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Monday, 18 May 2009

Saudi projects shrug off tough climate

Location of JeddahImage via Wikipedia

A rose-coloured gate capped by domed towers and arches marks the entrance to King Abdullah Economic City, a monumental project under construction by the Red Sea, north of Jeddah.

The $27bn scheme, which will eventually reach the size of Washington DC, is the flagship of four huge economic projects that Saudi Arabia’s government has scheduled for completion by 2020.

The plan is to turn this 168m square metre city, designed primarily by a Singaporean team, into a business centre with industrial and residential areas and a port linked by rail and road to elsewhere in the kingdom.

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Islamic finance

One of the last refuges of decoupling proponents is the idea that Islamic finance might offer a more stable alternative to traditional financial markets. True, issuance of sukuk – or Islamic bonds – fell by more than half last year, to $20bn. But difficulty raising money was inevitable as the financial crisis led investors to shun debt, Islamic or otherwise. Come the recovery, finance grounded in Sharia law – with its strictures against leverage and speculation – should thrive in a deleveraged world. Or so the argument goes.

Indonesia’s launch of a massively-oversubscribed $650m sukuk last month – the first global dollar-denominated sukuk issue of the year, and Indonesia’s first ever – has kindled hopes among sukuk boosters. Bahrain is expected to launch $1.5bn-$2bn of sukuk next month. As sovereigns return to the fray, analysts expect companies to follow. Investors should wait before diving in, however. It may ban leverage, but Islamic finance is beset by other uncertainties. One is how the claims of sukuk holders might stack up against those of other stakeholders in the event of default. Last week’s default on a $100m sukuk bond by Investment Dar, a Kuwaiti investment company that owns half of Aston Martin, the UK sports car maker, will be a critical test case. Courts must decide if sukuk – whose returns are based on an ownership claim on assets, rather than cash flows – should be lumped in with bonds, or be treated more like equity.

Islamic scholars, meanwhile, must reach an agreement on standards for what constitutes sharia-compliance. Uncertainty on both fronts partly explains why the spread on HSBC’s leading sukuk index remains at four times pre-crisis levels, compared with three times for its conventional Gulf counterpart. Until a more mature regulatory and legal environment emerges, investors who do not face religious restrictions on how they deploy their funds would be wise to stay on the sidelines.

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Second Iranian bank floats shares

Tejarat, Iran’s fifth largest commercial bank by capital, on Monday became the second state-owned bank to join the private sector by selling 6 per cent of its shares.

The sale came despite arrears which even the bank admitted amounts to about 20 per cent of its 10,400bn rials ($1.06bn) in capital.

Bank Tejarat ‘s financial situation is shared almost by all state-owned banks which are under pressure from the government to support the populist policies of Mahmoud Ahmadi-Nejad, the president. They are pressured to offer loans at 12 per cent despite 24.5 per cent of inflation.

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VTB Capital to establish branch in Dubai

Dubai International Finance Center.Image via Wikipedia

VTB Capital, investment business of VTB Group, one of the largest financial groups in Russia, today announced that it has received a licence from the Dubai Financial Services Authority (DFSA) to operate as an authorised firm in the Dubai International Financial Centre (DIFC).

Headquartered in Moscow, VTB Capital has a focused international expansion strategy as part of which it already has a well-established banking presence in London. VTB Capital’s London office has a branch in Singapore that operates as an Asia-Pacific hub for its business. Consistent with its international strategy, the Dubai office will serve a gateway for VTB Capital into the Middle East and Africa.

The new office will provide a wide range of investment banking services including arranging and advising on securities, derivatives and a broad set of other financial products. VTB Capital, through its Dubai branch, will facilitate investment flows between the Middle East, Africa and Russia by providing its clients, both in Russia and the Middle East, with access to market opportunities, unique solutions and tailor-made products.


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Will a 'Bad Bank' Provide A Solution To Kuwait's Financial Woes? (Registration required)

Kuwait Investment Authority LogoImage via Wikipedia

On May 14th, the Central Bank of Kuwait, the Kuwait Investment Authority (KIA) and a number of private companies entered into discussions to establish a fund, or a “bad bank”, to purchase toxic assets from the country's investment companies’ balance sheets. This could be the latest new tool in Kuwait’s tool box, and such plans come less than a week after the central bank proposed a third round of stress tests. While details have yet to be released – and there is still reportedly some concern about who and how it might be administered, this could be a step in the process of rescuing Kuwait’s financial sector, though only if it is done transparently.

