Financial tempest spreads to the Gulf states

Ellipse

The Living Force
FOTCM Member
Herald Tribune
David Jolly
October 26, 2008

The global economic crisis extended its reach into the Gulf states Sunday, as Kuwait suspended trading in shares of a major bank and the Saudi authorities announced a plan to help citizens receive credit.

The Central Bank of Kuwait halted trading in Gulf Bank, one of the country's largest lenders, after a customer defaulted on a derivatives contract. The central bank said it would "strongly support the bank's financial position" and protect depositors, to assure the public that Gulf Bank's business "will not be affected."

The central bank also said it was moving toward guaranteeing deposits at local banks. Many other countries have already taken that step, putting lenders in countries with no guarantee at a disadvantage.

In Saudi Arabia, always sensitive to potential unrest, King Abdullah said that 10 billion riyals, or $2.7 billion, would be placed in an account in the Saudi Bank of Credit & Saving to enable the bank to help hundreds of thousands of citizens get loans for family needs including marriages and home repairs.

Middle Eastern governments are mindful of how the crisis has left countries from Iceland to Hungary and Ukraine at the mercy of international creditors. On Sunday, the International Monetary Fund announced an agreement in principle to provide Ukraine with as much as $16.5 billion to meet its balance of payments needs.

In another sign of the times, the U.S. Federal Reserve is widely expected to cut interest rates again Wednesday to provide relief to troubled U.S. banks.

Major petroleum producing countries had appeared insulated from the crisis that is shaking the foundations of the international financial system. Oil prices rose for the first half of 2008, giving producers a thick cushion of cash. But after reaching a record of more than $147 a barrel in July, prices have collapsed along with the prospects for the world economy. On Friday, U.S. crude oil futures closed in New York at $64.15 a barrel, falling $3.69 even after OPEC announced that it would cut production by 1.5 million barrels a day.

With the fall in oil prices, the Gulf economies now appear vulnerable.

"This shows the Gulf countries are not immune to the overall problems in financial system," Olivier Jakob, an oil analyst at Petromatrix in Zug, Switzerland, said in an interview Sunday. "If we get below $60 a barrel, some of these countries will suffer."

The moves came as stocks in the region slumped. The benchmark indexes in Qatar and Oman fell more than 8 percent Sunday. Kuwait stocks fell 4.4 percent and Saudi Arabia's main index, which fell 8.7 percent Saturday, fell an additional 1.7 percent Sunday.

Stocks in the Gulf region are off about 40 percent so far this year, in line with the decline in the Standard & Poor's 500-stock index on Wall Street and the 45 percent decline in the Dow Jones Euro Stoxx 600 index.

On Saturday, finance ministers from the Gulf Cooperation Council and central bankers met in Riyadh, the Saudi capital, to discuss a more coordinated response to the crisis. In their communiqué, officials "underlined their confidence in the stability of the monetary system in their countries," and said their economies should continue to grow.

But they also expressed concern that the downturn in the world economy would hit home.

"We should all work to avoid the negative effects and reduce their impact on our economies by coordinating policies and measures," the Saudi finance minister, Ibrahim al-Assaf, told the Saudi Press Agency.

In addition to Saudi Arabia, the Gulf Cooperation Council includes Bahrain, Qatar, Kuwait, Oman and United Arab Emirates.

Globally, banks have posted losses and write-downs totaling $681 billion since the start of the credit crisis, according to Bloomberg News. But so far the damage has been limited in the Middle East. Any big ratcheting up of losses in the region could require governments to bail out their own lenders and dash hopes that sovereign wealth funds from the region would be able to help rescue troubled institutions in the West.

Gulf Bank's chief executive, Louis Myers, said the loss would have "no major effects on the soundness of the bank's financial position, and will not affect its ability to continue business."

Fawzy al-Thunayan, a spokesman for Gulf Bank, said Sunday that the loss was incurred by a Kuwaiti company on a "complicated currency derivative," essentially a bet on the euro. "The position worsened in the last 10 days as the euro dived against the dollar," he added, but the customer had been unable or unwilling to make good its losses.

The bank will not comment on the amount of the loss "until the position is completely closed," he said, and trading in Gulf Bank will remain suspended until the affair is settled. Ibrahim Dabdoub, chief executive of the rival National Bank of Kuwait, told Al Arabiya television the losses were as deep as 200 million dinars, or nearly $750 million.

The crisis could hurt the Gulf states in other ways. KPMG International, the accounting firm, warned last week that financial fraud in the region could run into the billions of dollars a year. Colin Lobo, a KPMG partner said the financial crisis was creating an environment "where the risk of fraud will increase as businesses come under pressure to show results. Likewise, individuals will also be tempted where costs are rising and income levels are flat."

http://www.iht.com/articles/2008/10/26/business/gulf.php
 
Continuing with the Financial Tempest it looks like all is not well in the Gulf States.

Exclusive: Saudi Arabia threatens to ditch dollar oil trades to stop 'NOPEC' - sourcesOil lines.png

LONDON/DUBAI (Reuters) - Saudi Arabia is threatening to sell its oil in currencies other than the dollar if Washington passes a bill exposing OPEC members to U.S. antitrust lawsuits, three sources familiar with Saudi energy policy said.



