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Tuesday, 4 August 2009

Dubai gold sales plummet as tourists stay at home

Gold jewellery sale volumes in Dubai fell around 40 percent in July on a year ago, as the economic downturn and summer heat deterred tourism, retailers said on Tuesday.

Tourists are a large part of the market for Dubai's tax-free gold, but recession has eaten into disposable incomes and hit the flow of visitors to the emirate, deepening the seasonal downturn in visitors as desert temperatures peak.

"There are no more tourists walking around the souk," said a salesman from ARY Jewellery based in Dubai's old gold souk.

UAE revamps inter-bank lending rate

The United Arab Emirates Central Bank said Tuesday local and foreign banks support the establishment of a new mechanism to calculate the Emirates Interbank Offered Rate (EIBOR).

At present EIBOR is calculated using an average of rates from ten banks excluding the highest and lowest rates.

Banks currently involved include Abu Dhabi Commercial Bank, ABN AMRO, Citibank, Commercial Bank of Dubai, Emirates Bank, HSBC, Lloyds TSB, National Bank of Abu Dhabi, National Bank of Dubai and Standard Chartered.

Analysts said the new procedure could incorporate two or three additional local banks and exclude the two highest rates and lowest rates. It would also involve the UAE Central Bank monitoring the fixing of the interbank rates.


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StanChart provisions up on Mideast exposure

Standard Chartered's rise in loan impairments for the first half of 2009 came largely from two projects in the Middle East and derivative losses in South Korea, the UK bank's top Asia executive said.

Earlier Tuesday, Standard Chartered said loan impairment losses across the bank rose to $1.09 billion in the six months to June 30 from $465 million a year earlier.

"We've had a couple of exposures in the Middle East," and while "it's early days on both transactions", the bank has recorded an extra $500 million in nonperforming loans from them, Jaspal Bindra, Asia chief executive, said in an interview.

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Saudi seen cutting all crude prices to Asia for September

Top oil exporter Saudi Arabia is expected to lower the price of all its crude grades heading to Asia for September on slow demand from regional refiners deterred by their current high costs, traders said on Tuesday.

A poll of seven refiners and traders said they saw no upside for Saudi crude prices to Asia as they estimated the August official selling prices (OSPs) to be too expensive and after Abu Dhabi issued very competitive OSPs late on Monday.

"The Saudi OSPs are too expensive now and I think some have already lowered their requirements," a trader with a refiner said.

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Topaz's Singapore deal sees hurdles

Dubai-headquartered Topaz Energy and Marine may not go ahead with its plan to acquire a Singapore-based offshore marine services company, Emirates Business has learned.

"It's not yet confirmed whether we will go with the deal but the signs are not positive right now," said Fazel A Fazelbhoy, Chief Executive Officer, Topaz.

He said Topaz and the South East Asian company are working on a resolution but if a consensus is not reached they will have to cancel the deal.

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Aabar shares regarded as 'value trade'

Aabar Investments PJSC, an Abu Dhabi government-backed investment firm with a 9.1 per cent stake in Daimler AG, may continue its rally as investors buy the stock as a cheaper alternative to shares in the world's second-largest maker of luxury cars, a fund manager said.

"The story here is the huge discount to the Daimler stake," said Akram Annous, deputy fund manager at Al Mal Capital PSC. "It is a value trade that is gaining more and more followers."

Daimler, based in Stuttgart, Germany, said on March 22 it will raise 1.95 billion euros (Dh9.76 billion) selling shares to the fund as sales slow and cash flow dwindles because of the global recession.

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Investors take great leap of faith

Consolidations of properties and mergers between developers have made the sector a rapidly changing, complex one for investors.

Some developers are encouraging investors to gather their purchases in one or two towers, then cancelling the rest of the buildings, or merging with other developers to pool resources.

This has happened in Marmooka City in Ajman, ACI’s developments in Dubai Waterfront, and with Damac and Hydra Properties on Reem Island, among others. For many investors, it is largely a question of trusting the developer.

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HSBC bad loans more than double in Middle East

Bad loans at HSBC’s Middle-Eastern arm more than doubled to US$921 million (Dh3.38bn) in the 12 months to June, the British banking giant reported on Monday.

The increase mirrors a global trend in which banks are writing off losses in the financial crisis and setting aside cash to provide for further defaults.

