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Tuesday, 22 December 2009

Opec eyes OECD demand

The Organisation of Petroleum Exporting Countries meeting in Luanda, Angola, agreed on Tuesday to leave oil output curbs unchanged, while calling for greater compliance with existing output targets — a signal the cartel currently believes the market to be well supplied.

One of the big debate points in Luanda, however, focused on how quick demand recovery in OECD countries would be in 2010. Remarks from Opec’s opening address highlighted the main issues as follows (our emphasis):

We also saw how crude oil prices had continued to improve from the lows experienced late last year, even though the market was still very volatile. Since then, the economic recovery has gathered pace. More OECD countries are coming out of recession and growth is accelerating in emerging markets, especially in Asia.

However, doubts remain about the dynamics of the recovery. This is not helped by continued uncertainty in the financial sector and worries regarding growth momentum on the back of still-rising unemployment and fears that stimulus measures may come to an end too soon. The weak, fluctuating dollar is adding to the uncertainty.

Turning to oil demand, there is a mixed picture in the market. Demand growth in the emerging economies is improving, but the OECD remains in negative territory. The market continues to be well supplied with crude and inventories are at high levels. Prices have moved up to more comfortable levels. This is good news for investment in production capacity and future supply. Some postponed projects have already been started up again in our Member Countries. However, the fragility remains in the market and we should not forget the detrimental volatility we experienced last year.

This is one of the issues we must again address at today’s meeting. For our part, we will continue our efforts to restore stability and balance to the market, in the interests of producers and consumers alike.

Considering the drop in OECD demand this year proved much stronger than many in the market — especially peak oilists — had expected, it makes sense for Opec to have stressed the issue so prominently in Tuesday’s meeting.

On that note, we’d flag up the following two charts from oil analyst Morgan Downey, author of Oil 101, which neatly expresses the situation as it stands today:

Saudi approves record budget

Saudi Arabia has said it expects to run a budget deficit in 2010 for the second consecutive year as the government on Monday approved the largest budget on record to accelerate economic growth and foster job creation.

The finance ministry forecast revenue of SR470bn ($125.3bn) and expenditure of SR540bn ($144bn) in fiscal year 2010. The world’s biggest petroleum exporter did not reveal the oil price assumptions in the budget, but economists estimate an average of $50 a barrel.

“The deficit is manageable. With current oil prices they will end up with a surplus in 2010, but the government often budgets conservatively,’’ said John Sfakianakis, Middle East economist at Banque Saudi Fransi-Credit Agricole Group.

Dubai Shares Retreat a Fourth Day on Lack of Standstill Offer

Dubai shares dropped for a fourth day, led by Emirates NBD PJSC, as three bankers said Dubai World may not present a standstill offer to lenders until January.

Emirates NBD PJSC, the United Arab Emirates’ biggest bank, fell to the lowest in seven months. Union Properties PJSC declined the most in almost two weeks. The DFM General Index retreated 1.3 percent to 1,803.31, the lowest close since Dec. 13. The index has lost 14 percent since Dubai World’s request to restructure debt on Nov. 25. Dubai Financial Market, the only Gulf Arab stock exchange to sell shares to the public, rose after it offered to buy Nasdaq Dubai.

Dubai World, one of the emirate’s three main state-owned business groups, roiled markets after it sought to freeze or delay debt repayments until at least May 30. It will present a standstill offer to banks in early January as it attempts to restructure about $22 billion of debt, according to three bankers who attended a presentation on the matter yesterday.

FT.com / Companies / Middle East & North Africa - Dubai Financial Market buys Nasdaq Dubai

FT.com / Companies / Middle East & North Africa - Dubai Financial Market buys Nasdaq Dubai

Turquoise (Iran economy) Newsletter - December 2009 Edition (PDF opens)

Click on headline to open online report.

Are Islamic bonds or sukuks now dead and buried?


The enormous bad publicity surrounding Nakheel’s $3.5 billion sukuk or Islamic bond repayment this month has exposed these debt instruments as nothing more than unsecured commercial bonds, with no recourse to underlying assets in the event of a default.

There is, of course, an irony in that Nakheel actually repaid its sukuk in full and on time thanks to the last minute intervention of the Abu Dhabi Government which dropped the Dubai Government a $10 billion lifeline.

