Shadow of credit crunch lingers

Banks and ratings agencies may be enjoying a boom time as Gulf borrowers raise fresh capital, but they are also warily extending their early-warning systems to prevent a repeat of the debt bust-up of the past four years.

Mall of the Emirates owner Majid Al Futtaim Holding has recently taken its first step into the Islamic bond market. Jaime Puebla / The National

The dust may be settling after Dubai's debt bust-up of the past few years but banks, regulators and ratings agencies are taking few chances as the Arabian Gulf starts to load up again on cheap credit.

With the UAE's bill for bad debts from the last crisis currently sitting at Dh61.7 billion (US$16.79bn) and rising, according to Central Bank data, the financial industry is beefing up its early-warning systems to prevent a repeat of the costs forced on the local economy following Dubai World's $25bn restructuring.

The ratings agency Standard & Poor's has increased staff in Dubai while financial services headhunters report a growing need for highly trained credit analysts.

A $26.1bn bonanza of bonds and sukuk sales in the Gulf has increased the demand for credit ratings as companies such as Majid Al Futtaim Holding take their first steps into Islamic bond markets.

"We're deploying people out of Europe with a lot of analysts coming out of Paris, London and Frankfurt," said Stuart Anderson, S&P's regional managing director. The ratings agency found itself "wanting and needing to have analysts on the ground to be more relevant and to have a deeper regional understanding", he added.

S&P has increased its staff numbers in its Dubai office from three in 2007 to about two dozen this year, most of whom are ratings specialists.

But ratings agencies are also increasingly warning that reported levels of bad debts still sloshing around in the financial system do not reflect financial reality - and that trouble could be looming.

Both S&P and Moody's Investors Service, a rival ratings agency, have warned renegotiated problem loans could re-emerge as a result of global economic turbulence.

The Central Bank has undertaken two major regulatory drives in the past three months in an effort to protect UAE banks from financial shocks.

The first capped the amount of money individual companies could borrow to 100 per cent of the lending bank's capital base - intended to shield lenders from vulnerability to bad debts from the big, government-related companies such as Dubai World.

This month, the Central Bank also announced new guidelines on bank liquidity, intended to put the UAE's lenders on track for compliance with the Basel III regulations.

The Central Bank's data shows the UAE's lenders remain well capitalised by international standards. But high levels of cash in reserve have not yet filtered through to the wider economy with sector-wide net loans and advances growing just 0.3 per cent to Dh1.074 trillion between January and May, the bank's most recent data says.

But banks risk letting good business slip away if they fear lending too much after a painful downturn, said Patrick Mulvey, a former Citibank banker who is training analysts on behalf of the recruitment agency GCC Partners.

The Dubai firm says it is encountering increased demand for corporate bankers with a strong understanding of credit risk.

Bankers also need reassuring that the impact of previous busts should not deter them from lending again, Mr Mulvey said. "The belief that you can never do business after you get hurt is pretty poor," he said.

"That's a pretty sad state of affairs."

Banks would do much better to strengthen their credit guidelines, dust themselves off and carry on lending, he said.