Money on the move

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UAE banks’ exposure to the real estate sector is estimated to represent a fifth of their loan books.

The onset of the liquidity crunch in the Gulf was brought about by large inflows of foreign capital on speculation early last summer that local currencies were about to be revalued against the dollar. When this proved to be a false alarm, funds pulled out of the country, leaving banks with gaping holes in their deposits.

The result has been a heavy drag on cashflow for companies already suffering from the downturn. In the property sector it has meant potential homebuyers have been unable to get mortgages, and on the construction side, consultants and contractors down the supply chain who rely on the developers for cash have a growing pile of unpaid bills.

At EFG, Madha says the UAE’s property sector is fuelling widespread risk aversion among lenders. Furthermore, it will be the key to stability in Dubai.

“There has been a systemic liquidity problem until March but now I wouldn’t say liquidity is the principal issue,” he says. “It’s the absence of money in the property sector which is affecting solvency. There is a solvency issue in the property sector which was in part brought on by a liquidity crunch.

“There is some ability to lend but the market is limited by risk-averse lenders worrying about some of the more vulnerable areas of the economy,” he adds. “I don’t think we’ve even begun to work through those bad debts yet.”

A Dubai-based analyst, speaking on condition of anonymity, estimates that UAE banks’ exposure to the real estate sector, including contractors, represents around a fifth of their loan books.

Total loans and advances as of April 2009 were at AED998bn ($272bn), according to monthly central bank data.

In Kuwait the principal drag on the economy, which the International Monetary Fund predicts will contract by 1.1 percent in 2009, will be liquidity, according to Mandagolathur at Markaz.

“Kuwait is dominated by the investment sector and the investment sector’s main problem is liquidity,” he says.

“If you provide liquidity, companies can roll over debt. If you have a prolonged liquidity issue, then a lot of companies will go bankrupt. Solvency follows liquidity problems.”

Williams at HSBC says borrowers have also grown more cautious and are unwilling to take on large amounts of leverage.

“Certainly there has been an increase in risk aversion in the private sector showing less appetite for taking on additional liabilities,” he says.

With benchmark crude oil prices reaching an eight month peak of $71 a barrel last week on hopes of recovery in global energy demand, Standard Chartered calculates that GCC members would have raked in around $30bn of extra cash above budget between March and June, with the UAE alone making $10bn.

“Interestingly enough, this happens to be exactly the same amount as the first Dubai bond issuance, which was deemed massive at the time,” said the bank’s senior MENA economist, Philippe Dauba-Pantanacce, in the report last week.

Higher oil prices will see continued government spending on infrastructure projects, as Gulf economies diversify away from the hydrocarbon sector, and will in turn attract foreign direct investment, a big driver of liquidity.

“If you have higher oil prices, liquidity growth will be very strong going forward,” says Mandagolathur.

So will credit growth in the Gulf return to pre-global crisis levels?

Possibly says Al Saidi, although there will be a shift in the source of financing.

“It [financing] will take a different form than it did in the past,” he says. “I think there will be less reliance on bank credit in the future and more reliance on financing through the equity and bond markets.

“This will be true for both the private and public sector.”

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