Kuwait was urged by a financial expert to increase government expenditure to avoid the impact of the current financial downturn at the Arab Fund for Economic Development summit.

National Bank of Kuwait (NBK), the highest rated bank in the Middle East, hosted member of the international advisory board NBK and CEO of PIMCO Mohammed El-Erian at a seminar titled “Reflections on the Crisis and Post-Crisis World.”

In the seminar, El-Erian explained the role the governments can play in the region and in Kuwait to come out of the crisis.

“This is the time not only to worry about the amount of fiscal spending but how to spend the money,” he said. “This is a time from a macroeconomic point of view where there is a need from fiscal stimulus and from long term view one can also find quality expenditure on infrastructure.”

The expert started his speech by saying that this generation is living through historic times. “We are living through the crisis of the global system, as opposed to the crisis within the global system.”

El-Erian praised the role of the Central Bank of Kuwait stating that the bank has been maintaining a cautious regulatory approach “there is a reason why Kuwait financial system looks so strong compared to other parts of the world,” he said.

The expert explained that three main consequences have been seen from this crisis. One that since there is no circuit break the crisis has evolved into something big; the second conclusion according to the expert was that the financial system never re-sets.

The third conclusion that has been drawn from the crisis is “the phrase that we have been using for the last nine-10 months the unthinkable is thinkable,” he said.

El-Erian then explained how the situation to the crisis was gaining momentum. He outlined three major reasons: structural weakness and risk management, massive financial innovation and an infrastructure that could not cope with the growing base of the global financial system.

“Because of these three factors you got very unstable situation,” he said. 

El-Erian further stated that since the crisis situation was gaining momentum this led to four major sectors of the US economy contracting.

According to El-Erian, the problem in the US economy began in 2006 with the sub-prime crisis, this was followed by the financial crisis of 2007 and then in the summer of 2008 the U.S. consumer faltered. 

He said the crisis would have been mainly in the US had September 15, 2008 not happened. 

“It is the day Lehman Brother failed,” he recapped. “The world had a heart attack on September 15.”

El-Erian stated that right now four big machines of the world economy are contracting which is why we have a set of unconventional policies.

He said from the crisis three things will emerge:  Larger government role in the financial systems, banks will be more like utilities and the third will be a tendency towards risk aversion.

“More jobs were lost in the last three months than in the previous nine months and this is just the beginning,” he said.

However El-Erian explained that the GCC will be relatively better off and will not get stuck into the crisis as long as the downside is managed correctly. 

“We need to have journey strategies and destination strategies we are not going back to the old world, the onus on anybody is to be able to navigate the journey and be able to position themselves,” he concluded.

“All of us will be taken out of our comfort zones and therefore we have to ask the question, do we have journey strategies or destination strategies, most of us will end up with the uncomfortable reality that happens to be true.” – TradeArabia News Service