Bank credit in the Gulf region has been persistent sharply dichotomous, although the group of countries with minimal growth is now limited to Kuwait and the UAE. Key government projects in Kuwait have been delayed by political disputes whereas progress in the UAE has been curbed by stricter rules on consumer lending and a persistent challenge of oversupply in most segments of the housing market. Nonetheless, lending in much of the region is now growing at an annual pace of 10 percent or more and is typically led by credit to the private sector. The regional banks being generally very solid and the economic growth prospects benign, these positive trends are expected to continue in 2012.

The regional equity markets, by contrast, posted a much more mixed performance. Secondary market trading has picked up and a roller coaster year for the regional bourses closed with Qatar ultimately posting a small 1.1 percent gain and Saudi Arabia's Tadawul nearly breaking even after a year-end rally. At the other extreme, the Bahrain bourse shed over 20 percent and Dubai, Kuwait, and Oman more than 15 percent. This unevenness was reflected in a disappointing year for IPOs. Q4 saw a total of three new offerings with an aggregate value of $212.2 million, while there were a total of nine primary offerings during the year as a whole. Their aggregate value, at just short of $0.8 billion fell markedly short of the roughly $2 billion recorded in both 2009 and in 2010. In a more encouraging development, a number of especially Saudi listed companies have turned to the capital markets to raise additional funds through follow-up offering.

The GCC conventional bond market experienced a pronounced rebound in the closing quarter of the year. Nonetheless, in the words of Kotilaine, "the structural growth drivers for sukuk now appear far stronger and, likely, durable. A number of blue chip names are actively considering issuance and plans by the Saudi government to enter the project finance field are well advanced. Some companies are now even refinancing conventional debt through sukuk."

After an exceptionally subdued Q3, the closing three months of the year saw a clear revival in the GCC conventional bond markets. There were a total of 14 issuances of more than a year during the quarter with a total value of $11.9 billion, up sharply on $0.9 billion in Q3 and in fact the best quarter of the year as a whole. This turnaround completed a rollercoaster year of exceptional volatility and the sustainability of the recent rebound still remains in question. 2011 saw a total of $28.4 billion worth of issues with tenors in excess of one year. This was only marginally down on the total of $31.5 billion in 2010. The overall number of issuances fell from 59 to 36.

2011 as a whole has been a landmark year for the global and regional sukuk markets. The positive trend continued throughout the closing months of the year and there are strong indications of a strong momentum into 2012 as sukuk are increasingly viewed as one of the main areas of resilience within the regional financial markets. Among the key developments during the quarter globally, the government of Indonesia issued a $1 billion seven-year sukuk in October while Bahrain placed a seven-year $750 million issuance. Bank Negara Malaysia issued a MYR3 billion ($950 million) government investment issue.

Total GCC issuance reached $3.3 billion, marginally up on the previous quarter, while non-GCC issuance stood at $17.1 billion.

Looking at the year as a whole, overall issuance in the Gulf nearly tripled in value from $6.9 billion in 2010 to $19.4 billion in 2011. At the same time, non-GCC issuance (including all maturities) rose from $43.7 billion to $65.8 billion. The number of issuances (including short-term paper with maturities of less than a year) rose from 33 to 44. In spite of a clear positive momentum in recent months, corporate sukuk issuance has remained dominated by a small number of large deals. The GCC saw a total of 12 corporate sukuk with a total value of $5.6 billion. This was up from a total of seven corporate issuances in 2010. Their total value reached $4.3 billion. It is clear that the GCC market - as indeed its Malaysian counterpart - remains critically linked to sovereign issuance. Much of this in the GCC is short-term paper sold for liquidity management purposes, mainly by the Central Bank of Bahrain.

The regional secondary bond and sukuk markets have stabilized significantly after the turbulence of the spring. Qatar, Saudi Arabia, and Abu Dhabi are generally the most stable markets. Dubai and Bahrain are more sensitive and tend to experience spikes during periods of market shocks, whether regional or international. In spite of improved resilience across the board, Dubai's main problem - a very high level of leverage - will require a long time to work through and will constitute a potentially major vulnerability in an uncertain economic environment. The government of Dubai and related companies and organization are estimated to owe a total of up to $129.3 billion of which $15.5 billion is maturing this year. In terms of asset classes, sukuk have continued to outperform conventional bonds and have been more stable in terms of their yields.

With most alternative sources of funding remaining under varying degrees of pressure, government spending will likely continue to underpin key areas of economic activity also going forward. Syndicated loans are faced with increasingly structural challenges due to the ongoing retreat of many European banks from the market. In 2011, the regional syndicated loan market contracted from $52.8 billion in 2010 to $47.0 billion, a 11 percent drop. Private equity activity is minimal and foreign direct investment will struggle to rebound significantly in the face of global uncertainty even if the regional growth prospects are benign. Recent government budgets in the GCC, with the exception some renewed signs of relative consolidation in the UAE, suggest that government spending with remain critical also in the year ahead. In Saudi Arabia, total projected government spending this year is set to attain SR780 billion, significantly ahead of the official budget target of SR690 billion. Capital spending is budgeted at SR265 billion. The government has sought to stimulate access to capital by allocating additional funds to the special credit institutions. These are set to receive SR86.1 billion in 2012, a remarkable 85.3 percent increase on 2011.