We can see from the graph that Iraq is the highest, i.e the most change in the Dollar amount since 2005, mainly due to the reconstruction of Iraq after the war. The UAE comes second. But what is interesting to see is that in April/May of 2009, developments in the UAE dropped substantially, since many companies cancelled their projects due to liquidity constraints. No other country saw that big of a drop. What made me curious is that Qatar is the most lagging country among the pool, which is hard to believe since we hear a lot about projects in Qatar, especially relating to the Oil and Gas industry.

It seems that the UAE was right all the way when it pulled out of the new GCC Monetary Council after Saudi Arabia, home to the world’s largest proven reserves of crude oil, was selected to house the proposed central bank.

Last week, Saudi Arabian Monetary Agency (SAMA) governor Mohammed Al-Jasser was elected the first chairman of the GCC Monetary Council in Riyadh and Rasheed Al-Maraj, Bahrain Central Bank governor, was chosen as his deputy. Both will hold the positions for one year before the slots rotate to Kuwait and Qatar.

The Appointment of Mohammed Al-Jasser underscores Saudi Arabia’s dominance in the single currency project. Back in May 2009, the UAE withdrew from the GCC Monetary Council when Riyadh was chosen to host the Gulf Monetary Council. It feared that Saudi Arabia would have more control over the union since Riyadh was the headquarter of the GCC council. Well, today we can all agree that Saudi Arabia obviously wants it all! While at first it was only fair that Saudi Arabia would host the Council as it is the largest economy in the Gulf region.(47% of GCC GDP). Today, it’s nothing close to fair when compared to the European Central Bank, where the two largest economies share control of the ECB with Germany playing host and France appointing the head.

“From Saudi Arabia’s position, it shows a clear commitment to bring all the countries closer together and move toward the currency union,” said John Sfakianakis, chief economist at the Riyadh-based Banque Saudi Fransi-Credit Agricole Group.

Is Saudi Arabia really demonstrating a clear commitment to bring all the countries together and more towards the monetary union? Or is it simply enjoys control?

We have been covering the whole GCC Monetary Council debacle at Alpha Dinar as it evolved. Below is a list of previous articles in chronological order:

• Did the UAE Pull the Trigger on the Gulf Monetary Union?
• Saudi Arabia to UAE: GCC Central Bank location is final.
• Part 1 of Saudi Retaliation: SEARCH ALL those Trucks!
• UAE Back in GCC Monetary Union? Probably.

By Naser:

The global recession has taught many lessons. Some lessons were global, while others more focused on the Arabian Gulf region. One of the lessons that I personally derived from the crisis is that we need formal Bankruptcy Laws that clearly state when a company is considered as bankrupt, and states the rights of each party related to the company.

The definition of bankruptcy globally is when a company fails to fulfill their financial commitments, such as not paying their debtors and bondholders. Once they fail to pay, all the company’s debt matures, and they go through bankruptcy. The company is then either reorganized with debt holders becoming the new owners, or the company’s assets are sold to help repay debt holders. Any excess value would be distributed to equity holders which are on the bottom of the list.

During the past year, the GCC region has seen many potential bankruptcy candidates popp up. Various companies weren’t fulfilling their commitments and their debt was maturing without going into bankruptcy. Some of the notorious examples are Global Investment House, Investment Dar, Safat Group, and Dubai World. These companies setup meetings with their creditors and attempted to amend the covenants of their debt without changing the ownership structure. This keeps shareholders and the whole business community in the dark with regards to the financial health of the company, and it smears its reputation and credibility. Global Investment House were successful in striking a deal with their creditors, and Abu Dhabi stepped in to bail out Dubai World.

We need laws similar to the Chapter 7 (Liquidation) and 11 (Reorganization) Bankruptcy laws in the US. Further, we must establish a bankruptcy court. Such laws would protect the rights of creditors and bondholders. It will also keep management in check and would not allow them to simply stop paying creditors without any serious repercussions.

by SAL:

Forrest, Joe Schmoe, or whatever name you would call that everyday person who came to the Arabian Gulf in search for a high paying job, extravagant life, and quick promotional ladder; quick transformation from the rags to riches in a year, or maybe two, and ask the rhetorical question. Am I full yet? Well, the emotional side of Forest has been given enough media coverage in previous months and is not the subject of our discussion today.

In this article, Forrest is not only that expatriate, but also his spending habits and the huge cash inflow that came with it. As the economic downturn took its toll on the region, FDI inflow started to shrink and investor confidence in the region started to deteriorate, in concourse with the economy.

