ARE WE IMMUNE FROM THE CURRENT FINANCIAL CRISIS?

For the past few months, international media has been following the developments in the global financial market and their effects on the “credit crunch” or the current financial crisis. However it’s only very recently that our media got aware of the crisis and started paying attention on the twists of the crisis. In the past week and in this week I had seen some reports on the crisis and its effects on our country, published on some news papers. They even went on quoting some prominent business people in Maldives, about what they think of the crisis and its effects on our country. Cabinet has also discussed about the issue in its last sitting.

Background of the crisis:

According to some financial analysts, the build up to the crisis rooted back to late 90s and early 2000s. The risky mortgages (usually referred as subprime mortgages in financial contexts) that made by US lenders in late 90s and mostly in early 2000s, and the subsequent securitization of those loans led to the crisis.

For various reasons, lenders were encouraged to make high volume of subprime or risky loans to individuals without sound proofs of credit worthiness. These individuals were only delighted to take up those offers with their unstable employment and income flows. Unfortunately the economic conditions in US got worsened, and through mid-2004 to mid-2006, US Federal Reserve increased the interest rate repeatedly causing those borrowers to default on their loan repayments.

When those borrowers defaulted on their loans, it wasn’t only the initial lenders who got in trouble. Through securitization, the initial lenders transferred those loans to other investors in the first place. Investment banks, hedge funds, wealthy individuals etc invested heavily in those loans (actually they invested in asset backed securities issued through securitization process but the return on those securities depend on the repayment of the loans). Some financial institutions invested a relatively large proportion of their funds in those securities. So the default of the borrowers put those investors on the verge of collapse.

Ultimately in August 2007, the crisis broke up with the collapse of a major US investment bank. From then we have been seeing the crisis continuing with surprising twists. In recent weeks it got worse than before and resulted many large financial institutions and hedge funds being bankrupt in various countries. Merely a financial crisis at the start has turned into a real economic crisis posing concerns over economic growth, employment etc. It’s for this reason we can’t shut our eyes on the crisis saying it’s a problem to be dealt with developed countries and international community.

Implications of the crisis for our country:

Unlike the developed countries, financial institutions in developing countries don’t seem to have a significant exposure to those “bad” securities. Hence our local bank and overseas banks in Maldives are safe to some extent. However the crisis has made it really difficult to get credit or funds in the international financial markets. So the banks in our country may suffer because of the limited or no funding from overseas to finance their lending activities. Apart from this I can’t see a direct impact of the crisis on our banks.

However we may have some serious indirect consequences which can send our economy into a slump. As I said before the crisis has taken a new twist causing real danger for economic growth and jobs in developed countries. Any slowdown or problems in the economies of our major tourist markets will be a problem for us. Europe and Japan being our major tourist markets can’t continue sending tourists to our country if their economies keep on deteriorating. So the current financial crisis can have potential negative effects on our tourism sector. Any Maldivian can imagine what will happen if the tourism sector performs badly or its income goes down.

Secondly any negative impact on our main donors like Japan will reduce the amount of foreign aids we get in the future. More than those foreign aids, the foreign direct investments (FDI flows) into our country may get reduced. This will be very harmful to our economy, especially in a time when we are badly in need of those FDI flows to undertake large projects which can potentially create many jobs. These FDIs are also important to maintain our foreign exchange reserves.

These are the main implications I can think of now, but as the crisis continues it may pose new threats and concerns to our economy. I think it’s high time that the government and tourism sector start thinking about this and plan how to tackle the problems. And this again highlights the danger of not having a diversified industrial base in our economy and depending too heavily on tourism sector.

A quick analysis of the election results and recommendations

[ This post has been sent to me by an anonymous reader.]

