DUBAI — As European banks have pulled back from overseas exposures to concentrate on cleansing their balance sheets and strengthening their core businesses, Middle Eastern and Asian borrowers have turned to local investors and alternative forms of financing, analysts say, with issues of Islamic bonds, or sukuk, notably on the rise.
In the first three months of 2012, $6 billion of sukuk were sold in the six countries of the Gulf Cooperation Council, approaching the total of $7.3 billion issued in the whole of 2011, according to data from the Dubai bank Emirates NBD.
“Many issuers who could have raised funds from European banks are now issuing sukuk and conventional bonds,” said Eric Swats, head of asset management at Rasmala Investments in Dubai. “Without the avenue of European financing available, they are turning to the loan markets.”
European banks lent about $237 billion into the G.C.C. region in the first nine months of 2011, according to a new report by Moody’s Investors Service, which said that Moody’s now expected to see “a sustained reduction of lending at a time when the G.C.C. faces sizable funding requirements.”
The six Gulf countries have an estimated $1.8 trillion of capital investments under way or planned over the next 15 years, the report noted.
Saudi Arabia, Kuwait and Oman, which have relatively low exposures to European lenders, are likely to be less materially affected by their retrenchment than the United Arab Emirates, Qatar and Bahrain, it said.
Much of Qatar’s rapid growth has been, and continues to be, financed domestically fromoil and gas revenue through a banking system that effectively recycles government deposits into loans to government-related entities and contractors. But despite the country’s huge wealth, analysts say foreign banks remain a main source of financing, particularly for coming World Cup 2020 infrastructure projects.
As of September 2011, the cumulative total of European bank lending to Qatar amounted to about $43 billion, equivalent to 25 percent of Qatar’s $173 billion annual gross domestic product.
European bank financing of the U.A.E. economy as of September last year amounted to $99 billion, or 28 percent of the country’s $358 billion annual G.D.P.
“The U.A.E. economy, particularly Dubai, has a significant reliance on foreign funding,” said Khalid Howladar, an analyst at Moody’s in Dubai. A further withdrawal of European banks “would leave a significant funding gap in the local economy, and new financing strategies would need to be found.”
Analysts say that Bahrain is the G.C.C. country most vulnerable to a pullback of European financing.
As of September, European bank financing of the Bahraini economy totaled $19 billion, or 76 percent its $25 billion annual output. In the first five months of 2011, all deposits placed with Bahraini domestic-focused banks fell about 4.3 percent, led by an 18.6 percent slump in deposits from foreign banks as Bahrain exploded into social unrest, the Moody’s report showed. West European banks withdrew $13 billion and U.S. banks $5 billion.
By September last year West European depositors had withdrawn an additional $3 billion of financing from Bahrain-based wholesale banks.
Faced with a scarcity of international funds, governments and some private companies in Asia and the G.C.C. are issuing sukuks to tap local liquidity pools for infrastructure projects, according to a report by Standard & Poor’s.
Qatar Petroleum is considering a corporate sukuk issuance this year, while the Bahraini central bank issued a sukuk last month that was oversubscribed.
Saudi Arabia is embarking on an ambitious infrastructure plan and its recent $4 billion sukuk issuance through the Saudi General Authority of Civil Aviation was three-times oversubscribed, the S.&P. report said.
While sukuk issuance has mainly been completed by the public sector, private companies have begun to issue Islamic bonds, including the $400 million sukuk announced in January by Majid Al Futtaim Holding, based in Dubai.
That issue “may open the market to other purely privately owned regional companies,” Nick Stadtmiller, head of fixed income research at Emirates NBD, said at a conference in Dubai.
Analysts say that Asian banks could also fill the financing gap in the future.
Asian and U.S. bank financing in the G.C.C. represented only 1.9 percent and 2.3 percent, respectively, of the region’s G.D.P. as of September 2011, according to the Moody’s report. Asian banks are most likely to increase their participation in the region, given major Asian trade flows with the G.C.C. American banks are likely to remain small players given their own domestic issues.
“The amount of trade between the Gulf and Asian countries has increased and the banks are starting to come in on the back of these projects,” Mr. Howladar said. Still, for now, the focus is on sukuk.
(New York Times / March 28, 2012)
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