How the world richest 'oil' nation facing a market meltdown can avert it!

The Panic continues! The Kuwaiti Stock Exchange (KSE) continued to suffer from panic selling.

Market capitalization in Kuwait is a key indicator. The entire lending structure of Kuwaiti banks and the private sector is secured by companies that are listed on the Kuwaiti stock exchange. As a result of the lack of decision-making, the companies' market capitalization is being devoured; therefore, most of the private sector companies are suffering from margin calls made by the bank.

Political ramifications of inaction are disastrous. The health of any economy is directly proportional to the ability of its leaders to take actions. Inaction and status quo is a sign of wakened and hesitant. When one is faced with a challenge the only way forward is to face it and address it. These are the points we raised at the highest levels and various meetings and seminars that I was invited too. I welcome that these were published in the largest paper of Kuwait today. (1)

1.Economic reality in today's world dictates that there has to be a political consensus if an economic meltdown is to be averted.

2.One does not need to be a rocket scientist to see that Kuwaiti economy is in a stalemate and growth has frozen completely. With oil at $70+ and Kuwaiti investments outside Kuwait running at an all-time high it is sad to see that domestic issues which need immediate answers are being delayed. Politicization of economic decision making process is taking the country towards an economic meltdown.

3.Market capitalization in Kuwait is a key indicator. The entire lending structure of Kuwaiti banks and the private sector is secured by companies that are listed on the Kuwaiti stock exchange. As a result of the lack of decision-making, the companies' market capitalization is being devoured; therefore, most of the private sector companies are suffering from margin calls made by the bank. The ability of private companies to raise money has completely dried. The banks are not lending because they are holding on to their high cash deposits. They are worried about a market meltdown. If one looks at mark to market closely, there is a serious risk that banks' market capitalization can be significantly eroded if three of the major companies like Zain, National Bank, and Kuwait Finance House, continue to slide.

4.The question we need to ask is: is it worth letting Zain, NBK, and other companies to slide because we want to achieve political point-scoring. Inaction to save market from complete meltdown is to be found by the government taking major stakes in the private companies – these are perfectly well run companies; the erosion of their market capitalization is a result of their expansion into world derivative markets, and a fallout from global recession. We can wait and see, and continue to play the game of watching who suffers from this meltdown, but what would be the result? We all know that notables from the private sector will be heavily suffering from this inaction, but there has to be a political will now. Inaction will result into much bigger problems later on because these assets can lead to banks being illiquid; if the Kuwaiti market continues to slide, we may see that many of the middle class Kuwaitis who invested their life savings in the stock market may then require a much bigger package.

5.At the end of the day, if market slides occur and a Gulf Bank kind of situation arises, then institutions will have to be bailed out, and the bill will be far bigger. Our economy is now unfortunately hostage to political bickering. Here the situation is to think about the country before individuals. There is no need to help an individual, but there is a need to help the state. And the help of state will only come if instead of employing hundreds of billions of dollars of Future General Funds into foreign markets, we may apply our attention to the local market and address the causes of this uncertainty.

6.The uncertainty of decision making is the real cancer in the society. Politicians and the government have to decide that letting it linger on is killing the growth of economy. Growth has stagnated. Without growth, the construction sector, all these big buildings and Manhattan-like skyline will halt to a naught. Imagine a default on these construction loans as a result of stagnation in growth, because growth provides the engine where the companies feel confidence to take space, and grow their businesses. In our opinion, inaction now can be linked to what ex-US Treasury secretary Henry Paulson failed to comprehend. His decision not to help Lehman Brothers due to personal differences with the Chairman of the Board, was considered to be a horrendous decision. The world is still licking the wounds of Lehman bankruptcy. Within a month of Lehman's bankruptcy, Merrill Lynch was taken over by Bank of America, Fed bailed out AIG for 85 billion dollars, Lloyds had to buy HBOS, WAMU was closed; European governments within 15 days scrambled to shore up the banks; US had to agree on a bailout package in excess of a trillion dollars and Britain had to inject hundreds of billions of pounds into the banking sector, and US Treasury had to inject 250 billion dollars to exchange for preferred shares.

