The region’s markets for large-scale project finance and real estate will be particularly affected by the global credit crunch, says a report.

With less than $3 billion officially acknowledged, the direct sub prime exposure of GCC banks has been limited thus far, although further exposure is likely to surface, said the Gulf Research Centre report written by Eckart Woertz.

Presumably, the exposure of the region’s Sovereign Wealth Funds (SWFs) has been higher as they have been more sophisticated in their asset allocation, although data are not available due to the relative opacity of such funds. As they have enjoyed large inflows due to high oil prices and have diversified portfolios, the impact is probably manageable, said the report titled “Impact of the US Financial Crisis on GCC Countries”.

Much more important than the direct impact of the international financial crisis is its indirect effect on the GCC countries, as financing becomes scarce and its costs soar. Corporate spreads in the GCC have widened dramatically, and a couple of companies have already witnessed problems in refinancing existing bonds and loan facilities.

Possible mitigation measures on the part of the GCC countries could include liquidity easing measures by the central banks without encouraging further credit growth. If push comes to shove, cash injections and strategic domestic investments by the region’s SWFs could also be contemplated, most notably in GCC companies like Sabic or Emaar that position themselves internationally and are key for the future diversification of the region’s economies, the report said.

As the financial crisis will cause a recession on an international scale, demand for important GCC export products like crude oil, petrochemicals and aluminum will be affected. As their budgets are balanced only as long as oil prices stay northwards of $55, the GCC countries should engineer Opec production cuts in case oil prices correct further below $80 to stabilize their revenue situation, it said.

After showing resilience in 2007 and remaining relatively unaffected by the global sub prime turmoil in 2007, the GCC equity markets have suffered much more than the ones in the US and other developed markets. In Saudi Arabia and the UAE (Dubai), indices have shed more than 40 per cent since the beginning of 2008.

It is now widely recognized that the financial crisis will spill over into the real economy and cause a recession, if not an outright depression as some analysts fear.

The notion that was held by some until recently that China or the GCC countries could decouple from this trend must be deemed futile, the report said.

The effects on the GCC countries will be far from negligible and will not be confined to the financial sector but will affect the real economy as well. Most notably, the demand for crude oil and products of the GCC’s heavy industries like petrochemicals and aluminum will suffer.
 
Besides, large project finance will not be as readily available as in the past and might affect the cost structure or even the feasibility of some mega industrial projects.

The real estate sector will be equally hit especially in more heated markets like Dubai, where it has relied heavily on debt financing and speculation. Luxury demand from high net worth individuals from abroad and affordability for domestic demand are likely to decrease while projects that are still in the planning stage could face a financial squeeze. Whether this will lead only to a slowdown and not an outright collapse as Citigroup has argued recently in a research note remains to be seen, it added. – TradeArabia News Service