Peninsula - 1/6/2006

Gulf Arab economies are expected to emerge unscathed from this year's stock market slump, which will have little impact on the region's well capitalised banks or on consumer spending, Standard & Poor's said yesterday.

Konrad Reuss, S&P's deputy head of sovereign ratings, said a widely anticipated correction in Dubai's real estate market was a concern, but that demand for property was still strong and bank exposure to the sector was under control.

All three international rating agencies expect economies in the world's biggest oil exporting region to ride out a confidence crisis that pushed equity markets into a nose-dive this year.

But Moody's Investors Services has warned of systemic risks building in the Gulf financial system, partly due to bank lending for stock market investment. Fitch Ratings, like S&P, says there is little immediate cause for concern.

"There must have been some margin lending for investment in the stock exchanges," Reuss said in an interview on the sidelines of the Islamic Development Bank meeting in Kuwait.

"But the banks in the region are well capitalised. If there is a (further) correction it could have some impact on their credit portfolios but it is nothing that could not be managed."

Some analysts say it is impossible to quantify bank exposure to equity markets because their is plenty of anecdotal evidence that consumer and corporate loans were also invested in stocks by investors hoping to ride the boom of the past few years.

The downturn that swept regional markets this year has ruined many small investors who borrowed heavily to buy stocks.

But Reuss said he was not particularly concerned about the impact of the equity downturn on economic growth, which has primarily been driven by high oil prices rather than household spending.

"I don't see a significant wealth effect where you would have to worry about household consumption," he said.

Reuss also said there was little risk to the banking system from any real estate downturn in Dubai, which kicked off the regional boom when it opened its real estate sector to foreign investment in 2002.

"The property market is not to a large degree driven by bank financing, it is more capital coming into the region on the back of the oil boom," he said. "If we are to see a correction in the property sector the risks to the banking sector is limited."

Reuss said he did not expect an imminent fall in real estate prices and that demand appeared to be continuing to outstrip supply in Dubai.

Analysts and officials have warned that Dubai real estate prices, which have quadrupled in some sectors over the past few years, are ripe for a correction, especially in the luxury apartments sector where new properties are set flood the market.

But property prices in the emirate were still growing in February, according to Standard Chartered Bank's Dubai property index, and some developers say a new law offering foreign owners clear title promises to extend the boom.