Before the fateful weekend of September 13-14, 2008, the hot topic on all bankers’ minds in the GCC was how to tackle inflation. Every country in the Gulf was battling ubiquitous, long-lasting and soaring inflation rates and deciding if they should de-peg their local currencies from the dollar. By mid-September, the picture was no longer so black and white — banks in the Gulf, like everyone else in the world, were scrambling to come up with emergency funds to mitigate lending restrictions and to guarantee bank deposits in order to ease the credit crunch they were facing. While the economies of the GCC were hoping the international crisis would blow right by them, Standard & Poor’s noted that, “recent events have shown that as these economies have opened up to the rest of the world in recent years, so too have their vulnerabilities to global economic conditions.” Merrill Lynch expects non-oil GDP growth in the GCC to decline to 7.5% in 2008 and to a mere 5% in 2009. Budget surpluses are also predicted to drop sharply, with Merrill Lynch’s forecasts reporting the current account surplus to plummet from 22% of GDP in 2008 to 15% in 2009. As for Lebanon, the IMF forecasts GDP growth in 2008 to have reached 6% and to drop to 5% in 2009. The Cedar Republic, on the other hand, was not affected in the same way by the global financial crisis. To cushion the effects on local banking sectors, governments around the Gulf have been injecting sizable amounts of liquidity into their banks. Paradoxically, the Lebanese banking sector continues to loan to its government and not vice versa. In the UAE, for example, the central bank plans to feed an estimated $19 billion into domestic banks across the Emirates. Other members of the GCC have announced similar plans, with Saudi Arabia’s central bank voicing a capability and willingness to inject cash into its local banks if and when necessary. David Gibson-Moore, president of BMB Group, believes that the banking sectors of the Gulf have “held up well in 2008” and that even though direct exposure to the subprime crisis has been limited until now, “further exposure is likely to surface.” Lebanon had also not been exposed to the subprime crisis, because the Lebanese central bank has — for quite a few years — imposed tight regulations on the banking sector, prohibiting its banks from investment in structured financial products. Seeing as the Gulf’s state finances are quite robust, the banking sectors of the GCC will surely be able to stay comfortably afloat despite the turbulences. Without such buffering support from their governments, banks in the Gulf would undoubtedly be feeling the effects of the international financial crisis much more.
Most experts hold that banks in the Gulf have been almost entirely unaffected by the global crisis. Such statements are expected — no one wants to hear the grim truth that if it weren’t for the local governments having the ability to provide large amounts of cash to the banks, many of them would have collapsed or would have been forced to merge with other banks. Analysts are dismissing the need for mergers and acquisitions, while some banks are revealing their inclinations towards ‘possible’ mergers in the future. Obscurity is rampant in these uncertain times and it seems neither mergers nor acquisitions will surface until mid to late 2009.
There are many lessons to be learned from the global crisis and the failures of major regulatory frameworks (such as Basel II). Seeing as Lebanon has been able to successfully insulate its banking sector from regulation failure, maybe regional banks could learn a lesson or two from the Banque du Liban. Regional banks need to make sure their money supply is properly supervised, especially since past controls were rather lax and thus “fed the asset price bubble,” said Gibson-Moore. Also, in order to maintain stable levels of liquidity, regulatory systems must be firm and sustained to make sure banks are lending sensibly. To ensure banks do not continue with their bad habits, Gibson-Moore noted that, “compensation systems need to be properly aligned with the successful long-term performance of banks.” Another lesson to be learned from global chaos is that banks and financial sectors altogether need good governance, with board members “that understand what is happening,” stated Gibson-Moore.
In general, the true effects of the crisis will be felt by banks across the MENA region early next year. Gibson-Moore believes that, “the effect of the financial crisis on the banks in the GCC countries is [to] be far from negligible and it will not be confined to the financial sector but it will [also] affect the real economy as well.” Banks in the Gulf are all facing challenges of how to maintain liquidity and the regulators in the GCC “are going to play it safe and be [more] cautious” in 2009, and rightly so, said Gibson-Moore. Lebanese banks, in stark contrast to their Gulf counterparts, have had no problem stabilizing liquidity, as theirs is one of the most liquid sectors in the world. Gibson-Moore feels there is an “urgency for tougher controls,” especially in Qatar and Dubai. Seeing as banking assets per capita are “still relatively low in most GCC countries,” Gibson-Moore contended that, “this leaves sufficient room for growth for all participants [in the Gulf].” Much is to be learned from the mistakes of 2008 and even more from those that began well before the 2008 fiscal year (in terms of investments and lenient policies). Still, Pik Yee Foong, CEO of Standard Chartered Bank Lebanon, expects the Gulf economies “to remain strong.” Most bankers and financial powerhouses are optimistic that although 2009 will present many challenges and growth will slow, banks are expected to perform reasonably well.