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The Week That Was

Source: NCB Capital

GCC projects coming off the shelf again

The economic roller coaster ride of the past year-and-a-half has severely tested the ambitious project pipeline of the GCC economies. Many of the projects were conceived on assumptions about the availability of finance that the subsequent liquidity crunch quickly invalidated. The inevitable result was a broad-based review of the pipeline which resulted in a large number of ventures being shelved or canceled altogether. New projects became virtually impossible to launch as banks effectively halted lending and the capital markets dried up. The turnaround was particularly severe in the UAE where sentiment was further tested by the bursting Dubai property bubble. Now, however, signs are mutliplying that the worse is over as anxiety recedes and financial markets stabilize.

Large-scale projects became a key hallmark of the ambitious economic development agenda of the Gulf countries during the oil-fueled boom of this decade. However, the prospects for many of these ventures deteriorated sharply in the second half of 2008 as the regional and global liquidity conditions sharply reversed. During 2008 alone, total debt capital finance in the GCC fell by 43% to USD13.5bn, from USD24bn in 2007. By the end of the end the first half of 2009 it was down to 35% of the 2007 level. At the same time, the number of initial public offerings (IPO) fell from 34 in 2007 to 25 in 2008. Despite a remarkable stock market recovery since March, only six offerings had raised USD1bn as of the end of 2Q09. This compares to a 2008 total of USD11bn. These woes were sharply compounded by growing anxiety in the banking sector, with long-term credit (over 3 years) especially hard hit. For instance the Saudi total as of the end of June was SAR162.bn was below the averages for 2008 and 2007 alike. The reversal in the UAE was even sharper since the country’s relatively open banking sector had benefited from a considerable influx of “hot money” in 2007-2008, fueled by expectations of a Dirham revaluation. The resultant gap between loans and deposits is unlikely to be overcome before next year.

Industry estimates suggest that the credit crunch has resulted in the delay or outright cancellation of some 19% of the roughly 3,000 construction projects underway in the GCC region. Most of the affected projects are in the UAE, which has seen USD900bn worth of ventures put on hold – some 41% of the total number (1,372) of projects. Also Kuwait has experienced a 17% drop. Saudi Arabia, by contrast, has remained relatively resilient with a total of 100 affected ventures in a total pipeline worth USD387bn. While Bahrain, Oman and Qatar have avoided major economic dislocations during the crisis, they have nonetheless seen a combined total of 69 projects be put on hold.

The effect of the downturn has been particularly pronounced on the construction sector. While the industry is inherently cyclical, it has experienced particularly sharp swings in the Gulf with the oil boom of this decade marking the true takeoff of the regional housing boom. The rapid pace of expansion, as well as the incomplete regulation of the relatively young sector, left it especially vulnerable in the face of the downturn. In some markets, most notably Dubai, speculation gained in importance, not least because of the limited range of other investible assets in the region. The abrupt market reversal has left Dubai with the largest annual fall in house prices globally as of this June this year: 47.3%. The only jurisdiction close to matching the fall was Singapore, where the average cost of residential property dropped by 27.7% over the same period.

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