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Saudi traders monitor stocks at a Saudi Bank in Dammam October 26, 2008.(Reuters Photo) |
Despite all the early confident official statements, it seems that the financial hurricane is hitting the shores of the desert kingdoms in the Gulf.
Amid much tension, the Saudi King has announced recently a governmental plan to spend 10 billion Riyals ($2.67 billion) in social grants to low-income families. At the same time, the Kuwaiti government moved to prop up the Gulf Bank – the second largest commercial bank in the country – after losing up to 200 million Kuwaiti Dinars ($744 million). And in the United Arab Emirates, injecting cash into the economy has not had the intended effect.
Thus, the Gulf economy appears to be reeling from the various blows it is receiving from all directions; lost investments in the West, falling stock markets, and dropping oil prices.
The Gulf countries have strong economic and financial relations with the United States, given that the world power’s huge economy – which together with the European Union produces over 40 percent of the world's economic power – plays a crucial role in stabilizing the Gulf economy.
The United States is a major trade partner to all Gulf countries, and it is the main destination for investments and capital from both individuals and governments in the region. Therefore, in light of such a strong connection, it is understandable why the current financial crisis has struck fear into the hearts of Gulf investors.
The First Shock
| "The Arab Gulf countries are the ones with the closest economic ties with the West in the region.” - A Saudi analyst |
The early period of the crisis was described as the “First Shock” – a period during which the Arab Gulf countries’ reaction was confined to issuing statements about the immunity of their economies to the repercussions of the US mortgage crisis.
However, adopting a more realistic attitude towards the crisis, heads of the Gulf chambers of commerce decided on Oct. 15 to hold a conference next November to discuss the effect of the crisis on the Gulf region, with the participation of 50 experts.
The conference will be attended by officials from central banks, stock markets, and chambers of commerce as well as the executive managers of the Gulf banks and investment companies.
The conference, which will probably be held in Saudi Arabia, will pave the way for organizing separate panels in each chamber of commerce to discuss the effect of the international financial crisis on each particular country, the impact of the financial meltdown on the private sector, and the significance of the cooperation between the public and private sectors.
“Such a conference and the big number of experts and decision makers expected to attend are clear indications that the international financial crisis will inflict – or has already inflicted – significant damage on the Gulf economy, given that the Arab Gulf countries are the ones with the closest economic ties with the West in the region,” Qusay Bin Al Khenezy, a Saudi economic analyst, told IslamOnline.
The Gulf Oil
| A decline in oil prices will stop or slow down the huge infrastructure projects in the Gulf region. |
Oil exports constitute a big percentage of the GNPs of Gulf countries, and they are one of the major sources of their national income. The oil sector in this part of the world is considered the main engine of economic growth; therefore, what worries the Gulf countries the most is the possibility of the world sliding into the depths of a recession as a result of the current crisis.
An economic recession can lead to the bankruptcy of the companies whose shares have lost part of their value in international stock markets, which in turn can result in the closure of some big companies and factories as well massive layoffs.
For Gulf countries, such a scenario is catastrophic on the economic level because the price of oil - their main source of income – depends on international demand; a decline in world oil demand as a result of a recession will lead to a sharp decrease in its price. If potential customers are jobless and capable only of affording food and shelter, it is easy to imagine a huge plunge in oil prices.
With oil demand drying up, there is no doubt that the coming balances of payments and economic growth rates of Gulf countries will be negatively affected.
If oil revenues fall, government spending will be decreased, which in turn will stop or slow down the huge infrastructure projects in the Gulf region. It is important to note that in Saudi Arabia – the world’s largest oil exporter, 89 percent of government revenues come from oil exports.
The prospects of this scenario are increasing as the price of oil barrel has already declined from $150 to around $60 as a result of the crisis.
The Gulf Financial Markets
| According to the WB, the Gulf region's investments abroad stands at $2.4 trillion. |
Compared to other Arab countries, the financial activities of the Gulf countries can be considered huge since they invest a considerable part of their oil revenues abroad.
