Debt Squeeze Ahead for Gulf Companies?

10/01/2012 10:30 am EST


Banks in the region are shifting their lending focus to companies with government backing, and the repercussions in the private sector are growing, writes Gregor Stuart Hunter of The National.

Private companies in the Arabian Gulf are facing a squeeze in financing as banks choose instead to focus on lending to government-linked companies, a top banker has warned.

Bank lending has grown steadily in the Gulf and balance sheets have been looking healthier as the region recovers from the global financial crisis and the effects of the Arab Spring, said Ashok Aram, Deutsche Bank's chief executive for the Middle East and North Africa.

But the bigger concern for the Gulf is the extent to which big, government-linked holding companies have had the lion's share of funding that would otherwise have reached the private sector, he added.

"The government-related entities have come in and absorbed most of the lending capacity," said Aram. "That's pushed the private sector out."

Western banks, seeking to shore up capital requirements as a result of the Eurozone debt crisis, have scaled back lending in the Gulf to focus on select clients—usually focusing on the strongest government-linked companies.

Total lending across the financial sector grew by 1.8% to Dh1.09 trillion ($296.74 billion) in the UAE during the first six months of this year, almost flat until a spurt of business activity in June, according to the latest data from the Central Bank.

Many private-sector companies, including the large trading firms of the Gulf's merchant families, are expected to be forced to tap bond and sukuk markets directly, Standard & Poor's said last week.

The IMF has called on Gulf states to develop their bond markets to help support funding requirements for infrastructure projects. To support that end, Qatar proposed the establishment of its own domestic credit rating agency.

Overexposure to government-owned entities was one reason the effects of problems at Dubai World in 2009 caused such great ripples throughout the financial sector. Since then, UAE banks have hoarded capital to rebuild balance sheets, while lending to the private sector has dwindled.

The Central Bank attempted to rectify the vulnerability of UAE lenders in April with new rules capping the amount banks could lend to governments and their holding companies.

But as the rules came into effect yesterday after months of lobbying from the financial sector, big banks already in breach of the regulations were in the dark about how to apply them. The Central Bank declined to comment yesterday.

"Providing capacity for the private sector is going to be a major theme," Aram said. He expects a "very, very strong" pipeline of new bonds.

Deutsche Bank has been one of the smaller players among the Gulf's loan markets this year, arranging $411.67 million in loans for Qatar National Bank, DP World, and the Dubai Government, according to Bloomberg data.

The bank has focused instead on assisting companies to access capital markets, underwriting $2.2 billion of bonds in the Gulf this year.
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