SWFs, bonds can inject liquidity
Abdul Aziz Al Ghurair, CEO of Mashreq Bank, has warned against the delay in taking necessary measures to tackle the current economic crisis. In an interview with Arabic daily Al Khaleej, he said the current situation will worsen if the government's relief measures, which have been announced so far, were not completed through the injection of more liquidity into banks so that they could resume lending and reactivate the national economy.
How do you see the chances of a quick end to the current economic crisis?
My participation in the Davos Forum allowed me to look into the most important ideas being discussed globally to weather the crisis. There is an agreement to re-structure banks and inject more capital into them. The injection of liquidity is even more important so that the banks resume financing and lending. There was an agreement that the lending mechanism needs to be set in motion as a basic step to tackle the crisis.
The issue of trade liberalisation in the light of current developments was discussed, too. It was agreed that it is necessary to go ahead with the liberalisation of trade by activating the principles of the Doha round of WTO negotiations. The list of people responsible for the international financial crisis has expanded to include control bodies, along with the greediness of the directors and employees of some companies. It was agreed that the most important thing now is to find solutions after it appears the crisis has reached near-economic collapse proportions for the entire world.
The forum was attended by more than 40 presidents, finance ministers and economy ministers from countries across the world. It acquired special importance through its concentration on the economic crisis and governments' methods to get necessary financial resources for pumping liquidity into their economies via banks. The sources of governments' finances ranged between taxes and resorting to loans as the US government has done. The countries that were able to form financial and monetary reserves in the years leading up to the crisis, like India and Korea, were urged to use those reserves now.
How can the money of sovereign wealth funds, which are invested in assets difficult to be liquidated, be used currently without incurring big losses?
A lot of the money with SWFs is invested in assets, but there is also a sizeable chunk of their wealth still liquid and available to power the economy. In addition, the SWFs can get loans depending on the assets they have.
What are the other sources that can be used to finance the injection of liquidity into the country?
There are other sources. It is possible for bonds to be issued by the federal government and offered in the international bond market, which is still providing money for private institutions and companies. So, it is natural the market will buy bonds issued by the government of an oil-producing country, which has a great record of economic performance.
What are the best methods or routes to pump liquidity into the economy after obtaining the necessary financial resources?
The government has many options to pump in the liquidity. The money can be put in banks as government deposits and then the banks can lend the money to investors. In addition, the government can buy the big debts from banks, especially sovereign debts, which should be paid by government bodies. Consequently, the liquidity resulting from the purchase of these debts can be used to activate lending.
The Central Bank can give loans in a direct way, too. This happens now in many countries where vital sectors are identified, like the oil sector, and investors in these sectors are given loans.
These methods can be used to take advantage of sovereign money. But it is necessary to put the economy back on track via the resumption of loans through banks. When the banks obtain the liquidity they will give loans, because this is their main source of income. Thereafter there should be some regulations that prevent them from lending in an indiscriminate and excessive way.
Do you support capping interest rates on loans?
The loans given by banks are for a long period of time. So the interest rates should be competitive. Interest rates also are determined according to the sector that receives the loans. The credit cards sector is different from the real estate and company sectors. Capping the interest rates of loans might make the banks refrain from expanding their lending activity, especially as the degree of risk in some sectors is higher than others.
There are payments overdue from some private and government companies, which disrupts the flow of liquidity into the economy. What are the available methods to tackle this problem?
It is necessary that government and private companies commit to settling all overdue payments in their projects. When these companies stop honouring their commitments, they begin a long chain of unfortunate economic events connected to it.
So the commitment to pay according to agreements is an essential issue to protect the economy from the crisis' worst aspects. In case the government and quasi-government companies are unable to pay, it is possible to resort to the issuance of bonds to deserving people, stipulating that payments will be delayed – but guaranteed – to a subsequent period in time.
These deserving people can then resort to the banks, which will buy the bonds, cutting a part of their value. And the banks can receive the full value from the companies when they are in a position to pay later and gain profits. I hope we will not be obliged in the country to use such methods to guarantee the overdue payments, especially as the banks do not have the liquidity to enable them to buy the bonds. So, the decisive factor is the provision of liquidity for banks.
Can we not be optimistic that the economic situation will improve in a short period of time?
I am optimistic the crisis will teach us many lessons. In the past, we did not have the opportunity to revise our work and the crisis has given us the chance to do that. At the banking and economic level, we can restructure in a better way. I think we have reached the bottom in this crisis. Having said that, the crisis might continue throughout the current year and into the beginning of the next. Then the reversion will come.
But this depends on the measures adopted to tackle the crisis. If measures are not taken for proper treatment, I am afraid our situation will worsen. If we did not move, this will not be in the interests of our economy.
At present, in general, we are in a better situation compared to many countries. Despite what has happened so far, our situation is better than the other GCC states. We have the region's second largest economy after Saudi Arabia and the second highest GDP per capita after Qatar. We have several notable achievements in infrastructure, tourism, trade, and in the property sector. We have big financial and monetary reserves and our sovereign wealth fund is the biggest. Our banking sector is robust, as its assets are nearly Dh1.5 billion. Even our real estate sector is bigger, compared to the other states. All these facts give us a huge ability to tackle the crisis and put us in a better situation at the GCC level. So we should take some essential decisions for our own economy, while at the global level, more important decisions are required from the United States, because its economy is essential in the international economy.
PROFILE: Abdul Aziz Abdullah Al Ghurair CEO, Mashreq
Al Ghurair is also the President of Al Ghurair City, Chairman of Masafi Mineral Water Company and Director of the Abdulla Al Ghurair Group of Companies. Al Ghurair is on the board of the Dubai Chamber of Commerce and Industry and the Economic Council of Dubai, and is a member of the Governing Council of Dubai's Higher Colleges of Technology. In 2006, he was appointed Chairman of the Arab Business Angels Network, while in 2007 he was elected as the Speaker of the Federal National Council. Al Ghurair holds a bachelor's degree in industrial engineering from California State Polytechnic University, the US.
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