7.Lehman was a lynchpin. Once the confidence in the banking sector eroded and the world came to know, the meltdown began. And that cost is around 2-3 trillion dollars in the OECD economy. Hank Paulson was asked and privately he has reported that without letting Lehman go bankrupt, there was no political will. Now for Kuwait we have to understand it is not a matter of individuals, there has to be a political consensus established to save the economy of Kuwait. It's a joke that a country with such a huge reserve of foreign exchange that is being utilized by the entire world is facing a domestic meltdown. We are saving the world's financial institutions and putting our own in peril because someone wants to punish and settle old scores. This mentality has to stop. There will be political repercussions if there is a dismantlement of old guards of the business. A strong private sector is reflective of a strong peoples, strong state, and strong institutionalization.

8.It is ironical to ask the state to intervene to save the private sector, but that is what has been happening all over the world. It was under President Bush, a Republican who believed in the private sector, when the biggest interventions were made. On the other side of the coin, Gordon Brown and David Cameron did not object on Gordon Brown taking over Lloyds or HBOS or Barclays. The problem with Kuwait is that the numbers required to stabilize and putting up a bottom for Kuwaiti stock market will give confidence to people not to panic sell. Panic selling causes loan to value ratios deteriorating. A real estate company whose shares are being utilized as collateral to the bank, faces liquidation because of the fact because unrelated panic in the market causes its shares to go below the limit where bank demands more assets and more liquidity. So this creates a domino effect.

9.Enough punishment has been meted out to players who have been aggressive and greedy. Here further economic decline will cause demographic polarization, social unrest, and eventually a mass package. Do we need to do that? Do we need to create this kind of polarization because we do not have the ability to take decisions and establish a political consensus between punishing the excesses and saving the institutions. We should be proud of our private sector, which will create jobs, it will be the major cause for economic revival. Without growth no state can prosper. State cannot provide jobs for every Kuwaiti; the private sector will have to be active. We are failing the private sector by the hemorrhaging we are causing to them. We will become hostage to demands of those who think that the only answer to Kuwaiti problems is to distribute the wealth and create an egalitarian society based on consumption, consumption, consumption.

10.Private sector has helped incorporation of technological advances in Kuwait, in the field of oil, construction, software, Kuwaiti companies are at a leading edge. The transformation of Kuwait from a desert land to a vibrant economy that has one of the best construction sectors building high rises and tallest buildings, and the best highways, it needs aptitude. Institutions that were relatively saved from the world meltdown, the burning question now is: should we kill the private sector? Let's not take revenge on the private sector because we are being short-termists. Kuwait will be stronger when our private sector is stronger; Kuwait will be stronger when incentives work hard; it's not an evil to help the private sector. If Gordon Brown, Bush and Obama who are from completely different political backgrounds, can do it, we should do it. There is no other answer. The liquidity in the system has disappeared. The banks' capitalization has become hostage to continuous meltdown and threats to the markets.

11.Answers will not come from our old friends, answers will come from within; answers do not lie in selling Kuwaiti assets to foreigners. Answers lie in that the assets be taken over, like they have been done in UK and USA, for future generations. Whenever the Kuwaiti government has intervened in panic situations, the state has always benefited. Panic creates opportunities. This is an opportunity for the state to make good investment for the future generation of Kuwaitis, and take stakes in well managed Kuwaiti companies and put the Kuwaiti economy back on track of growth. Once the economy grows, all wounds will heal and all these empty towers will fill up, and all our children looking for jobs will find jobs in the private sector. In this connected world, this is the call of the day. We should not let the lesson of Lehman Brothers go to waste. We should learn from what happened in the world. Let's see and have an open debate, and the real grilling should be on the merits of state intervention or not. Unfortunately this is a subject nobody is talking about.

12.Punishing the private sector and its leaders will only make Kuwait weak. The total banking exposure in the market is US$52-55 billion. This exposure determines the state of the banks' capitalization. If a bottom is taken out of the market, the first thing hit would be the banks' equity. The biggest problem is that once the system collapses, you have to have a debtors' program and maybe as large, if not larger, than the one post-Manakh crisis back in the 1980s.The crisis of confidence can only be overcome by the confidence in economy, the system and the private sector - that is the only way.

http://www.alqabas.com.kw/Article.aspx?id=548454&date=09112009

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