Bond replaces sukuk

Actually it was a $10 billion conventional bond with interest of four per cent payable over five years. Abu Dhabi did not want another Islamic bond. Traditional bond finance is good enough for the richest city in the Gulf.

This does make it very easy to understand the rights and obligations of the parties. Sukuk come in a confusing number of varieties dressed up in an exotic language only understood by Islamic scholars and they seldom agreed on anything (see the ‘Diminishing musharakah’ above).

Yet in the Oil Boom of the 2000s such was the rush to invest in the Gulf States that nobody worried too much about the small print or the niceties of sukuk. Western bankers were assured that sukuk are just bonds under another name. They took the word of the sellers and ignored any protests from their lawyers.

After the Nakheel bond debacle a great many more questions will be asked about sukuks by both local and international lenders. For anybody trying to actually borrow money they will likely be more of a curse than a blessing, and a reversion back to more conventional financial instruments is clearly going to follow.

There will be exceptions to this rule. Saudi Arabia is the kingdom of the sukuk where all banks are Islamic, and not paying interest is highly profitable when your customers accept it, although the rental payments on sukuk should in theory amount to the same thing.

Financial innovation

Otherwise, it is perfectly normal after a boom period and what might be described as ‘financial innovation’ for there to be a swing back to more conservative banking practices. Lenders will be very particular in their due diligence on sukuk.

Confusingly and very significantly sukuk are asset-based but not asset-backed, so unlike a mortgage-backed security, for example, investors have no security over the asset if the issuer gets into financial difficulties and can not pay up.

No doubt sukuk will continue as a part of Islamic finance but their role in larger scale financing may now be sharply reduced.

Goldman Sacks Kuwait

In a recent report by Goldman Sachs & Company on its economic outlook on the region and specifically Kuwait for 2010, Goldman drew a very pessimistic picture of what it perceives the future holds for Kuwait. According to the report Dubai and Kuwait will lag behind Saudi Arabia, Qatar, and Abu Dhabi in any recovery in the near future. It estimated that Qatar would grow the most between 7-7.5% and Saudi Arabia will grow at 4.5%. While both the economies of UAE and Kuwait contracted by around 2.5% this year, UAE is expected to grow at 2% in 2010 driven by Abu Dhabi. After much deliberation, I simply don’t agree with Goldman’s estimates. Why would Kuwait lag?

FACTS:

1. Goldman Sachs forecasts oil at $90 in 2010 and $110 in 2011. According to a report by Reuters, Kuwait’s GDP is forecasted to grow by 17% in 2010 driven by the rally in oil prices and investment in infrastructure projects. With the surge in oil prices from the December 2008 lows of $32, and oil being a main source of revenue for the country, Kuwait’s GDP is expected to grow the most, by 16.9%, followed by Qatar, Saudi Arabia, and UAE at 8.3%, 7%, and 5% respectively. To note, the estimates were based on a conservative oil price projection of $50/ barrel throughout the budgetary period. With the expected surge in oil prices for 2010 and the OPEC consensus of no change in oil production quotas, crude oil for January delivery trading at $73.38 a barrel, I believe that Goldman undermined the effect of the projected “$90” on the country’s GDP.

2. The political victory and vote of support that led to the survival of both Kuwait’s Prime Minister and Interior Minister from a non-cooperation vote in the parliament has been praised as a victory of democracy and turning point in the political field that is expected to bring with it’s a transition in the political system and passage of key economic policy changes and developmental projects. Kuwait is at REST. No ouster, no dissolution of parliament, and hopefully no standoffs between the government and MP’s anytime soon.

3. Global Investment House reaching formal agreements with all of its financiers to restructure $1.7 billion in debt has brought a close to uncertainty and boosted investor confidence and expectations of reaching a similar agreement on Wednesday when the Investment Dar sits down with its creditors. That, coupled with the $1.1 billion or 37% profit the KIA made from its successful investment in Citigroup.

Political rest, surging oil prices, and investor confidence finally kicking-in with the noticeable increase in trading volume in the KSE will help lead Kuwait to break the barriers Goldman has set for Kuwait and an expected rally in the KSE.END

Dubai Financial Market acquires NASDAQ Dubai

When the Dubai International Financial Centre first launched a new regional stock market former HSBC brokerage chief Peter Nankervis argued vigorously with the Dubai Financial Market that this was the wrong route to take.

