The Gulf's central banks were forced to lower their rates today thanks to an interest cut by the US Federal Reserve, bringing interest rates close to historic lows. All GCC members except Kuwait are pegged to the dollar. Kuwait's central bank had earlier acted independently and cut its key rate 1.25 per cent.
Six central banks around the world - including the US Federal Reserve, European Central Bank and Bank of England - simultaneously cut interest rates by half a percentage point today in response to free-falling stock markets. The Chinese central bank also joined in, cutting its rates by 27 basis points. GCC stock markets had closed by the time of the co-ordinated rate cuts, but western markets staged a brief rally before falling back. Only the Saudi market was still open and able to react, and recouped its losses from six per cent to 1.49 per cent. The UAE markets were hammered, with the Dubai Financial Market down 8.43 per cent and Abu Dhabi Securities Exchange falling 6.43, with banking and property stocks hit particularly hard.
"Stock market falls are a complete and utter capitulation," said Mohammed Salih al Hashemi, the executive director of asset management at Abu Dhabi Investment Company. "There has to be a bottom reached at some point, though when that would be no one knows. Reactive measures are not working. The only way to stop the rout is for the majority of banks to be wholly or partially nationalised. It's the least costly way to end it all."
The rest of the GCC markets fell, with Doha and Muscat down 8.75 and 7.21 per cent respectively. The pattern had been set by the performance of Asian markets in the early morning, with Tokyo losing 9.38 per cent in one of its biggest one-day falls and Hong Kong plummeting 8.17 per cent. The Gulf markets then followed that pattern, seeing huge sell-offs of stock on the basis that a major worldwide recession is now almost inevitable, which will pull down the price of oil - and with it revenues - alongside a local credit crunch already hitting the region.
Europe had woken up to the news that the British government had partially nationalised its banking sector by pumping in £25bn (Dh128.3bn) into institutions through the form of preference shares, with a further £25bn available if needed. European stock markets took the news badly, with double-digit losses. Bank stocks were hit especially hard and this carried on until the central banks slashed rates worldwide.
European markets went into positive territory briefly, but they soon slipped back, with London closing down 4.92 per cent, the German DAX closing 5.88 per cent and the French market closing down 6.31 per cent. Once again, trading on the Moscow exchanges was halted by the authorities today after the huge losses were deemed unacceptable and dangerous. The Dow Jones in New York climbed nearly 200 points when it opened today, but within minutes it slipped back into negative territory on the belief that the rate cuts would be ineffective. The ban on short-selling on financial stocks ended at midnight US time last night. This could drive down the market later today, when traders return and see the opportunity to borrow and sell more shares.
One leading economist agreed today that the interest rate cuts would have little impact, and that, just like the false dawn of the much-heralded US$700bn (Dh2.57 trillion) bailout, it should certainly not be seen as a panacea. "This will not necessarily improve lending over here," said the economist, who is based in Dubai. "With the balance sheet of banks, this is certainly a step in the right direction, but this is not a solution of the problem."
He added that while earlier this year the rate cut would be considered highly inflationary, the severe economic downturn was likely to push down price rises and neuter any such effect. Economists are hoping that bank lending will restart soon. The Central Bank's Dh50bn emergency lending facility, set up to improve liquidity, is now cheaper for banks to access - the interest rate banks will pay is now three per cent, down from five per cent.
The question now is what effect the collapsing stock market values will have on individual companies, especially in terms of their credit ratings - plunging stock levels often result in a downgrade because stock is used as collateral and a downgrade, in turn, makes it harder to borrow capital. Ali Khan, the executive director of Arqaam Capital in Dubai, said this had not been happening much in the country, citing the example of the ports operator DP World, which had fallen in value in the past year but had not been downgraded by Standard & Poor's.
The ports operator listed at $1.36 and is now just $0.54; today DP said its chief executive, Mohammed Sharaf, had bought 99,613 shares at a price of $0.55 on Tuesday. There are a number of UAE companies which have ratings, including Tamweel and Aldar. Mr Khan said that few companies in the GCC put up their stock as collateral, based on share price, when borrowing money, as western firms did. This was because of the region's financial "immaturity", which would now be to its advantage.
The biggest risk would be for an entire country to be downgraded, which would hit the borrowing ability of all local companies, but today S&P praised the UAE, saying the credit worthiness of local companies should not be affected by the turmoil - but growth will be hit if liquidity remains tight. It said credit fundamentals in the region remained sound and that the UAE would withstand the liquidity squeeze, but growth was likely to slow.
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