Journal Issue
Back Matter

Back Matter

May Khamis, Abdelhak Senhadji, Gabriel Sensenbrenner, Francis Kumah, Maher Hasan, and Ananthakrishnan Prasad
Published Date:
March 2010
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    Source: MEED (a Middle East Business Intelligence group). The U.A.E. and Saudi Arabia dominate project activity.

    Investments spanned the hydrocarbon sector and related infrastructure development, construction, the industrial sector, water and waste, and power.

    The reduction in government debt was most significant in Qatar and Saudi Arabia.

    The buildup of gross official reserves by Saudi Arabia dominated the total increase; assets of SWFs for countries that have them (Kuwait, Oman, Qatar, and the U.A.E.) are not included in gross official reserves.

    Non-oil GDP is the more relevant metric to measure credit expansion because the hydrocarbon sector has required little domestic financing in recent years of high oil prices.

    The impact of rising inflation on the REER of GCC currencies during this period was largely offset by the depreciation of the nominal effective exchange rate of the U.S. dollar, which resulted in a depreciation of the GCC currencies against their trading partners’ currencies, mainly in Asia.

    For example, Kuwait bank loans for security purchases amounted to close to 12 percent of the banks’ total loan portfolio in 2008. While other GCC central banks do not report bank lending for equity purchases separately, personal loans in other GCC countries might have been used for this objective. (See Mansur and Delgado, 2008, Stock Market Developments in the Countries of the Gulf Cooperation Council)

    Currently, the minimum regulatory CAR is 8 percent in Saudi Arabia, 10 percent in Oman and Qatar, 11 percent in the U.A.E., and 12 percent in Bahrain and Kuwait.

    See also the Regional Economic Outlook: Middle East and Central Asia, October 2009, IMF, and IMF country reports for Kuwait (No. 09/153), Qatar (No. 09/28), and the U.A.E. (No. 09/124), available at

    The standard deviation of daily average returns doubled between August 2008 and February 2009, compared to the period January 2007 to August 2008. Volatility since late 2008 has been lowest in Bahrain and highest in Abu Dhabi and Dubai.

    This could be attributed to the relatively high international leverage of Dubai corporates, the interlinkages of the Bahrain wholesale banking sector with global financial markets, and lower oil wealth of Dubai and Bahrain.

    In the post-September 2008 period there were also sporadic events that exacerbated liquidity pressures, such as the announcement of losses by a Kuwaiti commercial bank due to customer derivative transactions and signs of increased risk aversion among private depositors.

    Additionally, the number of initial public offerings (IPOs) within the GCC decreased in 2008, with no IPOs taking place between August and December 2008. In 2006, 2007, and 2008, GCC IPOs amounted to $7.5 billion, $12.0 billion, and $11.7 billion, respectively. Total bond issuance by GCC corporates dropped by more than 40 percent (to about $16.5 billion) in the 12 months through June 30, 2009, relative to the same period of 2007–08. The decline was driven by a dramatic drop in sukuk issuance of around 73 percent (to $4.34 billion) on concerns regarding sukuk market liquidity and contract enforcement. In contrast, conventional bond issuance increased by more than 17 percent, to about $13 billion.

    Based on MEED database. About one third of currently active projects are in the implementation stage, with 40 percent being developed by the private sector. Around 80 percent of projects put on hold are in the construction sector and two-thirds are private.

    Global Investment House, Global Market Report—GCC.

    Fitch Ratings stated that although the region and the banks are feeling the impact of the global crisis, banks’ long-term issuer default ratings are unlikely to change, as they remain driven by the probability of support from their respective sovereigns (Fitch Ratings, Impact of the Global Economic Crisis on GCC bank ratings, December 2008.)

    However, FSIs should be interpreted with caution. Since they represent the average performance of the sector, they could mask individual banks’ vulnerabilities. FSIs are also backward looking and might not provide a clear indication of future trends. Additionally, some FSIs are affected by the rate of asset growth and do not readily show the underlying trend in asset quality. For example, higher NPLs and loan provisioning in the fourth quarter of 2008 were not manifested in the NPL and provisioning ratios as they probably were masked by the high rate of credit growth in 2008.