Following the rescue of Gulf Bank and the default of Global Investment House of one of its bonds last fall, the government has been rolling out new measures in the face of weaker risk appetite in the GCC and globally. On the financial side, it has provided capital to banks, guaranteed deposits etc. It has continued monetary easing and plans to maintain spending though the details of allocation are uncertain. The political stalemate in the Kuwait has not helped these responses and uncertainty about the exposure of corporations and investment companies, as well as the fear of asset ,market losses have kept banks unwilling to lend. The default shed light on the vulnerabilities in other Kuwaiti institutions, underscored by a wave of banking downgrades in the GCC and in Kuwait’s overall banking system, towards the end of 2008 and start of 2009. Moreover, delays in reporting financial results led to trade of many financial and non-financial corporations in spring 2009. Although trading in most resumed after Q4 results were released, reports suggest that the same thing led authorities to stop trading today in 26 companies.

With Kuwait’s financial system was hard hit by the crisis, increasing the calls for the involvement of the KIA and political pressure for more intervention. However, despite the pressure on its financial institutions, Kuwait’s current NPL rate is relatively low (1.7%), lower than many of its neighbors and has been declining. Defaults rose briefly in mid 2008 after many individuals hoped that the government would pay off their debts but are still relatively low. But as noted below investment companies are vulnerable both to investment losses and to difficulty in attracting new funds as some local investors become more risk averse - the stock of GCC investment fund assets under management fell sharply since mid 2008 on investment losses and withdrawals.


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GCC – positive developments

Introduction
We have highlighted the need to improve liquidity in the UAE economy, and that the high advance-to- deposit (A/D)ratios of UAE banks are one of the main reasons behind the tighter credit conditions (see OTG, 12 February 2009,‘GCC – Pro-cyclicality, recession and the way out’). Our view is that in the current challenging environment,
policy has an important role to play. Saudi Arabia has already responded with an expansionary fiscal policy and an accommodating monetary policy. In Qatar, the authorities’ attention is still focussed on reducing inflation, but this has not stopped policy makers from ensuring that the banking sector is insulated from global developments and deteriorating market conditions. Recently, there have been positive policy responses in the UAE as well. Policy makers are acknowledging the challenges and are willing to take decisive measures. This will have a significant
impact on sentiment, which is already beginning to improve, and on the economy as a whole. More needs to be done. We expect further measures to be announced in coming weeks.

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Egypt cuts interest rates

On Friday, May 15, Egypt’s central bank cut overnight deposit rates by 50bps to 9.5% and its overnight lending rate by 100bps to 11%. In its statement, the central bank said that the narrowing of the corridor of the deposit rate and lending rates was appropriate as “the dire prospects for global growth in 2009 are likely to exert further downward pressures on external demand with unfavorable repercussions on the domestic growth outlook”.

As expected, Egypt’s central bank cut rates for a third time this year. The bank has responded aggressively to the economic slowdown by loosening monetary policy. With inflation on the decline, 11.7% in April 2009 coming off its peak of 24% in August 2008, the central bank has room to cut interest rates even further. We expect the central bank to do just that, cutting the overnight deposit rate to 9% by the end of Q2-2009.

The central bank is acting to stimulate a sluggish economy. GDP in Q3 FY09 reached 4.3% y/y v. 7.4% y/y the same period last year. Key revenue generating sectors, tourism and shipping i.e. Suez Canal revenues have been heavily affected by the global economic slowdown. In January 2009, Suez Canal receipts were down 19.7% y/y while hotel bookings are down more than 30% y/y in January 2009. Hotel occupancy rates in key resorts hover around 50-60% compared to their 90% usual occupancy rates. In addition to the central bank’s measures, the government plans to spend an additional USD 3bn in the second half of the year to extend its economic stimulus package, widening the budget deficit to almost 8% of GDP in FY10 v. the expected 6.8% in FY09 which ends in June 2009. The government has prioritized growth above all else. We expect growth to average 3% this fiscal year.END

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Standard Chartered regional boss calls on UAE to infuse more liquidity

The UAE probably needs to add about Dh50 billion to its banking system to help reduce interest rates and boost economic growth, the Middle East head of Standard Chartered Plc said.

"My greatest concern in the UAE would revolve around liquidity and certainly the follow-on effect on property through to the industry," Shayne Nelson said in an interview at the World Economic Forum at the Dead Sea in Jordan. "I think in fresh liquidity, we probably need around Dh50 billion."

The central bank in October set up a Dh50 billion credit facility for lenders and the federal government said it would deposit Dh70 billion with banks to increase liquidity and lower interest rates after global credit markets froze.

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UAE banks shun foreclosures

The window of the Better Homes estate agents at Jumeirah Beach Residence is full of properties for sale, but none of them are foreclosures. Outside, the street bustles with Saturday morning shoppers. There is little sign of housing distress here, despite prices of some apartments falling by 45 per cent since the end of last year.

Banks facing losses of as much as Dh24 billion (US$6.54bn) on bad home loans have yet to foreclose on properties in the Emirates, fearing they may become embroiled in a legal quagmire that could take years to resolve.

