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Tuesday, 19 May 2009

Jebel Ali Free Zone – Playing catch up (PDF)

Our credit view on Jebel Ali Free Zone (JAFZ) – rated A1/Stable and A/Neg by Moody’s and S&P respectively – is based primarily on the company’s strategic importance to the government of Dubai and its central role in the development of the emirate as a regional trade and logistics hub. While JAFZ’s revenue model is strong and the company reported good results for 2008, the high leverage, with debt/EBIDTA in excess of 8x, remains an overhang. We initiate coverage on JAFZ with a stable credit view.

We recommend investors buy the JAFZ ‘12 sukuk (AED) which is currently trading at an offer discount margin of 1,211bps. As a hedge, we recommend the Dubai 5Y CDS. Our target relative spread on the trade is 500bps (currently 711bps) with a stop loss at 850bps. The 16% yield (approx.) on the sukuk is high compared with the other quasi-sovereign entities in the Dubai Inc universe (see Chart 1 below). The sukuk was issued in 2007 at the peak of the dirham revaluation speculation and was the instrument of choice for investors to express a view on the currency. However, once speculation about revaluation abated, the sukuk, which had initially performed very well, began to sell off and never quite recovered, even though bonds issued by its
peers caught a strong bid post the federal assistance provided to Dubai earlier this year. While its high leverage means that JAFZ’s standalone credit quality is clearly weaker than that of its peers DP World and DEWA, its operations are of key significance both to Dubai and to the wider region. At these levels, the sukuk offers an attractive investment opportunity, in our view.

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Gulf Financial News (Opens ePaper)

Satellite image of Abu Dhabi (March 2003)Image via Wikipedia

"The trouble with economic cycles is that you can never really know at which point on it you are. It is very easy to mistake the green shoots of recovery for the gangrenous tinge of necrosis. As the credit crunch catalyses the capital market developments in the Gulf, it is also uncovering the true balance of power in the region.

The changing fortunes of Dubai and the subject of this month’s market focus, Abu Dhabi, in particular, is neatly illustrated by the traffic on the 10-lane highway between the two emirates. The north-bound lanes were once chock-ablock with the cars of those who could not afford the astronomical property prices near where they worked in UAE’s boom town and had therefore set up home in the country’s capital. Now the traffic is getting heavier in the other direction, with those who prefer to live among the bright lights of Dubai but to work where the action is hotting up: in Abu Dhabi."

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Kuwait parliamentary election results

Kuwaitis headed to the polls on 16 May to elect a new Parliament after the ruler dissolved it earlier this year to end the political standoff between the cabinet and parliament. The results of the elections are as follows: four women won seats in the legislature, the Sunni Islamists won 11 seats, down from 21 seats and liberals won eight seats, up from 7 last year, the Shia community won 9 seats up from four. Members of Parliament from tribal areas won the rest of the seats, some of whom are conservative and oppose the government’s efforts for free market reforms. Now, the ruler, Sheikh Sabah al-Ahmad al-Sabah will appoint a prime minster who will then form a cabinet. A new assembly is required to meet within those two weeks; a new cabinet is formed during that time.

The results of the elections questions whether or not the political issues between the conservative parliament and the more liberal government will in fact be laid to rest. While liberals have gained seats, many of the conservative Islamists in the previous parliament were re-elected. The next few weeks will be crucial in determining the political interaction between the two branches of government. Political stalemate in Kuwait between the cabinet and the parliament has had serious ramifications on Kuwait, for one it stalled the passage of an economic stimulus plan. The plan was only approved by the ruler through emergency legistlation; however, it needs to be enacted into law by the new parliament. Bills including a privatization bill as well and a bill to allow foreigners to own property are pending approval by the new government. Kuwait is expected to be the key underperformer this year with GDP at 0% in 2009, largely due to the fall in oil prices and the exposure of the Kuwaiti financial sector to the credit derivatives market. Thus, it is in the country’s best interests to put politics aside and focus on economic recovery.