The move to economic liberalization in the GCC coupled with the region’s strong economic prospects, surging oil prices, and improved regulatory environment attracted foreign investors to participate and deploy money. In fact, between 2005 and 2007 alone, FDI were 33% higher than their accumulated total over the last fifteen years or more than eight times the FDI flow into the GCC during the previous nine years!

The huge inflow of cash brought with it new expertise and managerial know-how to build and establish financial centers throughout the region. While national and regional barriers such as restrictions on ownership for foreign investors, rigidity of labor laws, lack of transparency and information sharing mechanisms limited FDI; they never seemed to reduce them. However, after reaching an all-time high of $1,979 billion in 2007, FDI inflows declined by 14.2% to $1,697 billion following the global economic crisis. FDI inflow to the GCC is expected to take a hit in 2009 that might even continue to 2010. Investor confidence has deteriorated in 2009 with a ripple effect that started with the political impasse in Kuwait and default of the two main leading investment firms Global Investment House KSCC and Investment Dar. The default of Ahmad Hamad Algosaibi & Brothers Co. and Saad Group in Saudi Arabia, and finally Dubai World projects have been delayed or suspended and is seeking a “standstill” agreement with creditors. With the delay and cancelation of projects, lack of transparency, tightening liquidity, tumbling real estate prices, and low investor confidence; How will money be attracted back into the region?

Default. In finance, default occurs when a debtor has does not meet his or her legal obligations according to the debt contract, e.g. has not made a scheduled payment, or has violated a loan covenant (condition) of the debt contract. A default is a failure to pay back a loan. It may occur if the debtor is either unwilling or unable to pay their debt. This can happen with all debt obligations including bonds, mortgages, loans, and promissory notes. (wikipedia)

This term was rarely heard of the good old days and was used only in textbooks not on Wall Street. After the collapse of Bear Stearns in the summer of ’07 and later Lehman Brothers, this term has been used in the papers daily. The wave of defaults has reached us here in the GCC on September of ’08 and what seemed to be impossible became so realistic as many companies became on the verge of bankruptcy. Reality has gotten uglier since governments and government-related entities (GREs) became new default candidates.

What will happen if Dubai World really defaults?

• Foreign investors will not be willing to invest and participate in the UAE credit market. This will spill0vver to Abu Dhabi and even prevent Abu Dhabi’s USD1 trillion spending program in the next decade owing to the fact that funding from local banks will be insufficient.

• Due to the added risk factor, cost of funds will be significantly higher specifically in Dubai, Abu Dhabi, and general GCC.

• The downgrade on several UAE GRE’s by rating agencies, making them non-investment grade securities, will plummet their prices as many global fixed income funds will liquidate non-investment grade securities.

• Creditors will force Dubai World and Dubai Holding to FIRE sell international assets, recognizing severe losses as most investments were bought at peak prices.

• GCC markets as a whole will feel the torment, as the banking system will fracture due to the high exposure to UAE GREs. This will further deteriorate loan books, thus adding further to the write-downs and possible bankruptcies, causing both equity and fixed income markets to collapse.

• The international community will begin to question the integrity of the UAE government and their dedication to their entities, which will lead to further FDI outflows.

With the expected introduction of the Gulf Cooperation Council (GCC) single currency in 2010, the peg issue is gaining a lot of momentum in the region these days. Should the unified currency be fixed to the U.S. dollar, to a basket of currencies, or simply let the currency float with ongoing exchange market interventions. In 2003, GCC countries pegged their currencies to the U.S. dollar in efforts to facilitate the launch of the Gulf monetary union and single currency. As close allies to the U.S. and oil exporting nations, GCC countries felt it was necessary to peg their currency to the dollar since their primary export, oil is sold in dollars. However, that has resulted occasionally in times of economic destabilization and surging inflation. Over time, GCC exports have become more diversified and a more flexible exchange rate policy such as pegging to a basket of currencies might provide more stability to the region.

As the U.S. dollar plunged to a 15-month low debate has intensified on the choice of type of exchange rate regime.  With the exception of Kuwait, which dropped its peg to the U.S. dollar in 2007 in favor of a basket of currencies, Bahrain, Saudi Arabia and Qatar are still pegged to the dollar. While Kuwait has no plans to return to the dollar peg, both Qatar and Saudi Arabia have repeatedly questioned their dollar currency peg.

Pegging to a basket of currencies has provided Kuwait with a more flexible monetary policy than it used to. With the extraordinary amount of debt the U.S. government has taken, weakening dollar, and record low interest rate- GCC countries should begin to reassess their exchange rate regimes before inflation gets out of control once again. The rising oil prices and anticipated growth in the GCC region could spur inflation once again.

Should they continue in lockstep with the U.S. monetary policy and simply wait for the Fed to raise interest rates, or is time to shift to a basket of currency peg?

