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All together now

All together now

Global markets have been brought to their knees. It’s time for the GCC pull its resources together. If not now, when?

October 21, 2008 10:03 by

Nader Habibi

Despite strong economic fundamentals and adequate liquidity, the financial institutions of GCC (Gulf Cooperation Council) countries have not been immune from the volatility of global financial markets in recent weeks. As a result of their greater integration with the global economy, GCC stock markets have experienced unprecedented volatility since early September.
The investors in GCC markets still have fresh memories of the 2006 decline which eroded nearly 65 percent of the share values in Saudi stock market while other GCC markets also declined by 30 percent to 70 percent during the same period. Fear of a similar downfall can lead to more volatility in the next few weeks.
The GCC governments are clearly concerned about the health of their financial markets and have already taken individual steps to restore confidence. Saudi Arabia has reduced the interbank (Repo) rate and has also lowered the commercial banks’ reserve requirements from 13 to 10 percent. This measure will allow the banks to offer more credit to their customers. The UAE Cabinet has approved a plan to ease the restrictions on share buybacks by listed companies. Now the listed firms no longer have to list their results before being allowed to buy back their own stocks.
Some other policies that some GCC governments are implementing in response to the current crisis include direct support for real estate prices; more restrict limits on daily share price fluctuations, and strengthening the bank deposit insurance coverage. The Kuwait Investment Authority and Qatar Investment Authority are also supporting their respective stock markets by large quantities of share purchases.
There is no doubt that these measures will have a positive effect on GCC financial markets. But if GCC governments do not coordinate their policies, the lack of coordination can lead to large flows of money across GCC markets and cause more instability. The GCC stock markets and banks are highly interconnected and as one Gulf state takes the lead in restoring confidence in its financial markets, investors might move their assets from other GCC markets into that country. This can put additional downward pressure on other Gulf markets. This will force other GCC governments to take even more drastic measures to support their national markets, which might cause further unnecessary capital movements.
This scenario is best demonstrated by what happened in European financial markets recently. Without prior coordination with other EU members, the Irish government augmented its deposit insurance policy to insure all bank deposits without any size limit. In response to this policy investors in many European countries moved their bank savings to Irish banks, causing significant liquidity shortages in other EU member countries.
In response to this unilateral Irish policy other EU governments were forced to raise their own deposit insurance ceilings.
The Irish government’s unilateral policy drew considerable criticism from other EU governments and weakened the Union’s ability to offer a coordinated response to the crisis. Fortunately, the EU governments have been able to implement a more coordinated response in the more recent days and as a result they have made more progress in calming their markets.
The GCC markets, along with other stock markets worldwide, have enjoyed a rebound in recent days but the risk of volatility remains high. Since there are no restrictions on flow of capital among GCC financial markets, the GCC governments must follow the example of European Union and coordinate their responses to this global crisis. If they fail to do so, their uncoordinated policies can prove costly and cause more volatility in their financial markets.

(Nader Habibi is the Henry J. Leir professor of Middle East economics at Brandeis University. This article was first seen in Arab News)

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