Local banks have so far reported about $1.3bn in provisioning for bad loans for the first half of the year. Collectively, those banks have seen second-quarter profits decline by almost 27 per cent compared with a year before.

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How Much Do the Major Sovereign Wealth Funds Manage? (Registration required)

Brad Setser and Rachel Ziemba Aug 3, 2009

A score of recent reports have put the total assets managed by sovereign wealth funds at around $3 trillion. That seems high to us – at least if the estimate is limited to sovereign wealth funds external assets.

We don’t know the real total of course. Key institutions do not disclose their size – or enough information to allow definitive estimates of their size. But our latest tally would put the combined external assets of the major sovereign wealth funds roughly $1.5 trillion (as of June 2009) – rather less than many other estimates. This portfolio of $1.5 trillion does reflect an increase from the lows reached of late 2008. But it is well below the estimated $1.8 trillion in sovereign funds assets under management in mid 2008. Significant exposure to equities and alternative assets like property, hedge funds and private equity led to heavy losses by most funds in 2008 – a fact admitted by many of the managers.

$1.5 trillion is lot of money. But it is substantially less than $7 trillion or so held as traditional foreign exchange reserves.

There are three main reasons for our lower total.

First, we continue to believe that the foreign assets of Abu Dhabi’s two main sovereign funds – The Abu Dhabi Investment Authority (ADIA), and the smaller Abu Dhabi Investment Council (which was created out of ADIA and manages some of ADIA’s former assets) – are far smaller than many continue to claim.* Our latest estimate puts their total size at about $360 billion. That is roughly the same size as the $360 billion Norwegian government fund – and more than the estimated assets of the Kuwait Investment Authority (KIA) and the combined assets of Singapore’s GIC and Temasek. Our estimate for the GIC’s assets under management is also on the low side.

To be sure, Abu Dhabi’s total external assets exceed those managed by ADIA and the Abu Dhabi Investment Council. Abu Dhabi has another sovereign fund – Mubadala and a number of other government backed investors. Its mandate has long been to support Abu Dhabi’s internal development (”Mubadala [was] set up in 2002 with a mandate not only to seek a return on investment but also to attract businesses to Abu Dhabi and help diversify the emirate’s economy) but it now has a substantial external portfolio as well. Chalk up another $50 billion or so there. Sheik Mansour’s recent flurry of investments also has made it clear that not all of Abu Dhabi’s external wealth is managed by ADIA, the Council and Mubadala. The line between a sovereign wealth fund, a state company and the private investments of individual members of the ruling family isn’t always clear. Abu Dhabi as a whole likely has substantially more foreign assets than the $400 billion we estimate are held by ADIA, the Abu Dhabi Investment Council and Mubadala. And despite Dubai’s vulnerabilities, it still holds a good number of foreign assets, even if its highly leveraged portfolio has suffered greatly in the last year.

Two, the dividing line between China’s sovereign fund and China’s state banks isn’t totally clear. We opted to exclude the CIC’s domestic investment in the state banks from our total, as we focus on sovereign funds external assets. That is conceptually clean. But it ignores the fact that the state banks were recapitalized with foreign assets and thus manage a substantial foreign portfolio of their own. If the state banks foreign portfolio and those of the investment companies is added to the CIC’s foreign portfolio, the foreign assets of China’s sovereign funds exceed the CIC’s nominal $200 billion in size (The PBoC reports that the state banks had $220 billion of foreign assets at the end of Q1, with $120 billion in foreign portfolio investments and another $100 billion in business with offshore counterparties).

Three, we would argue that stabilization funds that are managed by the central bank and counted as part of the country’s reserves should be considered reserve assets – and not included in the total for sovereign funds. Russia’s reserve fund is a case in point. Its mandate precludes investment in anything other than classic reserve assets – and it thus has a more conservative portfolio that many central banks. We would also include SAMA’s foreign assets as “reserves.” If it walks like a duck (is managed by the central bank) and quacks like a duck (is invested predominantly in traditional reserve assets), it is a duck … While SAMA’s portfolio does include equities, so do some other central banks.

