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Monday, 25 May 2009

Defaults to bring sukuk shake-up

Until the Kuwaiti firm Investment Dar said it had defaulted on a US$100 million (Dh367.2m) Islamic bond, the sukuk market had been largely untested.

The market has had strong growth over the past seven years, with the value of sukuk issued rising from nothing in 2002 to an estimated $90 billion today.

Before the default by Investment Dar, which owns half of Aston Martin Lagonda, no issuer had ever publicly failed to make good on its obligations. But that is changing fast as the financial crisis batters the economies of countries in the Gulf and South East Asia where sukuk have been most popular.

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What explains the rapid decline of sovereign-wealth funds?

Ancient silk road trade routes across Eurasia.Image via Wikipedia

Remember sovereign-wealth funds? SWFs were the gigantic pools of capital amassed by governments that were export powerhouses (China, Singapore, Korea) or commodity exporters (Saudi Arabia, Kuwait, Persian Gulf sultanates, Russia) benefiting from the boom in global trade and spiking prices. In 2007, after a five-year global boom, they emerged as a suddenly massive asset class. Morgan Stanley analyst Stephen Jen, one of the first to latch on to their importance, notched their collective net worth at $2.3 trillion in March 2007 and at about $3 trillion later that year.

The global financial class viewed them with a mix of fear (Oh no! The Arabs and Chinese are going to buy all our strategically important companies!) and optimism (Holy cash cow! A new source of financing and clients for investment banks!). The fact that SWFs operated with all the transparency of a sheet of tin foil only enhanced their appeal and apparent power. In January 2008, SWFs were the talk of the World Economic Forum at Davos, Switzerland. After all, if the potent economic trends that had made them powers in the first place were to continue, SWFs would only get bigger. (This was another example of what I've dubbed "pro forma disease," the tendency to extrapolate a few years of impressive growth endlessly into the future: i.e., since housing prices doubled in the last five years, they'll do so in the next five.) In October 2007, the precise top of the global bull market, McKinsey & Co. issued a huge report about private-equity firms and sovereign-wealth funds fueled by petrodollars and Asian exporters. The New Power Brokers, as McKinsey dubbed them, had about $8.4 trillion in assets in 2006, a number that had tripled since 2000 and "which could double in five years." McKinsey estimated that oil-related SWFs alone had more than $2 trillion, with the Abu Dhabi Investment Authority alone playing with $875 billion. In no time, McKinsey suggested, the newly formed China Investment Corp would have $300 billion, Korea's SWF would have $100 billion, and Singapore's Government Investment Corp. $300 billion. According to this report from early 2008, Simon Johnson, then the chief economist at the International Monetary Fund, believed SWFs' assets would rise to $10 trillion by 2012, while Stephen Jen of Morgan Stanley believed they'd rise to $12 trillion by 2015.

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UAE currency move lifts veil on Gulf rifts

The decision of the United Arab Emirates (UAE) to pull out of a Gulf Arab currency union last week is a sign of weakening Saudi power in the Arabian peninsula, where it has traditionally seen itself as the regional leader, analysts say.

"The UAE's decision is a blow to GCC (Gulf Co-operation Council) unity more generally and could be interpreted as a sign of how the balance of power between Saudi Arabia and the smaller, richer GCC states has shifted over time," said Tristan Cooper of Moody's Middle East.

The UAE bombshell came two weeks after Gulf leaders agreed at a summit in Riyadh that Saudi Arabia, the region's largest economy and the world's top oil exporter, would be home to the GCC joint monetary council and thus of the central bank that would manage the new currency.

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Oil Above $50 Saves Gulf States During Crisis

While their biggest customers may continue to wallow in recession into 2010, the oil-producing nations of the Persian Gulf are again luring foreign investment and looking for places to park their own wealth.

Crude prices that have stabilized above $50 a barrel mean the Middle East’s oil-rich economies are likely to pull out of the global financial crisis sooner than the rest of the world. Saudi Arabia, the largest Arab economy and the world’s biggest oil exporter, is attracting renewed interest from investors including leveraged-buyout firm KKR & Co. Qatar and Abu Dhabi have returned to international capital markets.

