Sovereign funds to play stabilising role in Gulf

Dubai: Gulf sovereign wealth funds will play a significant role in stabilising the regional economies in the event of a global economic slowdown spilling over into the Gulf, Mohsin Khan, Director of the IMF's Middle East and Central Asia Department, told Gulf News on Sunday.

"It would be imprudent to assume that the Gulf economies will be insulated from a global slowdown. The effects of the international credit crunch are already evident here. Thankfully the regional governments are amply liquid to meet any squeeze," he said.

Going forward Khan said, Gulf's government-controlled funds that manage trillions of dollars from the oil surpluses are likely to step in to help businesses if they run into difficulties.

"Governments across the Gulf have acted proactively to ease the liquidity squeeze in the banking sector. It would be very unlikely that major government and semi-government projects would suffer for want of finance," he said.

Faced with a severe credit crunch, the credit default swaps of a number of Dubai based companies rose by more than 600 basis points. Considering the total credit outstanding of Dubai estimated at $25 billion (Dh91.8 billion) in comparison to the huge surplus the UAE commands, he said such worries are exaggerated.

Earlier this month governments across the Gulf took steps to support their financial systems after stock markets suffered heavy losses following the global credit crisis.

Last week the UAE pumped Dh70 billion into the inter-bank market, bringing a total of Dh120 billion pledged since the beginning of the crisis. In addition to providing additional liquidity to the banking system, the UAE government announced that it would guarantee all bank deposits in the country including those with foreign commercial banks, and additionally it also guarantees all interbank liabilities in the country.

Vulnerable

Earlier this week other Gulf governments also announced a series of measures to shore up the financial system. Saudi Arabia, Kuwait and Bahrain have slashed interest rates and pledged billions of dollars to domestic banks. Qatar also decided to buy between 10 per cent and 20 per cent of bank shares.

Khan said the Gulf financial institutions are unlikely to suffer significantly should financial conditions in developed countries' markets continue to deteriorate.

However, he said the property sector in the region could be vulnerable to a correction, impacting bank portfolios and overall growth of GDP.

The IMF observed that the direct exposure of the Gulf to troubled financial institutions and credit markets in developed countries is limited. Gulf financial institutions are therefore unlikely to suffer greatly should financial conditions in developed countries deteriorate further.