Middle Eastern banks sound despite Gulf Bank bailout

The bailout of Gulf Bank by the Kuwaiti government is not grounds for investor worry in the Middle East, says analyst.
KuwaitÆs Gulf Bank has achieved the questionable honour of being the first Middle Eastern bank to require a government bailout. Stepping in after the bank incurred significant losses from currency derivatives trading, KuwaitÆs central bank bailed out Gulf Bank for an unspecified amount and proceeded to back all deposits held by domestic banks.

The losses prompted the resignation yesterday of Gulf BankÆs chairman, Bassam al-Ghanem, as well as one other board member, according to several media reports in the region. The bank has reportedly appointed Ghanem's brother Qutaiba al-Ghanem to take over as chairman. The Ghanems are the bankÆs largest shareholders.

While details of the central bankÆs bailout were not available, central bank governor Skeikh Salem al-Sabah indicated that Gulf Bank suffered losses from currency derivatives trading. Gulf Bank will absorb all losses until it works out an agreement with the counterparties on the derivatives trades. The bankÆs shares have been suspended from trading since Sunday at the request of the central bank.

CitiÆs Middle East economist Mushtaq Khan explains that Gulf Bank took a bet that the euro would continue to strengthen against the dollar. When the dollar unexpectedly rose rapidly against the euro, the bank faced a problem with its counterparty commitments that ultimately required central bank intervention.

ôThe transaction was a bet, a wrong bet, but since it is contained within Gulf Bank, that is a source of comfort,ö says Khan.

The euro has dropped 11% against the dollar since October 1, falling from 1.4058 to 1.2476 yesterday.

KuwaitÆs central bank on Tuesday also moved to guarantee all deposits in domestic banks. Despite this move and similar deposit guarantees implemented by the central banks in Saudi Arabia and the United Arab Emirates, the regionÆs financials remain sound, says Khan, who argues that the bailout of Gulf Bank is not a sign of weakness in Middle Eastern markets but an isolated incident.

ôOne comforting thing is that since this is an FX transaction, it is not linked to any underlying problems in the asset base of Gulf Bank,ö Khan says. ôAs long as other banks have not taken these sorts of positions, this should not be a problem. The Gulf continues to weather the current crisis fairly well. The regionÆs governments have the resources to support banks, and many local banks are either owned or connected to the government,ö he adds.

According to the International Monetary Fund (IMF), fundamentals in the Middle East remain sound because of growing domestic demand and strong performance in non-oil sectors. In its October World Economic Outlook, the IMF predicted regional GDP growth of 6.4% in 2008, up 0.2% from its July estimate based on continued private investment and ongoing construction of public projects.

In 2009, the IMF estimates economic growth in the Middle East will fall to 5.9%, which will be in line with 2007 levels.

To restore investor confidence in the market, Saudi Arabia and the United Arab Emirates (UAE) have both taken measures to shore up their banking sectors. In September, the UAE created a $13.7 billion lending facility for banks and earlier this month it injected another $19 billion of liquidity into the sector. Additionally, on October 13 the country moved to guarantee all bank deposits in foreign and domestic banks for up to three years.

Saudi Arabia, the Middle EastÆs largest economy, made $40 billion available for domestic banks earlier this month and on October 26, the countryÆs King Abdullah ordered an additional $2.67 billion in financing given to Saudi Credit Bank.
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