Gulf States Finding it Hard to Borrow Money
Where are the Projects?
There were years when banks and institutions looked upon the oil-rich Persian Gulf States with awe as they embarked upon a series of development projects. Each project was bigger, better and promised large returns on investments. Lenders bent over backwards to grab a share of the pie, as loans worth billions were made available to these projects, which now seem to be shaking at their very foundations. All the Gulf States had to do is say they needed to borrow money, and it was there instantly. Now that the environment is a bit different, projects are drying up very quickly.
Lavish Projects Ruled the Nation
It was a fact that each ruler of a Gulf State was trying to outdo the other in terms of lavish projects, which could only be called lavish in the most extravagant sense. Did they have the money of their own to finance these projects? No, they borrowed heavily from lenders across the world as well as floated bonds that were bought very quickly by over-enthusiastic investors. Perhaps the increase in oil prices over the last year fueled thoughts of a quick recovery. However that did not happen and today, the Gulf States find themselves defaulting on loans, sending world markets into a downward spiral.
The Downward Spiral
With each of the Gulf States trying to outdo the other with borrowed money, this was a slide waiting to begin. One of the first defaults happened when two companies owned by families in the Kingdom of Saudi Arabia, namely the Ahmad Hamad Algosaibi and the Saad group, defaulted on their Bahrain-based banking units. These were defaults that were not widely reported in the international media, keeping in line with the mysterious nature of the Gulf States. However, when the proposal for a restructure of a $26 billion debt by Dubai world surfaced on December 1, 2009, it sent shivers throughout the world markets and it soon emerged that the default was in fact even bigger than imagined. Dubai is currently looking to restructure nearly $59 billion out of the $80 billion it owes. How the financial wizards across the world missed these indications is a mystery.
A Wakeup Call
This was a wakeup call that came too late for many of the world’s lenders who had exposed themselves to this chaos. The Royal Bank of Scotland is believed to have a $5 billion stake in the debts owned by Dubai alone, and American lenders also have invested heavily in the projects that are now either on hold or have been slowed down. Some of the Gulf States like Qatar and the Kingdom of Saudi Arabia still have multibillion projects planned but are likely to have difficulties borrowing money.
Lenders Need to Re-evaluate Their Priorities
It has always been assumed that the Gulf States had a good cash flow from the oil they sold. Lenders looked at these cash flows and hoped that they would never be in trouble, but the scenario has changed drastically within a few days since Dubai World suggested that a restructure of their loans were required. Lenders will now have to re-evaluate whether any further loans to this region are viable or not, and from now on the Gulf States will certainly find it difficult to borrow money.