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The Gulf can run but it can't hide from market forces
The region's banks may have been feeling quite smug until these last few days.
Having successfully sidestepped the falling anvil of 'toxic debt', they seem to have walked into the manhole marked 'liquidity crisis.'
Like their counterparts in the US, local banks have been keen to gain exposure to the phenomenal real estate growth story of recent years. Unlike their counterparts in the US, they have happily avoided lending to people whose liquid assets are contained mainly in their fridges.
While that should be seen as good news, the local liquidity crunch has again destroyed the notion that the region's oil wealth somehow insulates it from what is happening in credit markets globally.
The UAE established a $14bn fund last week to provide the liquidity that had been lacking in the aftermath of the market panic that was triggered by the Lehman collapse, the Merrill-Bank of America merger and the nationalisation of AIG.
After the UAE Central Bank made its announcement, it subsequently emerged that Kuwait's Central Bank is also reviewing a similar plan to pump in capital to the banking system if needed.
Meanwhile, US Treasury secretary Henry Paulson disclosed in an interview that he expected other governments around the world to follow the US lead in attempting to "buy up" all the bad paper in circulation.
Such measures highlight both how vulnerable the regional banking system is to external shocks, and how reliant it may be on the real estate industry.
That is the big worry. There haven't been any subprime mortgages sold in this part of the world but the enormous escalation of property prices in the last year have been enough to raise fears that a drop in prices, or what estate agents like to call a correction, could leave many people in negative equity.
It is reasonable to expect that this could happen sooner than we all thought if large numbers of the foreign buyers who have been active in the market for the past five years decide to sell up.
That's not just potentially bad news for the real estate industry, but also for the banks that have been selling the home loans and investing their own equity into the industry through other investment vehicles.
In this week's cover story of Arabian Business, we report on the devastating impact that the credit crunch has had on global real estate markets and explore how a new and more sober assessment of the asset class is fast emerging around the world.
The other lesson from the events of the last week is that however positive local real estate or banking fundamentals may be, they're not much of a match for the sort of market forces that have threatened to lay low some of the biggest names on Wall Street in recent days.
And that applies whether crude is selling for $47 a barrel or $147.
Sean Cronin is the editor-in-chief of Arabian Business English.
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Comments 1-1 of 1
Posted by Aadil, Johannesburg, South Africa on 28 September 2008 at 16:32 UAE time
I've been saying this for a while now.
When the correction comes, the Banks are going to really struggle. Negative Equity is dangerous and inevitable here, but with the added risked of a transient society i.e. large number of expats, the risk is greatly increased.
The Perfect Storm is coming. When property prices fall, expats whose quality of life is already squeezed by ridiculously high cost of living, will simply pick up and leave their negative equity investments for the banks to pick up the tab.