No Escape
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No Escape

The Gulf countries may be financially strong, but even they cannot completely avoid fallout from the credit crunch

The Gulf countries may be financially strong, but even they cannot completely avoid fallout from the credit crunch 


The Gulf economies are now more than $1 trillion in size, and individual countries are growing by between 6% and 10% a year. Boosted by oil income, they remain fundamentally strong.

Yet just days after the mid-September meeting of Gulf finance ministers and central bank governors came a salutary reminder that the Gulf, for all its wealth, is not immune from events in the US and Europe.

A credit crunch in the UAE, caused in part by the cutting off of credit lines from western banks, gave the central bank no alternative but to announce that it would pump as much as Dh50 billion ($13.6 billion) into banks operating in the UAE.

The UAE has in part been a victim of its own success. There are plenty of attractive investment opportunities and general economic prosperity on the back of the oil boom. Demand for lending has grown fast – in the last 12 months it has been 57% – and much of this has been funded internationally, as the banks did not have sufficient deposits to lend against.

The combination of global credit crunch and local liquidity squeeze left the UAE central bank with little alternative to pumping money into the system. Some bankers say that the current situation has been made worse by the failure of local banks to hedge their currency exposures.

Other central banks in the region are prepared to intervene if similar problems occur. Kuwait’s central bank is prepared to put money into the banking system if necessary. Sovereign wealth funds, including Kuwait’s, are looking to support both domestic markets and companies such as DP World, which are owned by regional institutions. These are more interesting to them than rescuing western banks as they did earlier in the year.

This decision to invest locally rather than internationally is made easier by the fact that the Gulf sovereign wealth funds have decided that, by the end of September, the market had yet to bottom out. The Qatar Investment Authority (QIA) – now the biggest investor in Barclays Bank after investing $8.3 billion – was not at that point interested in buying into more banks. “From where we stood, it was too early to invest from a timing perspective," said Kenneth Shen, head of strategic and private equity at the QIA. N.D

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