Stock markets are rallying across the region, led by Saudi Arabia, whose Tadawul All Share Index ended last week up 26 percent for the year to date, after tumbling 56.5 percent in 2008.

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Saudi Arabia: Bullish on Oil (PDF)

Saudi Arabia’s Finance Minister Ibrahim al-Assaf dismissed the International Monetary Fund’s (IMF) forecasts for a contraction in the Saudi economy this year, saying they were based on overly pessimistic IMF forecasts for oil prices. Meanwhile Saudi Arabia’s Oil Minister Ali al-Naimi has echoed a more positive outlook for oil prices, highlighting - to the press - the view that crude oil would eventually rise to USD75 a barrel as global demand recovers. He added that current oil prices reflect expectations that the market would pick up.

Minister Ali al-Naimi also said that while compliance by OPEC members was good it could be improved. He said Saudi Arabia is currently pumping a little less than 8 million barrels a day and will have a capacity of 12.5 million barrels by June of this year. It is our view that oil prices (ICE Brent) will average USD57 and USD67 in Q3-2009 and Q4-2009 respectively, and average USD77 during 2010. We believe Saudi Arabia is taking very strong monetary and fiscal policy measures to support its economy and as such we forecast the Saudi economy to achieve a growth rate of 1% during 2009.

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Gulf base shows shift in France's focus

Nicolas Sarkozy, French president, will tomorrow open a French naval base in Abu Dhabi, underlining his country's renewed strategic interests in the Persian Gulf amid tensions over Iran's nuclear ambitions.

The new facility in the United Arab Emirates will support French naval operations in the Gulf and Indian ocean. It is France's first overseas base in 50 years.

Mr Sarkozy is expected to use his visit to Abu Dhabi, beginning today, to lobby on behalf of French companies, including Dassault, the military aircraft maker, and a consortium of Total, GdF-Suez and Areva, which is bidding to build two nuclear power stations in the UAE.

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Riyadh paves way for foreign ventures

The project began on a small scale, with two wells dug into the ground a short distance from the Nile as the river snakes a path through remote northern Sudan.

Tests on the underground water quality and the soil proved positive and a small batch of wheat was ­harvested last year, confirming that the land was suitable for cereal and forage crops.

The results mean Hail Agricultural Development , a Saudi Arabian agricultural company, will move ahead to the next stage of a 22,000-acre project in Africa’s largest country. For the oil-rich Gulf kingdom the move means that it is a small step closer towards its longer-term strategic goal of securing food resources through large-scale farm projects overseas.

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Shuaa starts brokerage in Jordan

Shuaa Securities, the brokerage arm of Shuaa Capital, has launched a brokerage business in Jordan, the company said today. Shuaa already had brokerage operations in numerous markets across the Middle East, including Saudi Arabia, Egypt and the UAE, where the company is based.

Shuaa cited the importance of the Jordanian market and its desire to give its clients direct access as the reason it chose to expand there. It's interesting that Shuaa, which recently posted a loss of $157.2m in the fourth quarter of last year and another $54m loss in the first quarter of this year, is apparently forging ahead with expansion plans.

Meanwhile, it was also revealed today that the company's CFO, Michael Burgess, was made redundant on May 14. Burgess had just joined the company last October from Morgan Stanley, according to Bloomberg.

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Exchange Views: Financial recovery?

Does the fundamental data now point to a recovery?

Few people prosper in a downturn. Bankruptcy lawyers and career advisers definitely, budget airlines maybe.

One industry whose services are much in demand is the financial media, whose articles have rarely been scrutinised so intensely for evidence of green shoots or withering vines.

It is hard to find clarity in the thicket of financial information that is released in the media each day, much of it seemingly inconsistent.

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Adnoc unit to issue Dh391.5 million bonds

Abu Dhabi National Oil Company ADNOC {{langar...Image via Wikipedia

A UAE marine construction firm controlled by the Abu Dhabi National Oil Company (Adnoc) said yesterday it would issue Dh391.5 million convertible bonds for a strategic partner to increase its capital.

