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Tuesday, 12 May 2009

Is the banking crisis over?

First-quarter results from the four main UK High Street banks showed that profits are starting to recover and bad debts - while still rising - do not look like spiralling out of control. Over in the US, the 'stress tests' applied to 19 major US banks resulted in many institutions having to raise less additional capital than had been feared. Stock markets have rallied strongly. Does all this mean that the banking crisis is drawing to a close, even if the economic crisis it caused remains in motion?
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Here are some headlines from this issue:

ADX: Abu Dhabi Securities Exchange (ADX) will list Green Crescent Insurance Company, an Abu Dhabi-based health insurance company, on its exchange tomorrow, making it the 66th company to be listed on ADX. This listing takes the total number of companies in the insurance sector up to 15.

ALBANIA and CROATIA became NATO’s newest members in a historic expansion into the Western Balkans.

ASE: On the occasion of the Kingdom’s commemorations of passing ten years of His Majesty King Abdullah II taking over the throne, and passing ten years since the establishment of Amman Stock Exchange,the ASE held a reception party in which a number of representatives from the local and international financial and banking sector attended.

ASE: In conjunction with the visit of His Majesty King Abdullah II to Romania, and the Jordan-Romania Economic Forum, Amman Stock Exchange (ASE) has signed a Memorandum of Understanding (MOU) with Bucharest Stock Exchange (BVB) so as to foster the relation between the two institutions.
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Investment Dar Defaults on $100 Million Islamic Bond

Aston Martin Lagonda LimitedImage via Wikipedia

Investment Dar Co., the Kuwaiti financial-services company that owns half of Aston Martin Lagonda Ltd., said it defaulted on a $100 million Islamic bond maturing in 2010.

“Default has been made in the payment of the periodic distribution amount due to certificate-holders on April 27, and that such default has continued unremedied for a period of 14 days,” Investment Dar said in a statement to the Bahrain bourse today.

Investment Dar had 1.08 billion dinars ($3.73 billion) of total debt outstanding as of September 2008, according to Bloomberg data, including $150 million in another Islamic bond that matures in September 2011. The company, which has more than 50 subsidiaries and associates, said last month it is developing a restructuring plan with Credit Suisse Group AG.

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GCC assets under management: a rough ride

This comes from the brilliant MR Raghu of Markaz in Kuwait: Funds in the GCC aren't holding their assets well. Assets under management for GCC funds declined by 46 per cent in the last half of 2008 alone, and lost another 23 per cent in the first quarter of this year.

That doesn't bode well for asset managers in the region, many of whom had hoped that the recent market declines would lead individual investors to seek professional assistance with their portfolios. There is a (slight) silver lining to all this, however. First, a lot of this decline in assets under management is surely attributable to market performance, which had been abysmal across the GCC until the past month or so. Second, Islamic funds, on which plenty of managers have pinned their hopes, aren't declining in assets under management as much as conventional ones.

Here's Mr Raghu's analysis:
GCC markets went through a rollercoaster in 2008, with H1 being positive for the six economies followed by an abysmal second half which saw assets under management (AUM's) of GCC funds contract by a massive 46%. There continues to be a cloud of uncertainty over the local, and international, financial landscape, with equity markets trading sideways, liquidity being tight and good news being somewhat scattered, although governments have shown proactive measures aimed at bolstering their economies. However, AUM's continued to decline in the first quarter of the year; the good news is that the shrinkage seems to have steadied somewhat. AUM's for both country specific and pan-GCC funds contracted by 23% in the QTD period to USD 9.0 bn. The QTD decline was led by Qatar and Kuwait, which saw their AUM's shrink by 29% and 34%, respectively. Saudi Arabia's AUM contraction has moderated though; declining by 10% QTD after plunging 55% between April - December 2008, in line with the market stabilizing. Conventional fund AUM's declined by 26% in the QTD period while those for Islamic funds declined by 19% to USD 3.59 bn. Most Equity funds continued to languish in the red, but there were some gainers in Saudi Arabia and the UAE.