Instead, lenders are negotiating with distressed mortgage holders in a bid to recover some capital and avoid having to start potentially costly legal proceedings that hinge on an as yet untested mortgage law.

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Tamweel may repossess properties in default

Tamweel, the country’s largest home lender by volume, may become the first to sell repossessed properties once the legal process is complete.

Legal uncertainties have made mortgage lenders reluctant to hold forced sales or auctions in the past, as the system has never been tested.

Instead, lenders have negotiated with distressed mortgage customers to try to recover some capital and avoid costly legal proceedings.
No repossessions have been completed by UAE banks, according to Mohammed Sultan Thani, the assistant director general at the Dubai Land Department, which would oversee the sale of any repossessed properties under the 2008 Mortgage Law.

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Rothschild’s roadmap for Dubai’s economic recovery

It is payback time for Rothschild in Dubai. The 200-year-old banking house, perhaps the bluest of the blue bloods of the world’s financial dynasties, has always prided itself on the strength of its relationships, especially with governments and global power brokers.

Now, after years of cultivating Dubai corporations with advice and assistance, it has landed the big one – the brief to advise Dubai Inc on the strategy for recovery from the financial crisis. Last month it was announced that Rothschild’s Dubai office had been retained by the Government’s Department of Finance to advise on the US$10 billion (Dh36.7bn) financial support fund (FSF) raised by Dubai on the bond markets (with a further $10bn in the pipeline).

When it came to it, Dubai – with a portfolio of borrowing relationships with most of the world’s big banking groups – had only two real alternatives: Rothschild, or its great rival, Lazard. As the financial crisis has thinned the ranks of the old-fashioned merchant banks, only those two were in a position to offer Dubai the kind of independent, objective advice it needed. Its final choice was recognition of Rothschild’s commitment to the emirate and the strength of its reputation as a financial problem solver.

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Home loan insurance should be a priority

The global financial crisis is having a significant impact on the property sector in the UAE and the rest of the GCC. Even with proactive measures by the region’s policymakers, widespread uncertainty globally has made local lenders more risk averse, leading to a tightening of credit for housing finance and stricter requirements for home loan approvals.

Without a return to normal lending practices for home buyers, the strains in the property market and related sectors such as construction are destined to worsen. In this situation, one way to boost home lending could be the introduction of mortgage insurance.

One of the main reasons that banks are currently reluctant to lend is the difficulty of evaluating the creditworthiness of clients in an environment characterised by uncertainty, where exaggerated rumours of layoffs and economic doom abound and where information on credit history is sketchy or absent. These problems are compounded by a lack of the tools and institutions available in many developed countries and even some emerging markets, which allow for risk mitigation and risk pooling. In particular, the UAE lacks an institution providing insurance against mortgage defaults by individuals experiencing economic hardship. Such institutions are increasingly common across the world and one might argue that the time has come for the UAE to establish a nationwide mortgage insurance company.

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Saudi central bank draws on foreign reserves

Saudi Arabia's central bank governor said on Sunday the world's top oil exporter was drawing on some foreign reserves but not selling foreign assets to finance a growing budget designed to stimulate the economy.

Saudi Arabia, which pegs its currency to the dollar and is a major holder of US Treasuries, would still see good growth this year in non-oil sectors, even as oil production falls, Mohammad Al Jasser told reporters.

"No, we are not," Al Jasser said in the Saudi capital, Riyadh, when asked if the central bank was selling foreign assets. Analysts said he was likely referring to US government paper.

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Funding shortfall could lead to part ownership

Funding shortfall may require an increasing number of private and single-tower developers to offer part ownership options to investors in their projects, according to experts.

A few developers in Dubai such as Cirrus Developments are offering unit purchasers the option of becoming a shareholder in the project. In March, Cirrus presented a restructuring proposal to the purchasers of Aquarius Gate project, which will convert their status from "unit purchasers" to "shareholders" in new project company.

Speaking to Emirates Business, Chet Riley, Equity Research, Middle East, Nomura International, said: "In attempting to schedule installments against the pace of construction and enforce minimum requirements before projects can be registered – the resultant funding shortfall will require an increasing number of private, single tower developers to attempt this type of structure. There is a form of regulatory arbitrage being developed here and the consequences have probably not been fully explored yet by Real Estate Regulatory Agency (Rera)."

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Private sector to have a say in policy decisions

The heads of state of Gulf oil producers have agreed to demands by their private sector to have a bigger say in economic decisions taken jointly by their governments, the chief of the region's private sector said yesterday.

The leaders of the six-nation Gulf Cooperation Council (GCC) approved the private sector's request for greater involvement in decision-making in the economy and other sectors at their semi-annual summit talks in Riyadh early this month, said Abdul Rahim Naqi, Secretary General of the Dammam-based Federation of the GCC Chambers of Commerce and Industry.