First round is almost over, and we have nearly taken the Maldives back. If we view the election as a vote of no-confidence, clearly Gayoom has lost. But we all must remember he needs about 12% or 25,000-35,000 votes to win in the second round (based on figures announced around 10 am). MDP should not be overconfident of a win in the second round. Such a confidence depends on these assumptions:

1. How many who supported Gasim Ibrahim actually would have supported Gayoom? (This question is relevant because in terms of economic favours to individual voters Gasim and Gayoom are more favourable than Hassan Saeed)

2. How many who voted Hassan Saeed would have voted Gayoom? (In terms of capability -- education -- and experience)

3. How many who voted Hassan Saeed and Gasim think Anni is the better candidate than Gayoom? Or alternatively, how many of them think Anni is the lesser evil? (Here questions like misconception about MDP's connections with foreign elements and 'churches' apply too.)

I want to be optimistic and suggest that most who voted Hassan Saeed and Gasim were united by their dislike towards Gayoom than their dislike towards Anni. But we cannot be too optimistic because Gayoom needs about 12% to win, while Anni needs about 25%.

Difficulties:

Hassan Saeed might not endorse MDP. One possible reason is he may be looking forward to the next presidential election. He might be pessimistic about an MDP-led government. He might be neutral between Gayoom and MDP. Remember he is the most centrist candidate.

Some recommendations:

Since we cannot automatically assume the 25% votes more Anni needs, the best that remains is to join forces against Gayoom. MDP must not be too confident not to do their best to bring at least Hassan Saeed to their side.

MDP should make some compromises. Ideally, if the laws allow, MDP should consider replacing Dr Mohamed Waheed Hassan Manik with Hassan Saeed as Anni’s running mate.

To bring in Hassan Saeed and his voters, MDP must consider repackaging their manifesto and policies taking the appealing policies from Hassan Saeed’s manifesto and policies such as the idea of bringing capable people to form a unity government.

In my opinion Gasim must be their last option, mainly because Gasim does not appeal to the reform oriented, change oriented, young people. He is seen as an uneducated, greedy rich person, without democratic credibility because of his business empire and influence in the society. However, MDP should look for Adhaalath’s support.

Finally, even if Ibrahim Ismail did the worst in this election, he still could bring political moral credibility and weight to Anni.

CALL FOR A NATIONAL UNITY GOVERNMENT

When Hassan Saeed called for a unity government and made it the number one promise of his presidential bid, we are seeing divided opinions on the matter from bloggers, journalists and politicians as well. From what I have seen, many have either misunderstood Hassan’s concept or they are purposely trying to misguide others.

First of all, his call for a unity government while being an independent candidate is not an indication that he doesn’t favor a multi-party system. He is simply arguing that we are lacking capable personals to run and manage six or ten political parties, and hence any individual party can not be trusted to govern the country all by themselves. It hasn’t been long since these political parties were formed. In this short period we have seen many unsettled politicians shifting parties and their loyalty. In my opinion these so called politicians have a lot to learn yet and parties have a lot to achieve. Almost all of these parties are formed and run around one strong figure. These parties don’t have enough capable people to manage even the intra-party affairs. So how can we form a competent cabinet from a single party?

Before we saw a strong MDP capable of governing the country alone, but today we are seeing a lot of strong figures leaving MDP and the party is not like what it used to be. While acknowledging Anni’s great sacrifices and hard work to bring reform and democracy to our beloved nation, I also note that he has not been able to show us a team of politicians in whom we can trust to govern our country alone. Even Anni might have thought the same thing, when he declared that he was even ready to become a running mate of someone who is not from MDP.

Therefore Hassan’s proposal is not destructive to a multi-party system, but rather it will help to enhance the multi-party system. A unity government will give the much needed time for political parties to become politically and intellectually more mature and to identify real leaders. We need unity among all pro reform parties to deliver the Maldivians a smooth and happy transition period. Let us give more time to our political parties and potential leaders to emerge fully and stand on their own feet. The last thing we need now is rumors and lies that can damage a potential alliance between Anni and Hassan to form a national unity government.