Here in Dubai, the most efficient way to receive physical mail is to have a post box. In fact, Emirates Post does not deliver mail to residential addresses as yet, although I understand they will. So I have a PO Box in Dubai, which works very well. Before it became my mail box, it had a previous occupier. I still receive all their mail, and since I do not have a forwarding address, I just write return to sender, or not at this address, as advised by the post office. However, the mail keeps coming and coming. Without exception, the mail is from banks.
And each one of these banks which is sending mail to my post box is chasing money owed by the previous occupier. This guy seems to have been some sort of credit junkie, as it appears he has maxed out credit cards to pretty much every bank in the UAE, not just Dubai, and also business loans. There are tens of thousands of post boxes just like mine at this particular post office, and I know my experience is not unusual, because there are huge bins provided by the post office to put this mail in, and they are all full with the same kind of mail. What I am wondering, is not where my guy has gone, because he has clearly gone, but when will the banks stop sending me all his mail. The answer I know, is when they write off the debts he owes. This of course, begs the question, how much bad debt are these banks in the UAE really holding, or hiding?
The U.S. and European banks have the same problem. In fact, as we all know, the problem is so bad that the taxpayers of each country now own the countries banks via tax payer funded bailouts. But here in the UAE, there are no taxpayers as such. There are sovereigns, and sovereign wealth funds. So if the banks here need bailing out, presumably it will be the sovereign wealth funds who will have to bail them, assuming they have the funds available. Many people assume that because the Middle East has so much oil, that they automatically have huge reserves of cash, and can absorb any and all bad debts. However, it should be remembered that many Middle Eastern economies subside the import of refined products, such as petrol for cars, and diesel, and other forms of energy, against the oil they export. So higher oil prices do not necessarily equal more cash, but often it means higher subsidy bills.
The Middle East and the UAE in particular has seen an infrastructure boom over the last 15 years, much of which has been financed by debt, rather than spare oil cash. The debt has mostly been given against the future value of property being built. Many, many people rode the property bubble here in the UAE, and it was the banks, many local ones, which financed them. Property in the UAE has dropped by as much as 50% since the high, assuming you can find a buyer. Supply, is greater than demand at the moment, which if course is adding to the problem. The UAE economies are predicting 3% growth this year, and on the ground, you can feel the energy and excitement moving from flat line to a faint heartbeat. However, this is unlikely to help bridge the chasm between debt and equity values any time soon.
So the banks are exposed to losses not only in the credit card market, small business market, but also the real-estate market. And this week, Aldar properties, which are a leading Abu Dhabi property developer, had to be bailed out by the Abu Dhabi Government to the tune of $3 billion. The prediction is that this is the beginning of a shakeout in the property and banking sector in the UAE, not the end of one. If that is the case, there is a high likelihood that we will see some property developers and banks in the UAE fail this year. The governments are not going to want, or indeed be able, to bail out every bank or property developer.
The question remains then, not who will make write downs in the banking sector in the UAE this year, more likely who will make them and be able to survive. In neighboring Qatar, the government this week has “asked” Western banks like HSBC and Standard Chartered to stop offering Sharia compliant products in Doha, so that the local banks can have more market share, no international competition and presumably survive a little longer.
This of course is no answer to what seems to be a straight forward problem in many markets, and clearly here in the UAE, that banks are going to have to write off their bad debts. I will just have to watch to see if the mail stops coming to my post box to know when the write offs have been made!
Global Markets are anything but integrated. What if we had a paradigm shift in the way we think, the way we actually do business with each other, between nations. Balanced global trade can only occur if we have transparent, accessible, efficient markets, with standardized contracts and on a standardized platform of global exchange. We are on the cusp of achieving this, although most people cannot see it. Sam’s Exchange aims to give its readers a clearer view and a platform for discussion. Markets, trade and economics are in fact nothing more than the result of our thoughts and actions expressed in numbers, not the reverse.
Sam Barden is CEO of SBI Markets General Trading LLC, a Dubai-registered trading and advisory company. Barden, 39, has worked in the global financial markets for more than 17 years in Europe, Russia and the Middle East. He has advised and executed strategic transactions for both the government and private sector, in particular in energy and commodity markets, advising various energy producing nations on their strategic market developments and interaction. He holds a degree in economics and finance from Victoria University, Melbourne, Australia.