Saving GCC banks most important challenge policy makers confront

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The authors of the report M.R. Raghu, senior vice president – Research and Amrith Mukkamala, senior analyst – Research, pointed out that the GCC financial sector is probably reeling under the same aftermath as that of the global mess and hence possible solutions cannot be any different. The report looks at various policy options available to GCC financial leaders and also provides an assessment of the damage this crisis is likely to wreck on the GCC banking and financial sector if these policy options were delayed.

 


The authors argued that currently the global response to the current financial crisis has been predominantly a rescue package initiated, launched and managed directly by the government in order to rescue local banks and financial institutions. These rescue efforts are even spreading to other sectors other than banks and financial institutions. The merits and demerits of such an approach where government will become a dominant player (instead of being a referee) are debated. Government intervention should definitely be questioned under normal circumstances. The authors state that circumstances are hardly normal and therefore instead of wasting time debating, the best course of action would be to follow the global model.

 


The experience in GCC has been very different. The government has been showing marginal interest in initiating and managing a direct rescue program. The only country where such efforts are in progress is Kuwait, where the government is seriously working to hammer an economic stimulus package. The proposal is yet to be approved by the parliament as of the date of this report. However, the package aims to rescue both banks and investment companies. Successful implementation of this bill will set the trend in the region. Other such actions include $ 20 billion bond issue by Dubai government (subscribed by the Dubai government to the tune of $ 10 billion) in order to provide support to distressed companies in Dubai. Also, in Qatar, the Qatar Investment Authority has been acquiring between 10 percent to 20 percent in the local Qatari banks. Given the scale of destruction in the GCC, the authors of the report strongly feel that an overt economic stimulus package is no longer a policy option but a necessity.

 


The second policy option prescribed in the report is to enhance the fiscal stimulus plans already announced for 2009 and to announce one if there hasn’t been any. The report stated that oil revenues (which form the majority – approximately 80 percent of the GCC government revenues) are expected to witness a significant fall in 2009. Despite this, majority of the GCC governments have already announced an increase in government expenditures to provide fiscal stimulus to their economies. Saudi Arabia has projected a 9 percent decline in revenues for 2009; however, government expenditure has been significantly increased by 16 percent. The Saudi Arabian annual budget expects this to result in a budget deficit of $ 17 billion as compared to a budget surplus of $ 11 bollion in 2008. Dubai too has unveiled an 11 percent increase in government spending. The annual budget of Dubai expects this to result in a budget deficit for the first time in Dubai to an extent of 1.3 percent to Dubai’s GDP.
However, Kuwait posted a contraction in its budget both in revenues and expenditures. The government expenditures as detailed in the annual budget for 2009 are all set to reduce by 36 percent and the revenues are budgeted to reduce by 39 percent. Analyst expectations on Qatar is also on similar lines with expenditures expected to be same as that of 2008.

 


The authors believe that an enhanced fiscal stimulus is a must in the current scenario and should be approached along with monetary easing.

 


The authors believed that there is a lot more room to reduce interest rates. Most of the other GCC countries have cut their interest rates inline with the fed rate cuts. However, the quantum of decline has not been matched. Saudi Arabia started 2008 with its policy rate at 5.5 percent and ended the year with a rate of 2.5 percent. The central bank of Saudi Arabia did not cut its interest rates till October 2008, by which time the Fed had already moved its benchmark rate from 4.25 percent to 1.5 percent.

 


The report noted that deposit rates in the GCC region have already been cut in almost all the countries ex-Kuwait. Kuwait is the only country in the GCC to witness an increase in deposit rate in 2008.

 

 

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