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Dubai – A new strategy (PDF)

Burj al Arab Hotel in DubaiImage via Wikipedia

The head of Dubai’s Real Estate Regulatory Authority (RERA), Marwan bin Ghalita has announced that Dubai is considering canceling 27 third party (sub-developer) projects. He estimates that this would represent about a quarter of all planned projects and that this figure had not changed from their previous estimates earlier in the year. A crisis committee made up of Dubai’s Land Department and RERA had been created to evaluate how many and what projects in the pipeline were unfeasible. RERA had already announced that the delivery date of 20% of residential units in 2009 and 40% in 2010 could be postponed.

This decision should be seen as a positive development as the government continues to refocus its strategy on more productive infrastructure projects. A lot of resources have, in the past, been devoted to a number of strictly real estate projects which have sometimes crowded out other long term investments as well as create a housing surplus in the emirate. The recent move to prioritise more strategic infrastructure has led to the acceleration of major projects involving roads, transport (metro/airport), ports and utilities. These should contribute in strengthening Dubai’s position as a global trade hub with first class infrastructure.

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ADX seeks more healthcare listings

The Abu Dhabi Securities Exchange (ADX) yesterday said it encourages the establishment of listed healthcare funds and the listing of more healthcare and life sciences companies on the exchange.

Speaking at the GCC Health and Development Forum in Abu Dhabi yesterday, Tom Healy, Chief Executive of ADX, said: "Abu Dhabi is in a stronger position coming out of the financial crisis than many other economies thanks to its hydrocarbon revenues and forward-thinking Government policies. ADX can therefore provide the international healthcare and life sciences sectors with the infrastructure to access capital on both a local and regional basis."

ADX has a small healthcare sector, with two listed companies – Gulf Medical Projects and Gulf Pharmaceutical Industries (Julphar). Healy said an expanded healthcare sector and the listing of related funds on the exchange will fulfill important aspects of the government's roadmap for economic development – Abu Dhabi Economic Vision: 2030.

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Mashreqbank initiates steps to shut down MFC III

Mashreqbank has initiated process to liquidate the Bahrain-based Makaseb Funds Company 111, the bank officials confirmed to Emirates Business.

The officials said the financial crisis that has dampened the fund markets the world over has left it redundant the running of the third company in the series – MFC 111. "We do not have any funds under the fold of Makaseb 111 as Makaseb Funds Company 1 and 11 run all active funds," they explained.

In March 2005, Mashreqbank set up the new investment company with a view to establishing, managing and promoting mutual funds, called Makaseb Funds Company (MFC) BSC. This was incorporated in Bahrain as exempt stock company under the licence from Bahraini Monetary Agency (BMA) and approval from the UAE Central Bank.

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GCC urged to strengthen central banks

GCC and other Arab countries were yesterday urged to strengthen their central banks and grant them the independence they needed to control banking operations.

The call was made in Sharjah at the Special Economic Zones Forum, which ended yesterday.

Dr Ali Lutfi, former Prime Minister of Egypt who has taught economics at a number of universities in his country, said the international financial crisis was not over yet. But he expected the downturn would end within the next few months and the global economy would revive again in 2010.

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DFM finalises sukuk issuance Standards

The Dubai Financial Market has finalised comprehensive standards to be established for the issuance of sukuk, or Shariah-compliant debt, said a top Islamic scholar.

The standards are ready and will be announced within two weeks after they are approved by the authorities, Dr Hussain Hamid Hassan, Chairman of the Shariah board of the Dubai Financial Market (DFM), the first and the only Shariah-compliant stock market in the world, told Emirates Business.

The principles will not only cover the issuance of sukuk but will address the areas relating to listing, trading on secondary markets and market making for these instruments. The establishment of standards is expected to help create a vibrant retail market for sukuk in this part of the world.

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Damas turns attention from Europe to UAE

Damas, the UAE jewellery retailer, has shifted resources for its expansion plans this year out of Europe to closer to home because of the global downturn, the company’s deputy managing director, Tamjid Abdullah, said.

Instead of adding outlets in France, Switzerland and the UK, Damas will open even more new stores to those originally planned in Saudi Arabia, Qatar, Egypt, Libya and Sudan, Mr Abdullah said. “The expansion has been concentrated in countries where we think it is more feasible,” he said.