National Marine Dredging Company (NMDC), owned 40 per cent by Adnoc, said the bonds would have a conversion rate of Dh7.83 and would be interest free.

It said its board had approved the bond issue and would present it to the company's general assembly for approval.

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GCC mutual fund industry to reach $200bn

The long-term prospects for the regional asset management industry remain positive and the GCC mutual fund industry is expected to double in size to about $200 billion (Dh734.5bn) by 2012, according to Securities & Investment Company (Sico), the Bahrain-based regionally-focused investment bank.

Anthony Mallis, Chief Executive Officer of Sico, said: "Despite the severe correction in the world's equity markets, we believe the long-term regional asset management story remains strong. The GCC still offers significant upside potential to investors with a long-term investment horizon and the industry is increasingly developing its practices to those of international standards.

"The prospects of growth and greater transparency will help to bring institutional investors back to the market, thus helping to provide the stability required by the region's stock markets."

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Global takes NBQ to court for $250m

Kuwait-based Global Investment House, also listed on Dubai Financial Market, has moved court against National Bank of Umm Al Quwain (NBQ) seeking recovery of a deposit the former placed with NBQ in the middle of 2008.

Global stated in a document that NBQ has failed to refund a deposit worth $250 million (Dh917m), which it says it placed with the bank as an advance on a transaction between the two.

"The advice by the group's [Global's] legal advisors confirms the validity of the parent company's rights to seek a refund of the deposit. Therefore, subsequent to the period end, the parent company has filed a lawsuit against the bank for recovery of the deposit," Global said in a note to its Q109 financial statement.

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Plan for 100% ownership

Abu Dhabi is considering allowing 100 per cent foreign ownership of some projects in the emirate, the chairman of the Department of Economic Development revealed yesterday.

"We feel strongly inclined to grant 100 per cent ownership to foreigners in new and old industries as well as other projects," Nasser Ahmed Al Suwaidi told Emirates Business.

"The percentage might be less in other sectors according to the emirate's needs. Ownership covers projects and not land."

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Rental rates at DIFC faring well

Commercial rental rates in the Dubai International Finance Centre (DIFC) are faring better than many other business locations, with the DIFC well placed to withstand the economic downturn, according to CB Richard Ellis, the global property consultancy.

While the DIFC has not been left unaffected by the global financial crisis, it is still maintaining its status as one of Dubai's prime office developments.

Quoting rents for space had reached as high as Dh750 per square foot before falling away over the last two quarters.

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Payments broke rules, court told

The chief executive of the developer Sama Dubai told a court yesterday that four former employees of The Lagoons project had been in breach of their contracts when they took a total of almost Dh5 million (US$1.3m) in commissions on the resale of properties.

Farhan Faridoni was being questioned at the Dubai Criminal Court of First Instance by defence lawyers for five people – including the former chief executive of The Lagoons project – who are accused of financial wrongdoing connected to three property deals in 2007 and 2008.

He said that although employees’ contracts did not specifically forbid them from reselling property on behalf of Sama Dubai’s clients, it was not their job. They were also obliged to abide by the rules of Sama Dubai’s parent company, Dubai Holding, which forbids the practice, he said.

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UAE ex-Minister pleads not guilty

The UAE’s former minister of State for Finance and Industry, Dr. Mohammed Khalfan bin Kharbash, yesterday, appeared in the Dubai Criminal Court of First Instance and pleaded not guilty to charges of embezzlement.

Kharbash, the former chairman of Dubai Islamic Bank (DIB), was charged with two counts of causing AED56.6 million worth of damage to the bank.

He was also charged with two charges of causing damage worth AED53.5 million to Deyaar, the property affiliate of the bank. The Dubai government holds a 30 percent stake in DIB while the bank holds a 45 percent stake in Deyaar. A composed Kharbash, who is on bail, denied the charges. His lawyers refused to speak to the press.

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