Fiscal firepower

As Dubai begins to spend funds from its $10bn bond programme, other Gulf Arab governments are preparing packages of their own to cushion the worst of the impact of the global downturn.

Dubai policymakers last week confirmed that funds from the emirate's $10bn bond programme will be available within weeks, to help troubled firms struggling due to a lending drought in the Gulf's former boomtown. The funding will be a much-needed tonic to big borrowers in the emirate who face having to repay debts accumulated over years of runaway growth.

Across the border, Saudi Arabia's government announced earlier this month it would use its state investment funds to offer credit to companies in an effort to offset banks reluctance to lend. Investors in Kuwait, meanwhile, are anxiously waiting on parliament to approve a $5.11bn injection to help banks aid the country's struggling investment companies.

The measures are just the latest in a series of stimulus packages devised by GCC governments to head off a slowdown in their economic growth, attempt to defrost credit markets and stimulate flagging investor confidence.

"These moves will not bring back the good times of the last five or six years," says Simon Williams, chief economist at HSBC Middle East. "But what they will do is put a floor under the slowdown, and ensure it's a story of economic deceleration, not derailment. I expect these support packages to maintain stability - that's the goal."

The last six years have seen an unprecedented boom across the Gulf, the region's ambitious development plans bankrolled by surpluses generated by the soaring oil price.

In September last year, however, US congressional leaders were forced to push through a $700bn financial rescue package to prop up the country's ailing economy, creaking under the weight of a financial crisis. Soon, politicians from Iceland to China were rolling out extensive economic bailout packages.

Now, with the shockwaves of the global economic downturn rippling through the Gulf, the region's policymakers are using oil revenues to buffer their economies from what has become a global crisis.

"What Gulf governments are spending is last year's oil revenues, so it is a more sustainable policy," points out Williams. "In the West and in other emerging markets which have announced similar rescue packages, they are using next year's tax receipts."

The need for economic stimulus in the Gulf is becoming more apparent every week.

Leading declines on regional stock markets has been the Dubai Financial Market General Index, which has plummeted 74 percent in the past year, while Saudi Arabia's Tadawul All Share Index has tumbled 57 percent over the same period.

With banks reigning in lending, the number of projects underway or slated to go ahead in the region in January 2009 stood at $2.94 trillion, down 62 percent from a year earlier.

But while the various government packages announced share broadly similar goals of stimulating demand and maintaining economic growth, there are marked distinctions in how they will be used, David Butter, regional director, Middle East & North Africa for Economist Intelligence Unit (EIU), says.

"The situation in Dubai is significantly different to elsewhere as there is a particular issue in refinancing debt this year and next," he notes.

Oil revenue enabled Dubai to borrow to finance its expansion as the emirate enjoyed a construction and property boom. With the real estate market now in decline, many Dubai firms have suffered, especially as lending cuts are made by banks facing the risk of greater mortgage and consumer loan defaults.

But investor concerns that some firms might struggle to repay debts maturing this year have been allayed by the government's $10bn emergency programme, to be funded by bond purchases from the UAE's central bank.

Nasser Al Shaikh, the head of Dubai's finance department, said this month several firms would begin drawing from the fund within two weeks. Real estate companies and small and medium-sized businesses would also have access to funding.

The finance department is already leading negotiations with local banks on behalf of Dubai Airports to refinance the company's $1bn debts, due in April, he said. A further $10bn fund is available to be issued by the government when needed, Al Shaikh added.

But these bailouts may not be enough on their own to improve the emirate's deteriorating economic outlook, and more measures may be in the pipeline, according to Monica Malik, an economist at EFG Hermes.

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