Emptying the Tool Box
After a relatively slow response to the gravity of the credit crisis in September, central bankers around the world are utilizing some serious fire-power to counter a global slowdown.
The U.S. Federal Reserve led the way with a sizable half percentage point cut, bringing the discount rate down to just one percent. U.S. Fed Chairman Ben Bernanke noted the bank is prepared to bring rates even lower to unlock lending to consumers and businesses.
Three regional central banks -- Kuwait and Bahrain -- followed suit cutting their key rates to help rekindle confidence, while a handful of Asian central banks, most notably China, did the same.
The timing is crucial. Countries are quickly trying to sing from the same hymn sheet before they gather in Washington on November 15th for an emergency summit, shortly after a new president has been elected in the United States. The meeting will be held under the auspices of the G20, which includes emerging markets countries from Asia to Latin America, with two Middle Eastern members, Saudi Arabia and Turkey.
Leading up to the U.S. elections, John McCain’s campaign used Joe Wurzelbacher, affectionately labelled “Joe the Plumber,” to contend that Barack Obama’s tax policy would hinder small business. The Toledo-based plumber was worried that he will have fewer options in his tool box to expand.
The tool box is an apt analogy for the world’s central bankers. They have used outright capital injections and share purchases of banks, cut interest rates on multiple occasions and now are looking to construct a new financial architecture to monitor and govern financial markets. They will have very few tools to reach for if commercial banks don’t start loosening up lending.
Seeing there is the same liquidity shortage in other countries, the U.S. central bank will provide $30 billion each to Brazil, Mexico, Singapore and South Korea. Hard money is being supported by a great deal of high profile diplomacy.
Robert Kimmitt, Deputy U.S. Treasury Secretary, concluded a four country Gulf tour to Saudi Arabia, the United Arab Emirates, Qatar and Kuwait in an effort to enhance dialogue with those who manage sizable sovereign wealth funds. Kimmitt said that these fund managers are “actively looking at U.S. opportunities.”
In this climate, there is less emphasis in Washington on who owns the Chrysler Building in New York (Abu Dhabi) and the debate over Dubai World and its attempted ports purchase seems a distant memory.
Not to be outdone, U.K. Prime Minster Gordon Brown crossed paths in the air with Kimmitt for his own tour. It is pretty smart business. Middle East sovereign funds have an estimated $2 trillion under management and can serve as key players as both equity and bond investors when it is needed most.
It is a bit too early to tell which way the funds are leaning today. On our programme we have been exploring the high profile investments into China and Southeast Asia over the past year by sovereign funds and Middle Eastern companies.
Saeed Ahmed Saeed Chief Executive of Dubai based property group Limitless said Asia provides “all the opportunities that would be expected as a return on investment.” Four out of ten of his international investments this year have gone to Southeast Asia. I used the example of Limitless, because it will be fascinating to see where the money will gravitate in the future which depends on how this financial drama will unfold in the coming months.
According to Morgan Stanley, their benchmark emerging market index has dropped more than 40 percent in the past month alone, but over the last decade the markets that make up the index far outpaced their peers in the U.S. and Europe. The reason is quite simple; many of these governments had to learn a difficult lesson ten years ago during the financial crisis which swept through Asia, Russia and Latin America. They are better prepared today than ever before.
Let’s hope that in a post-election environment and after pulling out a lot of arsenal to combat the slowdown that the Group of 20 can offer concrete solutions that work for all the members to move forward.
ABOUT THIS BLOGJohn Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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