Initially, it seemed that the Gulf Capital markets would avoid the global economic crisis, but it hit them in December 2009. Jason Peers considers the challenges ahead
It has been an extraordinary year in Gulf Capital markets. For much of 2009, most observers believed that the Gulf region, underpinned by liquid markets, strong banks, record oil prices and with relatively closed capital markets, would miss the worst of the global economic crisis. Indeed, some believed the region could emerge as a predator ready to snap up incredible deals never seen before in international equity and real estate markets.
At the same time, world leaders looked to the cash-rich Gulf countries to step in to shore up the West’s leading financial institutions with some costly consequences for the region’s sovereign wealth funds. However, by December it was clear that the global crisis would hit the Gulf Cooperation Council (GCC) and trigger a series of regional crises.
The Dubai real estate crash and its repercussions in other GCC markets was to be expected; what shocked was the speed and severity of the ensuing liquidity crisis. GCC governments moved quickly to support the banks, but the damage was done: the cost of deposits soared, confidence dropped and banks became very cautious to lend, even to healthier, non real estate borrowers. Private sector companies hit by payments delays hoarded cash, while international bank lending was hit by the emergence of a series of debt defaults, a feature that has not been seen in GCC markets for many years.
Saudi Arabia did not escape the contagion, despite ring-fencing its windfall oil gains against exposure to riskier international assets classes, such as sub-prime and discouraging Saudi banks from lending into the UAE real estate boom. However, the debt default of two hitherto blue-chip Eastern Province-based family conglomerates undermined ‘name lending’ and created tensions between GCC and other central banks sucked into the imbroglio to protect national interests.
Dubai’s ongoing problems have hit loan volumes across the GCC, and raised questions about the role of other quasi-sovereign borrowers. The only major loans raised in 2009 were sovereign or quasi-sovereign borrowers, but there is anecdotal evidence that lenders are retrenching here as well.
For the first time, the sukuk market registered several major defaults and is shrinking; new issues for 2009 are unlikely to exceed a third of the 2007 peak of $47 billion. The confusion surrounding the position of sukuk holders in the Dubai World project is further likely to limit the market’s attraction to sovereign and bank issuers.
Stock markets have had a roller coaster ride across the GCC. Equity issuers and their bankers have been very nervous of launching issues into this volatile environment and IPOs have fallen to $2.06 billion in 2009, compared to $13.15 billion in 2008 and $14.44 billion in 2007.
Investment bankers have felt the pressure to cut costs in the face of hugely depressed volumes of sukuk and equity capital market issues and very limited secondary market trading volumes. The few issuers still in the market have also been able to command ever tighter pricing from their advisers.
However, there are encouraging signs, although the market remains fragile and sensitive to bad news. Tangible progress on resolving the Dubai World bust and the Algosaibi/Saad dispute, combined with the rapid implementation of stimulus packages and faster, more decisive execution of government projects is crucial.
Equally, strong leadership from central banks and regulators is required to settle the regional lending market while re-establishing investor confidence. Borrowers should however prepare for a very difficult year. The successful will focus on rebuilding relationships with their banks and working out with them more innovative ways to source and structure funding.
In the meantime, governments and regulators face multiple challenges. Having embarked upon an ambitious and, arguably, long-overdue reform of capital markets, many countries were in the midst of either developing or fine tuning their regulatory frameworks when the global economic crisis hit.
Uncomfortably for everyone, the benchmark regulatory regimes they were encouraged to emulate, and did so slavishly in some cases, were found wanting. Embarked upon a reform programme these governments have found their freedom to adapt complicated by the interrelated nature of their markets and economies and in most cases have taken a tougher, more invasive approach.
Intra-regional barriers have sprung up across the GCC. This has undermined the hub-and-spoke model and reduced the attractiveness of hosting the financial centre. The emergence of the two regional powerhouses of Saudi and Abu Dhabi, both with a clear ambition to take at least their share, is going to test those centres that flourished while they lay dormant. The landscape is changing and regulators and practitioners alike are struggling to keep up with the implications.
Into the mix we now have foreign exchange operators seeking to export their models in a series of tie-ups with regional bourses, and the London Stock Exchange is seeking to establish its place in the region. The recent merger of the two Dubai Exchanges makes enormous sense – and even more so if it could be followed by further tie-ups in the UAE and beyond. Ironically, the series of international associations will make the chance of mergers or closer co-operation more remote in the short term.
Throughout, the Tadawul exchange in Saudi has steered a steady course of independence on firm regulatory and technology pillars. Few regulators are enticed currently by the thought of their local firms listing internationally or even across regional bourses, given that the scale of the Algosaibi and Saad losses is blamed in large part by many on the use of other markets than Saudi as conduits for borrowing.
With the establishment of a series of commodity exchanges across the Gulf, particularly in Dubai, the challenges for regulators are increased. And it is not yet clear whether these can all gain a sustainable market position in the highly competitive global landscape, although the success of the Dubai Mercantile Exchange to seize its seat in the global market place is promising.
Exchanges of all types depend on volume and churn that, in turn, requires confidence to return to issuers and investors alike. Without this, profits for exchanges, market makers and brokers alike will be elusive. Governments, regulators and operators are going to need to show resolve and keep their nerve.
Global Arab NetworkJason Peers chief executive at Jasper Capital Group. This article is published in partnership with the Middle East Association and was published by News desk Media in the Middle East Business Focus 2010 on behalf of the Middle East Association