolving and no longer centered in one or two limited hubs. The GCC has fortunately been insulated from the worst of these troubles, managing to grow and prosper. The IMF also recently predicted that Bahrain and other GCC economies will continue to grow at an average seven percent in the next year, he says.
Shaikh Mohammed bin Rashid Al Maktoum, ruler of Dubai and Vice President and Prime Minister of the United Arab Emirates (UAE), is also assured that his country’s economy, banking sector and financial markets are sound. Pointing to the past, he says that the UAE economy was able to weather economic downturns, even during the Gulf’s first and second wars. Boosted by flexible legislations that protect local and foreign capital, Shaikh Mohammed attributes the country’s ability to grow to its clear financial vision, world-class infrastructure, availability of local and international expertise and its attractive business environment. Commenting on the current changes in the international financial markets, Shaikh Mohammed cites the current surge in real estate demand as proof that the UAE’s economy is far from being affected by the credit crunch.
But these official assurances clash with the current rate cuts made by GCC central banks. In response to the deepening financial crisis, Bahrain lowered its key interest rates last week – the one-week deposit rate and overnight lending rate were reduced by 25 basis points and repurchase rate by 50 basis points. Effective immediately, the Central Bank of Bahrain’s lowered its rate on one-week deposit, overnight deposit, repo and lending rates by a quarter of a percent.
Pegged to the US dollar, Gulf Arab states (barring Kuwait) have been forced to track the US Federal Reserve to maintain the relative value of their currencies despite rising inflation in the region. Bahrain has been following the US Federal Reserve rate cuts from last September and this is the eighth in a series of lowered key interest rates since then. The rate cut by Bahrain’s apex banking authority came after four days of sharp decline in the regional bourses, including the Bahrain Stock Exchange that fell to its lowest in the last 52 weeks on October 8th.
Bahrain’s rate cut move also comes a day after Kuwait slashed its key discount interest rate by 125 basis points and the UAE reduced its own by 50 basis points as Arab stock markets began slipping over growing fears of the global financial turmoil seeping into the region.
Meanwhile, the Saudi Arabian Monetary Agency announced its readiness to pump SAR50 billion (USD$13.3 billion) into the system. Qatar ruled out lowering its interest rates, saying its economy remains solid.
Mitsubishi Norihiko Kato, regional head at the Bank of Tokyo, is not confident in Bahrain’s immunity. He expects that many development projects in Bahrain could soon be hit by the global credit crisis. He says that innocent borrowers from this part of the world, including Bahrain, will end up losers because they will not be able to borrow anymore. “This crisis has had a snowballing effect on the world markets, wherein banks across the globe have stopped trusting one another.” Kato explains that banks borrow from one another in “normal” times and in turn lend to their own clients. But when they stop this process, as has happened now, monies dry up.
Traditionally, the economy of the Gulf depends on oil exportation, but such dependency has been declining. Investment and real estate development, particularly in Bahrain and the UAE has provided the region’s economy with an alternative while other countries build infrastructure. Saudi Arabia is now building a strong manufacturing sector and Qatar is transforming itself to a modern business hub.
Bahrain and other Gulf economies can help the world weather the financial crisis, the Crown Prince said earlier this month. “We must take heart from the fact that some emerging economies around the world – particularly the Gulf and the Middle East – are resilient.”
About the Author
Suad Hamada has been a journalist in Bahrain since 1997. Her writing focuses on politics and women’s empowerment in both Bahrain and the larger Arab region. She has participated in national campaigns for the elimination of discrimination against Bahraini women, seeking to give them a voice in a society – that while liberal in comparison to its neighbors – still marginalizes and oppresses its female citizens.
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