Fiscal firepower

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Like UAE, Saudi Arabia and Kuwait governments aim to inject liquidity into their ailing banks to boost lending across business sectors.

"While we believe this is an important move to ensure that liquidity is available to the banking system, it is no longer just an issue of tight liquidity," she says in a research note this month. "With the deteriorating economic outlook, risk aversion by the banking system has increased, especially given the correction in property prices and job losses."

Malik says there is a strong possibility the UAE's central bank could loosen its credit growth cap in a bid to revive the economy.

In February, Dubai's neighbour Abu Dhabi announced a $4.36bn injection of capital into five of the emirate's banks, in a step aimed at shoring up balance sheets and stimulating lending. The Abu Dhabi Commercial Bank, National Bank of Abu Dhabi, Union National Bank, Abu Dhabi Islamic Bank and First Gulf Bank all received between $544m and $1bn in the form of five-year notes at six percent interest.

It follows around $32.6bn of emergency funding facilities launched by the central bank and finance ministry since September 2008, in a bid to reignite lending. The Emirates interbank offered rate (EIBOR), an average of interest rates banks charge each other for loans, has fallen as a result of the state's measures.

"The Abu Dhabi support for its own banks was not as a result of any crisis but as a measure to head off a slowdown and give Abu Dhabi a chance of getting closer to its own medium-term growth targets," says Butter at the EIU.

In a bid to recapitalise its listed banks, Qatar has said its sovereign wealth fund, the Qatar Investment Authority, would begin buying shares within the institutions' investment portfolios by the end of March. The announcement, earlier this month, sent stocks on the Doha Securities Market soaring and if the investments are sufficient to boost liquidity, the financial services sector could stabilise.

Saudi Arabia's Public Investment Fund (PIF), a state investment vehicle holding shares in leading companies, is ramping up its lending facilities, making loans available to Saudi companies with a five-year grace period.

Funding for small and medium-sized firms within the Gulf's biggest economy is being made available through the Industrial Development Fund and the Saudi Credit and Savings Bank.

In Saudi Arabia the measures are not really a sign of distress but a recognition that there needs to be supplementary finance to keep non-oil growth at an acceptable level," says Butter.

Although Saudi banks have for the most part not been exposed to risky overseas assets, they have been tightening their lending requirements nonetheless. Lending to the private sector dropped by one percent in the second half of 2008 and as much as $39bn of projects were suspended or cancelled altogether by mid-February, according to Saudi bank Samba.

A vote was postponed by Kuwait's parliament earlier this month on a draft law to approve a $5.11bn package for banks to bailout the country's troubled investment firms. The plans also guarantee half of as much as $13.6bn of banks' new loans to local firms.

A Kuwaiti official said in November 2008 that a fund worth at least $3.4bn, spearheaded by the Kuwait Investment Authority, the country's sovereign wealth fund, would buy shares on the market over five years. The same month, Oman announced a $390m fund to invest in its flagging stock market.

While questions have been raised by some investors that some of the bailouts being drawn up in the GCC have not been targeted enough, HSBC's Williams believes further initiatives could be in the pipeline, especially if the financial downturn deepens.

"This is a systematic response that is still evolving," he says. "There's scope for further action in the weeks and months ahead. Policymakers in this region are in a position to use the wealth at their disposal to maintain order."

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