x Abu Dhabi, UAESaturday 20 January 2018

See if you can shake a few million out for me, Gordon

Gordon Brown's visit to the Gulf may be a solid indication for contrarians that the worst of the crisis is behind us.

So Gordon Brown is panhandling around the Gulf this week, which may be a solid indication for contrarians that the worst of the crisis is behind us. As a former chancellor of the exchequer, Mr Brown may be a sharper pencil than most, but politicians unfortunately don't often sit on the cutting-edge of financial trends. They are usually rather woefully behind. So it stands to reason that Mr Brown's calls for help come too late. Mr Brown may be trying to use his shining but brief moment of clarity - nationalising the UK's banks and thereby forcing the US and Europe to do the same - to claw back some political credibility for himself. Better late than never.

But currency markets and treasuries indicate that the Fed's rate cut last week appears to have staved off the emerging markets crisis by convincing investors that the carry trade is a better bet than the US dollar and arresting the perverse flight to safety in US dollar investment. As an indication that the collapse of risk appetite has abated, the Swiss franc has also declined. Funds are already flowing back into emerging markets, except perhaps this one. The euro and Australian dollar have resumed their fall, presumably in anticipation of a co-ordinated rate cut this week with the Bank of England.

The troubles at Gulf Bank in Kuwait have crystallised questions over the health of the Gulf's banking sector, its exposure to regional real estate and its risk provisioning in general. Fitch Ratings' very helpful report over the weekend on UAE debt underscores that the risk is largely in the financial sector, and not necessarily in government-backed corporations such as Dubai Inc, although Taqa's burgeoning debt load does raise some eyebrows.

The fact that the market has not responded to the Central Bank's sluggishness to mark rates down along with the Fed is a troubling sign. It seems to indicate that investors believe that either the Central Bank is bluffing or that a bailout of the country's banks is around the corner. One sector of particular worry is the Islamic banks. While the fundamentals of Islamic finance have enormous ethical appeal, the mainstream form being practiced globally is little more than a form of semantic marketing that differs very little from conventional finance except that, because it is newer, it has not yet exposed itself to the type of securities that have torpedoed the world's largest financial institutions.

One problematic thing about Islamic banking is its reliance on property as the basis for all lending. The requirement that all loans be fully backed by an asset virtually eliminates leverage. That may sound good in our present climate, but it reduces the velocity of money in an economy. Moreover, the fact that funds cannot be obtained in the Islamic finance setting without property stands to push property and commodity prices (the basis for the Islamic version of a derivative - the commodity-backed murabaha) even higher since they are the only basis for an extension of credit.

Worse, Islamic banks are exposed like no others to cycles in the property sector. When the IMF performed its stress tests of UAE banks, Islamic banks were found the most susceptible. The good news is that the world is readying to celebrate a Barack Obama victory in the US presidential elections. It's hard to find any corner of the world that doesn't welcome an Obama win, but for this region it isn't clear that Mr Obama will actually be better than Republican John McCain, for reasons I've already elaborated. He is almost definitely not going to be better for any Americans living in the UAE, having authored legislation to tighten restrictions on the use of non-US bank accounts by US citizens.

Life for Americans abroad will get very complicated indeed if such legislation is passed by the Obama Congress. The end of income tax exemptions for Americans abroad could well be nigh. And what better time to move back to the US than during a Democratic administration presiding over the worst recession since the Great Depression? Can you say works progress administration? Gravy days for artists, writers and hopefully bloggers and columnists caught in a vice of high inflation, politial uncertainty, mind-numbing ID card registration queues and now higher taxes. warnold@thenational.ae