    Only one commercial bank, Gulf Bank (Kuwait), ended up with losses in 2008 on account of customer-related foreign exchange derivatives transactions. The bank was recapitalized through a combination of capital injections by shareholders (68 percent) and the government (32 percent) via the Kuwait Investment Authority.

    The 2009 fiscal deficits for Bahrain and Saudi Arabia are estimated at 4.5 percent and 4 percent of GDP, respectively. The convergence criteria allows for a fiscal deficit of 5 percent when oil prices are low, as opposed to a 3 percent limit in normal conditions.

    Stress tests for Kuwait and Saudi Arabia took into account, directly or indirectly, the impact of stress on listed nonbank corporate balance sheets.

    It should be noted, however, that the defaults by the parent groups of the two banks have had a more significant impact on regional banks that the defaults by the banks themselves.

    Some market participants estimate that family businesses represent about 90 percent of the corporate sector in the region. There are at least 5000 companies that hold combined assets of more than $500 billion and employ 70 percent of the workforce. The decision-making process in family firms in the GCC is often informal in nature and is made by owners and top-tier management with little or no accompanying structure or framework. The large growth in the number of listed companies in the GCC region in recent years does not indicate significant changes in the legal status of family business groups; it reflects, to a large extent, either the privatization of publicly owned institutions or legal constraints that force companies to go public. See Ithmar, Dow Jones Private Equity, 2007, “The Impact of Private Equity on the GCC Family Businesses.”

    Contingency plans should identify vulnerable banks (in terms of liquidity, solvency, or both), their systemic risk, and the strategy to address their weaknesses as they evolve, including the probability of additional capital injections by core shareholders.

    See “An Overview of the Legal, Institutional, and Regulatory Framework for Bank Insolvency,” April 17, 2009, IMF, available at

    Issues related to the choice of exchange rate regime for the GCC countries are analyzed in a recent IMF Board paper, “The GCC Monetary Union—Choice of Exchange Rate Regime,” August 28, 2008, available at

    See Alexandre Chailloux and Hakura, Dalia, “Systemic Liquidity Management in the U.A.E.: Issues and Options,” IMF working paper, forthcoming.

    For example, Moody’s notes that in March 2009, Abu Dhabi issued a $3 billion bond in international markets, although it did not have an underlying financial need to do so. The issuance assisted Abu Dhabi in establishing a yield curve that could potentially be used as a benchmark for further corporate issuance, and could therefore assist the development of the local bond market. (See Moody’s Global Corporate Finance, “Gulf Corporates: The Flip-Side of Globalization,” June 2009.)

    Mutual fund assets amount to 4.3 percent of GDP in Saudi Arabia and 80 percent in Bahrain.

    For example, pension fund assets amounted to 3.2 percent of GDP in Saudi Arabia (end-2007), 2.7 percent in U.A.E. (end-2007), and 20.5 percent in Bahrain (end-2006).

    Trading by high net worth individuals classified as retail investors is often larger than that of institutional investors.

    This was at a time when local currency markets became the fastest growing segment of the emerging market debt asset class. Emerging market corporates began displacing sovereigns for the dominant share though sovereigns continued to play the role of benchmark. These developments were supported by a doubling in size of pension fund assets since 2002.

    Sukuk are sale-and-leaseback obligations based on issuers’ tangible assets, often land. Sukuk special purpose vehicles avoid interest payments, which instead take the form of rents. Sukuk have become popular with Western fixed-income funds looking for regional diversification and yield pick-up.

    Although Malaysia remains the largest single market, Malay sukuk are denominated mostly in MYR. Source: Moody’s, January 2009.

    Kuwait-based Investment Dar Company defaulted on its $100 million in December 2008, the first sukuk default in the Gulf. Saudi-based Saad Trading Contracting and Financial Services Company have initiated debt restructuring discussions ($650 million due May 2012) with creditors in May 2009. Dubai-based real estate developer, Nakheel, announced that it was seeking a standstill on its sukuk ($3.5 billion due December 2009) on November 25, 2009.

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