LONDON: As governments the world over contemplate the fallout of the first anniversary of the global credit crunch a few days ago, the signs are that things are going to get much worse before they start improving.
Perhaps it is a cliché to stress that no-one is immune to the impact of the credit crunch especially in today's globalized world, it is inevitable that some economies and individuals have weathered the storm better.
But it would be foolhardy for any government or investor to be complacent and to think that they are somehow immune to the effects of the credit crunch. Already some economists have questioned the morality of the staggering $20 billion China has forked out for staging the world's greatest sporting spectacle, the Beijing Olympics 2008 - the most spectacular and expensive Olympics in history. After all, China, despite its huge capital base and phenomenal 13 percent annual GDP growth rate, has still some of the poorest and underdeveloped regions in the world, with huge swathes of unemployment and poverty.
It is amazing how in hindsight even those diehard of fund managers including George Soros and John Bolton of Fidelity, the consistently most successful UK fund manager over the last 30 years with an estimated return of almost 14,000 percent over the period, have blamed the credit crunch on the "greed, greed, greed" of their colleagues, some of whom it has transpired were even prepared to commit fraud in their desperation to preserve their bonus payments.
Unfortunately, a financial services culture that usually emanates in London and Wall Street, is soon emulated the world over including Hong Kong, Dubai, Mumbai, Johannesburg, Sao Paolo, Kuala Lumpur, Sydney and Singapore. And the worry, as the UK's Financial Services Authority (FSA) last week pointed out, that there needs to be much greater responsibility on the part of banks and lenders and those who regulate them.
A danger in the Gulf Cooperation Council (GCC) countries flush with estimated private liquidity in excess of $1.2 trillion, and GCC oil revenues set to hit $600 billion annually for 2008 and 2009, according to a study by Gulf Finance House, is that the greed culture may take hold albeit in a benign form especially in a much less rigorously regulated financial market environment. There have already been some indications of this in the initial public offering (IPO) sector with companies, effectively worth very little, going to the stock exchanges to raise funds through public offerings are wholly unrealistic valuations. Two years ago the GCC stock exchanges had a foretaste of the "irrational exuberance" of investors when the stock markets were returning unrealistic values, only to force a market correction of about 30 percent, which affected many ordinary families especially in Saudi Arabia, who frankly should never have played the stock markets in the first place.
As Ala'a Al-Yousuf, Chief Economist at Gulf Finance House points out there are other dangers as well. "All of this (record oil revenues) good news is, however, not without a price. GCC states will have to live with the paradox of low-single digit interest rates and high double digit inflation rates. With little recourse to monetary policy tools, all eyes are on the authorities' fiscal responses to these challenging times."
In the UK on the other hand, the CBI, the country's largest employers' organization, on Friday warned that the UK economy is deteriorating faster than it previously thought. This follows an earlier warming by the FSA that the UK's housing slump may be worse than that in the last recession some 15 years ago.
This is once again down to the complacency and over-optimism on the part of both governments and financial sector forecasters. High inflation, which is expected to touch 4 percent next week, and a paltry GDP growth rate not even touching 0.5 percent, have prompted fears of a possible recession.
Indeed, the CBI has cut its own growth forecast from 1 percent to 0.4 percent for 2009 through to 2010, as economic activity is slowing in all key sectors of the economy; business confidence is down; and house prices continue to fall to 10-year lows and tight credit conditions have dented consumer confidence and spending.
The Council of Mortgage Lenders on Friday warned that some 50,000 Britons could lose their homes in 2008 because they would not be able to keep up with their mortgage payments. Already 18,900 Britons have had their homes repossessed in the first half of 2008. Banks and lenders have come under attack for being too hasty to repossess homes and the UK government has been accused of dithering in its efforts to help the hapless homeowners and buyers especially in announcing a temporary suspension of stamp duty tax.
Those most affected by the impact of the credit crunch, precipitated due to the investments in dodgy US subprime mortgages, are the banks, investors, policy makers, home owners and ordinary consumers.
US and European banks have had to turn to investors, especially state-controlled investment funds, in the Middle East and Asia to repair their balance sheets. But even this exercise has not been without political implications. The G-8 countries even asked the OECD to investigate whether these sovereign wealth funds (SWFs) from the GCC and Asia should be regulated or not. It is just as well the OECD reported that no regulation was required, because these SWFs have acquired a powerful presence in the global capital markets which seem to have shifted the power and influence away from traditional markets in the US and Europe.
Abu Dhabi, Singapore, Saudi Arabia, China, Hong Kong, Kuwait, Qatar and Russia are the new capital kings of the global markets. For instance, the government of Singapore Investment Corporation (GIC) invested $6.8 billion in Citigroup shares and bought a 9 percent stake in Swiss bank UBS while fellow Singaporean fund Temasek acquired a 10 percent stake in Merrill Lynch.
The Abu Dhabi Investment Authority invested $7.5 billion in a stake in Citigroup while the Kuwait Investment Authority acquired a $6.6 billion stake in Merrill Lynch. The Qatar Investment Authority similarly bought a GBP1.7 billion stake in Barclays Bank. On the other hand, China Investment Corporation invested $5.5 billion to acquire a 9.9 percent stake in Morgan Stanley.
Investors also have been badly affected with billions wiped off stock values, especially financial stocks. One vagary or important indication is that Shariah-compliant stocks have tended to perform much better in this credit crunch year because Islamic funds are not allowed to invest in conventional financial institutions because of the proscription in interest. Both Dow Jones and FTSE Islamic indexes report better performances of the Shariah indexes and predict a growth in Islamic equity funds over the next year or so.
Similarly, UK providers of Islamic mortgages confirm that they have had no repossessions thus far in their mortgage book despite the crisis in the conventional mortgage market. "Statistically we should have had a few repossessions. But thus far we have not had one. This augurs well for the Islamic mortgage market. Unfortunately we have not articulated our story to the wider market," confirmed a senior manager at probably the largest provider of Islamic mortgages in the UK.