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The Middle East has increasingly been cited in recent months as the ultimate safe haven for hard-pressed companies reeling from the impact of the credit crunch. The region's seemingly endless oil-financed construction boom has proved a boon for a clutch of UK companies, but the good times could be coming to an end as debt escalates in Dubai and the oil price falls.
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The United Arab Emirates (UAE) this week issued a guarantee of all savings and inter-bank lending in the country amid a falling stock market and worries over an over-heating property market in Dubai. Credit-rating agency Moody's added to the new mood of caution by releasing a report that showed Dubai to be particularly vulnerable to a freezing of credit markets, with the country now now $50bn (£29bn) in debt, equivalent to 103 per cent of its 2006 gross domestic product (GDP). No UAE bank has ever defaulted, despite several banking crises in past 30 years, but the country's reliance on Western tourism could be a problem in a weakening global economy.
Moody's predicted that the future of Dubai's economy, which has seen property values climb 40 per cent this year, is now dependent on the willingness of oil-rich Abu Dhabi, controller of 90 per cent of the country's reserves, to underwrite its debt obligations and ensure its continued expansion. Major infrastructure projects could be delayed if tight credit conditions persist and the refinancing of current debt takes precedence over arranging new facilities.
Analysts have begun to downgrade their predictions for economic growth for the entire region as oil revenues fall and sovereign wealth funds and private investors take big hits from equity investments. This could hit UK-listed companies with Middle East exposure to construction, infrastructure or building services.
The Middle East has become a totem for many companies who have banked on the region's buoyant growth to off-set falling sales elsewhere. Cape may see its infrastructure consulting business suffer. Aim-quoted Panceltica, with one major customer in Qatar, is vulnerable, as is industrial equipment hire provider Northbridge. We downgrade all to fairly priced at 165p, 90p and 138p respectively.
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