Gulf Countries Should Pick Their Battles

In banking world systemic risk motivates prudential regulations. The argument is that if there are risk externalities among banks, a large shock to one bank affects the market perception of other banks.

If transpose this analogy to the GCC countries, we see the need for mutual, consultative competition as opposed to the emerging hostile competitive environment. While no one is arguing that competition is not good. It clearly enhances the consumers welfare level by offering choices at better prices or at improved value.

The recent liquidity surge due to increased oil & gas prices bolstered by the repatriation of GCC wealth from the US and European countries has thrown the region into a buying frenzy. Too much liquidity chasing assets or creating assets has transformed sluggish towns into bustling metropolis unrivalled elsewhere in the world. For example, great architectural feats of Dubai are now a subject of Discovery Channel and civil engineering textbooks.

But if this abundant money supply is not managed appropriately it could increase the systemic risk in the region. Real estate bubble in one emirate or state could trigger frenzy selling across the region as witnessed during the 2006 stock market meltdown.

The proliferation of airlines, banks, construction projects at a scale never witnessed before sends this worrisome signal. There is a clear argument that when supply exceeds demand prices decline. This is clearly scary. While pain must be felt at Gulf Air where about 1,200 staff are being retrenched, this kind of crises is yet to be faced by banks and finance companies.

There is a need for a strategy which should aim at minimzing the systemic risk across the region, channel liquidity into creating national champions, creating a broad base of development with the initiation of excellent academic and professional enrichment centers, development of laboratories and research endowments. Other socially driven agendas should include collective efforts to eradicate poverty, and overcoming health issues.

The spend stream should also be adjusted based on mutual consultations to avoid competitive traps, which could lead to the demise of national institutions like airlines. For instance, it maybe right to limit the number of airlines or banks on a per capita basis.

This should all be aimed at creating a minimum systemic risk environment. After all a monetary reunion in 2010 would all but reshuffle the deck. The reconfiguration in post-monetary union era could create more opportunities for better managed institutions. A supreme forum comprising of the council of finance ministers or governors of central banks should aim at achieving this.