He thought the DFM should have been broadened and expanded into a larger exchange, rather than creating yet another local trading platform. And even after today’s news that the DFM is to acquire NASDAQ Dubai, the Abu Dhabi bourse remains a second trading floor in the relatively small United Arab Emirates.

Details of the takeover have not yet been released, and it will almost certainly fall someway short of the single trading floor for Dubai that Mr. Nankervis proposed all those years ago.

Mubadala Development ratings affirmed due to key role of Abu Dhabi

Standard & Poor's Ratings Services said today that it affirmed its 'AA' long- and 'A-1+' short-term corporate credit ratings on the operating holding company Mubadala Development (Mubadala) based in Abu Dhabi in the United Arab Emirates (UAE). The outlook is stable.

"The ratings on Mubadala, the Abu Dhabi government's principle vehicle for diversifying the local economy away from hydrocarbon revenues, are based on an equalization with the ratings of the Emirate of Abu Dhabi (AA/Stable/A-1+)," said Standard & Poor's credit analyst Farouk Soussa.

This reflects our view that, as per our enhanced criteria for rating government-related entities (GREs), the economic role played by Mubadala is "critical" to the government of Abu Dhabi, and the link between the company and the government is "integral" Thus, our assessment is that extraordinary support from the government of Abu Dhabi in the event of financial distress at Mubadala is "almost certain".

UPDATE 1-DFM to buy Nasdaq Dubai for $121 mln | Reuters

UPDATE 1-DFM to buy Nasdaq Dubai for $121 mln
| Reuters

Dubai Financial Offers to Acquire Nasdaq Dubai for $121 Million

Dubai Financial Market PJSC, the only Gulf Arab stock market to sell shares to the public, has offered to acquire 100 percent of Nasdaq Dubai for $121 million.

The company made an offer to Borse Dubai Ltd. and the Nasdaq OMX Group Inc, and it comprises $102 million in cash and 40 million Dubai Financial Market shares, according to an e- mailed statement today.

The transaction has been endorsed by DFM’s board in its meeting on Dec. 21 and is subject to certain closing conditions, including the receipt of regulatory approvals, it said.

Consumer courts to open next year

The consumer courts that were planned to be in place by the end of this year will not be operational until the new year, an official from the Ministry of Economy said yesterday.

The 10 judges designated for the arbitration courts, which will address complaints against merchants, were taken into the ministry for orientation last week, said Mohammed al Shihi, the director general of the ministry.

The emirates that already have federal courts – Sharjah, Ajman, Umm al Qaiwain and Fujairah – have made the most progress towards opening their consumer courts, Mr al Shihi said.

Oil contract signing begins in Iraq

This month’s successful bidders for deals to develop seven Iraqi oilfields have started signing contracts with Baghdad, despite heightened geopolitical and security concerns.

On Sunday, a consortium of Royal Dutch Shell and the Malaysian state-owned Petronas signed an agreement to develop the Majnoon field in southern Iraq, a “supergiant” with 13 billion barrels of proved reserves, among the world’s biggest oil deposits.

Yesterday, Petronas and Japan Petroleum Exploration signed an initial deal to develop the smaller Gharaf field, which has about 900,000 barrels of reserves, after submitting the winning bid for the work during Iraq’s second postwar auction of oil licences, held this month.

Dubai set for Jan standstill pitch, meeting tepid

Dubai World disappointed creditors on Monday by making little progress on securing standstill on $22 billion of debt, as a key creditor meeting turned out to be a tame affair with less than half the expected attendees showing up.

A banking source said that Dubai World told creditors it would pitch the standstill proposal in mid-January. [ID:nLDE5BK1FS].

Dubai World [DBWLD.UL] said the meeting was an overview and that creditors need to form a panel for talks to proceed, but gave few details. [ID:nLDE5BK0WQ]

2010 will be the year of reassuring recovery for economy

The 2010 budget at its core gives a few important messages to the private sector and the world: Saudi Arabia is committed to its $400 billion fiscal stimulus program through 2013. It is willing to sacrifice its fiscal position by incurring a small yet manageable budget deficit but it would hold on to its course. Another message is that the state has to not only spearhead the country’s drive to sustainable development at least for now but also help the economy recover fast. As the private sector is now becoming half of this economy’s annual output (47.8 percent of the country’s GDP in 2009) it too has to increase its domestic investments. The state has to be recognized for doing its duty of spurring private sector growth. The private sector certainly needs to expand, invest and nationalize its work force more. Of great importance are the continuous efforts to build public-private partnerships and for the trickle down between government and private sector to unfold unfiltered in the years to come.