Those two pools add up. Russia had –at the end of June, a $85 billion in its stabilization fund and a $90 billion in a wealth fund (that is also managed for now by the central bank’s reserve managers). The Saudis have around $425 billion in non-reserve foreign assets (largely because the Saudi Treasury has substantial deposits with the central bank). But these pools are currently shrinking. The Saudi foreign assets fell by about $50 billion in the first half of 2009. Russia’s reserve fund will be depleted in 2010, if not before. Indeed, Russia’s current trajectory implies that its wealth fund – which was created to manage the surplus in its reserve fund – could also be exhausted in the near future.

Kazakhstan and Chile do not count their sovereign funds as part of their reserves. But their funds are mostly restricted to high grade fixed income, and they are also being drawn on to make up for 2009 fiscal deficits. Each count for about $20 billion

But the dividing line sometimes cuts the other way as well. The Hong Kong Monetary Authority has a substantial investment portfolio that isn’t invested in classic reserve assets. And Jamil Anderlini has reported that up to 15% of SAFE’s portfolio was – at least at one time – invested in risky assets. That puts SAFE’s “investment portfolio” at around $300 billion (though SAFE likely has substantial unrealized losses on this part of its portfolio, so its market value is likely less than this). If SAFE’s investment portfolio were to be considered separately, it would already be roughly the same size as many large sovereign funds.

Sum it all up and the pool of assets managed by sovereign funds and central banks that is currently invested in risky assets is around $2 trillion. And in a lot of way the amount of money available for investment in risky assets by major sovereign investors is the most important concept; it really doesn’t matter that much if the investment is managed by a central bank or a sovereign fund.

Will this total rise rapidly?

Our best guess is that it will not.

Although reserve accumulation has resumed, it remains slower than in late 2007 and early 2008. Moreover, the crisis likely led many countries to conclude that they should take fewer – not more – risks with their reserves. And perhaps some countries with sovereign funds will conclude that they would have been better served by more conservatively managed stabilization funds.

The inflow into the main Gulf funds is likely to remain subdued. Most Gulf countries are exporting less oil and are spending more at home. Mega-projects aren’t cheap. $70 a barrel doesn’t necessarily imply the large inflows that ADIA and KIA received in 2006 and 2007. Moreover, the proliferation of new investment vehicles has also reduced the inflow into the traditional sovereign funds. Much of Abu Dhabi’s surplus may be flowing to the Abu Dhabi Investment Council and other direct investors like Mubadala or the International Petroleum Investment Company (IPIC).

But for every rule there is an exception. China didn’t have to dip into its substantial stock of reserves during the crisis – and it now clearly wants to support the direct investments of its corporations. Vehicles like the China Development Bank (CDB) should grow rapidly. The CIC wasn’t fully invested prior to the crisis – limiting its losses. It is now clearly shifting out of cash and money market funds into various “risk” assets. And if China’s government decides it wants to hold more market risk, it could easily redirect some of its new reserve growth into the CIC – or just authorize SAFE to take more risk.

Estimated Foreign Assets of Major Sovereign Wealth Funds
























All told, though, we still aren’t convinced that sovereign funds are quite as big as some have suggested – or are likely to grow all that fast in the next year or so. And for that matter, some funds may have been used heavily to support local markets and local firms, and thus may have fewer external assets than we estimate. It isn’t quite clear, for example, how the Emirates central bank financed its purchase of the large bond Dubai issued to raise emergency cash.

Then again, forecasting is hard. Forecasts that sovereign funds would swell rapidly were made just before the crisis dramatically reduced the size of many existing funds. If asset markets and oil prices soar, all bets are off.

A methodological note: Unless other information is available, we assume that these funds fared no better or worse than other investors with similar asset allocations (our estimates are based on the performance of prevailing benchmarks – see more on our methodology here). However, based on information from some funds, we did assume that a smaller share of new capital flowed into the heaviest hit risky assets in 2008.

* Landon Thomas of the New York Times has reported that ADIA has signaled that the Setser/ Ziemba estimates are within the real realm of reason.

“The Abu Dhabi authority, like all global investors, has also been hit by the world economic downturn, as well as lower oil prices — and it has tended to have a much larger position in equities, especially those in emerging markets, than other funds. Brad W. Setser, an analyst at the Council of Foreign Relations, estimates that the Abu Dhabi fund lost more than 30 percent last year, bringing its size down to about $300 billion from a peak of $480 billion — a figure that is much lower than some of the larger public estimates and one that executives within the authority acknowledge is closer to the truth.”

