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Rashid Al Maraj, the governor of the Bahrain Central Bank, had only one thing on his mind as he sat facing editors and journalists around a large round table: convincing them that Bahrain was, thus far, insulated from the perils afflicting global financial markets.
It was a challenging task. The local and regional newspapers were flooded with reports of banks shutting down and billions of dollars being lost.
Few believed that the global crisis which forced governments to use trillions of dollars to bail out failing banks — while people suffered from soaring inflation and rising unemployment — did not seriously affect Bahrain, the financial hub of the Middle East.
International media, on the hunt for news about the collapse of a bank in the Gulf, had sent some of their most perspicacious reporters to the region to cover the seemingly inexorable misery of the banks.
Surge in suicides
Matters were not improved by the stern warning from the World Health Organisation (WHO) that with global stock markets plunging and some banks teetering on bankruptcy, there would be a surge in suicides and mental illnesses.
Yet in the midst of the tension, Al Maraj kept his composure and assured the media through a series of short but focused answers that the financial institutions in Bahrain were faring well and that the monitoring system put in place by the Bahrain Central Bank was working infallibly.
“There is enough liquidity in the market … Some banks returned some of the liquidity as they did not need it … No brisk movement of money withdrawal …” — Al Maraj had the answers that everybody around the table wished to hear.
It was not the usual “where is the blood?” type of question that journalists ask.
Rather, they were looking for a strong indication that would consolidate confidence in the future against the backdrop of a fiscal tsunami that was threatening to annihilate the global system.
The journalists wanted to pass on the message to the people that there were genuine assurances that the repercussions would not devastate Bahrain’s banking system.
Two days earlier, the Bahrain Chamber of Commerce and Industry had taken the government and the people overseeing the local financial institutions to task, asking them to reveal promptly and unequivocally the extent of the effects of the crisis on the local market.
The parliament was calling for an open session to discuss the measures taken by the government to ensure that people would not suffer due to any possible fallout of the global crisis.
Several economic analysts had warned that the tragedy that unfolded at the end of the summer on Wall Street would spark a crisis that would have an impact on the rest of the world and that the pictures of shocked men and traumatised women who lost their savings would be repeated at the bourse of Bahrain.
But Jasem Hussain, a local analyst and professor of economics at the University of Bahrain, said the impact on Bahrain would not be “enormous”.
“The pinch will be felt, particularly when banks and financial establishments start publishing their balance sheets.
However, the pinch will be much less severe than the effect on the industrialised nations, for example. This is mainly due to the small size of the Bahraini market,” he said.
“Fear has caused the performance of the Bahrain Stock Exchange to fall, the analyst said, adding: “The index lost about 20 per cent of the value of assets in September and October. This lack of trust, with all its negative effects, has not ended.”
According to Hussain, the quasi-stagnation in real estate was mainly due to the people’s desire to maintain liquidity. “At the same time, financial institutions are not willing to grant mortgages and property owners are keen to keep the prevailing prices.
But I believe there are expectations of a decline in the values of property in some areas for those who have high financial obligations and need liquidity,” he said.
The fall in oil prices resulting from the slowing of global economic growth has reduced demand and, therefore, government spending, Hussain said, stressing that income from the oil sector represented about 80 per cent total state revenue.
“Official expenditures make up more than 40 per cent of the gross national product and with the government’s decision to reduce project allocations in the 2009-10 budget, economic growth will be affected and the chances of finding new jobs and maintaining existing positions will be reduced,” he said.
Investment within
Bahrain’s losses in state investments abroad, including those by General Organisation for Social Insurance, will be limited since “Bahrain is not known for investing huge amounts of money abroad and more than 90 per cent of the investments of Mumtalakat, for example, are within the kingdom”.
Yet according to Hussain, Bahrain has the chance to enhance its investments in the United States, especially with the tremendous pressure on the economies of the Gulf Cooperation Council countries to invest in America and Europe.
“In the event of termination or expiration, such as the end of the phenomenon of investment banks in the US, a restructuring of the financial sector is expected,” he said.
“Overall, the financial sector in Bahrain does not suffer from operational difficulties because of the permanent control by the Central Bank of Bahrain, which requires banks to submit daily financial statements and to grant foreign companies the opportunity to scrutinise their assets.
We have noted that there was not a single announcement that banks declined requests for withdrawals from depositors,” Hussain said.
“The tight control by the Central Bank imposed some years ago on loans has contributed to keeping the Bahraini financial environment safe. Since 2005, commercial banks operating in Bahrain had to implement the new rules imposed by the Central Bank of Bahrain with regard to consumer finance.
