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Eye of the storm
While some Arab governments appear to have successfully fought off the worst effects of the global economic crisis, long-term challenges loom.
May 12, 2009 3:06 by Ed Blanche
The government’s response to the crisis has been haphazard, and may have done more harm than good. Despite hefty state intervention, the country’s stock exchange lost more than 40 percent of its value between November and January.
“Kuwait did it in a confusing way, backward and forward, with different figures for the rescue thrown around, and with a lack of coordination,” says Fadi Al Said, regional head of equities at ING Investment Management. “They hoped that a lot of announcements would bolster sentiment, but it’s done the opposite – investors don’t like uncertainty.”
Kuwait’s cabinet resigned on March 16, four months after its predecessor quit in late November. The March resignation helped keep the prime minister, Sheikh Nasser Al Mohammed Al Sabah, from being grilled by the National Assembly over a long-delayed $5 billion financial-sector support package.
This was designed to encourage domestic commercial banks to refinance debts from local investment firms, which the World Bank says are worth approximately $17 billion. And it was finally put into action in early April.
But the uncertainty continues to take its toll. Multibillion-dollar industrial projects, vital for upgrading the emirate’s energy industry, have been cancelled. Moody’s rating agency recently put Kuwait’s sovereign and banking bonds under review, citing “erosion of institutional strength,” and paving the way for a possible ratings downgrade.
The full impact of the global meltdown is only now being felt in the developing world. According to Michael Klare, an American academic and the author of “Rising Powers, Shrinking Plant: the New Geopolitics of Energy,” the global downturn could have catastrophic results outside the West. High food prices will be one of the critical catalysts, considering the GCC states import almost all of their food.
“Because the crisis was largely precipitated by the collapse of the housing market in the United States and the resulting disintegration of financial products derived from the ‘securitization’ of questionable mortgages,” Klare observes, “most developing countries were unaffected by the early stages of the meltdown, for the simple reason that they possessed few such assets.
“As the wealthier nations cease investing in the developing world or acquiring its exports, the crisis is hitting them with a vengeance,” he continues. “Conditions are deteriorating at a time when severe drought is affecting many key food-producing regions.”
The GCC states have been buying up tracts of farmland in Africa, Asia and Latin America in recent years, to ensure their food security in future decades. The endeavor has many critics, who say it contains the seeds of trouble and will come under threat as poor developing states struggle to feed their citizens.
First seen in Trends magazine.