Corporate Governance - Quantity Versus Quality - Middle Eastern Perspective. Saleh Hussain

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СКАЧАТЬ style="font-size:15px;">      •The United States pledged $540bn to support mutual fund companies.

      Oil Prices

      Oil prices,which saw their peak in the middle of 2007 at around US$150 per barrel, took a dive in late 2008 to approximately US$36 per barrel, contributing further to a squeeze in liquidity that oil-exporting countries were experiencing.

      Economists' forecasts for the oil price for 2009 varied from US$30 to US$70. At any level below US$50, oil-exporting countries will have liquidity and budget deficit issues, as some of them based their budgets for 2009 and 2010 on prices ranging from $50 to $60.

      Other Economic Sectors

      The impact of the current economic crisis on other sectors of any economy will not be limited to banking and energy. In fact, we have seen little impact on other sectors so far, but what is to come might be frightening. The two sectors that we have started seeing an impact are real estate and automobile manufacturing.

      In real estate we've seen only in the beginning of major projects being halted, canceled or scaled down. In 2009 and 2010 we will witness major changes in this sector, including prices decreasing by as much as 50%, if not more. Rental rates on existing and new units of property will also suffer a major correction.

      The automobile industry has already entered a difficult phase. The United States has pledged close to US$20 Billion to help major auto makers. Certainly Japan, UK, Germany and other car-making countries will be subjected to the same difficulties.

      The degree of such impact is still to be seen in other sectors. However, building materials including steel, cement, blocks and others have already shown signs of receiving their share of it. The downstream retail sector will soon show signs of decline as well.

      Job Losses

      Millions of jobs will be lost around the world in 2009 and 2010, compounding the problem of an economic slowdown worldwide. In the United State alone, the number of job losses for the next two years is estimated at 2 to 3 million and in Europe no less than 1 million. The number for Asia is bigger than the U.S. and Europe combined.

      Impact on the Gulf Cooperation Countries "GCC"

      Gulf Cooperation Council countries "GCC" are not immune from the worldwide economic crisis. In fact they are as much involved as other countries, if not more so, due to the fact they are blessed with reserves emanating from oil revenues. Therefore, the crisis had its spill over to the GCC as well. The impact and severity of the crisis will certainly take time to be determined. Below are the areas of impact on the GCC:

      •Losses on GCC stock markets in 2008 were estimated to be between 35% and 50% compared to the value of the indices at the end of 2007.

      •Credit / funding cost increased in the last quarter of 2008 by 250 to 400 bps compared with costs prevalent in the first three quarters of the year.

      •Liquidity tightening was apparent especially in money market transactions.

      •International investors started offloading their GCC positions due to the financial crisis at home and the need for liquidity. There were no immediate buyers of those positions anyway, and those that managed to sell did so at prices lower than asked.

      •The regional banks had to reduce lending activities and avoid large ticket transactions. In fact some signed and committed contracts had to be canceled or renegotiated.

      •Some GCC countries announced the halt of planned projects. Most of those projects were planned over the past few years at the peak of high oil prices.

      •The real estate sector started to experience a setback, and the coming years will certainly see a major correction.

      •The GCC sovereign wealth funds "SWFs" had already shown signs of big losses in 2008. Some reports spoke of US$450 bn. The estimated value of those SWFs at the end of 2008 was US$850 billion (US$1.3 trillions less the estimated loss of US$450 billion).

      •Provision for sub-prime loans in 2007 and 2008 for banks and financial institutions in the region were estimated at a figure close to US$10bn.

      •The impact on investment banks is still unknown. There are two types of investment banks, those that operate within the principle of Sharia laws, i.e. Islamic banking financial institutions and those that handle traditional, conventional banking. Due to the way their balance sheets are structured, it might not be readily possible to know the impact of the crisis on their operations. Some of them are thinly capitalized and might be assuming responsibility for large transactions on behalf of their investors. The extent of their position and viability will only be established over the next two years.

      GCC State and Central Banks Actions & Support

      •The United Arab Emirate Central Bank injected DH50 bn (US$ 13.6 bn ) to support the market and provided a 3 year guarantee on bank deposits

      •The Kuwait Central Bank also provided the public with a guarantee of bank deposits. It provided a bailout package to the collapsed Gulf Bank. The Kuwait government thereafter pledged KD1 billion (US$.3.3 bn ) to buy shares in the stock market

      •The Saudi Arabian Monetary Agency "SAMA" injected liquidity in the market worth SAR40 bn (US$.10.7 bn ) to support the banks. It further approved a reduction in the bank deposit reserve requirement from 13% to 11%. Reports circulated of further undisclosed liquidity sums injected in the market to ease the liquidity crunch.

      •The Central Banks of Bahrain, Qatar and Oman issued various circulars and made a number of announcements to assure markets that support to the banking industry would be provided as required.

      •A high level meeting of finance ministers of the GCC was held in Riyadh on 24 October 2008. The attendees issued a communique assuring that the position of GCC - in dealing with the crisis is sound and pledging support to the banking sector in the GCC as needed.

      •Central banks established committees to supervise daily liquidity and monitor the positions of banks and required daily returns and reporting from banks and financial institutions.

      Relevance of CG to the Crisis

      With increased awareness of and introduction of corporate governance codes and practices worldwide, why is the world still faced with financial crisis? Aren't these CG regulations designed to mitigate risks and avoid such disasters from happening? Understandably, many frustrated stakeholders and the public at large question the effectiveness of the regulations and soundness of their implementation.

      It is an accepted fact that all corporate governance regulations,like all other laws, are designed to address principles of governance that render best practices of businesses. In addition, they are sometimes issued to rectify certain circumstances or actions that happened in the past. In other words, these regulations could be a reaction to malpractices and improper human behavior. On top of this, no matter what regulations and laws are issued, the human mind is capable of finding ways and means to get around them. Then the question becomes: what would the situation have been if there were no regulations? Certainly the damage could have been far more severe.

      The thinking about the relevance of CG in the СКАЧАТЬ