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01 March 2024

Gulf corporate activity to slow down

By Darren Stubing

Although domestic liquidity in the Gulf banking sector remains good, the continuing fallout of the sub-prime crisis will likely cause a slowdown in corporate activity in 2008.   Global credit conditions continue to tighten as international banks and financiers refrain from taking on new large loan exposures.


It is estimated that around $200 billion is (Dh734bn) locked up in the world’s biggest corporate debt market. Some market observers hope the backlog will be cleared by the middle of next year, but this really depends on a quick resolution of the global liquidity crunch that may not happen.


On the global markets, 10 major merger, acquisition and restructuring deals make up 90 per cent of the outstanding commitments that are weighing heavily on the US senior debt capital markets, which went into meltdown in the aftermath of the sub-prime lending crisis. Borrowing spreads have widened by as much as three percentage points above previously normal lending rates and, accordingly, companies and their backers in the investment banking community have found it almost impossible to get deals away, given the cost of the debt involved.


Global debt markets have been just as badly hit as their inter-bank lending counterparts with the liquidity problems cascading directly through to the balance sheets of the world’s major investment banks that have been forced to write off tens of billions of US dollars in bad loans. Gulf corporates, banks and finance houses will naturally also see a tightening of funding conditions going forward together with higher costs. 


Roughly around 10 per cent of Gulf banks’ funding is sourced from the international financing markets; with specialised banks such as the Bahrain-based wholesale and investment banks the percentage is much higher.  The longer credit markets are shut, and the longer banks are forced to warehouse their funding requirements to fill that hole, the greater will be the pressure for domestic yields to become more attractive.


The biggest impact has been felt in the US and European markets where debt funding for existing and new issues has ground to a standstill. On a relative scale, markets in the GCC have largely escaped any significant impact up to now.


Latest figures from the US show companies such as BCE, Chrysler, Hilton Hotels and Clear Channel are in the market seeking $168bn in debt to finance deals worth a total of $220bn – equivalent to almost 91 per cent of all financing commitments.


In the Gulf, many corporate customers have turned to the major domestic banks seeking stability of funding. However, domestic banks are relatively small and hence do not have the financial resources to support large deals.


Nevertheless, with cash from substantial oil revenues, the GCC countries are buying overseas assets at a record rate and like never before. The pace of international investments by Gulf states, which earn $1.2bn a day from oil exports, is quickening as they seek to diversify beyond energy. The nations have already spent a record $68bn on overseas acquisitions this year. 


Despite this, there will be a knock-on affect going forward. The extent of the impact depends on the US economy. Former Federal Reserve chairman Alan Greenspan says the chances the US economy will enter into a recession in 2008 stand at “50:50”.


His latest comments came just days after the Federal Reserve cut interest rates by a quarter-point and announced its part in an unprecedented $100bn injection of funds into the banking sector.


Greenspan’s comments also follow the grim prediction of Morgan Stanley, which believes the United States is heading towards recession – and the rest of the world should be concerned. The key issue for economies outside the US was to determine how much internal demand of their own they had to offset any shortfall from consumers in the world’s largest consumer economy.


The International Monetary Fund says it will lower its growth outlook as the continued credit crisis hurts the US and European economies, while global imbalances also weigh on growth.