Financial crisis moves to Gulf states

Global financial crisis hits oil-rich Arab Gulf.

October 27, 2008 08:43
3 minute read.
Financial crisis moves to Gulf states

Kuwait investors 88 224. (photo credit: Gustavo Ferrari)


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Kuwait moved Sunday to prop up the country's second-largest commercial bank and scrambled to protect other depositors in a sobering day of reckoning for the oil-rich Arab Gulf, which had hoped to emerge largely unscathed from the global financial crisis. The central bank's decision to halt trading in Gulf Bank shares because of high derivatives losses triggered shock waves across the region's bourses. Key stock indices sustained hits of between 3.5 percent to almost 9%, before moderately paring losses after the bank announced it was considering widespread deposit guarantees. The developments were a stark contrast to an all-clear message issued by Gulf finance ministers just one day before. Together, they highlighted problems the oil-rich states may still confront as they try to sustain massive spending and high economic growth rates amid falling oil prices and bank uncertainty. In particular, a long and lucrative property boom in the United Arab Emirates also shows signs of strain. "The halting of Gulf Bank shares spread panic in the bourse today because the government has been saying banks are safe from [global financial crisis] losses," investor Ahmed al-Fadhli told AP. Neither the government nor Gulf Bank revealed the size of the losses or their time frame. But Ibrahim Dabdoub, the chief executive of the National Bank of Kuwait, told Al Arabiya television the losses were up to 200 million dinars ($742 million). Gulf Bank said in a statement it had advised the central bank Thursday that some customers had incurred losses stemming from "the significant decline" in the exchange rate of the euro against the US dollar. Louis Myers, the bank's chief executive, said the losses will "have no major effect on the soundness of the Bank's financial position, and will not affect its ability to continue business." The Gulf Bank news also appeared to push the Kuwaiti government to take a step it has so far resisted - guaranteeing deposits. The country currently makes no deposit guarantees. The central bank said it would propose an urgent bill to guarantee deposits at local Kuwaiti banks in an effort to "boost confidence in our banking sector and enhance its ability to compete with banks in countries where deposits were guaranteed by the state." So far, Gulf countries have contended they are largely insulated from the crisis circling the world, in part because of an oil-money cushion they built during years of high oil prices. But because most of the region's banking sector is privately held, little is known about the institutions' true risk exposure. That question mark has fueled investor concerns and sharp stock losses. The Saudi stock exchange - the region's largest - fell by 8.7% Saturday and is down more than 50% since January. Saudi's benchmark Tadawul index closed down about 1.6% Sunday, while the Dubai Financial Market sank 4.7%, and Qatar's exchange closed down almost 9%. Kuwait's exchange was down 3.5% at closing. In an emergency meeting Saturday, the six Gulf Cooperation Council ministers had praised regulatory regimes they said were insulating them from the crisis. But their draft agenda, obtained by reporters, said "unjustified fears" still could lead to a "hysteria" of bank runs in the Gulf. And it voiced the very real fear that foreign investors may pull money from Gulf markets as developed countries' growth slows. Analysts think the built-up oil cash will cushion the countries from the short-term impact of the credit crunch, but that the development of mega-projects may slow. The International Monetary Fund says many of the countries still could see GDP growth of about 6% on a regional average. But the property boom that has underpinned a sizable chunk of the growth could take a significant hit. The Abu Dhabi-based newspaper The National reported Sunday that real-estate agents in the UAE capital and Dubai are starting to see a decline in prices for as-yet-unbuilt properties, known as off-plan developments. Demand for such investments has been brisk for years among speculators who were able to snatch up what were seen as relative bargains and then resell them for quick profit. But that appears to be changing as easy credit disappears and foreign investors pull money from the region. The UAE has been one of the more aggressive Gulf nations in tackling the crisis's impact. It has injected liquidity into the economy and cut rates in tandem with the US Federal Reserve. But in Kuwait, the government has been less hands-on, an approach that has angered investors. That led to a failed lawsuit to try to temporarily close the bourse and, on Sunday, prompted traders to walk out of the bourse for the second time in less than a week.

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