Regional banks can fill the void

02 May 2008

Foreign banks are taking a step back to nurse their losses in other markets. The question is how much progress local banks can make in the interim.

The attractions of the Gulf markets for international investors should be self-explanatory. Rapid economic growth, a lack of cor-relation to global markets, record oil prices, huge investment potential and strong state support for businesses all make the region attractive to financiers.

Yet while foreign investors were typically taking up the majority of debt in the region last year, there are signs that their interest is waning.

Part of the problem is that the cost of funding for international banks is rising, restricting their ability to fund deals. The losses they have made elsewhere, particularly from exposure to sub-prime investments, is also prompting a flight to only the most credit-worthy deals.

Borrowers in the region have been accused of failing to come to terms with the higher price of dollar debt, after years of cheap funding.

Some bankers deny there is a major problem, and the general slowdown in deal activity is also obscuring the picture. But if the caution of international banks gathers momentum, it presents a challenge and an opportunity to the region’s own institutions.

Local banks, awash with dirhams and riyals, are already filling the gap with cheaper currencies, while foreign firms take a temporary step back to nurse their losses in other markets.

These local banks now have the opportunity to build important relationships with clients by showing what they are capable of. Despite their reluctance to support some deals, international banks are unlikely to let their most lucrative relationships with regional firms go easily.

The wider challenge will be to maintain the Gulf’s increasingly high profile on the international stage if foreign investment appetite wanes, even if only in the short term.

The strong underlying position of the region’s economies means that international investors will come back at some point in the future. The question is how much progress local banks can make in the interim.

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