With the primaries and caucuses in full flow in the US there is one common assertion in all lofty promises made by the presidential hopefuls: to revitalise the economy which is on the verge of a recession.
Economic pundits, chief executives and money managers across the globe still seem to be clueless about how severe the damage is and how critical the subprime mortgage quagmire would be in the months to come.
America’s economic woes just seem to multiply endlessly and corporate bigwigs are falling casualty to this subprime crisis.
Oil prices which continue to escalate rather steeply amid worries of recession also rubs salt into the wounds. US Fed Reserve chairman Ben Bernanke was quick to announce sops in the form of rate cuts and other fiscal stimulus.To find a plausible answer to this economic pandemonium let us first examine an emerging trend in the global scenario which helped the giant US corporates fix few of their financial woes.
The year 2007 witnessed one of the largest shopping sprees by the Arab world in Wall Street which resulted in six Gulf states together controlling Sovereign Wealth Fund (SWF) assets of some $1.7 trillion which constitutes 50 per cent of the world’s sovereign wealth fund holdings.
The trend set is clear. The void created by American investment and private equity firms which refrained from further investments due to the credit crunch which has taken its toll on the US economy, is being filled by Gulf investments.
For President Bush or the presidential candidates, be it Senator Obama or Clinton, the panacea to the current financial quagmire means more investments or more capital which in turn will boost business.
Fiscal stimulus packages like tax rebates would be nothing but short term solutions, as giving cash to consumers will only help move the economy just a jot. The need of the hour for corporate America is strong policies which may satisfy long-term growth needs than short-term benefits.
Long-term investments in businesses would help create more jobs, and thus boost public spending which in turn will put the economy on track and prove to be more sustainable though it may be slower acting.
The Fed has to recover billions in real estate funds and mortgage-related investments to revitalise the economy and thus prevent the markets from entering the hands of the bears completely. What best America can do to bail itself out is to capitalise on the upsurge in SWF investments.
Bearing in mind the goodwill of these corporations one is fully aware of the fact that the slump is only a temporary phase because of the weak dollar and the subprime credit crunch and that one day, as normalcy is restored, these sound companies will bounce back with a bang.
The US may also take a leaf out of the 1990 Swedish financial crisis where rapid injection of capital into the financial system helped it save four of its key banks from the brink of collapse.
With funds flowing in from the Arab countries, the US need not worry about the risk that it may face by bailing out private investors as most of the funds can be returned once the economy resurrects bearing in mind the fact that corporate US has always stuck to economics of consumerism.
With China and India booming, it is the Gulf SWFs that come as an opportunity in the US market. These funds could help revitalise the American economy. Can the Americans find a panacea to its economic problems with these petrodollars?
By Ravi Kumar, Special to Gulf News, April 28, 2008
The writer is an analyst and consultant engineer with CKR Consulting Engineers, Dubai.