“Consumer finance was defined as any form of credit facility. The premium paid by an individual for consumer loans equals half his income and the payment must be made within a maximum of seven years,” he said.
No bailout in sight
Hussain, an MP in the 40-member lower house and member of the financial committee, said: “Bahrain, with a budget of about 2 billion dinars (Dh19.49 billion), cannot provide financial support to banks and bail them out”.
“This may explain the adoption of a conservative fiscal policy. At the same time, we can notice that the 2009-10 budget does not include clauses for social assistance,” he said.
In Saudi Arabia, the government, aware of the erosion effect on disposable income for a growing number of Saudis caused by record inflation and a depressed stock market, decided to widen the scope of Saudi Credit Bank’s reach by injecting a 10 billion riyal (Dh9.8 billion) grant to the bank that gives interest-free loans to needy Saudis.
Against the backdrop of an imploding global financial system, the Saudis never blinked, displaying remarkable resolve.
A moment that boosted confidence in the Saudi economy despite the slide in oil prices and trouble in global stock markets was when Prince Alwaleed Bin Talal Bin Abdul Aziz unveiled a model of Kingdom City, a $26.7-billion mini-city to be built in Jeddah, the Red Sea port, featuring the world’s tallest building — a tower more than a kilometre high — for offices, luxury residences and a five-star hotel.
It was the strongest indication of confidence in the future.
In a column he wrote for the Saudi daily Al Jazeera, Economy and Planning Minister Khalid Bin Mohammad Al Qusaibi said his country’s economy would, despite the crisis, continue to show reassuring growth rates.
“The present crisis is a global one that will affect almost all the world’s economies. However, forecasts by specialised local institutions indicate that the Saudi economy will continue to achieve positive and reassuring growth rates in the next phases ... The Saudi economy posted over the 2003-2007 period an average 5 per cent growth per year,” he wrote.
When seeking to confront the seemingly lacklustre corporate results and outlooks, weakening economies and dried-up consumer credit, Britain’s Prime Minister Gordon Brown thought help could come mainly from Saudi Arabia.
The International Monetary Fund (IMF) needed money, deeply concerned that the $250 billion it has in its emergency fund would not be enough to help the ominously expanding number of countries seeking financial assistance.
The list so far comprises Hungary, Iceland and Ukraine, which together have depleted the fund of about $30 billion.
With more countries expected to make emergency cash calls — Pakistan has already said it might call on the international body for another $5 billion — the IMF would face serious problems and the economic outlook in Europe and elsewhere would be dangerously bleak.
Saudi Arabia and other Gulf countries could help ease the recession born of the worst financial crisis in 80 years, Brown thought.
“I think people want to invest in helping the world get through this very difficult period but I also think people want to work with us so we are less dependent on oil and have more stability in oil prices … The Saudis will, I think, contribute so that we can have a bigger fund worldwide,” Brown told BBC Television on November 2 before embarking on his Gulf tour.
The equation for Brown is clear: billions of dollars earned from soaring oil prices for a pledge to the business leaders in the Gulf that they would have a say in any future new world economic order. “I believe that your country has a crucial role to play and your voice must be heard,” Brown told business leaders in Saudi Arabia.
Business Secretary Peter Mandelson, who was travelling with Brown and a delegation of more than 20 British executives, confirmed that Saudi Arabia and other Gulf states would now expect a bigger role in global institutions in return for their investment.
“These are the new kids on the block. And we can’t do this by simply paying lip service to these emerging economies. We have to treat them as equals,” he said.
However, the British Prime Minister should tone down his expectation that the Saudis and other Gulf nationals would readily pump more money into the IMF to help stricken economies.
Saudi Arabia cannot be treated as a “cash cow”, Saudi and Gulf opinion leaders and journalists have insisted.
It has already made plans to spend the billions generated by the oil price surge to develop infrastructure and public services, investing in education and training and improving living standards.
Such domestic objectives would certainly top the Saudi agenda — well ahead of providing help to the Western economies that have been put to risk by global economic turmoil.
The Organisation of Petroleum Exporting Countries (Opec) has already said there was no reason for its members to bail out a crisis that originated in the US.
In wait for an alternative
Financial experts say even if Saudi Arabia, Qatar and the UAE did want to step in to bail out the affected countries, they would not do it through the IMF, which they see as dominated by the US and G7 countries.
Brown in fact did not make it easy by telling journalists on the flight to Riyadh that he did not want Middle Eastern countries to try to use investment to gain political influence, even though Britain was “open for business”.
“As long as they play by our rules and operate in a commercial manner, we welcome the investment of sovereign wealth funds,” he was quoted as saying.
But Gulf nationals are adamant that any deal should mean a change in the rules and a greater role for the Gulf.
