By Siddiqi, Moin
The Middle East , No. 393
SPIRALLING OIL PRICES--extending above $145 a barrel in the summer--have enriched the prospects of many regional banks as well as profits for calendar 2008, despite an unabated global credit crunch and mountainous bad debts hitting the balance sheets of western banking giants (notably UBS and Citigroup). One observer put it: "Credit crunch? What credit crunch?" Omar Bouhadiba, executive vice-president of Mashreqbank (the UAE's No.1 private sector bank), agreed by saying: "Times are good for everyone in this part of the world."
Vigorous economic activity and lack of exposure to the US sub-prime mortgage debacle are two reasons why leading well-managed regional banks are performing strongly amid a bearish financial climate in the US and Europe. Commenting on financial ritedowns on structured credit instruments (see Banking Glossary), Moody's Investors Service wrote: "Fortunately we do not expect to see much spill-over into other asset classes and very few banks in the region are exposed." Standard & Poor's (S&P) echoed this assessment: "Exposure is limited with a few exceptions, with higher provisioning expected mainly in Bahrain but also some in the UAE and Saudi Arabia."
This year could be the best ever for the Gulf Cooperation Council (GCC) economy, the bedrock of Arab banking. Omar Bin Sulaiman, governor of the Dubai International Financial Centre, boasted: "We have only seen the tip of the iceberg for growth in the region. There will be a bigger boom in the next five-to-10 years, as people keep coming to Dubai from around the world. During the current cycle of rising oil prices, a larger portion of the oil wealth is being invested in the region and it is being supplemented by growing foreign direct investment." Real gross domestic product (GDP) growth averaged 7.1% in the six-member GCC nations (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE) over 2003-07; during the same period, GCC governments added $500bn to their net official external assets despite higher spending on projects.
In the MENA region generally, GDP doubled from 2003-07 and is projected by the IMF to reach $2.15 trillion in 2008, representing a compound annual growth rate of 24%; and within that, the GCC bloc should comprise nearly one half of regional GDP. The Gulf States are all poised to record swelling 'twin surpluses' (the state budget and current account) for the eighth year in a row.
As a rough indicator, every $1 hike in oil prices, sustained for one month, boosts the exchequer coffers by an extra $500m. Moreover, the authorities are wisely observing fiscal probity, resulting in vast surplus revenues in recent years.
Analysts reckon that public expenditure is largely based on oil-price assumption of $50 a barrel. Daniel Smaller of Algebra Capita, a Dubai-based fund manager, explained: "At $51, you're putting another dollar into the sovereign wealth fund for every barrel of oil. So at $110 ..." Hence, the wealth effect on Gulf banks is tremendous. Abdel Hameed Shoman, CEO of Jordan-based Arab Bank, said: "As the foreign assets of the Middle East oil-producing countries and their sovereign funds are now measured in trillions of dollars, you can rest assured that there is sufficient cushion to prevent a meltdown in the event of weaker oil prices."
Today, Arab banks (not only premier institutions) are reaping the rewards of massive liquidity, at both sovereign and private level, growing consumer confidence, rising capital spending, sophistication and increased foreign investments, liberalising regulatory environments and a more vibrant private sector across the region that seems 'recession-proof'. Thus, such benign conditions underpin demand for retail, corporate and private banking, and project finance and wealth management services. Cerulli Associates, a US research house, expects Middle East onshore assets under management (excluding sovereigns and institutional investors) to exceed $100bn by 2012 from $57bn in 2007. …