This research material discusses the scenario prevailing in the Global economy and provides a glimpse on the effects of the global financial crisis and the significant measures taken under the theme of 'God's Global Governance'
As a whole, GCC states control 45% of the world's oil reserves, and 18% of the world's natural gas reserves. The GCC has emerged as a role model for the transformation on economic and social fronts. The world's increasing energy demand has enabled the GCC states to generate a considerable fiscal surplus, thereby substantially improving the balance of payments position. Key policy initiatives have been instituted in order to diversify the predominantly oil-based economies and also to propel non-oil sectors. This has resulted in a massive infrastructural creation and industrial expansion. This multi-sector development has changed the face of the GCC completely since year 2000. Furthermore, the GCC as a bloc now has a unified stand on most of the key issues including the currency union, controlling inflation, management of liquidity, etc. Regular coordination and working towards common issues are making the GCC stronger day by day.
The GCC economies have a similar macro-economic composition and an increased degree of openness in investment, trade and commerce policies. Capital has abounded with the modernization and creation of infrastructure. GCC economies have also been more resilient to the crisis due to measures taken by governments and regulators. The GDP per-capita is the highest amongst ranking countries. GCC economies have a huge fiscal surplus, investable surplus and current account surplus, due to hydrocarbon exports. The budgets of Saudi Arabia and Oman are based on a higher oil price when compared to 2011, and the emphasis has been on the infrastructure sector.
During the boom phase between 2003 and 2008, inflation in the Gulf states were running in the double-digits - parity linked dollar was fueling the inflation. Whether the Gulf States should delink from the dollar or devalue their currency was the question. America's role in the Gulf States is strategic, and delinking from dollar was not an option, I expressed my opinion on this in the CNBC interview in London in March 2008.
When the dollar was getting weak in early 2008, the GCC countries had little option but to revisit their currency link to the dollar. The first option was tore-peg and the second option was to delink, whereas the final option could be that the GCC has a unified common currency. The lesson we have learned from the EU is the key. Designing the currency under a set of criteria, whether deficit financing, gross debt to GDP, inflation etc., are defined by rules. It is not the rules alone which can decide the fate of the currency, but practicing it and enforcing it to stay within the union is paramount. Whether and when it will happen in the GCC is the question.
During the crisis, real commodity driven economies such as the GCC experienced limited access to funds, an increase in the cost of fund procurement, a weak securities market, reduced cash flows for businesses, a rise in credit losses, an increase in balance sheet risks due to asset price deflations, lower profit levels among businesses, volatility in the commodities market, a reduction in trade freedom, increased government intervention, and shifts in consumer behavior.
Consumer confidence was down and interbank lending and money market lending had dried up. Institutions did not trust each other, because there was no creation of credit. Stock markets took a blow because the hedge fund holders disinvested as the housing market was drying up. It must have provided a good opportunity to buy Qatari banks
The GCC Is resilient because the macroeconomic fundamentals are strong.
While the Gulf region was booming, Islamic banking gained momentum, evidenced by a huge creation of infrastructure. The property boom was visibly supporting Islamic banking, because asset-backed securitization is the Sharia norm. People preferred equity financing over debt financing. At the same time, the financial crisis did not even spare Islamic banking. Instead of asset-backed transactions, asset-based securitization was invented, as the property market was booming. This is contrary to Sharia principles, as many of the institutions derailed their practices in order to face the downturn during the property market collapse. The Qatar Government agreed to take a 20% stake in all Qatari banks. Interbank guarantees and deposit guarantees were provided, and regulators took measures in a co-ordinated manner. We expected confidence to be restored after a point in time.
Gulf economies are trillion dollar economies, and the GOP and the per capita income is growing. Real economies, such as GCC, are here to stay, and the financial economies will have to convert. In February 2009, the Dubai Government issued US$20 billion in long term bonds, with the first installment fully subscribed by the UAE central bank. In February 2009, Abu Dhabi raised US$3 billion through a bond issuance.
In the first Quarter of 2009, the Government of Qatar bought US$1.8 billion worth of local Qatari banks' portfolios of local shares listed on the Qatar Exchange. Subsequent to this, in June 2009, the State of Qatar bought US$4.12 billion of banks' real estate investments.
The precautionary measures adopted by the government towards the banking sector have enhanced the ability of banks to cope with any possible repercussions from the global financial crisis, in spite of the robustness and stability of the banking system. This clearly reflected the government support to the Qatari banking sector, as it wished to continue its leading role in the development process and to promote sustainable economic growth.
The Banking Supervision division of the Qatar Central Bank (QCB) periodically tested the stress of all the Qatari banks for exposure to the securities and real estate markets, including respective collateral coverage. In addition, the QCB also mandated that all Qatari banks create a risk reserve to cover contingencies on loans and advances with a minimum requirement of 1.5%-2%, after excluding provisions and exposures against cash collaterals. These risk management mechanisms have enabled professionals to monitor and manage the whole system proactively.
