The race between Gulf states to build the biggest airport, tallest skyscraper or glitziest hotel is turning into a competition simply to convince banks to keep lending to the oil-rich region.
Emirs, presidents and sheikhs of the six members of the Gulf Cooperation Council meet in Kuwait next week with the days of easy credit over following a year of debt defaults and deferred payments. State holding company Dubai World said Dec. 1 it was seeking to restructure $26 billion of borrowing.
"Financing will be harder to attract for all companies in and related to the Gulf in the next few quarters as international banks will be loath to have any association with regional corporates and governments, regardless of their stability," said Emad Mostaque, who helps manage $100 billion at Pictet Asset Management Ltd. in London.
While the global financial crisis forced bank bailouts across the western world, in the Gulf it has jeopardized plans to develop securities markets, create flourishing banking centers and forge closer economic ties.
At the GCC's annual meeting in Muscat on Dec. 30 last year, leaders approved a monetary union agreement, a step toward forming a Gulf single currency. Kuwait said this week that the project may take 10 more years to come to fruition.
When the two Saudi family holding companies, Ahmad Hamad Algosaibi & Brothers Co. and Saad Group, defaulted on their Bahrain-based banking units earlier this year, the U.A.E. complained that there was no communication within the GCC.
The perception that "the money was there and it would just be splashed around regardless of moral hazard or business viability has not been the case," said Jane Kinninmont, an economist at the Economist Intelligence Unit in London. "If there's less money to go around, there will be more competition between the Gulf states."
Qatar is building a $14 billion luxury residential project called the Pearl similar to Dubai's palm-shaped islands. Saudi Arabia is trying to develop its own financial center in Riyadh that will challenge Dubai's complex of banks including Deutsche Bank AG (DB) and Goldman Sachs Group Inc. (GS).
"It's healthy to develop competition," Sheikh Hamad Bin Jabor Bin Jassim al-Thani, director general of Qatar's General Secretariat for Development Planning said yesterday in Dubai. "We need to embrace where our strengths are and ensure that we focus around them at the initial stage."
Saudi Arabia's Kingdom Holding Co., whose chairman is Prince Alwaleed Bin Talal, started a $26.6 billion real estate project that will include the world's highest tower, overtaking the U.A.E.'s Burj Dubai set to open Jan. 4.
"Everyone's been trying to build the biggest airport, the best tourist infrastructure," said Kinninmont. "Everyone is trying to compete for the same territory."
Investor confidence has deteriorated as Kuwaiti investment firms Global Investment House KSCC and Investment Dar along with the two Saudi family holding companies defaulted on debt. Global said Dec. 10 it signed an accord to restructure $1.73 billion.
Dubai World, whose property unit is building the landmark palm-shaped islands, sought a "standstill" agreement with creditors. Dubai's benchmark share index is down 22 percent since Nov. 25, while bond prices tumbled and the credit ratings for several Dubai companies were cut.
Saudi Arabia, the Arab world's biggest economy, is Mostaque's "top pick" to emerge strongest.
The kingdom's central bank governor, Muhammad al-Jasser, has said that the economy is in recovery and it may avoid a contraction this year as oil prices rebound to what the world's largest oil exporter deems a "fair price" of $75.
Then there's Qatar. The world's largest exporter of liquefied natural gas "is a strong story," according to Marios Maratheftis, a Dubai-based economist at Standard Chartered Plc. The Gulf state is forecasting economic growth of 9 percent this year and 16 percent next year.
"The economies that have better balance sheet structures will recover a lot quicker," said Ahmet Akarli, a London-based economist at Goldman Sachs. "Saudi Arabia has a healthier balance sheet, so does Qatar, even Abu Dhabi is in a good position but Dubai will drag the U.A.E. down."