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Saturday, 10 January 2009

Waiting for rebound

2008 may be remembered as the year with no place to hide.

Half a decade of speculative excesses produced the worst global recession in two generations and steep declines in nearly every asset class deemed not to provide the utmost safety. Few markets anywhere escaped intact, but UAE investors, who benefited more than many during the boom, may have been left feeling especially exposed.

An index of UAE stocks compiled by the research firm MSCI Barra fell 73.2 per cent on the year, far more than the 42.1 per cent decline of the MSCI World Index.

Chinese Reits

Nice idea; shame about the timing. Amid the steepest global property downturn in decades, China is expediting plans to allow developers to raise funds through public real estate investment trusts, or Reits. A televised presentation by the country’s vice housing minister earlier this week emphasised that China wanted to learn from the horrendous recent performance of these structured vehicles, which lagged global equities by about 13 per cent last year.

The proposal makes sense on paper. Every serious international capital pool has shifted property risk from banks to its stock market. Cash-strapped developers may jump at the chance to diversify funding, even if that means selling properties into a Reit at a discount. And investors are easily bewitched by the chance of owning a piece of a gleaming tower or shopping mall.

Capitalist crisis becomes thriving business

Amid the economic gloom, at least one business is booming this year – conferences on the crisis of capitalism.

This week, a host of policymakers and economists – including four heads of state or government and three Nobel prize-winning economists – descended on Paris to debate how to stick the shattered world economy back together again. A flurry of similar meetings is taking place in advance of the Group of 20 summit in London in April, which aims to redesign global governance.

Already, several themes are becoming commonplace. First, the excesses of the financial sector must be directly tackled through smarter, tougher, global regulation extended to all institutions that pose a systemic risk.

In bondage to the bond markets

The global economy continues its swan dive. In the three months to November, UK industrial production fell by 2.7 per cent. US unemployment surged by 524,000 in December alone and purchasing managers’ indices suggest the quagmire is deepening in Asia. The only growing sector is government. But questions are now being raised about whether states can finance their widening deficits.

The flow of public spending around the world is growing while tax revenues are thinning. Investors are lending enormous volumes to states to make up the difference. Governments can borrow cheaply, but will still need to service the debt. It is not clear in every case how they will afford to do so: around the world, lots of taxable productive capacity is being destroyed.

This week, investors chose not to take up all the debt on offer at a German Bund auction, leaving nearly €2bn of debt unsold. The price of insuring government debt is rising: it costs more to insure against US and UK government default with a credit default swap than against the collapse of McDonald’s, the fast-food chain.

Going south

Until a few months ago, as financial and economic turmoil gripped the industrialised world, Latin America was suffused with optimism that it would escape the worst. “People ask me about the crisis and I answer, ‘go ask Bush’,” Brazil’s President Luiz InĂ¡cio Lula da Silva said of his US counterpart in early September. “It is his crisis, not mine.”

It is Mr Lula da Silva’s now. Brazil’s industrial production sank 6.2 per cent in the year to November, according to figures announced this week – the sharpest decline in output since December 2001.

Across the continent, the crisis has brought about a large-scale destruction of wealth. Claudio Loser, a former western hemisphere chief at the International Monetary Fund, calculates that 40 per cent of Latin America’s financial wealth was wiped out in the first 11 months of 2008 through falls in stock and other asset markets and currency depreciation. That $2,200bn (£1,440bn, €1,610bn) loss alone could cut domestic spending by 5 per cent next year, he estimates.

BP signs peace deal with Russian partners

BP and its Russian partners in the TNK-BP joint venture have signed the peace deal they agreed in principle in 2008, weakening the British group’s grip on the company.

The deal, which followed months of conflict over the venture, leaves two of the Russian shareholders in powerful executive roles.

It will also lead to the appointment of a new chief executive, who must be approved by the Russian tycoons who own 50 per cent of TNK-BP.

Abu Dhabi staunch in the face of crisis

Abu Dhabi is the economic powerhouse of the UAE, its prosperity founded on abundant hydrocarbon resources that generate around 60 per cent of the emirate's GDP.

Despite its concentration on oil and gas, the steep fall in international oil prices poses little threat to the emirate's credit standing, thanks to its robust public finances. Moody's estimates that Abu Dhabi's fiscal break-even oil price is around $30 per barrel, considerably below even today's depressed prices.

Even if oil prices were to fall below $30 per barrel, the Abu Dhabi Government could afford to run sizeable fiscal deficits for many years given its stockpile of financial assets.

Financial woes mount in region

Cairo: Kuwait's biggest investment bank, Global Investment House, on Thursday said it had defaulted on the majority of its debt while Bahrain's two biggest commercial banks saw their ratings outlook downgraded, as the global financial meltdown pummelled the Gulf Arab region that months ago was the focus of an economic boom.

Further reflecting the troubles facing the region, Standard Chartered Bank on Thursday revised down its outlook for growth in the region, citing the current global meltdown.