These measures were adopted by the Qatari Government to improve consumer confidence in the banking industry and to manage the systemic risks as well. It has also enhanced the ability of banks to cope with any possible repercussions of the global financial crisis. This clearly reflected the support of the Government to the Qatari banking sector.
The property market downturn around the world and especially in Dubai has created extraordinary distress. Dubai's ability to meet its commitments and obligations was put to the test, as the creditors in the financial institutions were blowing the issue - Dubai is an integral part of the UAE, a nation that has set a vision for its future. The kind of infrastructure Dubai has created - seaports or airports, road or rail networks, is testimony to the fact that it has a constructive strategy for a long term vision. In December 2009, I told BBC and CNBC that it would only be a matter of time before it would rebound.
Around this time, Dubai received a US$10 billion bailout from its neighboring oil-rich emirate Abu Dhabi to pay part of government owned conglomerate Dubai World's debt, as well as its struggling property unit Nakheel.
The Government of Dubai, acting through the Dubai Financial Support fund (DFSF), negotiated with creditors for the restructuring of its debt. The DFSF provided significant financial support for Dubai World and Nakheel. In March 2011, Dubai World finally agreed to a debt restructuring deal.
If we look at all these factors, we can see that the model has worked, as GCC economies have made progress in social, political and economic areas. The realignment will take place- it is now a question of time.
In January 2011, Qatar Investment Authority (QIA) acquired another 10 percent of the promised 20 percent stake in Qatari banks, reflecting the Government's continued support for the banks to strengthen their financial positions
Some GCC financial institutions introduced a crisis monitoring team, tightened the cash management system, allowed credit following a thorough risk evaluation, initiated key working capital initiatives, looked for opportunities to restructure the debt, focused on cost & organizational efficiency, kept real-time communication with all stakeholders, and adapted product portfolios to change consumer behavior.
The ongoing global financial crisis is indeed an opportunity for all commodity driven economies, such as the GCC, to showcase their fundamental strengths and come out of the crisis even stronger. New Qatari regulations in 2011 impacted retail consistent with global regulatory reforms. The new ceiling on personal loans will not curtail consumer lending. In fact, it is positively synchronized to encourage the banking sector to steer much of the funds and surplus into venture financing, which is undeniably linked to the aggregate productivity of the economy. Rulings that are related to risk management, and eligibility in correlations to the customer's financial commitments will help banks combat non-performing loans, and reduce the risk of customer's defaults. "Qatar Credit Bureau" was introduced in March 2011 to support growth of credit on sustainable basis. lt will also support implementation of risk management through provision of analytical data.
We are confident that the worst in the banking sector industry is over. Financial stability is the key for the regional market. Qatar has developed a public private partnership to build up its financial stability. Regional regulators employed customized solutions to handle the crisis, and the result has been overall financial stability, except in certain pockets of UAE.
Qatar has been judicious with its sovereign funds
Qatar had put money in Barclays, and got into a deal with Sainsbury. Qatar and other GCC economies have diversified and have not confined themselves to oil and gas. It should move into new sectors for long term sustainable revenue generation.
Politics or Economics
In June 2008, Qatar invested in Barclays as a part of a structured diversification strategy. Over £2.3 billion was invested in Barclays. When I was interviewed by the BBC and asked the wisdom of this financial investment, the anchor even went on to ask me whether it was a political or economic decision. My answer was candid, as I saw justification in diversification and also a possible return on the investment that happened thereafter.
In spite of material prosperity, Qatar is a model for governance, as it has converted material prosperity into the changing habits of people. Clearly a move towards economic progression and political progression has been the key to sustainable prosperity for the gross welfare of the common man.
Qatar is a very small country. Look at its model of governance. Their representation in the United Nations Security Council is a clear example of their political progression. When it comes to social progression, health care and education plays a bigger role in society. Qatar has diversified in spite of its oil rich prosperity. It has diversified toward the London stock exchange and Barclays, and has invested in its long-term sustainable performance.
Essentially, the wealth distribution has taken place through multiple forms or multiple offerings. Clearly there is wealth distribution in the society. What need to be done is to alter the vision; to convert material prosperity into changing minds and habits. We should productively deploy excess money towards welfare of the society, both internally and externally. This is what Qatar has started. Investments and joint venture partnerships are taking place, and Qatar is playing a central role in mediation. Whether investing in India or Singapore or Lebanon or Japan or Korea, there is a character depiction in its investments. When it comes to internal development, education is the key.
As Qatar looks to the future, it looks beyond its current dependence on oil and natural gas, and to a world where a green economy will underpin all of its major achievements. It is my firm belief that there is no other way forward for the economies of our future. This may seem counterintuitive, as Qatar's economy is built on oil and natural revenues. But this cannot last forever. Not only does Qatar see the importance in diversifying the economy and moving away from a dependence on hydrocarbon industry, but they also recognize that in the long term, the dependence will have a negative impact on the global environment. Therefore, in addition to other steps, Qatar will encourage active investment in carbon credits in order to achieve an ecological balance throughout the global marketplace. The Qatar National Development Strategy is baaed on Qatar's National Vision 2030, which has also placed environmental development as one of the pillars of its vision. The environment will also support the millennium goal of "Ensuring environmental sustainability."
