Although largely untouched by the global credit crunch, the MENA region has had some casualties. Stephen Timewell reports on the outlook for the banking sector in the wake of the Dubai debt crisis
Relatively isolated and insulated from the global financial crisis, the banks in the Middle East and North Africa (MENA) region have been largely cushioned against the corrosive damage inflicted on many banking sectors worldwide. But while the region is expected to bounce back in 2010 as global recovery takes root, the region’s financial sector has not escaped completely unscathed.
The announcement on 14 December that Dubai would receive a $10 billion bailout from oil-rich Abu Dhabi to avoid a default on a $4.1 billion sukuk (Islamic bond) held by property developer Nakheel, helped steady investor nerves.
But it is not just Nakheel’s request for a debt standstill and the unfortunate way in which that request was handled that has unsettled markets; the failure to resolve the dispute between two well-known Saudi firms, the Saad Group and Ahmad Hamad Algosaibi and Brothers (AHAB), involving debts of $20 billion to more than 100 regional and international banks, has added another element of uncertainty.
The key concern is that the Dubai debt crisis and the Saudi dispute highlight the need in a globalised world for greater transparency and speed of response in dealing with complex and fast-moving situations than has been the norm in business dealings in the Gulf and Saudi Arabia.
These developments have changed attitudes to banking in the region. While the reality is clear that both the UAE and Saudi authorities will not allow their banking sectors to be permanently tarnished and they have abundant funds available to deal with any crisis, lending in the region in the future will take a different form. Lenders will demand cast-iron guarantees from sovereign governments for any state-owned company borrowings, while the so-called ‘name lending’ of the past will come under much greater scrutiny.
So, what is the outlook given that the Nakheel sukuk has been settled and the Dubai debt crisis is slowly, but surely, heading towards a restructuring and a resolution? Although chastened by the experience, bankers are not despondent. Stephen Green, chairman of HSBC Holdings, which has a large exposure to the region, said he is confident Dubai will overcome its debt crisis and retain its status as the Gulf region’s major financial hub. Equally, Robert Zoellick, president of the World Bank, agrees that Dubai’s debt crisis will be contained and manageable.
Commenting on the impact of the Dubai standstill on banking in the region, George Kanaan, chief executive of the London-based Arab Bankers Association, says: “Undoubtedly, it will cause retrenchment, greater risk aversion and a return to basics, which, given the need to further develop human resources, regulatory practice and management information systems (transparency), is probably not a bad thing… Bankers in the region should, as a result of the crisis, become more adept at distinguishing visions from mirages and wishful thinking.”
While aware of its problems, bankers are also well aware of Dubai’s achievements. Ibrahim Dabdoub, chief executive of National Bank of Kuwait, a large regional player, says: “I don’t think any other centre can replace the Dubai model. To be a financial centre is not just about having a law, it’s a [business] culture: it’s the immigration officer at the airport; the porter at the hotel; the way you get a licence in a couple of days instead of taking months.” The problem was that “Dubai went overboard with borrowing, which had nothing to do with the original business model”.
As details of Abu Dhabi’s latest bailout and the restructuring of $80 billion or more of Dubai debt emerge, relations between the emirates are expected to change. John Sfakianakis, chief economist at Riyadh-based BSF-Credit Agricole Group says: “We believe Abu Dhabi has and will attach political conditions to its financial rescue, including possibly seeking strategic equity stakes in Dubai assets and reining-in Dubai’s independence in foreign policy, as well as imposing greater banking regulation on Dubai-based banks.”
Nevertheless, apart from the Dubai debacle, the prospects for banking in the MENA region as a whole remain relatively buoyant as oil fundamentals in the Gulf look solid and economies such as Egypt, Jordan and Lebanon have managed successfully to weather the global downturn and provide opportunities for growth.
Washington’s Institute of International Finance (IIF) also highlighted the growing attractiveness of the Gulf Cooperation Council (GCC) in September 2009, noting: “The combined foreign assets of GCC governments, state institutions, and banking systems (ie excluding non-financial corporate sector) are expected to increase to $1,500 billion at the end of 2009, equivalent to 165 per cent of GDP. The rising current account surplus is likely to add $130 billion to the region’s foreign assets position in 2010, boosting them to $1,600 billion by the end of the year.”
Unlike their global counterparts, Middle East banks have fared relatively better through the crisis with tight central bank management in countries such as Lebanon and Jordan, limiting exposures to toxic assets and maintaining high liquidity. According to The Banker’s Top 1,000 World Banks listing in July 2009, aggregate pre-tax profits of Middle East banks fell just 20.7 per cent from $29.4 billion in 2007 to $23.3 billion in 2008, compared to an 85.3 per cent fall for the Top 1,000 overall.
Also, while some Gulf banks suffered, many banks in relatively isolated Lebanon, Jordan and Egypt continued to expand significantly in 2008 and 2009, with banks such as BLOM in Lebanon, Arab Bank in Jordan and Commercial International Bank in Egypt keeping conservative policies and boosting profits.
In addition, Islamic finance continues to grow, maintaining compound annual growth rates in Sharia-compliant assets of 27.9 per cent over the last four years, according to The Banker’s 2009 Top 500 Islamic Financial Institutions listing. Islamic finance is drawing support from international banks and is growing from Malaysia to Europe with the major focus being the Gulf.
Although much still depends on the fragile global recovery continuing without any sharp shocks, the MENA banks are well-placed to benefit from any upturn. With strong growth opportunities for banks in expanding markets such as Egypt, and markets such as Libya and Syria opening up, the wider MENA region has arguably as much to offer both domestic and international players as the GCC.
Also, the current issues, particularly the Dubai debt crisis, may teach bankers and authorities in the region some valuable lessons. The last 18 months of crises may in fact strengthen banking, making the Gulf overall a stronger, more attractive and profitable financial region. As the world’s focus moves east, the GCC can play a growing part. Global Arab Network
Stephen Timewell is Editor Emeritus, The Banker Magazine. 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