Oil to lift GCC in 2010, debt remains concern
Dec 31, 2009 at 15:03
By Andrew Critchlow and Oliver Klaus
DUBAI - Arab Gulf states may get a boost from higher oil prices in 2010 but the region's real-estate and banking sectors still face head winds.
"We are going to see an improvement in macro-economic conditions, mainly due to higher oil prices, which will trickle down to corporate activity," said Faisal Hassan, head of research at Global Investment House.
The United Arab Emirates, Saudi Arabia and four other Arab Gulf states depend heavily on revenue from oil exports, which still provide about 60% of the regions foreign currency earnings.
Oil prices have more than doubled from lows of about $35 a barrel at the beginning of 2009 as fear of global economic Armageddon has given way to optimism about a recovery led from Asia. New York Mercantile Exchange crude futures averaged just above $62 a barrel in 2009, according to Zawya Dow Jones calculations.
Saudi Arabia, the Middle East's economic powerhouse and its biggest oil producer, is expected to see real gross domestic product grow by 3% in 2010, after successfully averting contraction this year, according to Kuwait's Global. The kingdom is expected to record marginal real GDP growth of 0.15% in 2009.
STOCKS
The primary benefactors of higher oil prices could be the region's stock markets, which lagged behind global benchmarks in 2009.
"I see the stock markets here outperforming next year," said Benedict Floyd, executive director of DPTG, the region's first trading arcade. "Dubai in particular will pull itself back from this recession far quicker than what many think."
The benchmark Dubai Financial Market index clawed back heavy losses following the sheikdom's shock announcement in November that Dubai World was seeking a standstill on about $26 billion of debt. The stock measure finished the year about 10% up.
Of the Gulf's main markets, Bahrain and Kuwait suffered most from the global financial crisis, both ending the year deep in the red. Still, skeptics point to bad debts amongst the region's banks and exposure to real estate weighing on stocks.
"I expect to see significantly higher provisions on non-performing loans and accounts receivables taken by banks, developers and contractors, which could also pressure stock prices," said Saud Masud, head of research at UBS AG in Dubai.
PROPERTY WOE
The real-estate industry, a major catalyst for the boom in cities like Dubai, may continue to face hard times deep into 2010 as excess capacity, a shortage of finance and economic uncertainty continue to undermine investor confidence.
Emaar Properties PJSC (EMAAR.DFM) will greet the year with the opening of Burj Dubai, the world's tallest skyscraper, that now looms over the city's main highway. But leading analysts remain concerned that Dubai real estate has further to fall after a year that saw 50% wiped of the average value of a home in the emirate.
"I estimate property prices in Dubai to decline another 30% from current levels. I think there needs to be more realistic expectations that we are in an economic down-cycle so a V-shaped turnaround is unlikely and house prices will likely continue to slide," said Masud of UBS.
The unabated increase in Dubai real-estate inventory, coupled with continued pressure on its transient expatriate population as international companies retrench will hit the sector in 2010.
"Many U.A.E. banks have weak balance sheets with substantial exposure to local real estate and to Dubai Inc. companies that will limit their capacity to resume aggressive lending." said Masud.
DEBT RESTRUCTURING
Repairing the damage from 2009 in the Gulf will occupy bankers over the coming year, with much of their attention focused on Dubai's astronomical debt pile. The first test of their readiness to deal again with Gulf borrowers could come in January when creditors are expected to hold a second round of meetings with Dubai World to restructure the company's debt.
How Dubai government manages its estimated $80 billion of sovereign and corporate debt could set a precedent for restructuring across the Gulf. Equally troubling for international banks will be the uncertain outcome of a feud between Saudi conglomerates Ahmad Hamad Al Gosaibi Bros. & Co., or AHAB, and Saad Group, who both may default on their debts after heavy losses at their Bahraini banking units.
Estimates on the exposure global lenders have to the two groups range from $16 billion to about $20 billion.
"Global banks burned with Dubai exposure and the Saad and Gosaibi default will be reluctant to return quickly to regional lending and governments will assume a larger burden of credit extension to large infrastructure projects," said Ali Al Shihabi, founder and executive chairman of Rasmala Investment Bank Ltd.
