December 1, 2009 2:00 am
The first signs of regional contagion from Dubai's debt travails appeared yesterday when the Egyptian stock exchange plummeted almost 8 per cent, replicating the battering taken by the United Arab Emirates' bourses.
Since Dubai announced that Dubai World, one of its main entities, was seeking a standstill agreement with creditors, investors have been weighing up the implications for the region, whether it be reputational damage, the impact on equity markets, the potential for international credit lines to dry up or the effect on regional companies with exposure to the Gulf's main business hub.
Rachid Mohamed Rachid, Egypt's trade and industry minister, told the Financial Times that "the Dubai situation" would have serious consequences for the region.
"I am confident that Dubai will recover, but the question is what will be the cost and the consequences in terms of companies, people?" Mr Rachid said. "We can anticipate that it will have an effect on the flow of investment to Egypt. We have a lot of companies dealing with the emirates in terms of goods and services, including big construction companies."
The issue highlighted a woeful lack of transparency in the region, Mr Rachid said. "We need to learn from that lesson."
Yesterday was the first day Middle East stock markets had traded since Dubai World's announcement last Wednesday because of an Islamic holiday, and the Egyptian market was the only major bourse to open outside the UAE. The market in Abu Dhabi fell more than 8 per cent.
In the Gulf, bankers expect at least a short-term impact on governments and sovereign-related entities seeking to tap the capital markets to raise finance - a process that had been gathering pace before Dubai World's announcement.
International bankers had already been wary of investments in the region's private sector businesses after it emerged in the summer that two Saudi companies - Saad Group and Ahmad Hamad Algosaibi and Company - had defaulted, owing more than 100 banks in the range of $20bn.
The Dubai saga will lead foreign investors to question how they are to gauge the extent of implicit sovereign guarantees for state-related companies, bankers say.
The impact on credit growth, which had been slow before Dubai's standstill statement, was expected to put a brake on the economic recovery throughout the Gulf, said John Sfakianakis, Middle East economist at Banque Saudi Fransi-Credit Agricole Group.
Ironically, it could be Abu Dhabi that is among the worst affected, analysts say.
"Abu Dhabi is obviously further behind in the cycle [of development] and now [the emirate] has its foot on the accelerator they are going to have to pay for the sins of Dubai," said another banker in Abu Dhabi.
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