“We have magneto trouble ...” wrote John Maynard Keynes in 1931.
The Central Bank of the UAE has responded with a monetary stimulus package that will bolster confidence in some sectors. But how do we start up again with renewed vigour and confidence?
The fundamental cause of the trouble is the lack of new enterprise due to unsatisfactory demand for capital investment. This has been magnified by the pandemic, and has led to a decline in current expenditure as well.
Since trade is international, an insufficient demand leads to idling throughout the world and affects profits and production of all countries alike. While this is an unduly simplified picture of a very complicated phenomenon, it contains an essential truth. To ascertain that truth, we need to look at the attitude of lenders.
Given the fact that the Central Bank has attacked this root cause is a reason for optimism, but lenders will have to go farther than this if there is to be a revival, because in many sectors, the cost of production has exceeded the revenue that is being recorded.
In a normal course of events, this frightens lenders, as it does to borrowers as well, with the consequent effect of a precipitous decline in the value of capital investment. If lenders do not go far enough, there will be a spate of defaults that will cascade, and for banks to avoid this, they must be willing to “come to the party” and work with borrowers such that there is instantaneous relief to the consumer as well as the business owner. What is key here is that the spigots of liquidity that are being opened up should not only be to finance losses of the borrowers, but for new capital investment as well. This idea may seem preposterous in the current environment, but it is exactly during these times that we see the emergence of both opportunistic investors as well as a new breed of entrepreneurs.
Union of ideas
Dubai and the UAE knows the above two categories well enough. So does the banking ecosystem. So does the privet sector, big and small players alike.
Even though there is a sense that the slump is currently overdone for psychological reasons, there cannot be a real recovery in my opinion until the ideas of lenders and productive borrowers are brought together again.
There cannot be a real recovery until the stimulus is broad-based, immediate and across the board for the consumer and the producer alike. Only with easier payment terms will borrowers be able to recover their spirits. Only with lower collateral terms (an idea that I have been mentioning for some time) will lenders be able to recalibrate again and infuse liquidity into the system.
Seldom in modern history has the gap between the two been so wide and difficult to bridge. Bankers need to bend their wills and accommodate requests immediately; this is not the time to exercise monetary prudence.
This is the time to provide relief.
Fill the breaches pronto
Central banks throughout the world have started to take resolute action. This is for the most part the playbook of the past. This time, the action needs to be more immediate and more drastic to mitigate the after effects of this shock.
In the coming weeks, we shall see whether further monetary stimulus is provided, but we do know that it has to be immediate and substantial. The measures to react in economic terms may be seen by many as “overreaction” (exactly nobody has said that as of yet, because no country has overreacted), but similar to the reaction in response to the growing threat of the pandemic, there is no such thing as an overreaction here.
While it is beyond the scope of this column, to give all the specifics, this is a call to arms. What we know about the truth is that it needs be told and written.
Across the world, there is a truth of stimulus that is needed to jolt the world economy awake. That time is now. There cannot be this sense that eventually the economy will course correct. Equilibrium will not be restored, until the injection of liquidity is massive, immediate and overwhelming.
- Sameer Lakhani is Managing Director at Global Capital Partners.