Until 18 months ago, "safe harbour" and "haven of liquidity" were terms commonly used to describe the Middle East.
Even in 2007, as liquidity dried up around the world, consistently high oil prices ensured the language of decoupling continued to circulate in the Gulf region.
But after crude oil reached a record high of $147.27 a barrel in July 2008, it steadily fell thereafter and by mid-December, had nosedived to around $40 a barrel, on declining US and international demand.
From save haven, the Middle Easts status quickly slipped to that of an also ran, an economic pariah, a catastrophe waiting to happen. Dubais property boom was slowing down and questions started to emerge about the $80bn debt mountain the emirate had amassed, and its ability to refinance it in the absence of funding from the international capital markets.
But despite the doubts expressed by the media, bankers in the region remain sanguine.
"International investors have been retrenching their exposure to emerging markets in general and the Middle East is no exception," says Hani Deaibes, head of MENA DCM at JP Morgan in Dubai. "The region is not totally immune to global deleveraging."
New issuance fades, secondaries feel the strainNew issuance out of the Gulf Cooperation Council (GCC) all but evaporated in 2008, with just $5bn of new deals, compared with $13.6bn in 2007.
With high quality European companies such as Diageo paying 310bp over mid-swaps for six year paper, there is little incentive for investors to venture down the credit curve into emerging market credits.
Added to this, as banks cost of capital rises and risk appetite wanes, fewer international banks are willing or able to lend to the region.
"As international debt capital markets are now effectively closed to most issuers and overall risk tolerance is reduced for financial institutions, risks related to liquidity and external funding needs have increased," says John Tofarides, a Dubai-based analyst at Moodys.
The effect on credit default swaps in the region has been severe. At the end of 2008, Dubais five year CDS was at 650bp while Abu Dhabis was at 250bp and Qatars at 225bp.
Bid/offer spreads are at historic wides of three to five percentage points, while, as Jonathan Segal, director, financial solutions group at Barclays Capital in London, points out, "at the peak of the market, they were at half a point." Dubai Ports debt is trading in the region of 800bp-900bp over mid-swaps, while Dubais real estate issuers are trading at 1,000bp-1,200bp over mid-swaps.
"We are witnessing a combination of events," says Deaibes at JP Morgan. "Global deleveraging is combining with tightened liquidity in certain domestic markets. Ordinarily when international investors offload at distressed levels, we witness bottom fishing by local accounts, but this time around, there are some constraints on both dollar and local currency liquidity in certain areas which will take some time to dissipate."
Barclays Capitals Segal is optimistic that issuers may return to the market in the second quarter of 2009, although he admits "we are unlikely to see significant volumes".
"The first issuers to come to market will be from Abu Dhabi or Qatar, not Dubai," Segal predicts. "And they will be government related borrowers."
GCC deals will be smaller and bought more by regional investors, adds Luis Costa, research analyst at Commerzbank in London. "There will be little access to external debt."
And while some borrowers in Russia in particular have sought to buy back discounted bonds, in the Middle East, heads of treasury are simply looking to build liquidity.
Hubris punishedIn fairness, the Gulf region has not helped its own cause.
In November, concerns surrounding the real estate sector fed through to the Dubai-based sharia-compliant banks Tamweel and Amlak, which were merged under the UAE Real Estate Bank into a new $8bn lender, creating the largest real estate financial institution in Dubai.
Mohammed Alabbar, chairman of Emaar Properties and head of a new economic taskforce to tackle the financial crisis in Dubai, said the merged lender could benefit from government funding if needed.
From a public relations point of view, the timing could not have been worse, coming on the heels of a "mines bigger than yours" announcement from fellow property giant Nakheel of its plans to build a 1km tall skyscraper in Dubai and the $20m party it splashed out on for the opening of the $1.5bn Atlantis resort.
Where once the regions self-belief inspired international investors, the optimistic line being pushed by the local business community began to sound downright delusional.
But while the Amlak/Tamweel merger highlighted the troubles in Dubais real estate sector, it also showed the willingness of Abu Dhabi to step in to lend support to Dubai, says BarCaps Segal.
