The Global Financial Crisis - Report Example

Introduction The Global Financial Crisis (GFC) started in the US in 2008 before sweeping across Europe. It is dramatically similar to the current crisis being felt in the Arab world all the way from North Africa to the middle. The Arab Stock Market in the Middle East and North Africa was mainly shielded by the minimal direct interaction with the US and European markets and its petrodollars. However, the GFC definitely had a direct impact on the unfolding Arab stocks crisis of 2009 (The Saudi Gazette, 2009). The cause of both crises is very similar. In the US, banks went on a lending spree to customers seeking mortgages to build or buy homes. This caused what has come to be known as “bursting of the housing bubble” in 2005-2006. Suddenly there was a steep rise of defaulters who could not pay their mortgages. The banks reacted by raising the adjustable rate mortgages thus making it impossible for those who had loans in the category to pay. The result was a drop in the value of houses below the rate of the mortgages (Uchitelle, 2008). As shall be discussed below, the situation in the Middle East is quite. Similarities of the Crises Once the prices of houses dropped in the US, an incredible opportunity for entrepreneurs availed itself. That is when cash began to flow in from, among other sources, the Middle East. Those with lots of petrodollars in the region rushed to buy the cheap houses in 2007, flooding the already unstable US market with more dollars, the last thing the market needed. Soon problems appeared in the bourses with the value of stocks plunging and investors beginning to take a run. According to a joint staff article of the Saudi Gazette online (2009, 31 July) in a story titled; ‘Arab Stock Markets Plunge’, in Saudi Arabia a very similar situation, stemming from financial overconfidence and arrogance, occurred at the beginning of 2009. At the time there was an economic boom in the kingdom in particular, and in the Middle East in general. Investors were talking in superlative terms. Among the hot topics were building the tallest tower, the largest artificial island, the biggest shopping mall and the most extensive airport in the world. The plans they unveiled topped US$ 100 billion projected for 2009 alone. All along, the feeling in the region was that they would not be affected by the GFC. The story further says that during the dark three days 27-29 of July 2009, the prevailing confidence collapsed like a stack of dominoes. The Tadawul or Saudi Arabian stock market, the largest in the ME, dropped 7.03 %, which was the lowest point since it was reformulated in 2007. The second largest bourse in the region, Dubai, fell by 3.9 %, the worst performance in 16 months. But the most amazing drop was in Egypt where the bourse lost 16 % effectively wiping gout all the gains since 2006. By this time, it was quite obvious that the superlative terms were now in terms of losses. In total the seven leading bourses in the region lost a combined $ 150 billion in those three days alone. Reactions of the Arab World Some banks such as the Al-Rajhi, Al-Riyadh, Saudi French and Saudi Hollandi say that they have not been affected by the crisis so far. Many rank and file citizens of the region are not even aware of any developing crisis and at best tend to share, albeit out of ignorance, in this optimism. On the contrary, the Saudi Arabian Monetary Agency (SAMA) does not feel this confidence. It says that the Central Bank of the Kingdom is already finding it hard to lend the banks money and control inflation at the same time. The difficulty is further compounded by the run of investors on the bourse in the face of declining public confidence (Cho & Appelbaum 2008). The unfolding saga sadly reminds the world of similar happenings in America before the situation of the GFC worsened. At first some people thought it was not their problem seeing as it affected only Banks and mortgage holders. Soon enough, no one could claim it didn’t affect them anymore. Especially when it spilled over to the stock market, major corporations and ultimately in the dicey job market. However, countries from the Middle East and North Africcan Region (MENA) that have traditional strong trade ties with Europe such as Morocco, Tunisia and Egypt felt the impact of the GFC as early as 2008 when they went through food crises following reduced trading with their partner. Many in the Arab world now feel that it is not going to be any different in the current Middle East situation. The looming feeling in the region is that it is going to get worse, unless something is done urgently. One of the positions that have been taken on the issue is that of Kuwaiti stock trader Khaled Al-Awadi who has sued the Kuwaiti government and stock exchange in court, to compel the closure of the stock exchange as a control measure against the slipping stocks. A very radical measure perhaps but as economist Ali Al-Nimesh argues, Kuwait is a part of the world and has been affected both psychologically as well as practically by the GFC. Its comparatively close ties with both the European and American markets have put it on the direct line of fire of the GFC. Therefore, many stockbrokers have threatened to enjoin themselves to the Al-Awadi lawsuit. The Kuwait Government has already gone a step further. They have already asked for the merger of two main of the construction companies in the region Deyaar and Union Properties. The reasoning is that financing problems have worsened and the merger could enable the two to just survive it. This reflects on the fears of the Government that the crisis is only getting worse hence their adoption of a better