The year 2008 will forever be remembered for bringing the global financial system to the brink of total collapse. “When I predicted earlier this year that we were facing the worst financial crisis since the 1930s, I did not anticipate that conditions would deteriorate so badly,” said George Soros, the billionaire American financial speculator, aptly capturing the scale of the global financial crisis in the New York Review of Books. Soros went on to warn that, “a deep recession is now inevitable and the possibility of a depression cannot be ruled out.” Thus, globally 2009 will be dominated by the repercussions of the financial crisis.
How the global financial crisis will impact the Middle East is still unclear and analysts expect the full implications to slowly emerge over the next year. Already there has been a dramatic drop in the price of oil, real estate in the GCC has been shaken, investor confidence rocked and stock markets in the region have shown a volatility similar to those in the major financial centers throughout the globe. Yet, concomitantly the Middle East has so far appeared to have navigated itself away from the most severe aspects of the financial crisis, as seen in the West. The economic fundamentals of the GCC are seen by analysts to be strong and able to withhold the continued onslaught from the outside.
As vice-president of MENA Capital Ziad Maalouf explained, “The banks have strong fundamentals in the GCC because the governments are behind them with their huge reserves and have shown in the crisis that they are willing to act to support the banks if need be. In the UAE we have already seen this [the central bank of the UAE introduced a $14 billion liquidity support facility].” In addition, the GCC governments have given a 100% guarantee on all bank deposits. The economic fundamentals in the Gulf became so strong primarily because of the huge surpluses obtained over the last few years due to record oil prices. Thus, stated Faisal Hasan, head of research at Global Investment House, “The governments of the region have saved 70% of their surplus oil revenues over the past five years and sovereign wealth funds in the MENA region have over $1.5 trillion at their disposal.”
Those with oil and those without
The current account surpluses of oil exporting countries are expected to reach 25% of GDP in 2008, according to the IMF. Thus, the economic fundamentals of the GCC are expected to be strong enough for growth to continue in 2009. For non-oil exporting countries next year is going to be very difficult. Amjad Ahmed, CEO of Investment and Merchant Banking at NBK Capital, said that Egypt and Turkey in particular are going to have a hard time as both these countries’ growths have relied on the inflows of foreign direct investment from the GCC and with the financial crisis, “FDI from the Gulf will be significantly reduced.”
The GCC states, while having the surplus liquidity to overcome the crisis, still had to face significant impacts on their economies. “Gulf stock markets have shed $160 billion of their total value during the first couple of weeks of the financial crisis, the Saudi All Share Index fell 17% and the Dubai Stock Market posted a 22.5% loss … several Arab sovereign funds incurred substantial losses as well on their worldwide portfolios,” said Fadlo Choueiri, head of research at Credit Libanais.
Exactly how much was lost by these SWFs is, unfortunately, guess work because of a complete lack of transparency. Jad Chaaban, acting president of the Lebanese Economic Association, warned that, “There are a lot of rumors that major sovereign funds [from the region] lost major amounts of cash in the US, but we don’t have numbers. But it has impacted the risk perception of investors.” This lack of transparency should be a cause for concern as it was a deficiency in transparency and regulation that caused the global financial near-meltdown.
While the economic fundamentals have been important in convincing investors and analysts that the GCC will be able to weather the financial hurricane, timing has also been essential in keeping the worst affects of the crisis at bay. As Ziad Abou Jamra, director of the Trading Desk at FIDUS, explained, “Lending standards were just starting to deteriorate in the GCC area when the crisis started overseas, which created a timely opportunity for GCC banks to adjust and halt all risky lending. US banks, on the other hand, were giving out loans with zero down payments, no documentation, and zero interest rates for the first two years [i.e. subprime loans].” Further to this, Hasan claimed, there was “weaker integration of MENA’s financial sector with those of the US and Europe. There were also improvements in MENA’s financial fundamentals over the last decade, including better fiscal and monetary management, more open regimes with more flexible exchange rates, and better debt and financial management that has reduced exposure to international capital markets.”
The independence of the GCC from the international financial system is contested. Choueiri said that there has been increased integration of the region into the world economy, “evidenced by some 89.18% correlation between the GCC 200 index and the Dow Jones Industrial Average during the period between September 7 and October 20,” adding “it is inevitable for government authorities in the region to implement stiffer regulation on banks and sovereign funds.”
The most significant implication of the 2008 global financial crisis on the region is likely the substantial hits that many individual investors took as, according to Ahmed, “their investment portfolios left them exposed to what happened in Europe and the US.”
