That Sinking Feeling

The financial situation in the Gulf continues to worsen despite assurances from Gulf finance ministers over the weekend that local economies remain stable. Kuwait was hit strongest on Sunday when trading of shares in Gulf Bank, the emirate's second largest bank, were suspended after it was revealed that the bank had made significant losses in derivative trading. Although the bank offered no details, officials from the Central Bank of Kuwait told the Financial Times that the losses were estimated at around $800 million, triggered by the fall in the euro's value against the dollar. The announcement prompted CBK to appoint a supervisor to monitor Gulf Bank's treasury management and monetary market activity. The announcement also sent a wave of panic among Kuwaiti traders, who for the second time in as many days staged a walkout to protest for more government intervention in the falling stock market.

The Kuwaiti government on Sunday introduced an emergency bill into the National Assembly guaranteeing all bank deposits. The government had been resisting such a move and as late as 24 October said it would not offer any guarantees as the banks were in good shape. Kuwait's moves follow those of Saudi Arabia, who on the 21st of October deposited between $2-$3 billion into local banks to ease a shortfall of funds. The Saudi government also guaranteed bank deposits and reduced compulsory bank reserves from 13 to 10 percent. Qatar, on the other hand, pumped $5.3 billion into its financial system by acquiring shares of listed local banks. Most GCC governments have also lowered interest rates in recent weeks.

All of these moves follow another wretched month for local stock markets. The most recent estimates put stock market losses in the Gulf at $200 billion in October so far, topping September's abysmal losses of $150 billion. Gulf finance and economy ministers met over the weekend to discuss a common strategy for dealing with the crisis. As expected, nothing substantial came out of the meeting with all governments claiming unity but choosing unilateral action instead. Although no one was surprised by this outcome, the IMF director for the Middle East and Central Asia warned in an interview with the UAE's Khaleej Times that "a coordinated approach to the issue by all member states is the need of the hour." One can't help but agree as it seems likely that Gulf Bank's losses will be only the tip of the iceberg.

If Gulf governments learn any lesson from the financial crisis as it unfolds in the West, it should be to come clean as quickly as possible. Trying to hide the existence of losses or deny problems will only prolong the crisis and increase its scope as investors try to guess where the bottom might be. US, European, and Asian markets are largely still in a downward spiral set off by Lehman's failure. (Performance in recent days excluded.) Sadly, early moves by Gulf governments appear to be following the opaque, deny all problems approach. Saudi Finance Minister Assaf's statement over the weekend that the Gulf economies are showing "strong indications of relatively higher growth rates" is weirdly reminiscent of comments made on the US campaign trail. Later in the statement Assaf puts Gulf growth rates at between 4 to 6 percent in 2008. If achieved, such growth rates do put the Gulf ahead of most of the rest of the world but are down signficantly from where the IMF forecast the Gulf to be at 7.1 percent. Assaf and the CBK should be more upfront about the problem. In this current environment, better to swallow the hard pill up front than to have to guess at the size of the dose down the road.