If we look at the bigger picture, there is integration within GCC states. The Qatar Exchange, Central Bank, Financial Market authority, and the Qatar Financial Centre all are integrated into a unified vision. Qatar has its vision for 2030, and it is focused on social, economic and political progression. The model is quite unique from the rest of the market. Qatar has a vision and a plan for professional execution.
In June 2013 His Highness Sheikh Tamim bin Hamad Al Thani became the Emir of Qatar after his father His Highness Sheikh Hamad bin Khalifa Al Thani hands power to him. This development paves the way to pursue the development and growth process framed by HH the Father Emir Sheikh Hamad bin Khalifa al-Thani, giving the country its distinguished international position.
The GCC region is insulated because of economic progression, and not isolated from global risks. The Quantitative easing and stimulus worked, but we should look at the enterprise risk management with a focus on systematic risks and market risks. We have to look at the Basel framework, and we need to look into liquidity risks. Operational risk needs to be fine-tuned again, and credit risk needs to be realigned for cross border deals. Liquidity management measures need to be realigned for a GCC regulatory framework.
The realignment of capital adequacy norms and the creation of risk reserves will be of paramount importance. We must conserve reserves and increase the capital.
Dubai will come out of its downturn. In 2011, Dubai World signed a restructuring deal for US$25 billion of debt. As part of the deal it will return US$4.4 billion to bank creditors in five years and US$10.3 billion in eight years. It will also convert US$10.5 billion of loans to the Dubai government as equity.
In August 2011, Nakheel restructured its debt of US$16.06 billion, which includes US$8.71 billion of government debt to be converted into equity. The remaining US$7.9 billion is owed to trade creditors and banks. Bank creditors will be offered an interest rate of 4 percent over the London Interbank Offered Rate LIBOR / EIBOR, and repaid after five years. Trade creditors already received 40 per cent of what they were owed through cash payments.
The Impact of Arab Spring
The Arab Spring has been of enormous importance for North African political change, and has impacted the Gulf's financial markets. It is only incidental that gross welfare to the mass of Arab brothers is integral. This also aligns with my comment on the Libya turnover and the other developments in the Gulf States.
In the first Quarter of 2011, Saudi Arabia announced US$36 billion worth of financial support measures to improve education, infrastructure and healthcare. In March 2011, Saudi Arabia announced financial support measures worth SAR350 billion (US$93 billion). The Central Bank of Bahrain's (CBB) Governor has confirmed that there was no major capital flight in Bahrain due to recent tensions. The CBB Governor assured the banks that the CBB will continue to cooperate and support the retail banks.
The GCC capital markets witnessed a downturn in the first quarter of 2011 on account of the Arab Spring. The Credit Default Swap (CDS) spreads moved up. However, Qatar and Abu Dhabi are not similar to Egypt. Hence these swings provided opportunity to invest in Qatar markets. The markets got back on track.
Following the Arab Spring, the Middle East and North Africa (MENA) region requires social governance, which will bring stability. Social governance measures have been taken by GCC states.
Comments on Libya and the Arab Spring
From the beginning of Arab Spring I was outspoken about expecting a transformation in Libya, and when I was questioned on Fox News Channel in April 2011 on Qatar and America's role in Libya, I emphasised that America's role was not just confined to military in the Middle East but must also extends to trade, investment and finance. Finally, in October 2011 my comments were proven right.
Muammar Gadhafi's death
As Libya is one of the biggest producers of oil and allied products, the turmoil in Libya had the attention of every nation in the world. I landed in Sydney in October 2011 and saw the news of Colonel Gadhafi's death. The question remains what impact the Arab Spring will have on the overall political stability of the Arab world, and also what it means to 'financial markets, including the oil markets. Libya has been blessed with vast natural resources. Political stability should provide enormous opportunities to enrich the nation and its people in the years to come, whether it will be medium or long term, time will prove but one thing is certain - freedom, democracy and empowerment of people will enrich human dignity.
EGYPT UNREST – JULY 2013
The human dignity freedom has been redefined after the Egypt political unrest in July 2013. Egypt crisis has global implications and international aids are at stake. Their should be functional democracy, political and financial stability resulting in gross welfare to the mass. Political tensions in Egypt had sent the oil prices on concerns in the Suez Canal and emerging markets growth can be at stake. In 2011 the beginning of Arab spring sent GCC markets down and bond yields up. Qatar has added value to the Arab world. It needs to be seen how politics and economics converge.
Small and medium size enterprises
The Arab spring impacted both social progression and economic progression. Employment opportunities and growth are integral to the sustainability of the Arab world. We must promote small and medium sized business by facilitating social entrepreneurship, thereby delivering jobs and growth in labor market, as a result of social and political progress.
Political stability will come as long as welfare is provided to the masses. A diversification strategy should also bring political stability. We have to ensure that financial reforms result in financial and political stability.
Opportunities and unrest in the Middle East