Gold and jewellery sales in the UAE have fallen this year, with April’s sales down as much as 40 per cent in Dubai and 15 per cent in Abu Dhabi, according to retailers, who say the decline is due to the higher price of gold, fewer tourists, and local residents reducing discretionary spending.

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Dubai considers scrapping 27 projects

Regulators are gearing up to review all outstanding developments under a new law that gives them authority to cancel projects that do not start construction within six months of being approved by the Dubai Government. They are already considering cancelling 27 projects and are ready to halt additional developments that show no sign of being built and force developers to repay any outstanding amounts.

Marwan bin Ghalita, the chief executive of the Real Estate Regulatory Agency (RERA), said the new regulation would bring transparency to the market and encourage developers to follow through with their commitments.

“Many of these projects are from developers that are coming to us and saying ‘we don’t want to be in trouble’,” Mr bin Ghalita said. “It’s better to cancel them, rather than leave them dangling. It will give the market correct data.”

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Global crisis cuts deep into Amlak’s profit

Amlak Finance, the home finance provider based in Dubai, recorded a net loss of Dh204 million (US$55.5m) in the final quarter of last year, compared with a profit of Dh128.4m for the last quarter of 2007.

The Islamic lender, which was taken under government stewardship late last year, suffered a sharp fall in revenue from property investments and a rise in the cost of borrowing caused by the global financial crisis, it said in a statement.

Nasser al Shaikh, Amlak’s chairman, said: “The last quarter of the year has been a very challenging period for the entire industry due to the global financial crisis.”

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Local firms owe millions of euros to overseas suppliers

The international export credit insurer Coface says it is chasing at least €60 million (Dh299.7m) owed to overseas suppliers by companies based in the UAE, as orders and projects are cancelled because of the economic slowdown.

Coface, which insures exporters against non-payment and collects debts, has seen a rapid increase in claims because of the distressed property sector.

“There are easily half a dozen big incidences here where foreign suppliers are owed around €10m each,” said Jerome Cazes, the chief executive officer of Coface. “This compares with absolutely nothing at this time in 2008.”

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The economic experts who are out to lunch

When the legendary economist Milton Friedman wrote There’s No Such Thing As A Free Lunch, maybe he hadn’t yet visited the International Monetary Fund in Washington. There, an excellent meal can be had each mid-day on starched tablecloth – if not quite free then, at most, for some loose change. The buffet is good, the desserts impressive. After suitable nourishment, staff head back upstairs to think big thoughts about the world. Should a little drowsiness threaten productivity in the late afternoon, there’s a coffee barista to jump-start the brain cells. It’s this kind of sustenance that allows the institution’s staff to come up with serious, considered reports such as the one they released on Sunday that included the Gulf states.

In its outlook for the economies of the Middle East and Central Asia, the Fund projects that growth this year will be 2.6 per cent. It had previously thought these economies would grow 6 per cent. Think of the difference as an “update”. The IMF does a lot of that. In February, it predicted that Gulf economies would grow 3.6 per cent this year; now, it says 2.3 per cent. The Fund also believes the UAE economy this year will dip 0.6 per cent. Hold your breath for an adjustment. Of course, re-evaluations are nothing new and have been a longstanding practice of the Fund. For example, during the Asian crisis a decade ago, the IMF was strongly critical of Malaysia for imposing currency controls to ease interest rates. The Fund changed its mind after Malaysia quickly emerged from recession.

It also has a propensity for stating the obvious. The IMF thinks regional states must maintain spending to offset the impact of the world economic crisis. Yet a taxi cab driver attempting to negotiate the massive construction site that is Salaam Street in the capital will know this is already happening. The crisis is also hurting the region as a result of lower oil prices, lower tourism demand, tight credit conditions and falling international investment, says the Fund. If this had been a prediction last autumn, it would have been remarkably prescient. As a statement issued this week, it inspires a reaction commonly expressed in the grade-school monosyllable “duh”.

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Markets need to pull in fervent foreign investors

When things don’t go according to plan and as a result someone is hurt, be it physical or financial, human nature looks for someone or something else to blame. When the Gulf stock markets succumbed to the impact of the global “credit crunch” in the second half of last year, that “someone” or “something” was foreign investors.