Dec 31, 2009 at 15:03
By Andrew Critchlow and Oliver Klaus
DUBAI - Arab Gulf states may get a boost from higher oil prices in 2010 but the region's real-estate and banking sectors still face head winds.
"We are going to see an improvement in macro-economic conditions, mainly due to higher oil prices, which will trickle down to corporate activity," said Faisal Hassan, head of research at Global Investment House.
The United Arab Emirates, Saudi Arabia and four other Arab Gulf states depend heavily on revenue from oil exports, which still provide about 60% of the regions foreign currency earnings.
Oil prices have more than doubled from lows of about $35 a barrel at the beginning of 2009 as fear of global economic Armageddon has given way to optimism about a recovery led from Asia. New York Mercantile Exchange crude futures averaged just above $62 a barrel in 2009, according to Zawya Dow Jones calculations.
Saudi Arabia, the Middle East's economic powerhouse and its biggest oil producer, is expected to see real gross domestic product grow by 3% in 2010, after successfully averting contraction this year, according to Kuwait's Global. The kingdom is expected to record marginal real GDP growth of 0.15% in 2009.
STOCKS
The primary benefactors of higher oil prices could be the region's stock markets, which lagged behind global benchmarks in 2009.
"I see the stock markets here outperforming next year," said Benedict Floyd, executive director of DPTG, the region's first trading arcade. "Dubai in particular will pull itself back from this recession far quicker than what many think."
The benchmark Dubai Financial Market index clawed back heavy losses following the sheikdom's shock announcement in November that Dubai World was seeking a standstill on about $26 billion of debt. The stock measure finished the year about 10% up.
Of the Gulf's main markets, Bahrain and Kuwait suffered most from the global financial crisis, both ending the year deep in the red. Still, skeptics point to bad debts amongst the region's banks and exposure to real estate weighing on stocks.
"I expect to see significantly higher provisions on non-performing loans and accounts receivables taken by banks, developers and contractors, which could also pressure stock prices," said Saud Masud, head of research at UBS AG in Dubai.
PROPERTY WOE
The real-estate industry, a major catalyst for the boom in cities like Dubai, may continue to face hard times deep into 2010 as excess capacity, a shortage of finance and economic uncertainty continue to undermine investor confidence.
Emaar Properties PJSC (EMAAR.DFM) will greet the year with the opening of Burj Dubai, the world's tallest skyscraper, that now looms over the city's main highway. But leading analysts remain concerned that Dubai real estate has further to fall after a year that saw 50% wiped of the average value of a home in the emirate.
"I estimate property prices in Dubai to decline another 30% from current levels. I think there needs to be more realistic expectations that we are in an economic down-cycle so a V-shaped turnaround is unlikely and house prices will likely continue to slide," said Masud of UBS.
The unabated increase in Dubai real-estate inventory, coupled with continued pressure on its transient expatriate population as international companies retrench will hit the sector in 2010.
"Many U.A.E. banks have weak balance sheets with substantial exposure to local real estate and to Dubai Inc. companies that will limit their capacity to resume aggressive lending." said Masud.
DEBT RESTRUCTURING
Repairing the damage from 2009 in the Gulf will occupy bankers over the coming year, with much of their attention focused on Dubai's astronomical debt pile. The first test of their readiness to deal again with Gulf borrowers could come in January when creditors are expected to hold a second round of meetings with Dubai World to restructure the company's debt.
How Dubai government manages its estimated $80 billion of sovereign and corporate debt could set a precedent for restructuring across the Gulf. Equally troubling for international banks will be the uncertain outcome of a feud between Saudi conglomerates Ahmad Hamad Al Gosaibi Bros. & Co., or AHAB, and Saad Group, who both may default on their debts after heavy losses at their Bahraini banking units.
Estimates on the exposure global lenders have to the two groups range from $16 billion to about $20 billion.
"Global banks burned with Dubai exposure and the Saad and Gosaibi default will be reluctant to return quickly to regional lending and governments will assume a larger burden of credit extension to large infrastructure projects," said Ali Al Shihabi, founder and executive chairman of Rasmala Investment Bank Ltd.