The Rivers of Global Funding Run Dry

Financing is fast disappearing, leading GCC states to consider radical moves like de-coupling from the dollar.

So, what will Kuwait do with the $7.5 billion it won't be spending on Dow Chemical? Presumably, KPC won't be investing the money into new production, having been chastened by the country's boisterous legislature on the dangers of investing during a slump in oil prices. Perhaps they'll figure out a way to use the money to prop up stock prices. Meanwhile, the groundwork is being laid for a major spike in refined product prices once the recession ends. Saudi Arabia, meanwhile, appears to be pushing ahead with its own development plans, even if doing so means going into a fiscal deficit. The developer of Jazan Economic City, one of six such urban projects in the kingdom, said yesterday that the project has raised 100 billion riyals in investment since launching two years ago. Presumably the government is bankrolling that, since funding elsewhere must surely be hard to come by. Some economists have called for a coordinated fiscal response by GCC members and if one is to be had, it may emerge from Muscat today, where a GCC summit is going on. A joint decision to ditch the dollar peg might help offset the impact of lower oil prices by sending Gulf currencies down, raising the local buying power of a barrel of oil revenue and encouraging import substitution. This is a move, however, that is not likely to sit well with Washington, but with the White House in a state of flux, this might be a politically opportune time to make such a move. The latest sign of America's diminishing allure comes from the Mexican border, where fewer people are bothering to cross over into what is no longer seen as the land of opportunity. Those that are crossing are more often than not going to los Estados Unidos to shop. The dollar's tentative retreat appears to represent a reappraisal of the relative safety of US investments, though it remains to be seen whether it will have any stamina. While it could be bad for exporters, it could be good for the global credit crunch and companies that cater to domestic demand or at least don't rely on US consumers. Economists differ on just how dependent Asia is, for example, on such exports. Some suggest that the importance of exports has been grossly exaggerated, particularly in economies where exports represent little value-added, but rather contribute largely to corporate revenues. A weaker dollar seems unlikely to stimulate global recovery, however, and since it will undermine the value of emerging market savings (like ADIA's), it would appear to be a troubling, if predictable, sign. If local interest rates are any indication, the latest moves by the Central Bank to improve liquidity still aren't working. Bank deposit rates have climbed as high as 6.75 per cent as banks struggle to raise adequate cash. The Gulf - and the emerging world in general - face now the long-term threat of a world in which the global capital flows they have relied on for years are reduced to a trickle. Even if the emerging world's domestic demand proves as resilient as hoped - the vaunted "decoupling" - the demise of Wall Street and the global financial clearing house it ran is going to be hard to replace. Already, trade financing is drying up around Asia and the Gulf, suffocating what few embers of growth may remain. If former CIA analyst Bruce Riedel is to be believed, the greatest threat to regional stability may be lurking in the mountains along the Pakistan-Afghanistan border. There, a resurgent al Qa'eda is poised to capitalise on Pakistan's growing weakness. [e-mail]