RIYADH: The debt problems in Dubai will have little impact on Saudi Arabia, says Jadwa Investment in its latest report.
“Saudi banks have minimal exposure to the affected companies in Dubai and the direct impact on the Saudi economy will be small. Confidence about the unique dynamics of the Saudi economy meant that the stock market was largely unscathed,” said the Riyadh-based joint stock company which offers all types of investment services.
The report observes that on Saturday, the first day of trading after Eid holidays during which Dubai World announced a standstill on its debt repayments, Saudi Arabia’s TASI index fell by only 1.1 percent, albeit on very low volumes. On Sunday, the TASI rose before falling back on Monday after another sharp fall on the Dubai stock market. Saudis are permitted to invest in the Dubai stock market and vice versa. It is, therefore, possible that some Emirati investors cut their holdings of Saudi shares to cover losses at home.
However, Jadwa says, this would not be significant enough to have an impact on the market as their holdings are small (non-Saudi GCC investors accounted for 1.2 percent of total trade by value on the Saudi stock market in November). Non-Emirati GCC investors were responsible for just over 5 percent of total trades by value on the Dubai Financial Market in September, the Jadwa report observes.
Saudi banks have very little exposure to Dubai World, Jadwa maintains. The SAMA governor put the exposure at just 0.2 percent of total assets. Of Dubai World’s total liabilities of $59 billion, only those of its property companies, Nakheel and Limitless (worth a combined $26 billion) are being restructured. It is possible that some Saudi banks hold the sukuk issued by Nakheel, but this will only be a very small proportion of their total investment portfolios, the report adds.
“We do not expect serious direct fallout on the Saudi economy. Companies working on projects in Dubai may see some impact and questions are likely to be raised about the projects that Dubai government-backed enterprises are working on in the Kingdom. The only project being undertaken by one of the affected real estate companies is Limitless’ $12 billion Al-Wasl real estate development in north Riyadh, which is currently at the infrastructure construction stage. UAE developer Emaar, while owned by the government of Dubai, is not part of Dubai World. We, therefore, do not think that work on the King Abdullah Economic City, being undertaken by its local subsidiary, Emaar Economic City, will be affected. Other Emaar projects in the Kingdom (Khobar Lakes and Jeddah Gate, both in early stages of construction) are potentially more vulnerable to developments in the UAE real estate market,” said the authors of the report.
No data is available on Saudi real estate ownership in Dubai. “Anecdotally, we do not think that Saudi investors are heavily exposed. Furthermore, investors in individual units have already seen property prices fall sharply and, therefore, almost certainly suffered the bulk of their losses before the debt standstill. The same applies for those Saudi companies that financed developments in Dubai,” it said.
Saudi businesses in Dubai will be exposed to a likely renewed downturn in the local economy. Prior to the standstill there had been signs that confidence was returning (notably, property prices had risen and the exodus of expatriate workers during the summer was far lower than had been expected), but this process has been set back. As a result of the renewed troubles in Dubai, the IMF has said it is likely to revise down its real GDP growth forecast for the UAE as a whole from 3 percent to around 2 percent.
According to Jadwa, a final potential implication of what happened in Dubai for Saudi companies is in the sukuk market. Saudi companies have been looking at sukuk as an alternative source of finance, given the reluctance of commercial banks to lend.
A $3.5 billion sukuk issued by Nakheel, due to mature in mid-December, is set to be the first major sukuk default. This will provide a serious test for the mechanism for resolution of legal issues around sukuk and if not handled smoothly and equitably could complicate sukuk issuance for local companies.
Investors will also insist on clarity of government support for part- or fully-owned government companies after the government of Dubai distanced itself from the debts of Dubai World, contrary to the assumption of many investors.