Financial Storm Hits Gulf 
Speculative Currency Trades Plunge Kuwait Into Bank Bailout
ABU DHABI — The global financial storm rolled across the Persian Gulf on Sunday, as Kuwait’s central bank guaranteed bank deposits and cobbled together a hasty bailout for one of the country’s largest banks.
The Kuwait intervention is the first bank rescue in the oil-rich Gulf, which until now had seemed relatively immune to the current crisis. It came as local markets across the region continued their steep selloffs. With oil prices down more than 50% from their July highs, the explosive, petroleum-fueled growth of the Gulf now looks suddenly vulnerable at the same time as international and local investors are pulling back sharply.
Associated Press
Kuwaiti investors follow the indicator boards showing the downturn of shares prices at Kuwait Stock Exchange on Sunday.
Saudi Arabia, in an apparent bid to ease the fallout of the global credit crisis on its citizens, said it would funnel some $2.3 billion in loans to low-income borrowers. And in Dubai, real-estate brokers in the Mideast boomtown said they are seeing signs of price weakness for the first time in years, as financing dries up and speculators bow out of the once red-hot market.
Property investors “are not finding buyers,” says Tanya Vodenicharova, a property consultant at Dubai real-estate broker 9 Properties. A significant property-market correction in Dubai could crimp government finances, slowing or halting the debt-fueled expansion.
In Asia Monday morning, Tokyo’s Nikkei Stock Average was up 0.72% in early trading after Japan’s finance minister suggested the government is willing to counter the strengthening yen. South Korean stocks were up about 0.39% after the central bank cut interest rates.
High oil prices have allowed state and private investors across the Gulf to funnel billions of dollars into property markets, infrastructure projects and, more recently, foreign-exchange speculation. In particular, many foreign and local investors earlier in the summer made speculative currency trades, betting that regional governments would drop their currency pegs with the dollar to help tame rising domestic inflation.
International investors — many of whom simply opened up local bank accounts in anticipation of a strengthening of regional currencies if they abandoned their peg to the dollar — rushed out of those trades late in the summer and early last month when it was clear governments weren’t going to act.
That left many banks strapped for cash, and scrambling for ways to make new loans. When international borrowing seized up last month, the region found itself stuck in its own credit crunch.
But it was currency trades — not bad loans — that plunged Kuwait into a banking bailout on Sunday. Gulf Bank said defaults by counterparties on bad euro-dollar derivatives contracts forced the bank to seek government intervention.
The bailout further roiled Kuwait’s stock market, which fell 3.5%, adding to losses that have pushed the country’s main market index down 19% this year. Other regional markets fell sharply as well.
Currency Trades
Companies, banks and individuals have been burned by sharp moves in global currency markets as fears of economic distress prompt an unwinding of trades that have depended on borrowed money. The dollar and the yen have both soared against nearly every other global currency over the past month as investors became convinced that a world-wide recession was looming. This has been particularly problematic because investors have bet heavily on emerging-market currency positions.
For months, the Gulf appeared largely safe from some of the worst fallout from the housing, credit and banking crisis that has rippled from the U.S. across Europe and Latin America and into parts of Asia. Awash in oil revenue, Gulf officials assured investors their banking and financial systems were safe.
Several governments even took dramatic pre-emptive moves, funneling billions of dollars of cash into their relatively small but liquidity-starved banking systems. Earlier this month, Saudi Arabia promised $40 billion in lending facilities to banks that needed cash. The United Arab Emirates pledged a sweeping three-year guarantee on domestic bank accounts and promised to back up interbank lending.
None of the moves reassured the region’s equity investors. In recent weeks, they have followed international investors out of the Gulf’s handful of stock markets, which earlier this year were some of the best-performing among emerging markets. Sharp falls in the price of oil have also rattled confidence here.
While oil prices are still high enough to provide generous budget surpluses for most of the Gulf’s petroleum-dependent governments, the prospect of further falls has spooked investors.
Much of the Gulf has budgeted for much lower oil prices. Gulf states, on average, need prices above $47 a barrel to keep from running budget deficits. But some states are more vulnerable than others: Bahrain’s so-called break-even price is $75 a barrel, compared with Saudi Arabia’s $49 and Kuwait’s $33, according to the International Monetary Fund.
The speed of crude’s tumble — to about $64 a barrel — has unnerved officials despite the apparent cushion. At an emergency meeting on Friday, the Organization of Petroleum Exporting Countries hastily decided to cut output by 1.5 million barrels a day, the biggest single cut in almost eight years. After that move failed to curb crude’s fall on Friday, some oil officials suggested over the weekend that another cut was in order.
Weeks of sliding equity prices have wiped out billions of dollars of wealth for the region’s influential clique of local retail investors. Saudi Arabia’s main stock-market index is down by more than 50% year to date. The fall has wiped some $205 billion of value off the region’s biggest exchange by market capitalization since June.
