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Prime concerns
As the Gulf's summer heat reaches boiling point a chill has swept across global financial markets. Just how far will the malaise spread and how far will it impact markets in the Middle East?
Vulnerabilities in the US sub-prime mortgage market have triggered nervousness among investors. This has resulted in a sharp downturn in the performance of the world's financial markets since mid-July. Nowhere is this more apparent than in the global credit market. And the impact is now being felt here in the Gulf.
According to Raj Madha, senior research analyst at regional investment bank EFG-Hermes, these are "tougher times for the credit market in which raising significant amounts of credit has become more difficult".
A partner at a UAE-based private equity house says that he detects a feeling in the market that bankers are more cautious. "People are now asking themselves whether they are pricing risk correctly" he tells Arabian Business.
In July alone no less than three major companies in the region have been forced to postpone plans to release bonds as the consequences of a surge in defaults on sub-prime mortgages in the US ripple across the globe.
UAE-based Dana Gas, Abu Dhabi-based First Gulf Bank and Bahrain's Ithmaar Bank have all experienced delays with their bond plans. Also in July, Barclays Capital postponed a US$937m bank loan to DAE Aviation Holdings, a US subsidiary of Dubai Aerospace Enterprises.
On July 27, Hamid Dhiya Jafar, Dana Gas' executive chairman, stated: "In the light of the extreme weakness currently being experienced in the global credit markets, Dana Gas has been advised by Barclays Capital and Citi to postpone the pricing of its equity-linked Sukuk offering until September."
Keeping things in perspective analysts at EFG-Hermes note that the current climate represents what is in fact a modest sell-off in global markets by historical standards. However, emerging markets are feeling the consequences.
Of those in the Middle East and North Africa, the Gulf may be particularly exposed as a result of higher levels of foreign investment in the area. Attracted by the stability of the GCC, institutional investors are more active here than elsewhere in the Middle East. According to EFG-Hermes, anecdotal evidence suggests that western institutional investment in the UAE market tops that among Gulf nations, with Qatar following.
Furthermore, private equity shops in the oil rich Gulf states are seeking investment opportunities at home and abroad. In the business of borrowing, should the current situation persist, they will find difficulty raising the huge amounts of capital required to complete takeover transactions.
In recent years high levels of liquidity in global markets have created a buoyant environment in the world's banking sector. This has seen banks with large funds seeking opportunities to place money where healthy returns can be made.
Significantly, these opportunities included financing the debt behind complex and often heavily leveraged M&As.
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