Finding solace in humour and Minsky

It looks like gloom breeds black humour. Last week one of our readers forwarded me a list of recession jokes. One of them read: "You know there is a recession when your neighbour loses his job. It's only a depression when you lose yours."

Jokes apart, suddenly everyone is talking about the economic downturn and potential job losses. Last week Damac, a Dubai-based real estate developer, announced that the company is laying off 200 employees. Fearing similar action by other real estate companies, banks have suspended credit facilities to employees of some of these firms.

I strongly believe it is a knee-jerk reaction and just a passing phase.

So do many bankers and prominent economists. For instance, Richard Meddings, group finance director of Standard Chartered Bank, told me last week that the UAE and the region will be resilient to the global slowdown. Jean-Pierre Beguelin, chief economist of Pictet, a Swiss private bank who was in Dubai last week, echoed that view. "The UAE, a well-managed economy with huge accumulated resources, is well-placed to cushion the impact of an external shock of this nature," he said.

Then on Thursday Alex Patelis, an economist with Merrill Lynch, sent me an interesting note on the works of Hyman Minsky (1919-1996), a Russian economist known for the so-called "Minsky moment" - a term coined after the 1998 Russian financial crisis to describe a precipitous and sudden collapse in market prices following a long period of prosperity.

At the core of Minsky's thinking was the belief that market capitalism is an inherently unstable system. Periods of prosperity and financial stability are inevitably followed by bursts of financial instability, as expectations of continuously rising profits are eventually disappointed. In Minsky's view, the main reason why the financial collapse of the late 1920s triggered the Great Depression was that the US government was too small and financially too weak to take any decisive action at the time to make a difference.

Going by Minsky's theory, we can safely assume that the financial strength of the UAE government and institutional framework in the UAE should make a big difference. Although the liquidity shortage has impacted lending to some extent, unlike their Western counterparts banks in the UAE are not facing any systemic risk. While the UAE Central Bank has assured that the portfolio risks faced by domestic banks are minimal, the government has virtually underwritten all kinds of potential banking risks by guaranteeing both deposits and interbank liabilities, in addition to providing Dh120 billion in liquidity.

Clearly the UAE government and the institutional framework of the country have demonstrated the ability and the willingness to manage the situation from slipping out of control. Going by the standard definition, a recession is a decline in gross domestic product (GDP) for two or more consecutive quarters. Even if the UAE economy were to go through a slowdown, it is still expected to report healthy growth of more than 6 per cent according to the latest IMF forecast.

In the globalised economic environment, external macro-economic factors are likely to have some impact on the business environment in the country. However, it would be naïve to assume that this is the end of all growth opportunities.

If the jokes going round don't crack you up, that at least is something to make you smile.