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Gulf SWFs have Big Exposure to Turmoil, Says GRC Analyst

Dr Eckart Woertz, Program Manager Economics of the Dubai-based GRC, said GCC-based sovereign wealth funds that control almost $1.5 trillion assets worldwide, probably had also invested more in riskier debt structures like CDOs (Collateralised Debt Obligation) than the region’s banks.

“Unlike banks, SWFs do not have to act when the values of these assets decrease on a market to market basis; in case these assets do not default, they have the luxury of holding them until maturity or until the storm has hopefully passed,” Dr Woertz said.

“Still, unlike 2007, the losses of 2008 must have hurt the region’s SWFs to a considerable extent, although they have diversified portfolios and have enjoyed continuous inflows because of relatively high oil prices,” he said in a report titled “Impact of the US Financial Crisis on GCC Countries.”

Larger overseas investments of GCC companies, like Emaar’s $1.05 billion investment in John Laing Homes, the second largest privately held home builder in the US or SABIC’s $11.6 billion purchase of GE Plastics, have not been faring too well either and will affect the foreign asset position of the GCC countries negatively for the time being, he pointed out.

Dr Woertz, said the exposure of GCC banks to the US subprime crisis could be higher than the $2.7 billion announced so far.

“Only a limited number of Gulf banks have yet publicly admitted and quantified their exposure to the subprime crisis. Some banks may be concealing related losses and more exposure might surface in future,” he said.

Compared to more than $500 billion write-downs revealed by banks in the US and Europe to the toxic assets, the magnitude of the fallout is less for the Gulf banks, he said.

The banks that have announced their write-downs include Abu Dhabi Commercial Bank ($272 million), Bahrain’s Arab Banking Corporation ($1.2 billion), Kuwait-based Gulf Investment Corporation ($246 million) at the end of 2007 and is expected to add another $200 million by the end of this year.

Dr Woertz said the GCC countries, which have an estimated $1.8-2 trillion in foreign assets by the end of 2008, of which about 60 per cent are held in US dollar, should be concerned about asset depreciation.

“However, the most visible effects of the US financial crisis thus far have not been caused by direct exposure to troubled assets but in indirect form, as the Gulf Cooperation Council countries and their burgeoning project finance markets have been affected by the rising costs of borrowing and declining availability of large credit facilities,” he said.

Spreads for corporate borrowing have skyrocketed since July and will seriously impact on the viability of larger project finance, he said.

Equally a global recession will leave China and other Asian export oriented nations not untouched and will lead to decreasing demand for some crucial GCC export goods like crude oil, petrochemicals and aluminium.

issacjohn@khaleejtimes.com