In a statement sent to Emirates Business, Naqi said the new summit decision meant that representatives of the GCC private sector would participate in periodical meetings of the group's ministers and other government officials and would be consulted on any resolution before it gets final approval.

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Zabeel shelves plan to invest $1bn in US hotels

Zabeel Investments has shelved plans to invest $1 billion (Dh3.67bn) in US hotels and will rather prioritise on the completion of its property projects in Dubai, Emirates Business has learnt.

"Our focus today is our investments and everything that we do is in Dubai," said Zabeel Investments Executive Chairman Mohammed Ali Al Hashimi in an interview. "Right now, internationally we do not have any intentions at looking at anything.

"First, because I think recovery will take much longer and second, the priority for us is our economy."

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Recovery to begin next year as oil prices look up

The UAE economy will start recovering from next year with international oil prices hitting $50 (Dh183.5) for a fast acceleration for the next 10 years as the global economy comes back to normal, said a British economist.

Robin Bew, Editorial Director and Chief Economist at the UK-based Economist Intelligence Unit, who was in the capital to have a roundtable with Abu Dhabi Government officials, in an exclusive interview told Emirates Business that the UAE was set for an accelerated growth from the next year after seeing some severe downturns this year.

At the roundtable last week that was closed for the press, Bew presented a 27-page comprehensive report on the country's economy to the government officials and discussed how to attract further foreign investment in the country.

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Smaller US banks need additional $24bn

Small and medium-sized US banks must raise some $24bn to meet the capital standards set by the government in its stress tests of large institutions, research conducted for the Financial Times by Sandler O’Neill shows. News of the potential capital shortfall could increase pressure on many of the 7,900 US banks that form the backbone of the US financial system, the FT said.

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Iraq $8bn gas deal raises hopes for Nabucco

Europe took a surprise step towards reducing its dependence on Russian gas yesterday as two of its oil companies agreed to develop a gas field in Kurdistan, Iraq's semi-autonomous region.

OMV, of Austria, and Hungary's MOLagreed the deal, which will feed the planned Nabucco pipeline.

The 3,300km pipeline is the centrepiece of Europe's energy policy and attempts to reduce imports from Russia by providing the region with gas from central Asia.

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Kuwaitis elect women MPs for the first time

Kuwaitis have elected women members of parliament for the first time, it was announced yesterday.

Analysts said the election was a vote for change after combative parliaments had locked horns with the government but failed to deliver economic reform.

Four women were voted into the 50-member parliament that saw an unusually high turnover of representatives. The parliament was dissolved in March after MPs made repeated attempts to question one of the emir's nephews over the alleged misuse of public funds.

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Dubai gov't denies living in 'state of denial' - official

A senior Dubai government official has hit back at media claims the emirate is living in a “state of denial” over the economic impact of the global crisis, during a panel discussion at the World Economic Forum in Jordan on Sunday.

Nasser Al Sheikh, director general of Dubai’s Department of Finance, admitted to delegates the crisis had been the first real challenge for the UAE.

However, the country was now going through a mode of “stabilisation” – rather than recovery - and liquidity remained an issue of concern for some of the emirate’s key firms, delegates heard.

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Q1 2009 80 stock brokers in red 15 green (Re-posted from Blogoronomy.wordpress.com)

Al Bayan article via Mubasher (Translation):

80 out of 95 local stock brokerage companies registered losses in the first quarter of this year after disclosing financial performance to the Emirates Securities and Commodities Authority (ESCA). Last year 28 stock brokerage companies registered losses for the same period.

Analysis by Al Bayan Economic (Business section) observed that the increase in losses follows dramatic declines registered by the stock markets in the first quarter. The losses represent a precedent for the brokerage companies since the markets’ inception 8 years ago, signalling the need to study market conditions to help preserve the rights of investors (clients), especially those of smaller companies suffering from lack of liquidity. These smaller companies exceed 60 in number and are barely covering their operational expenses.

The study covering the financial reports of 95 companies shows that losers include large brokerage houses affiliated with banks, an indication of how dire the situation is for stock brokerage firms.

The study notes the urgent need for industry consolidation to increase the finanical ability and strength of brokerage companies to ensure survival in the future.END

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Carlyle sees opportunity in Middle East

Carlyle Group expects a pick-up in Middle Eastern private equity activity this year, following a sharp decline in asset valuations during the downturn.

The group, which has raised $500m for its Middle East and North Africa fund, is looking for opportunities in capital intensive sectors, including oil and gas companies, health care, pharmaceuticals and specialist manufacturing, said Walid Musallam, managing director at the fund.

The vehicle was launched two years ago with the intention of raising $750m but closed after reaching $500m because of the global economic turmoil. In spite of looking at some 200 opportunities, it only executed one deal in 2008 because of high valuations, buying a 50 per cent stake in Turkey’s TVK Shipyard, which builds specialised chemical vessels.

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