FILE PHOTO: An oil tanker is being loaded at Saudi Aramco's Ras Tanura oil refinery and oil terminal in Saudi Arabia May 21, 2018. REUTERS/Ahmed Jadallah
29668

They said the option had been discussed internally by senior Saudi energy officials in recent months. Two of the sources said the plan had been discussed with OPEC members and one source briefed on Saudi oil policy said Riyadh had also communicated the threat to senior U.S. energy officials.

The chances of the U.S. bill known as NOPEC coming into force are slim and Saudi Arabia would be unlikely to follow through, but the fact Riyadh is considering such a drastic step is a sign of the kingdom’s annoyance about potential U.S. legal challenges to OPEC.

In the unlikely event Riyadh were to ditch the dollar, it would undermine the its status as the world’s main reserve currency, reduce Washington’s clout in global trade and weaken its ability to enforce sanctions on nation states.

“The Saudis know they have the dollar as the nuclear option,” one of the sources familiar with the matter said.

“The Saudis say: let the Americans pass NOPEC and it would be the U.S. economy that would fall apart,” another source said.

Saudi Arabia’s energy ministry did not respond to a request for comment.

A U.S. state department official said: “as a general matter, we don’t comment on pending legislation.”

The U.S. Energy Department did not respond to a request for comment. Energy Secretary Rick Perry has said that NOPEC could lead to unintended consequences.


DOLLAR HEGEMONY
NOPEC, or the No Oil Producing and Exporting Cartels Act, was first introduced in 2000 and aims to remove sovereign immunity from U.S. antitrust law, paving the way for OPEC states to be sued for curbing output in a bid to raise oil prices.

While the bill has never made it into law despite numerous attempts, the legislation has gained momentum since U.S. President Donald Trump came to office. Trump said he backed NOPEC in a book published in 2011 before he was elected, though he not has not voiced support for NOPEC as president.

Trump has instead stressed the importance of U.S-Saudi relations, including sales of U.S. military equipment, even after the killing of journalist Jamal Khashoggi last year.

A move by Saudi Arabia to ditch the dollar would resonate well with big non-OPEC oil producers such as Russia as well as major consumers China and the European Union, which have been calling for moves to diversify global trade away from the dollar to dilute U.S. influence over the world economy.

Russia, which is subject to U.S. sanctions, has tried to sell oil in euros and China’s yuan but the proportion of its sales in those currencies is not significant.

Venezuela and Iran, which are also under U.S. sanctions, sell most of their oil in other currencies but they have done little to challenge the dollar’s hegemony in the oil market.

However, if a long-standing U.S. ally such as Saudi Arabia joined the club of non-dollar oil sellers it would be a far more significant move likely to gain traction within the industry.

WHAT IF?
Saudi Arabia controls a 10th of global oil production, roughly on par with its main rivals - the United States and Russia. Its oil firm Saudi Aramco holds the crown of the world’s biggest oil exporter with sales of $356 billion last year.

Depending on prices, oil is estimated to represent 2 percent to 3 percent of global gross domestic product. At the current price of $70 per barrel, the annual value of global oil output is $2.5 trillion.

Not all of those oil volumes are traded in the U.S. currency but at least 60 percent is traded via tankers and international pipelines with the majority of those deals done in dollars.

Trading in derivatives such as oil futures and options is mainly dollar denominated. The top two global energy exchanges, ICE and CME, traded a billion lots of oil derivatives in 2018 with a nominal value of about $5 trillion.

Just the prospect of NOPEC has already had implications for the Organization of Petroleum Exporting Countries. Qatar, one of the core Gulf OPEC members, quit the group in December because of the risk NOPEC could harm its U.S. expansion plans.

Two sources said that despite raising the dollar threat, Saudi Arabia did not believe it would need to follow through.

“I don’t think the NOPEC bill will pass but the Saudis have ‘what if’ scenarios,” one of the sources said.

ASSET SALES
In the event of such a drastic Saudi move, the impact would take some time to play out given the industry’s decades-old practices built around the U.S. dollar - from lending to exchange clearing.

Other potential threats raised in Saudi discussions about retaliation against NOPEC included liquidating the kingdom’s holdings in the United States, the sources said.

The kingdom has nearly $1 trillion invested in the United States and holds some $160 billion in U.S. Treasuries.

If it did carry out its threat, Riyadh would also have to ditch the Saudi riyal’s peg to the dollar, which has been exchanged at a fixed rate since 1986, the sources said.

The United States, the world’s largest oil consumer, relied heavily on Saudi and OPEC supplies for decades - while supporting Riyadh militarily against its arch-foe Iran.

But soaring shale oil production at home has made Washington less dependant on OPEC, allowing it to be more forceful in the way it deals with Saudi Arabia and other Middle Eastern nations.

Over the past year, Trump has regularly called on OPEC to pump more oil to lower global oil prices, and linked his demands to political support for Riyadh - something previous U.S. administrations have refrained from doing, at least publicly.

 
Back
Top Bottom