Global Depression and Gulf Economies

Ibrahim Oweiss10 February 2009

Monthly Dialogue Series:

Current Global Depression

• Causes

• Consequences

• Is any country immune from the current depression? NO

• How about the Gulf countries in particular? Are being affected in varying degrees

• How long? Well into 2012.

• Is it the end of capitalism?

CAUSES

• The war on Iraq

• Unwise fiscal policy during the Bush Administration ..tax reduction at war times

• Lack of regulations

• Greed.. Fraud .. Misuse of Trust

• The Bernard Lawrence Madoff Affair

• Excessive bonuses to Wall Street Executives

• Mortgage problem

• The ballooning of the use of credit cards and other instruments of borrowing

CONSEQUENCES IN THE USA

• Business failures of banks and other financial institutions. President Obama does not rule out further failures

• Foreclosures• Liquidity crunch• Unemployment, currently at 7.6% or 3.6 million unemployed• Increase in public debt. It reached $10.7 Trillion! on Feb 6, 2009• Huge Budget Deficit .. $1.2 trillion in February 2009• Increase in interest payments: In Fiscal Year 2008, the U. S.

Government spent $412 Billion on interest payments to the holders of National Debt almost 7 times what had been spent on Education

• In general world industrial machinery is slowing down, curtailing production and marketing of goods including cars.

CAN THE BAILOUT WORK?

The world economy is bound to have the slowest growth since WWII according to revised projections of the International Monetary Fund

• The crack in the US economy is too wide and too deep to be filled with proposed rescue plans

The Gross Domestic Product in the USA showed a decline of 3.8% in the fourth quarter of 2008, largest drop since 1982. I expect that the first quarter of 2009 will show even more drop, probably as much as - 4.5%.

• In spite of the bailout, still credit is difficult to attain• Lending institutions are adopting an over cautious strategy leading

to partial paralysis in economic activities• Hence current depression is unavoidable, BUT recovery could be

shortened by the bailout

HOW ABOUT THE GCC?

• Petrodollars are declining because world industrial machinery is slowing down

• Hence less demand for oil • Prices of oil lost more than $100 a barrel in the

course of few months. • Prices of oil is expected to decline further

probably less than $30 a barrel• The Oweiss Demand Curve may offer an

explanation

ECONOMIC EFFECTS ON THE GCC

Lower oil prices, the global recession, tighter liquidity, job cuts and the absence of speculators have all put pressure forcing developers to review project requirements.

Drop in the rate of inflation GCC labor market is bound to be reduced. In view of credit crunch the drop and real rents, real

estate market had actually slowed down. Psychological effects as reflected in the GCC stock

markets. Arab investors follow closely and are affected by the fluctuations of major stock markets.

THE UAE The United Arab Emirates is delaying or canceling real-estate

projects worth more than $260 billion amid falling demand and deteriorating market conditions, according to a new report by Morgan Stanley

In the fourth quarter of 2008, property prices were corrected sharply downwards, rental rates eased in Dubai and there was an increase in the rate of announced projects delays/cancellations

At the end of 2008, approximately $1.25 trillion worth of construction projects were underway in the U.A.E. However, as the region's once-booming real estate market slumps amid falling prices and a growing number of layoffs in the construction and financial sector, some of the Emirates' leading developers are being forced to review project requirements.

Property prices in Dubai have fallen by almost one third since the peak of early 2007. It was announced last week that Dubai is canceling almost 60 projects. Dubai's Palm Jumeirah Prices Plummet 50%

GCC SOVEREIGN FUNDS AND OTHER

EFFECTS• According to Deutsche Bank, losses of Arab Sovereign

Funds may reach $450 billion = to all petrodollar revenues for the year 2008 of which $b155 UAE losses, Kuwait $100, Qatar half of its $b30 in portfolios of stocks and bonds in real estate in the UK

• I think such estimates do not hold water as they represent losses on paper. GCC Sovereign funds should not be liquidated. Otherwise the losses may not be recoverable.

• Psychological effects of Arab investors contributed to losses in Arab stock markets as they eye what is happening in major stock markets in New York and others

OPTIMISTIC CASES

• In spite of what seems to be the worst year economically, yet Qatar may be able to have a reasonable rate of growth in 2009, probably around 6-7% because of the immense expenditures on natural gas and other projects.

• Qatar has financial reserves that are of great help in lean years

• Saudi Arabia is embarking on a rail-road immense project

IS IT THE END OF CAPITALISM?

• Following the collapse of the financial institutions in 2008, President Nicolas Sarkozy of France announced “it is the end of capitalism”

• Capitalism is the economic system allowing private citizens to own capital and to benefit from it.

• Hence, there is a broad range from what Arnold Toynbee called “unbridled individualism” to a controlled one by the government for the overall benefit of the society.

• What is going to emerge as what had happened in the 1930’s following the great depression, government controls will have to emerge to put capitalism under an oxygen tent so that it can survive.

SAFE INVESTMENTS

• Let me conclude that in spite of the bleak economic conditions, I may suggest some safe investments

• Gold• A forgotten British currency - fully backed by gold and

the govt. - could soon double in value versus the dollar. In fact, this ultra-safe money will be the hottest currency of the next 18 months.

• Shares in drug companies just about to win an FDA approval for new drugs.

• Shares in high-tech industries• Real estate of properties that had faced substantial drops

in their market value.