Saudi Arabia’s 2010 budget shows a strong commitment to spending to help create opportunities for the private sector to establish and ingrain the necessary human and infrastructure skills to keep the economy on a sustainable growth pattern. If last year’s budget was the largest in the history of Saudi Arabia then the latest one is again a first for the Kingdom. In fact, the 2010 budget is three times bigger than the one for 2005. The spending that Saudi Arabia has embarked on is being done with no debt created in contrast to many other G20 countries. The overspending that the Kingdom witnessed in its budget in 2009 was in line with the overspending of the past years. However unlike in 2008 when it overspent by 27 percent, this time the Kingdom overspent by 15.7 percent, which is close to average overspending patterns of the past few years. It seems that the authorities are also cognizant of the fact that there can’t be runaway overspending.

In 2010 the private sector will continue to recover as well as the rest of the economy. Definitely it would be a better year than 2009, which was challenging given that the global economy went through its worst recession in the past 50 years. I expect real GDP in 2010 to reach at least 4 percent and inflation to be around 4.6 percent. Inflation does not seem to be a problem for the moment but it is still high for an economy that witnessed close to zero percent growth.

Sabine Pass to take 2 Qatari tankers late Dec

The little-used Sabine Pass liquefied natural gas terminal in Louisiana is expected to receive two Qatari cargoes in the next couple of weeks as U.S. gas prices rise and other markets struggle to take more gas.

STOCKS

Sabine Pass, owned by Cheniere Energy (LNG.A), has received about 10 cargoes this year, much less than Cheniere expected, with low Gulf gas prices and demand elsewhere keeping shippers from sending much gas there.

But as storage in Europe brims ahead of winter and U.S. gas prices rise above British prices due to cold weather, the United States has seen an uptick in imports in the last couple of weeks, which is expected to carry on into the New Year.

Kuwait’s fragile democracy gains ground

Though Kuwait is one of the few democratic nations in the Arab world, the shifting state of its politics has made it the butt of many jokes, and provided fodder for rulers who say elections will do little to solve regional problems.

Yet Kuwait’s hitherto chaotic democracy passed an important landmark this month. Sheikh Nasser al Mohammed al-Sabah, the prime minister, survived a first parliamentary grilling and then comfortably won a vote of no confidence – another first in the region.

In recent years Kuwait has been stuck in a seemingly endless cycle in which the conservative opposition has deployed the threat of interrogation of ministers by deputies to stymie progress. Either leading cabinet members have been threatened with cross-examination and have resigned pre-emptively; or the emir, Sheikh Sabah al Ahmed Al Sabah, has sought to protect his kinsmen in cabinet by dissolving parliament and triggering elections.

Austrian developer bets on Dubai turnround

Josef Kleindienst is a rare breed of investor in Dubai. Rather than trying to recover money from an emirate groaning under a debt mountain, he is trying to lure buyers to its battered property sector.

As bank creditors met on Monday to kick off the restructuring of indebted holding company Dubai World, the Austrian developer launched a resort on one of Dubai’s more outlandish offshore developments, hoping to prove that The World has not come to an end – even if Nakheel, the master developer of its 300 man-made islands, is at the heart of the debt crisis.

Dubai World, Nakheel’s government-owned parent, triggered panic last month when it bungled an announcement that it may not be able to meet payments on distressed debts of $26bn (€18bn, £16bn), forcing the emirate to take another $10bn bail-out loan for Dubai World from the United Arab Emirates.

UAE minister blasts reports for distorting remarks on Dubai debts

United Arab Emirates (UAE) Economy Minister Sultan bin Saeed Al Mansouri said Monday that earlier reports citing him as saying that debt-laden Dubai may need more financial aids misrepresented his remarks.

There was a media campaign aimed at twisting the fact of the UAE economy and confusing the public, Al Mansouri was quoted by the official news agency WAM as saying.

"I'm confident this campaign will not impact the reputation of the UAE and our national economy has proven its strength and ability to deal with global challenges. The UAE has already taken concerted efforts to meet the challenges arising from the global financial crisis," the minister said.