The merger of Amlak and Tamweel marked the first move by the oil-rich emirate of Abu Dhabi the largest and most powerful of the seven emirates in the UAE to bail out companies in neighbouring Dubai suffering under the strain of the global financial crisis. And Abu Dhabi is widely expected to support the economies of its neighbours in return for more control of the UAEs federal affairs.
"This merger was interesting, given the speculation over whether Dubai would be able to repay its obligations," says Segal. "It shows the UAE and Abu Dhabis willingness to step in."
Regional liquidity stressThe UAE government acted quickly to alleviate the liquidity shortage in the region, providing a repo facility from the central bank, worth a maximum of Dh50bn, and a direct deposits scheme from the Ministry of Finance for a maximum of Dh70bn.
On October 13, the federal cabinet also announced plans to guarantee banking deposits for three years, covering both national and foreign banks with significant operations in the UAE.
"This served to substantially bolster confidence in the banks," says Segal.
JP Morgans Deaibes agrees that the governments response was "well-timed and appropriate."
But in a research report released in November, Moodys remained concerned about liquidity stress in the regions banks. "The intense rivalry among banks to attract deposits is creating large movements of deposits across banks, with clients shopping around to place funds with the highest bidder," says Tofarides at Moodys.
"This, coupled with the high level of deposit concentration creates additional volatility in the funding base, thus exerting pressure on banks to maintain more liquid (and often low return) positions and to raise funding costs, thereby affecting core profitability," he adds.
Constraints in external funding will also make raising long term finance for projects in the Gulf more challenging and, unless debt markets improve in 2009, a large portion of the unexecuted projects in the region will likely be cancelled or postponed, Moodys warns.
Refinancing: debunking the mythsDubais total debt of some $80bn, with an average maturity of three to five years, implies refinancing needs of around $20bn annually. Abu Dhabi and Qatar together have less than $5bn of refinancing to complete in 2009.
"The question is not so much whether borrowers in the region can meet their debt obligations and can successfully refinance maturing loans," says Barclays Capitals Segal. "The issue is more about new projects. There is little doubt that some new projects will have to be sidelined, in the absence of international funding."
The regions vast currency reserves are likely to act as a successful backstop to ensure government related entities are able to refinance their debt.
"The media doesnt always have the full picture," says JP Morgans Deaibes. "The surpluses of the GCC government and the UAE are significant. The UAE will have a fiscal surplus of approximately 20% of GDP in 2008 that is more than enough to cover its refinancing needs."
One issue is that much of the money from the sale of oil goes to the sovereign wealth funds, whose mandate was to diversify the economies of the Gulf states, not to invest in them. "Some sovereign wealth funds have been directed at foreign investments, but in the absence of foreign liquidity in the region, they can step in and play a role in that respect," says Deaibes.
Future still looks brightDespite the negative headlines, bankers who cover the region remain optimistic about the Gulf.
"We still think these countries will continue growing there are plenty more government sponsored projects the expectation is just for lower growth," says Segal. And the Gulf region can pump oil more cheaply and efficiently than anywhere else in the world. "Even with oil at $40-$50 a barrel, theyre still generating a lot of money."
"I dont believe in an Armageddon scenario," Commerzbanks Costa adds. "There is a lot of Asian demand in the region, and a great many captive investors. Well just see more government support from the cash and oil-rich states like Abu Dhabi, the UAE and others."
Costa is also keen to defend Dubai against the media campaign that would have the emirate as the worst example of the excesses of the credit boom.
"Dubai marketed itself and now is a major hub in the Middle East," he says. "The prospects for Dubai are fantastic, but over the last couple of years, the amount of indebtedness grew way too fast. This happened in many other countries too Dubai is not unique in this sense.
"We strongly believe that states like Dubai, which runs total debt of around 110%-115% of total GDP, are nothing special. We are not especially concerned about refinancing risk, since the crisis needs to become much worse before the cash reserves in the UAE and Qatar dry up," Costa says.
Deaibes agrees. "The region remains an important part of our business. We are still in growth mode."