It is true that at the same time as stock markets in the UAE and wider Gulf region began to fall, foreign investors were selling their shares. But why?

There are two answers to this. First, during a time of such financial stress, investors will often have to repatriate their money to cover positions at home. Next, a considerable amount of speculative money flooded into the UAE markets in 2007 and early last year in expectations of the de-pegging of the dirham from the US dollar. When this began to look unlikely, the speculative money left. But the timing was unfortunate.

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No Rally In Dubai

Whether you believe the rally in European and American stock markets over the past two months is the last gasp of a bear market or the mewling of a nascent bull, at least there has been a rally. Over in Dubai and Abu Dhabi, where the financial crisis pulled the rug out from under a boom fueled by high oil prices and real-estate fever, the mood is still decidedly depressed.

Since March 11 of this year, the Abu Dhabi AFX index has gained 11.2%, or only slightly more than Dubai's benchmark DFM index, up 9.0%. This is weak tea when compared with the stock-market rebound in the West. The S&P 500 index in the U.S. has risen by 26.8%, while the Dow Jones Euro Stoxx 50 has advanced 34.2%.

"There's been a little bit of a bear market rally in Dubai, but certainly nothing compared to that of Western markets," said Christopher Davidson, an academic and author of several books on the United Arab Emirates. "This is not a correction in Dubai, but a bubble bursting."

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UAE firm casts doubt over Saudi aluminium venture

A UAE-based firm threw into doubt on Monday plans to develop a $5 billion aluminium smelter in Saudi Arabia, dealing the second blow in less than six months to the kingdom's industry ambitions.

An executive of state-owned smelter Dubai Aluminium Co (Dubal) said the future of an aluminium plant project at Saudi Arabia's King Abdullah Economic City was "uncertain" in the current economic climate.

Dubal held talks with Saudi Arabian Mining Co (Ma'aden) in April over the plan, 13 months after it signed an initial agreement with the Saudi Arabian General Investment Authority (SAGIA) and Emaar Economic City to develop the 700,000 tonne per year smelter.

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Ahmadi-Nejad risks grapes of wrath

Iranians no longer have to wait until winter to eat oranges and for the summer to find grapes. Markets in Tehran and other towns and cities are now saturated year-round with Chinese pears, Pakistani tangerines, French apples and Chilean pomegranates.

Even Israeli oranges were recently found on sale in Tehran and some other cities, embarrassing the government of Mahmoud Ahmadi-Nejad, the president, who is the source of much incendiary rhetoric against the Jewish state.

All this abundance comes at a cost. Iranian farmers and critics of Mr Ahmadi-Nejad, who is up for re-election next month, say the government has wasted windfall oil earnings and stoked an import-led boom rather than encouraging domestic food producers.

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Exports offer hope in Iraq oil share row

The Kurdistan regional government has told oil companies working in the northern Iraqi province that they will be able to export oil using Iraq’s main pipeline as early as next month, an apparent breakthrough in a long-running dispute about sharing Iraq’s oil wealth.

The oil ministry in Baghdad confirmed that crude extracted from some fields in Kurdistan could be exported. There remained significant confusion, however, and analysts warned this could be yet another false start. “We are absolutely certain oil will flow on [June 1],” Ashti Hawrami, the KRG’s oil minister, told the Financial Times.

“Iraq desperately needs the oil revenues, and no one can deny that. The rest that needs to be worked out is just rough edges – I am talking about the oil law, the constitution, the legalities.”

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Kuwait pays for investment company ills

In 1999, Global Investment House in Kuwait established a proprietary investment operation with just over $30m in seed capital. A decade later, the division has brought the investment house, one of the best known in the Gulf, to its knees.

Pumping billions of dollars of borrowed money into investments, ranging from stakes in Tunisair to the Asian Finance Bank, ensured that Global was known far outside the borders of Kuwait, and generated enviable returns for investors and shareholders for much of the past decade.

But the credit crunch has hammered the investment company. In December, Global suffered the ignominy of becoming the first Gulf-based financial institution to default on its debts since 2002, after it was unable to make repayments on about $2.7bn of short-term debt to local and international banks.

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