“They need to be involved in serious decision-making regarding the financial and economic health of the global market. It is no longer possible to leave them out,” Abdul Khaleq Abdullah, a professor of political science at Emirates University in Al Ain, was quoted as saying by AP recently.
“The tendency has been a dismissive one so far and that hasn’t been wise.”
Western leaders will, therefore, have to tone down anti-Arab rhetoric in their own countries. “It’s no longer credible to call these guys fanatics and extremists ... and make them scapegoats,” Abdullah said.
But Brown is not the only leader interested in the Gulf states.
On the eve of his visit to Oman and Qatar, India’s Prime Minister Manmohan Singh on November 7 suggested that India can leverage “vast surplus funds” in the Gulf for its development needs in the backdrop of the global financial crisis.
“The international economic and financial situation prevailing provides a unique opportunity for India to leverage the vast surplus funds in the Gulf for our development needs and to accelerate trade and investment flows into each of the countries,” Singh said in a statement.
It was Manmohan Singh’s first visit to the Gulf region — home to nearly 4.5 million Indian expatriates.
“His visit comes at a time when the world is looking at the cash-rich Gulf afresh in the wake of the global financial crisis and India is planning to give more economic and strategic weight to its ties with the Gulf region,” IANS said.
“In the wake of the global financial crisis, the Gulf has emerged as a key player in the world economic order.
Leaders of Western countries have been visiting the region over the past couple of weeks seeking help to tide over the crisis.”
But before dealing with international visitors and dignitaries, the Gulf countries strived to contain the impact of the crisis on their economies.
In Kuwait, the government formed a task force to handle the impact of the crisis and moved to guarantee bank deposits.
The decision was announced after the central bank said Gulf Bank, Kuwait’s second largest lender, incurred “losses” from trading in derivatives and immediately suspended its shares on the stock market.
Investors also staged protests demanding a halt to trading on the bourse following weeks of decline of the stocks.
The parliament eventually approved by 50 to 7 a government Bill to guarantee deposits in local and Kuwait-based foreign banks to cushion them against the global financial crisis.
The government pledged to use public funds to pay for any deficit faced by a bank and does not set either a time limit or a ceiling on the guarantees.
However, Kuwait’s Finance Minister Mustafa Al Shamali said the impact of the global financial crisis on his country was minimal, although its foreign investments sustained some losses.
“There are some unrealised losses ... but we have the capability to continue and wait for a long time. We consider ourselves as among the countries least affected by the crisis,” the minister was quoted as saying by the Kuwait News Agency.
“Our investments are holdings in stocks and bonds. The impact on bonds has been very small while, with regards to stocks, we are long-term investors.”
The Kuwait Investment Authority, the country’s sovereign wealth fund, manages its foreign investments, which stood at more than $260 billion at the end of March. Most assets are invested in the US and Europe.
In the UAE, the government in early October announced that bank deposits would be guaranteed and that national banks would be protected from credit risks and assured everyone that the local banking sector was fairly robust.
It also funnelled about Dh120 billion into the local banking system.
“We are determined to protect our financial and banking system out of keenness to preserve the interests of our country and people,” His Highness Shaikh Mohammad Bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai, said at a cabinet meeting.
The government then warned banks against using the multi-billion-dollar emergency cash injection for speculation and said the funds meant to boost interbank liquidity will cost lenders about 4 per cent.
Qatar insisted that its plans and projects will not be hindered by the global financial crisis.
No plans to slow down
“We have no intention to halt infrastructure projects at home or reduce overseas investments. Qatar will not stop or slow down its various projects due to the global crisis,” Prime Minister and Foreign Minister Shaikh Hamad Bin Jasem Bin Jabr Al Thani recently said.
His confidence was echoed by Qatar’s Emir, Shaikh Hamad Bin Khalifa Al Thani, who said his country would be less affected by the global financial crisis than other developing nations because there was no shortage of liquidity.
“The effect of the world crisis on the state of Qatar will be less than on many of the other developing countries because the banks and monetary institutions in Qatar enjoy a high monetary cover,” he told an ordinary session of the country’s advisory council in Doha on November 4.
“The increase in oil and gas production will compensate the fall in their prices if that fall continues and the monetary reserve of the government will help satisfy the needs of the country if necessary,” he said.
“I would like to affirm that the international crisis has not prevented us from carrying on with the realisation of sustained development according to the goals set for it: achieving economic and financial stability, establishing a sound monetary policy and an efficient monetary cover that is safe and improving the monetary services of the State,” Shaikh Hamad said.
Recently Oman became the last Gulf country to intervene in its financial sector to fend off the impact of the global financial crisis. Oman’s central bank agreed to provide dollar loans and swaps to local banks facing hard currency shortage.