Sharaf eyes strategic ties in Qatar and India

A senior official at Sharaf Industries said that joint ventures are the way forward in the competitive market and the company is eyeing strategic partners in Qatar and India. "I am negotiating with South Korean and Japanese companies," said Yousuf H Sharaf, Managing Director and board member of Sharaf Industries. "We are also studying the idea of an IPO and are looking at September or October to reach solid ground." He told Emirates Business that he expects further contracts from the Meydan project .

Can you give us a group overview of Sharaf Industries?

Shipping is the core business of the group. We evolved from that to establishing Sharaf Industries in 2005. And today it has an annual turnover of $500 million (Dh1.8 billion). The idea was to have companies that complement each other (see box one). This will give us more strength as a contractor when we tender for a project. We are not at the mercy of the market but have the logistics under control. Sharaf Industries is a holding company to manage our industrial interests – namely manufacturing, contracting division and hospitality, malls and hotels division.

GCC economy will shrink to 1.5% this year, says StanChart

The GCC economy will slow significantly to 1.5 per cent this year before taking off to likely become the first to come out of the global crisis, says a new study by the Standard Chartered Bank.

The GCC has an impressive track record and a combined economy worth $1.1 trillion that also has the world's highest per capita GDP. Qatar, with nominal per capita GDP of $106,459, is the wealthiest country in the world on a per capita basis, according to the study.

"The region is dominated by Saudi Arabia, which makes up approximately 47 per cent of the GCC economy, followed by the UAE at 23 per cent, Kuwait at 14 per cent and Qatar at 10 per cent," said Marios Maratheftis, Regional Head of Research at the bank.

Dubai Gold Securities sees record turnover

Trading in Dubai Gold Securities (DGS) on Nasdaq Dubai has clocked a record 460 per cent jump in volume so far this month.

The number of DGS contracts has risen to 12,589 with a value of $1.15 million (Dh4.2m) in May – higher than March (6,865 contracts) and April (2,246 contracts) put together. DGS was listed on March 2 this year.

"We are pleased to see growing interest in DGS from investors as they become more familiar with the product, especially those seeking a Shariah-compliant opportunity," said a Nasdaq Dubai spokesman. "DGS is the only gold-backed security on any GCC stock exchange and it can be bought and sold through a broker just like shares."

Mubadala owned 65.8m GE shares through March

Abu Dhabi's Mubadala Development Co. said it owned 65.8 million shares of General Electric Co. through March, bringing the state-owned investment company closer to its goal of becoming a top 10 shareholder.

The stake as of March 31 represents about 0.6 per cent of the Fairfield, Connecticut-based company's outstanding shares, Mubadala said on Monday in an e-mailed statement. That would make it the 17th largest holder, according to data compiled by Bloomberg.

Mubadala and GE last year formed a partnership to invest in emerging markets, including the Middle East and Africa. At the same time, Mubadala said it would seek to become a top-10 shareholder. General Electric has lost about 51 percent since that July 22 announcement.

Dana Gas and Crescent Petroleum express confidence in Nabucco deal

The $8 billion (Dh29.36 billion) energy deal promoted by UAE-based upstream energy explorers Dana Gas and Crescent Petroleum bringing in two European rivals - Hungary's MOL and Austria's OMV - has raised a lot of eyebrows among global players, while also raising hopes among European consumers.

The gas deal is aimed at feeding surplus gas to Europe through a $10 billion Central Asia-European gas pipeline. In an initiative dubbed the Nabucco project, Middle East and Caspian natural gas sources will be routed to Europe through a new gas pipeline.

However, Baghdad has already rejected the deal on technical grounds, saying that it has not been approved by the Iraqi Central Government.

Oman buys sterling and euros

Non-Opec oil producer Oman is buying small quantities of sterling and euros to diversify reserves but plans to keep the US dollar as its main reserve currency, the central bank chief said on Monday.

Most states in the world's biggest oil-exporting region, including Saudi Arabia, peg their currencies to the dollar and their central banks invest heavily in dollar-denominated assets.

"We are making small investments in pound sterling and the euro, but the main reserves will remain with the US dollar since our riyal is pegged to the dollar," Central Bank of Oman Executive President Hamoud Sangour Al Zadjali said.