I know I misquoted Clinton’s famous election phrase, “It’s the economy, stupid.” For the US in 1992, it was the economy. In Kuwait, people wonder what is our problem. Some say it is political, others say social, and the financially savvy like to point to the economic side as the culprit. The best answer to that question is, “It’s everything, stupid.” Everything: we are dysfunctional from a political, social, and economic perspective.

Political:

The country is daily riding a roller-coaster of politics orchestrated by a  cynical populist parliament and a fragile inefficient government. The political roller-coaster is circulating in a never-ending fashion from impeachment to dissolution. When is it going to end? I don’t want to elaborate on the political side. For more, refer to my previous post titled, “Parliamentary plays derail reform.”

Social:

Why it it that everyone in Kuwait regardless of their wealth live the most lavish lifestyle? The answer is simple: why not? Charge it on a credit card and expect the government to forgive loans. It is sad that a graduating senior from a Kuwaiti high-school’s dream is not to get into Harvard, but to drive a Maserati and upgrade to a Ferrari after college graduation. I remember a time when I was a kid and I used to enjoy going to my family’s weekly gathering to go to the supermarket and buy candy. You know what is a Kuwaiti kid’s dream nowadays? A Blackberry phone and an Abercrombie & Fitch t-shirt. This consumer mentality has to come to an end. More importantly, the parenthood relationship between the government and its citizens has to be abolished. There is severe moral hazard in our nation and its a vicious downward spiral cycle. Our government acts as a free collection agency for businesses. Our parliament sponsors morally hazardous acts such as sending families for tourism in the name of sickness and proposals such as debt forgiveness and “attractive” laid-off employee benefits. Our citizens enlist in unheard of universities in the likes of Zimbabwe and the Philippines to get a high-paying government job doing, well, nothing.

Economic:

We were the first to establish a stock market in the GCC, but today we are the only country without a governing Capital Markets Authority. It hurts, so I don’t want to talk about where we were, coulda, shoulda, and woulda. I wish I could say it in a different way, but what is happening in Kuwait’s stock market is a disaster. The domino effect is unstoppable without government intervention, regulation, and a complete overhaul of the economic system. We desperately need to instill confidence in our stock market. We want to send a message to everyone that what happened during Souq Al-Manakh crisis was a one-time event that isn’t currently in the making.

The government has to take the initiative and push for a new era of economic transparency and development. We need a Capital Markets Authority that acts as a watchdog that punishes all malpractices in the industry. Isn’t it humiliating to see the United States question manipulations by Kuwaiti individuals and companies while no one in Kuwait addresses these issues? Isn’t it ironic that market leaders are currently on the verge of bankruptcy? With added transparency, investors would have enhanced clarity and can potentially make an informed decision as opposed to gamble or leverage on an insider tip. Rest assured that the wounds of burnt foreign investors will take time to heal and it will be challenging to win them back. The establishment of a Capital Markets Authority is pivotal to the critical process of confidence restoration in our financial system. What we lack in Kuwait is priorities. Why don’t we organize and push for passing the Capital Markets Authority in the parliament? Let us prioritize our problems and address them in a one-by-one basis instead of being overwhelmed by their magnitude.

After the Agility controversy last week, people are left wondering what could stop the free-fall of our stock market? As with any solution, there is a short-term and long-term approach that need to be addressed in tandem. Establishing a Capital Markets Authority helps in the long-term, but shorter-term we have to focus on addressing the issue at hand. The reality is that our stock market is made-up of a few Chaebols*. These few Chaebols have numerous companies attached to them. These numerous companies ultimately depend on the success of the few and the few are all in trouble. The biggest four companies by market capitalization in the Kuwait Stock Exchange are Zain, NBK, KFH, and Agility. There used to be Dar and Global, but there are gone.  Zain is operationally challenged and its owners want to bail-out (but seemingly can’t), NBK will be hit hard if Zain owners can’t sell their stake, KFH depends heavily on real-estate and with the wealth destruction in Kuwait there is no hope there, and Agility’s sheer existence is being challenged by a complex fraud case.

I believe government intervention should be through recapitalizing banks. The government should simply buy a 5-10% stake through new share issuance by all banks. This will provide banks with much needed cushion for taking write-downs. Instead of the never-ending provisions drama, let us mark down these assets, take the hit, and move on. The US is a perfect example of such successful approach. Establishing a portfolio that buys into stocks and tries to lift the market is a very limited solution. The government is only addressing a symptom when it does that and should do that simultaneously with other solutions proposed.

*Chaebols: large, conglomerate family-controlled firms of South Korea characterized by strong ties with government agencies.