safe than sorry attitude. Some markets have not really been affected yet. Countries such as Iran, United Arab Emirates (UAE) and Oman have still got nothing adverse to report. This is mainly due to their little trade involvement in the epicenter of the GFC phenomenon. Another handy cushion is the oil dollars, which keep flowing in the face of increasing oil prices. Iran and Oman for example did not involve themselves significantly in the rush to buy property in the US in the face of the drop in housing prices. The most involved were Saudi Arabia, United Arab Emirates (UAE) and, of course, Kuwait. All the same, provided that there will still be markets for oil in the world, which is inevitable in the foreseeable future, the Arab Oil Producers, who are among the largest stabilizing economies in the Middle East and North African region, then there will still be a threshold of survival for the countries (Doing Business And Investing in United Arab Emirates, 2005). Politics in the Arab World has also favored some countries in the region in the face of the GFC. It is no secret that Iran and Libya do not particularly have a warm relationship with the US and its European allies. As such trading between them has been cagey at best. This has ironically acted as a shield for them against the worst of the GFC ravages. Another political aspect is that traditionally, the Arab countries have not had the kind of unity that enables them to have the any strong trading blocks. Apart from OPEC, which some of the non-major oil producers do not even belong to, nothing binds the countries strongly together. Even Islam and hatred for Israel do not really tie the countries strongly (Baaghil 2007). Countries such as Saudi Arabia and Kuwait have always been US allies and trade partners even as Palestine sees itself as a victim of US injustices. Iraq and Iran do not see eye to eye on almost anything including strong trade ties. This disunity is very bad and normal circumstances, but it generally stems the flow of such crises as the GFC. The stronger the trade ties between individuals and countries, the faster the spread of the effects of the crisis. That is why Europe is mainly seen as a victim of American financial malpractices where the GFC is concerned. Another factor in the region is the emergence of China and other Far East tigers as trading partners for the Arabs (Kouame A., 2009). Their direct dependence on the west for trade opportunities has therefore greatly reduced. Many countries in the Arab World have always felt that the strings that come attached with trading involving the Breton Woods Institutions, that are heavily dominated by Western Countries, have continued to impact negatively on their culture and religious beliefs. This new relief from the Far East does not come loaded with concepts of democracy, freedom, free market policies and sanctions, like the Western model. The new trade routes have also inadvertently shielded the Arab countries from the direct impact of the GFC. Even though the Far East countries such as China, Japan, South Korea and Malaysia are themselves deeply immersed in the GFC, their involvement with the Arab world does not directly translate into a crisis for the latter. Religion has itself played a major role in cushioning the Arab world against the worst of the GFCs ravages. Islam, which is the dominant religion, does have its advantages under such circumstances. The Sharia governing the religion does not allow certain banking practices. One of the factors that are strictly controlled is profiteering schemes by both banks and customers. The uncontrolled lending by the western banks that aggravated the GFC in the West are therefore not likely to happen to the same extent in the Arab world. A case in point is the Adjustable Rate Mortgages, which some American banks used to try and recoup the losses they had incurred from other unpaid mortgages. It is simply impossible to arbitrarily increase rates without any consultation with the customer under Sharia. Conclusion At the moment things look pretty in most countries in the Arab World as far as the issue of the GFC is concerned. There are even citizens in the region who may not have heard about the GFC. Conversely, this situation is already looking unsustainable especially as the GFC takes longer to resolve in the rest of the world. With the signs that are already being seen in the Stock Markets in the region and panic reactions such as the proposed merger of Kuwaiti construction companies, it is only a matter of time before the true impacts of the GFC begin to be felt more strongly in the region. When this happens, it can only be hoped that petrodollars, religious factors and newly emergent trade factors will cushion the region from deteriorating too much. But anyone who relaxes and shoos away the rest of the world as none of their business will be in for a shock. References Cho, D. & Appelbaum, B. (2008-10-07). "Unfolding Worldwide Turmoil Could Reverse Years of Prosperity ". The Washington Post. Retrieved 2009, July 30. Doing Business and Investing in the United Arab Emirates (2005). Intl Business Pubns USA. Baaghil S. A. (2007). Eccentric Marketing: Awakening the Arab Business World to the Benefits of Branding. New York: iUniverse Publishers. Kouame A. (2009, July, 14) Impact of the Global Finacial Crisis on MENA Countries. The World Bank Group. Saudi Gazette Staff (2009, 30 July). Arab Stock Markets Plunge. Uchitelle, L. (2008, September 18). "Pain Spreads as Credit Vise Grows Tighter.” The New York Times. . Retrieved 2009, July 30 Saif, I. (2009, April). Arab Country Responses to the Global Economic Crisis. Farah Choucair International Economic Bulletin. Read More