Protest in Kuwait
On Sunday, Kuwaiti traders, clad in white flowing robes and waving placards, staged their second stock-exchange walkout in as many trading days. (Kuwait’s market is closed on Fridays and Saturdays.) Protesting before a government building in downtown Kuwait City, they demanded more state intervention in the markets to prop up share prices. The chief executive of the National Bank of Kuwait, Ibrahim Dabdoub, called on authorities Sunday to close the exchange altogether.
“If I were the man responsible for the stock market, I would order an immediate suspension of trading,” Mr. Dabdoub told the CNBC Arabiya satellite channel.
Meeting in Riyadh
Gulf finance ministers met Saturday in the Saudi capital of Riyadh to discuss a unified response to the same seize-up in local credit markets that has plagued the U.S. and Europe and now threatens government and privately funded projects across the Gulf.
Kuwait and the rest of the region have a long history of government bailouts and generous subsidies for citizens. It was unclear on Sunday whether the central bank would absorb Gulf Bank’s losses to help it keep operating, or work out a repayment schedule between it and its clients.
Gulf Bank, which has assets of $18 billion, and the government declined to disclose the size of the bank’s trading losses, but industry estimates in Kuwait were above $700 million. The government on Sunday appointed a state supervisor for the bank’s operations, suspended trading in the bank’s stock and opened an investigation.
Few analysts believed the government would allow the bank to fail. Kuwait and other Gulf states, with massive oil savings, have plenty of financial firepower to throw at institutions if more problem trading emerges.
“Given the overriding paternalism of the public sector, it seems unlikely that governments are yet ready to tolerate high-profile bankruptcies or defaults,” says Tristan Cooper, vice president for Moody’s Investor Services in Dubai.
Real-Estate Drag
Meanwhile, in Dubai, real-estate agents are seeing what could be the first signs that the city-state’s property boom is sputtering. There’s no concrete evidence yet of significantly falling prices, and Dubai’s property developers have said they remain optimistic. But property investors, who were making big gains buying and then reselling property just a few months ago, are lowering asking prices and increasingly willing to stomach losses to free up cash, brokers said.
The sudden softening could be an early warning of deeper problems for Dubai, which has fueled its recent supercharged growth through debt. Amid today’s financial crisis, overseas borrowing and refinancing are much more difficult, raising questions about Dubai’s ability to pay back its loans.
Government and private corporations here have invested heavily in the property sector. Fitch Ratings estimates that government-owned or partially government-owned developers control some 50% of new property development due to hit the market in coming years. Meanwhile, banks, many of them partly government-owned themselves, have been lending heavily to developers and investors.
If home prices here tumble, that would further strain revenue and finances for a handful of government-controlled entities increasingly reliant on hard-to-come-by overseas borrowing. Unlike most other governments in the Persian Gulf, Dubai — one of seven semiautonomous emirates that make up the U.A.E. — doesn’t have much oil.
Government entities have borrowed some $47.6 billion in publicly reported debt, or 103% of gross domestic product, according to Moody’s. Dubai has a lifeline: Its oil-rich neighbor Abu Dhabi, the biggest of the U.A.E.’s emirates, has plenty of petrodollars in reserves. Dubai officials didn’t respond to requests for comment.
Analysts have been forecasting a downturn in prices for months. Earlier this month, property consulting firm Colliers International said Dubai property prices rose 16% in the second quarter. That was much slower than the 42% price rise in the first quarter. Regional bank EFG-Hermes said last month that it expects prices to peak next year and fall — as much as a cumulative 20% — by 2011.
Real-estate agents in Dubai said they’re now seeing a clear slowdown. They say speculators, especially those who were financing their property investment, have largely fled the market.
“There are a lot of people who need liquidity, and a few of them are ready to drop their prices,” says Mara Firetti, a consultant at AAA Group, a real-estate broker in Dubai.
Investors in new luxury villas at one Dubai development — each priced at between $1.4 million and $2.2 million — were reselling property at premiums of 10% to 15% of the original purchase price just six months ago, Ms. Firetti says. Now, premiums have shrunk to zero in many cases. That means investors are willing to sell at a loss, because they’ve already sunk in upfront fees.
Tighter Credit
Buyers looking for actual homes — so-called end users, in industry speak — are still shopping, brokers said. But tighter credit requirements instituted recently by regulators and by banks have curtailed financing for these would-be buyers, too.
HSBC Holdings PLC, the largest international bank offering home loans for Dubai property, tightened its requirements last month, asking borrowers to put down as much as 50% of the purchase price for some homes. The bank will now only lend up to 70% of the total value of the property in the best cases, down from 85% last month. The tougher terms are “to ensure that customers receive loans that they can afford to repay at a time of considerable uncertainty around the world,” the bank said in a statement to Zawya Dow Jones.
“Nobody wants to buy,” says Lillian Gold, a property consultant at Blue Horizon Real Estate in Dubai. “Everyone wants to sell.”
Write to Margaret Coker at margaret.coker@wsj.com and Chip Cummins at chip.cummins@wsj.com
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