Mega property projects in the Middle East could face funding problems

Large scale finance and real estate projects in the Middle East, some of which were announced at Cityscape, will be vulnerable to the global credit crunch, according to a new report.

Not only are GCC banks facing a liquidity crisis but the direct sub-prime exposure, which has been limited so far, could be greater, warns the report from the Gulf Research Centre.

Further exposure to the sub-prime crisis could surface but as this is likely to be through Sovereign Wealth Funds the impact is probably manageable as they have enjoyed large inflows due to high oil prices and have diversified portfolios.

'Much more important than the direct impact of the international financial crisis is its indirect effect as financing becomes scarce and its costs soar, says the report, the Impact of the US Financial Crisis on GCC Countries.

Corporate spreads in the GCC have widened dramatically, and a couple of companies have already witnessed problems in refinancing existing bonds and loan facilities, it claims.

If push comes to shove, cash injections and strategic domestic investments by the region's SWFs might be needed, most notably in GCC companies like Sabic or Emaar that position themselves internationally and are key for the future diversification of the region's economies, the report continues.

If a deep world recession develops, as many are currently predicting, demand for key GCC export products like crude oil, petrochemicals and aluminum will be affected. The notion that was held by some until recently that China or the GCC countries would be immune must be deemed futile, the report adds.

Large project finance will not be as readily available as in the past and might affect the cost structure or even the feasibility of some mega industrial projects.

A similar warning comes from Egyptian investment bank EFG-Hermes. It is questioning how some of the mega projects announced at Cityscape will be funded including Nakheel's $38.2 billion one-kilometre high tower and Satwa's $95 billion Jumeirah Garden City development.

'While these projects received a lot of attention due to their scale, we believe their timing cannot be considered to be ideal given the reduced appetite for new projects as a result of the global confidence crisis,' the bank said. 'Moreover, the tighter liquidity picture raises the question of funding, which was not particularly addressed.'

However Nakheel said it believed that the global economic downturn would only have a limited impact on the Middle East. It would, however, 'monitor the market closely' and 'build to meet future needs'.