DUBAI,(Reuters) – The ratings outlook for Gulf Arab banks has darkened with the credit crisis but remains stable with the exception of Dubai, where the outlook is more negative due to real estate exposure, Moody’s said on Tuesday.
Gulf Arab banks face slower growth and lower profitability from the credit crisis but not the type of emergency situation hitting Western financials, the head of the credit ratings agency’s bank analysis team for the region told Reuters.
“Overall, the credit outlook is less positive in the Gulf than it was before but it is not negative, it is stable,” Mardig Haladjian, general manager for Moody’s Middle East, said. “But in Dubai in particular…it is stable to negative.”
However, the agency has concerns about banks’ exposure to the real estate sector, where over $1 trillion in new projects in the Arab peninsula are on the table, including Dubai’s palm-shaped islands, themed leisure parks and the world’s tallest tower.
“What we have been worried about is direct and indirect exposure to real estate and real estate developers in Dubai,” he said.
While the property sector is growing rapidly throughout the Gulf, Dubai, in particular, has been the focal point of purely speculative purchases.
“What has really distorted the market is all these speculators who believed this was a one-way bet. They were buying in bulk with quite a bit of borrowing, without much transparency about who they were or where they were borrowing,” he said.
“When the music stops in Dubai, they will be caught and so will the developers.”
Elsewhere in the Gulf, the banking outlook remains stable, even if the financial sector gets squeezed by the global credit crunch.
“We don’t really see an emergency situation developing in the Gulf. Liquidity will be tighter, but it can be managed and it can be replaced,” Haladjian said.
“We don’t really see a scenario of banks coming into difficulties and having to be bailed out over a weekend.”
The differences between many Gulf states and the West include the huge cash reserves controlled by governments and the fact that many Gulf banks rely little on the market to obtain funding, rather, they have ample customer deposits.
“Access to capital markets has become more expensive and more difficult. Syndicated loans are much more difficult to put together but on the other hand most of these banks have fairly good customer deposit funding,” Haladjian said by telephone.
The energy-exporting Gulf was briefly spared by the global credit crisis but an exodus of foreign capital in the past month has aggravated tight lending conditions, forcing Gulf central banks to intervene to keep the economy functioning.
“In the UAE, the government, the central bank and the sovereign funds can divert their money to the local market…as a support to replace the international funding that is leaving,” he said.
The steadily rising cost of short-term funding means that Gulf banks will simply operate less profitably than before, when liquidity was abundant. “It may not be a very comfortable situation but they can handle it,” he said.
“Many institutions will have to review their growth plans. The assumptions that funding growth will continue at a certain place no longer stand,” Haladjian said.
Non-speculative real estate development appears intact with the region expecting rapid population and economic growth. As long as those fundamental economic assumptions remain valid, so will much of Dubai’s property sector.
“It is very difficult to see a serious imbalance between demand and supply at least for the next 12 and probably the next 18 months,” he said.