As stocks slid Sunday in Kuwait, a group of investors showed up at the Seif Palace, where they were met by the police, and tried to demand government intervention. (Gustavo Ferrari/AP)
The global economic crisis extended its reach into the Gulf states Sunday, as Kuwait suspended trading in shares of a major bank and the Saudi authorities announced a plan to help citizens receive credit.
The Central Bank of Kuwait halted trading in Gulf Bank, one of the country’s largest lenders, after a customer defaulted on a derivatives contract. The central bank said it would “strongly support the bank’s financial position” and protect depositors, to assure the public that Gulf Bank’s business “will not be affected.”
The central bank also said it was moving toward guaranteeing deposits at local banks. Many other countries have already taken that step, putting lenders in countries with no guarantee at a disadvantage.
In Saudi Arabia, always sensitive to potential unrest, King Abdullah said that 10 billion riyals, or $2.7 billion, would be placed in an account in the Saudi Bank of Credit & Saving to enable the bank to help hundreds of thousands of citizens get loans for family needs including marriages and home repairs.
Middle Eastern governments are mindful of how the crisis has left countries from Iceland to Hungary and Ukraine at the mercy of international creditors. On Sunday, the International Monetary Fund announced an agreement in principle to provide Ukraine with as much as $16.5 billion to meet its balance of payments needs.
In another sign of the times, the U.S. Federal Reserve is widely expected to cut interest rates again Wednesday to provide relief to troubled U.S. banks.
Major petroleum producing countries had appeared insulated from the crisis that is shaking the foundations of the international financial system. Oil prices rose for the first half of 2008, giving producers a thick cushion of cash. But after reaching a record of more than $147 a barrel in July, prices have collapsed along with the prospects for the world economy. On Friday, U.S. crude oil futures closed in New York at $64.15 a barrel, falling $3.69 even after OPEC announced that it would cut production by 1.5 million barrels a day.
With the fall in oil prices, the Gulf economies now appear vulnerable.
“This shows the Gulf countries are not immune to the overall problems in financial system,” Olivier Jakob, an oil analyst at Petromatrix in Zug, Switzerland, said in an interview Sunday. “If we get below $60 a barrel, some of these countries will suffer.”
The moves came as stocks in the region slumped. The benchmark indexes in Qatar and Oman fell more than 8 percent Sunday. Kuwait stocks fell 4.4 percent and Saudi Arabia’s main index, which fell 8.7 percent Saturday, fell an additional 1.7 percent Sunday.
Stocks in the Gulf region are off about 40 percent so far this year, in line with the decline in the Standard & Poor’s 500-stock index on Wall Street and the 45 percent decline in the Dow Jones Euro Stoxx 600 index.
On Saturday, finance ministers from the Gulf Cooperation Council and central bankers met in Riyadh, the Saudi capital, to discuss a more coordinated response to the crisis. In their communiqué, officials “underlined their confidence in the stability of the monetary system in their countries,” and said their economies should continue to grow.
But they also expressed concern that the downturn in the world economy would hit home.
“We should all work to avoid the negative effects and reduce their impact on our economies by coordinating policies and measures,” the Saudi finance minister, Ibrahim al-Assaf, told the Saudi Press Agency.
In addition to Saudi Arabia, the Gulf Cooperation Council includes Bahrain, Qatar, Kuwait, Oman and United Arab Emirates.
Globally, banks have posted losses and write-downs totaling $681 billion since the start of the credit crisis, according to Bloomberg News. But so far the damage has been limited in the Middle East. Any big ratcheting up of losses in the region could require governments to bail out their own lenders and dash hopes that sovereign wealth funds from the region would be able to help rescue troubled institutions in the West.
Gulf Bank’s chief executive, Louis Myers, said the loss would have “no major effects on the soundness of the bank’s financial position, and will not affect its ability to continue business.”
Fawzy al-Thunayan, a spokesman for Gulf Bank, said Sunday that the loss was incurred by a Kuwaiti company on a “complicated currency derivative,” essentially a bet on the euro. “The position worsened in the last 10 days as the euro dived against the dollar,” he added, but the customer had been unable or unwilling to make good its losses.
The bank will not comment on the amount of the loss “until the position is completely closed,” he said, and trading in Gulf Bank will remain suspended until the affair is settled. Ibrahim Dabdoub, chief executive of the rival National Bank of Kuwait, told Al Arabiya television the losses were as deep as 200 million dinars, or nearly $750 million.
The crisis could hurt the Gulf states in other ways. KPMG International, the accounting firm, warned last week that financial fraud in the region could run into the billions of dollars a year. Colin Lobo, a KPMG partner said the financial crisis was creating an environment “where the risk of fraud will increase as businesses come under pressure to show results. Likewise, individuals will also be tempted where costs are rising and income levels are flat.”
By David Jolly
Published: October 26, 2008