It will not be until sometime next year that the extent to which individual investors in the GCC have been affected will be clear, but sentiment in the market suggests it was significant. What is maybe more significant is the advice that brokers are giving their clients, which is being repeated across the region and the globe. “We are telling our clients to liquidate some of their investments and move to safer types of products and we have re-initiated two structures that give more protection to our clients. So we are trying to protect our clients by investing in these structures instead of going straight into the market,” Ezzedine said.
It appears that 2009 will be a hard year for capitalists in the region. “Cash is scarce, many high net worth individuals lost substantial sums of money, the financial crisis has hit the ability to fundraise for Private Equity firms such as ours in the region,” said Gilles de Clerck, senior manager of Capital Trust.
The Lebanese great escape?
In Lebanon, 2008 will be remembered as the year of Riad Salameh, governor of the Banque du Lebanon, the country’s central bank. Many people in the sector believe he helped Lebanon escape the financial crisis’ worst effects. Ezzedine said that “Lebanese banking will not be affected [by the global financial crisis] because we do traditional banking in Lebanon, which means none of the Lebanese banks were allowed to invest in any of those derivatives that caused the crisis. This was because Riad Salameh saw this crisis occurring because of the over-leverage of properties and he saw the cycles and possibilities of a bubble bursting that would affect the whole financial system.”
Thus, miraculously, the financial crisis even brought an improvement to Lebanon’s economic situation. According to
Oil prices reached a record $147.27 per barrel on July 11 of this year and, according to the IMF, oil and gas exports will amount to an estimated $1.1 trillion in 2008, up from $700 billion in 2007. Analysts are putting this record price down to massive speculation on oil and the subsequent drop to $51, at the time Executive went to print, appears to confirm this view. “These speculators were buying every small dip in prices and the rally continued, which eventually led to the final blow off and $148-per-barrel prices. This latest drop in oil prices will definitely be a big negative for speculation in the region (lower liquidity) and will definitely lead to lower GDP growth levels,” said Ziad Abou Jamra, director of the trading desk at FIDUS. However, while speculation was no doubt a major cause of declining prices, the global financial crisis is now also causing a serious hemorrhage in demand. The uncertainty over what will happen to oil in 2009 has even led Goldman Sachs to close their recommendations for oil. Future markets expect oil to average $102 a barrel during 2009- 2013 on a cumulative basis, giving the region a projected fiscal revenue of $5.6 trillion over the five-year period, compared to $1.8 trillion during 2003-2007.
Sentiment among analysts in the region regarding the oil price is relatively upbeat, despite the uncertainty. As Faisal Hasan, head of research at Global Investment House, stated, “Trade balances and balance of payments are likely to remain positive… The sharp decline in oil prices will reduce the consolidated external current account surplus of the GCC countries by almost half, but still it will remain positive.” Most analysts in the region are remaining confident mainly because they believe that for most of 2008 oil was overpriced and they expect oil prices to stabilize at $60-70 per barrel next year, which will still be above the average $47 per barrel needed for the GCC to achieve a fiscal balance. Amjad Ahmed, CEO of Investment and Merchant Banking for NBK Capital, said that although the market is fluctuating a lot, “growth in India and China will ensure that oil is maintained at the $60-70 mark.”
Nonetheless, the continued dive in oil prices is not promising and the decision by Goldman Sachs to close their recommendations for oil pricing illustrates the uncertainty in the market. This is further accentuated by the fact that the continued slide in oil prices has occurred in the context of two production cuts by OPEC, Fadlo Choueiri, head of research for Credit Libanais, pointed out. However, Abou Jamra countered that, “speculators loved buying oil at around $150 and now they hate it at around $50. Betting against speculators is usually a winning proposition.”
Antoun Samya, a research analyst at BLOMINVEST, there has been an inflow of $8 billion into Lebanese banks from Arabs and expatriate Lebanese. “Lebanon is currently seen as a safe haven by high net worth individuals,” Samya said. However, negative impacts of the crisis in Lebanon are expected to be felt in 2009, despite the IMF estimating growth to reach 5% in real GDP. In Ezzedine’s view, “negative impacts have begun to appear and on the real estate side, some projects have been slowed down… also a slowdown in remittances from abroad will occur.”
2009: Wait and see
The economic fundamentals of the GCC are facing their biggest test yet and 2009 will be a year of continued questioning of these fundamentals. Analysts are quietly confident that there is enough liquidity in the region to escape any severe economic crisis in the GCC, but simultaneously there is nervousness as the full implications of the crisis in the region are still unclear. Oil prices continued their decline to the crucial $50 mark and the existing confidence is fragile. The coming year will be a long one and the start of an even longer recovery period for the global financial system. The age of conspicuous consumption is over.