Unity is the key
One lesson to be drawn from the crisis is, according to Hamad Bu Amim, director-general of the Dubai Chamber of Commerce and Industry, Gulf governments should use feedback from what happened and develop new strategies to better manage their assets.
“They need to speed up cooperation and use the economy of scale in establishing the GCC single currency and monetary union. They need to review their financial risks management and establish a common institutional floor to build up future financial systems,” he told ‘Weekend Review’.
Global turmoil and religion
For several religious scholars, the global turmoil is the result mainly of anti-religious practices.
In Manama, two religious associations said that the meltdown was a punishment from God for those who indulged in usurious malpractices.
“Banks and financial institutions should not abuse the trust and needs of vulnerable people who need assistance.
The usury system is against Islam’s tenets and solidarity calls, and as such, it should not be allowed,” Al Asala and Islamic Education Society said in a joint statement.
Addressing worshippers in Adliya, a posh area in Manama, the capital, Shaikh Fareed Abdul Hadi, a university professor, said the crisis could have been averted if people complied with Islamic financial rules.
“I am not the only one to say this. Several experts and scholars in Europe have been talking about the positive options offered by Islam in relation to financial deals. Maybe this crisis will serve as a wake-up call to everyone and direct them to the right direction,” he said.
In England, Dr Rowan Williams, the Archbishop of Canterbury, blamed greed for the global financial crisis and called for more “just” rates of interest.
Speaking at the end of a conference in Britain devoted to improving understanding between Christians and Muslims, Dr Williams said that Christians and Muslims should work together to decide what might constitute a fairer system of borrowing and suggested an alternative to the present banking system.
He acknowledged that while Islam still forbids the charging of interest, Christian leaders watered down their opposition to the practice centuries ago.
“The Christian tradition has always been cautious about interest. For many centuries it was very much of one mind with the Islamic tradition but after the 16th century that changed. I think the question since then has been what are just rates of interest rather than absolute prohibition.
I would like to see a dialogue developing with Islam about this question of what a just, reasonable rate of interest might look like in the light of a religious ethic but this is very much in its infancy to put it mildly,” he said, according to media reports.
But when he was asked what he thought was to blame for the present economic crisis gripping the world, he did not suggest, as might have been expected, Satan.
“As religious leaders we want to say that the root of the problem is human greed which is not specific to any one nation or even to the governing class or any one religion,” he said.
A crisis interpreted
The global crisis has elicited diverse responses mainly from economists but it has also drawn opinion from intellectuals and religious leaders.
Mohammad Jaber Al Ansari, the prominent Bahraini thinker, said people should study the causes and consequences of the crisis carefully and intelligently to avoid repeating mistakes.
“I find it astonishing that some people rush into drawing and announcing conclusions.
Just like Francis Fukuyama, in his book ‘The End of History’ published after the collapse of the Soviet Union, argued that the advent of Western liberal democracy may signal the end of mankind’s ideological evolution and the historic conflict between capitalism and communism with the triumph of the former, some people today rush to confirm the collapse of capitalism and to assert, psychologically, the near-collapse of the American power. This power, like other powers in history, is subject to the law of rise and decline.
However, many people, in an act of ideological confusion, associate market economy with Western capitalism.
This is a big mistake. Japan’s economy is based on a market economy while the Chinese economy is rushing towards it. The Indian economy is emulating them, as is Brazil’s booming economy. All these new forces are emerging and are not associated with the dwindling American power.
Al Ansari refers to the case of England, the nation that saw the birth of capitalism, where the Labour Party, when it came to power, it did not announce the abolition of capitalism.
Instead the party developed it, promoting social security and justice for workers and cooperation between the private and the public sectors for the sake of public interest.
“Socialist parties in the Scandinavian countries, France and other states also did the same thing when they came to power,” he said.
According to Al Ansari, the crisis has highlighted the existence of two major contrasting tendencies “emanating from two different sources and which reflect a high sense of irresponsibility and wishful thinking.”
“The first tendency emerged right after the fall of the socialist , bloc in Europe and called for a capitalism that reigns free and has no consideration for any humane or social dimension. The second tendency is based on the delusion that the state, in the age of globalisation, is diminishing and fading away.
Events have demonstrated the fragility of this view,” he said.
“The state is needed to correct the deficiency in uncontrolled capitalism and to restore the balance between the market economy and the needs of society. It is astonishing that those who had predicted the end of the state today demand that it intervene to save what can be salvaged and protect people from irresponsible capitalism.
Thus, the state, to some people, may be bad but it is a necessary evil that must be reformed to empower it to remain the custodian and protector of the people when necessary.”
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