Keeping it all in the Family

Gulf family businesses contribute a big share to their countries' economies. As the third generation now moves in, some critical decisions may be necessary to ensure sustainable growth.

It happened once. A family business owner, fed up with his son's lousy performance, went home and invited the son for a talk in the hot tub.

There, he put on a boss hat and sacked the young man. Shortly afterwards, he replaced the hat with another that carried the word "dad" on it, and said:

"Son, I am very sorry to hear that you've lost your job. Is there anything I can do for you?"

Your cheque is in the mail … maybe

Getting paid on time is not something those working in construction have ever really been used to. Even before developers were strapped for cash, it was usual for contractors, subcontractors, architects, consultants and all others further down the chain to receive their dues two months or more after submitting an invoice.

But back in the heady days when developers and contractors happily shook hands on billion-dollar deals and set off into the sunset to bring an architectural drawing to life, nobody really cared.

With all the money that was around, those in the business could count on getting what they were owed some day. They could also count on getting more work, which came with a profit margin of about 15 per cent.

Credit card fraud on the rise, say banks

Fraud involving credit cards issued in the GCC, after years of being kept at bay, appears to be on the rise, bankers said.

Speaking on the sidelines at the 10th Annual Cards Middle East conference, Jonathan Campbell-James, HSBC’s regional head for security and fraud risk, said the bank had experienced a “notable” jump in fraud in the first quarter of 2009 from the previous year.

“I think we will see by the middle of the year that we’ll be suffering from more [fraudulent] transactions,” Mr Campbell-James said.

Banks withhold data from credit bureau

Most banks are still not sharing customer information with the national credit bureau despite rising bad loans, senior bank managers said yesterday.

Banks have delayed sharing information with the private Emcredit bureau because they say it still lacks an official mandate from the Central Bank.

Emcredit was created in 2006 by the Dubai Government but operates throughout the Emirates.

Trade disputes double in Dubai

The number of trade disputes heard at the Dubai Chamber of Commerce and Industry (DCCI) doubled last month as the credit squeeze made it harder for companies to access finance and pay suppliers on time.

The Dubai International Arbitration Centre received 40 trade dispute cases last month, compared with 20 a month earlier, according to data released by the chamber yesterday.

That took the total number of disputes in the first four months of the year to 80. There were 28 arbitration cases for the whole of last year, the DCCI said in its monthly report.

Dubai demotes finance director

Dubai on Monday night removed Nasser al-Shaikh as director-general of the department of finance, one of the most senior officials tasked with steering the emirate through the global financial crisis.

The emirate’s ruler, Sheikh Mohammed bin Rashid al-Maktoum, ap­pointed as the new director-general Abdul Rahman Saleh al-Saleh, the national news agency reported.

No reason was given for Mr Shaikh’s removal. But his demotion to assistant director of external affairs at the ruler’s court will prompt concern among the region’s business elite and the bankers helping to steer Dubai out of the current downturn.

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Iraq’s biggest bank reaches telling milestone

Iraq’s national museum was not the only institution to be devastated by looters during the 2003 US-led invasion. But, among all the other cases, the ransacking of the country’s banks has had arguably the most profound impact on the post-war economy.

The banking sector is still struggling to overcome its past as a pillar of Iraq’s command economy, the legacy of the war and the preceding years of sanctions, international isolation and neglect.

Rafidain, a state bank and by far the country’s biggest, recently reached a milestone when it opened its first automated and inter-connected branch in Iraq – in Baghdad. While better equipped private banks have made inroads in Iraq in recent years, the impact of the modernisation of Rafidain on ordinary Iraqis is likely to be huge.

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Dissent upsets court for Dubai investors

Emaar PropertiesImage via Wikipedia

“We know the company needs the money – but we need it, too.”

That was the refrain of one investor, summing up the attitude of many, as shareholders staged an unprecedented walkout at the annual general meeting of Dubai’s largest real estate company this month.

Emaar’s AGM has always provided fireworks, even during the good times when property values were rocketing. But with the credit crunch having demolished the real estate market, shareholder after shareholder grabbed the microphone to plead for a dividend payout.

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