The FT’s Andrew England also has used an estimate for ADIA that is more line with our estimates, reporting in December 2008 that “ADIA’s assets are estimated at $450bn-plus and traditionally its income has been reinvested in the fund, but it and the emirate’s other sovereign funds are believed to have suffered from the collapse in world equity markets.” That gives us hope we are not all off– but it is also isn’t definitive. We are always interested in other estimates, especially those that lay out the funds ADIA is estimated to have managed over time.

The most recent IMF article IV suggests that the UAE’s International Investment position was around $600 billion in 2007, roughly consistent with our estimates after accounting for the private wealth and other miscellaneous assets.

The UAE’s balance of payments data for 2008, incidentally, shows only $30 billion of outward flows from public investors – the line item that corresponds with sovereign funds. That isn’t any higher than in 2007



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Comment: lessons from a tragic tale

It was an unusual phone call. One Sunday last month, a Kuwaiti, to whom I had never spoken before, introduced himself as Hazem to alert me to an “important story”. A company known as Arabian Peninsula Group was about to take over Harman International, an audio systems company listed on the S&P 500, he said. He had seen an article in a Kuwaiti newspaper and thought we should be aware of the “deal”.

An e-mail from an unknown source had already dropped into my inbox with similar information, littered with grammatical mistakes. It described APG as “one of the Gulf’s large privately owned Conglomerate” and said it was going to make the transaction “throw a public tender offer”.

But an internet search for APG revealed no record of the company. Yet Hazem called again, saying the business was owned by a Saudi family with Emirati partners and had assets of about $25bn.

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Moody’s downgrades Dubai’s JAFZ

Moody’s on Monday downgraded ratings on Dubai’s Jebel Ali Free Zone because of the re-export hub’s exposure to its parent, the indebted Dubai World government conglomerate.

The one-notch downgrade, from A3 to A2, comes as the ratings agency places all Dubai government-related entities on review for a possible downgrade because of limited transparency on the extent of support for state-backed companies.

Dubai’s slowing services-led economy is struggling to lift itself out of the doldrums amid the challenge of refinancing its $80bn debt mountain and facing a property market collapse.

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Contractor focuses on frontier markets

A photograph from June 1999 shows Yassir Arafat smiling as he holds hands with David Haug, Middle East chairman of Enron Corporation, and Palestinian magnate Said Khoury, chairman of Consolidated Contactors Company, as the three signed a deal to build a power plant in Gaza.

A decade later and the Palestinian leader, the power plant and Enron are gone, yet CCC continues to grow. The 57-year-old company is the world’s 16th biggest contractor, according to Engineering News-Record, an industry title. Last year, it tallied $5.5bn in revenues and picked up $6.3bn in new contracts.

Yet the past year has also brought challenges for one of the Middle East’s largest conglomerates. CCC is being pursued in the US and UK courts by Munib al-Masri, another prominent Palestinian businessman, and has seen two of its Lebanese subsidiaries put under administration.

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Egypt's cotton traders and exporters spin yarn of woe as profits fall

The phrase "Egyptian cotton" conjures up an image of a soft, luxurious fabric made of a raw material that has traditionally been recognised as the best in the world.

The long and extra-long staples or fibres of the cotton give it strength and durability that allow it to be spun into very fine yarns used to make premium fabrics. Its only competition comes from Pima cotton in the US.

The material is so inextricably linked with the idea of luxury that plush hotels in the west cite "Egyptian cotton sheets" in their promotional material as one of the pleasures on offer to their discerning guests.

Race to Dubai to cut prize fund as sponsor feels pinch

The European Tour's flagship tournament is expected to lose its claim to being the richest in professional golf this week when officials will announce that the prize fund for the much-vaunted Race to Dubai is to be cut because of the economic troubles that have beset its sponsor.

Details of a new deal struck between the tour and Leisurecorp, a Dubai-based developer, will be announced this week but it is understood that the world's leading players will be playing for at least 25% less than had been promised.

If confirmed, this will mean the season-ending Dubai World Championship will carry a $7.5m (£4.4m) prize fund (down from $10m) and the Race to Dubai, the season-long points event that replaced the Order of Merit, will be worth a similar amount.

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