“A big percentage of Saudi Arabia’s monetary reserves – more than two trillion Riyals – are deposited in the US financial system,” said Abdel-Hameed Al Amry, a member of the Saudi Economic Society.
Also, the Gulf countries have sovereign investment funds abroad, particularly in the United States and Europe, and there is no doubt that some of those investments are in financial institutions that are facing problems or on the verge of bankruptcy.
According to the World Bank, the Gulf region’s investments abroad stands at $2.4 trillion, and those investments will definitely be affected by the current crisis.
The banks in the Gulf region are among the most badly hit institutions by the crisis despite their attempts to distance themselves from the mortgage crisis and the fall of international financial institutions.
According to statements made by key officials in major banks, the instability resulting from the international financial slowdown has obviously affected the Gulf banks.
The National Commercial bank – the biggest bank in Saudi Arabia in terms of the assets owned by the government, for instance, has declared recently that its gains decreased by 31 percent because of the impact of the international crisis on its portfolios.
However, given that most banks do not reveal the details of their investments , it is difficult to tell to what extent those banks’ investments abroad have been hit by the US mortgage crisis and the fall of international banks and financial institutions.
Therefore, some experts play down the seriousness of the impact of the wrenching global crisis on the Gulf financial institutions in general.
“It is unlikely that Saudi banks will go bankrupt because the ‘financial Tsunami’ will lose much of its momentum before reaching the Kingdom. Other banks will receive the first shock and absorb the biggest part of it, which is natural because earthquakes are usually most destructive at the center,” said Dr. Wadee’ Ahmed Kably, professor of economics at King Saud University.
The Gulf countries’ investments and deposits in the West, according to Kably, are not that big, which can be attributed to the cautiousness of their financial institutions.
There has been much discussion recently about the prospects of monetary integration between the Arab Gulf countries. In June 2008, central bankers in the region agreed on taking the first steps towards creating a joint central bank, setting 2010 as a target date for launching a common currency.
However, according to some observers, the current situation can jeopardize the plans for economic unity in the Gulf region.
“The current turbulences in financial markets will hinder the monetary unity in the Gulf region because of the growing expectations of increasing inflation rates,” said Saud Gelaydan, a Saudi economic analyst.
Conspiracy Theories
| According to some, the financial meltdown is simply a “financial plot.” |
Some analyses of the crisis have conspirational undertones. According to some, the financial meltdown is simply a “financial plot” that aims at embezzling the investments of other countries.
Strange enough, a recent statement by the Saudi King implied the same line of reasoning.
“You know what is going on in the whole world. I wish to tell you that I believe that the world now is facing a covert economic war and you must take this into consideration,” King Abdullah told editors-in-chief of Saudi newspapers in Riyadh on today.
Conspiracy theorists believe that the campaign of “political blackmail” that followed the 9/11 attacks has acquired an economic dimension, drawing parallels between the events of September 2001 and September 2008. In this context, the Bush administration is regarded to be continuing its “crusade” against developing and resource-rich countries.
Possible Solutions
There have been recent calls in the Gulf region for breaking away from the orbit of the falling US economy, with many voices urging the Arab Gulf countries to jump from the sinking ship.
“One of the solutions that can save the Gulf region from the repercussions of the crisis is dropping their pegs to the dollar. It is unwise to continue depending on the US economy, given its current state of weakness,” Al Amry told IslamOnline.
Also, economic experts have been advocating creating alliances with the new emerging economic powers.
“Gulf countries have to look for other alternatives and to seek cooperation with more powerful economic players, such as the European Union, China, or India,” said Dr. Abdel-Aziz Khodeiry, a development expert.
Despite all the analyses, it seems that the repercussions of the financial earthquake that has hit financial markets globally are not fully on display. Few appear to be aware of what is still to follow as events unfold; however, one fact seems to stand out: even the better-off nations of the world are not insulated from the ramifications of the global crisis.
“The amount of loss will depend on the crisis’s time span. The more time it takes, the more loss we will suffer. In the age of economic globalization, no economy is immune to the consequences of the international financial crisis,” Kably told IslamOnline.
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