The Gulf’s Fickle Finance Fade
Gulf stock markets were mixed through October as the UAE was hobbled by Dana Gas’ imminent default on a $1 billion sukuk as foreign hedge funds were averse to a standstill. It represented the emirates’ first possible bond non-payment since the crisis as Dubai government-linked companies restructure bank debt but honor the instruments. Kuwaiti and Saudi issuers have already taken that route, and Sharjah-based Crescent Petroleum with a 20 percent stake has indicted no rescue is needed as customers in Egypt and Iraq will eventually cover shipment arrears. Its share price dropped almost 10 percent on the impasse as the bond traded at 70. Talks continued on partial payments to big holders including Blackrock and Ashmore before a convertible swap was agreed, but the private consortium expects no official lifeline from Abu Dhabi as with Dubai’s workouts. Resolution will occur against a more uncertain GCC economic and financial backdrop, according to the IMF in a recent paper prepared for central bank heads. GDP growth should average over 6 percent this year on high oil prices and public spending, which has also supported $17 billion in aid to Arab transition countries Egypt, Libya, Tunisia and Yemen since the start of 2011. Monetary policy has brought “exceptionally low” rates with dollar currency pegs intact to cushion reduced flows from European banks and emerging market investors. Inflation has been under 5 percent with food and real estate prices under control, but the break-even per-barrel threshold for fiscal and current account balances has risen to $100, above the medium-term forecast by many experts especially with the onset of new hydrocarbons technologies like fracking. The European crisis which has already pinched through bank and trade channels could dent the region’s large $1.5 trillion pool of external assets including core and peripheral sovereign bonds. GCC claims on global banks at $450 billion outstrip foreign bank lending lines by $125 billion. Saudi Arabia is the largest creditor and the UAE the main borrower although Bahrain’s exposure is outsize with its offshore banking emphasis. International providers have deleveraged in Kuwait but kept lines in Qatar which is gearing up for future World Cup hosting.
Gulf banks have capital adequacy ratios over 15 percent and NPL levels around 5 percent average with high provisioning rates outside Bahrain and Kuwait. FDI has been 5 percent of GDP mostly between Council members, although Europe’s share in Saudi Arabia is one-quarter of the total. Energy subsidies remain a budget drain, and domestic debt markets lack yield curves and corporate access. Social transfers may be better targeted toward new-hiring and training needs to remedy foreign labor reliance and steep youth unemployment and bridge public-private sector disparities. With ruling family traditions of secrecy, the Fund also urged improved collection and circulation of harmonized data through the Gulfstat agency which may soon appear.
