Q&A-Exclusive Analysis on Middle East risk

Middle East analysts from London-based risk consultancy Exclusive Analysis answer emailed questions about Iran, Saudi Arabia and UAE.

Iran

What impact will recent unrest in Iran have on the business environment, particularly for foreign investors?

The UK and France have borne the brunt of the government accusations of Western involvement in the post-electoral unrest and have both had Tehran embassy staff subject to arrest and intimidation by the Iranian authorities. The key foreign trade partners of Iran, Italy and Germany, have had less trouble and were subject to lax verbal attacks by the administration. These developments are unlikely to leave a long-term impact on trade ties between Iran and Europe; Iran is able to effectively divorce its economic ambitions, particularly in the energy sector, from its political considerations. However, as European companies, under pressure from the US, delay starting projects in Iran's energy sector, Iran is likely to favour Chinese and domestic companies for oil-sector development.

Saudi Arabia

How will recent defaults by the conglomerates, Saad Group and al-Gosaibi, impact on debt dynamics in the kingdom in the financial and other sectors? Would there be any wider impact on the rest of the region?

The Saudi government's refusal to bail out Saad and AHAB sends a strong signal to lenders that, unlike in strategic sectors like energy, transport or telecoms, non-strategic firms facing major debt crises cannot expect rescue by the state. This will make local banks - many of whom hold a substantial amount of Saad and AHAB's bad debt - less willing to lend what they perceive as troubled firms, raising the risk of defaults in non-strategic sectors, especially as many companies are facing serious financial crises amidst a global economic crisis. The government's decision to freeze the assets of Saad Group's billionaire chairman, Maan al-Sanea, along with several AHAB accounts will further discourage lending and worsen the current GCC liquidity crisis. The defaults do not, however, substantially change the probability of firms defaulting in other GCC countries. The governments of the UAE and Qatar have shown they will intervene financially to rescue large, prestigious business interests from collapse. However, the negative impact will be felt in the GCC banking sector due to Gulf banks' exposure to Saad and AHABs debt. The Lebanese and Jordanian banking sectors are minimally exposed - the former is especially tightly regulated - and are performing strongly, while the Egyptian one has never attracted much foreign capital or invested heavily abroad, limiting risks there.

United Arab Emirates

Do you anticipate widespread defaults in the UAE in light of the global credit crisis? Which sectors are most likely to be affected? How will this affect the internal dynamics of the United Arab Emirates and wider politics within the region? What would this mean for risk for other investments in Dubai and the region, such as real estate?

We do not think defaults will be the major issue for businesses and financial institutions in the UAE. Despite the high volume of projects announced in real estate, infrastructure, retail and other sectors over recent years, much of this work is being funded by local banks or large semi-public developers and holding companies. Abu Dhabi has amassed a sovereign wealth fund estimated at $350 billion and has readily provided financial support for the UAE's troubled banks. It has also backed its large real estate developers, minimising the risk of defaults. Instead, what we are likely to see in the UAE are widespread project delays and cancellations especially in real estate, including commercial and residential developments. Around half of the country's projects have been cancelled or placed on hold since the financial crisis hit the UAE in late-2008. This is mainly due to falling demand amidst a global recession and a substantial oversupply of high-end luxury developments, especially in Dubai. A $10 billion bailout of Dubai by Abu Dhabi increased local banks' deposits and mortgage lending but did not address the key issues of oversupply and falling demand which will continue to drive project cancellations and delays going forward. HSBC estimates property prices in Dubai fell by 40 percent in September 2008-March 2009 and the large developers which dominate the sector have cut their workforce substantially. Significant population shrinkage (5 percent to 30 percent) is expected this year in Dubai and will worsen the problem. We also anticipate delays and cancellations in industrial developments manufacturing commodities like steel, glass and concrete as demand for these follows trends in the real estate sector. For example, Pilkington Emirates has cancelled plans to build a $200 million glass factory and Al-Tuwairqi Group has stopped work on a $400 million steel melt shop. Risks will increase beyond July 2009 when many expatriate families plan to leave the UAE at the end of their children's academic year, further denting demand. Enforcement of penalties for delays and cancellations is likely to be inconsistent as courts seldom rule in favour of non-nationals, so foreign investors who have already committed money to developers are particularly exposed