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Govt cover keeps GCC banks in good health

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Points of Essence:
  • GCC banks seemed to escape the global financial storm unscathed due to the strong government support and the resilience of Islamic banking industry in the region. But the financial crisis may lead to the liquidity deficit and real property cool off  which may indirectly impact the growth of the banks.
  • Banks in the GCC remain in much better shape due to government backing and strong Islamic banking industry, according to various financial institutions reports.

    Merrill Lynch said the UAE and Qatar remain capital-rich and capable to support the needs of their banking systems because their local governments provide substantial deposits and own major stakes in key banks.

    In addition, both countries’ current and fiscal surpluses account for more than 30 per cent of their respective GDP. It said banks in the UAE and Qatar are facing funding constraints not due to a lack of investors’ confidence but mainly due to a combination of aggressive loan growth and an exit of foreign exchange speculations.

    The strong Islamic banking industry has had a key role in shielding the GCC from the global financial crisis.

    Kuwait Finance House (KFH) on the other hand says the GCC is in a much better fiscal situation to withstand the global economic crisis thanks to its strong Islamic banking industry that has shied away from sub-prime mortgages (selling debt on debt), which are not Shariah-compliant.

    Islamic transactions are asset backed, and in structures such as Ijarah and Musyarakah, the assets are ring-fenced around the securitised structure.

    Ratings of sukuk take into account the assets in a structure as such provide a true reflection of risk on each sukuk, in addition to a rating on the issuer. Islamic banks will only lend to the extent of their deposit base and do not borrow from the credit market through structured notes.

    Merrill Lynch and KFH, however, admitted that although not directly affected by the sub-prime crisis, the threat from a liquidity crunch in dollar, a prolonged decline in oil prices and a correction in real estate markets could lead to an economic slowdown.

    “We feel that the banks will be able to tap government-linked funding and adjust further by bringing down their loan growth. However, we will not be surprised to see a couple of dismal quarters as the banks adjust to new realities and see downside risk to our current forecasts,” Merrill said. “Given the substantial demand for borrowing on the back of the investment spending boom, we expect the banks to focus their lending on key projects and clients.”

    KFH said the liquidity crisis in the US is spilling into GCC markets and could lead to a cooling off in property markets, especially in Dubai, and to a lesser extent Bahrain, where the real estate markets are highly leveraged.

    “In markets such as Dubai, where foreign ownership is at its highest, and in most instances with foreign funding, the likelihood of real estate distressed assets poses a slight risk to the correcting property market,” Kuwait Finance House said.

    As real estate becomes cheaper in the US and in home markets, the take-up rates of new high-end projects will be under pressure as foreigners consider home markets purchases. And although the fundamentals in the region remain strong, liquidity is drying up in GCC, particularly among the foreign banks.

    Baljeet Kaur Grewal, Managing Director at Kuwait Finance House, told the 2008 Investment in Oil and Gas Forum that financial markets are already facing liquidity issues in dollar funding, which had led to a surge in GCC domestic lending or borrowing.

    “For instance, Dubai Electricity and Water Authority (Dewa) in June, completed a Dh2.75bn sukuk priced at 125bps over Eibor. A year ago, Dewa issued a $1bn sukuk, priced at 25bps over Libor, reflecting higher dollar funding cost and the preference of local currency over dollar funding due to global credit crunch,” she said.

    Thus a return to dollar funding is anticipated for corporate loans and bonds in line with rising GCC project financing, but only when US dollar liquidity returns, which implies only when the US financial markets get better.


    30%: The share of current and fiscal surpluses in the GDP of the UAE and Qatar


Written by Suapi Shaffaii

November 2, 2008 at 9:14 pm

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