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Thursday, 24 December 2009

Kuwait MPs give initial approval to debt relief plan

Parliament in the oil-rich Gulf state of Kuwait gave its initial approval on Thursday to a bill that requires the government to buy some 21.6 billion dollars of loans taken out by citizens.

The plan stipulates that the state would reschedule repayment of the principal in interest-free installments over 10 years after scrapping current interest, estimated at more than 5.2 billion dollars.

MPs passed the bill at first reading by 36 votes to 18, following a marathon 13-hour debate that ended in the early hours of Thursday.

Day of Reckoning dawns for Dubai property developers

As the Dubai debt crisis of the past few weeks has clearly demonstrated there is a Day of Reckoning dawning for UAE property firms. The state-of-denial is over and it is time to face up to the reality of the Dubai real estate crash that is easily the worst in the world.

Hopes for a swift consolidation of the Dubai property sector have been dashed with Emaar Properties clear rejection of a merger proposal with Dubai Properties. Yesterday shares in Union Properties and Deyaar slumped on news that their merger is also off.

Consolidation off

The hope was that consolidation would result in a leaner and more profitable sector, and put a check on the upcoming supply chain. Oversupply now threatens to keep prices under pressure for another 18 months, according to local estate agents.

New property completions are daily news. Damac yesterday proudly trumpeted the topping out of its 84-storey Ocean Heights tower in the Dubai Marina (pictured above). When finished this one tower alone will add 680 apartments to the Dubai inventory, and it is surrounded by towers of similar height that are still soaring upwards.

And while it is certainly a positive to see that stories about the financial condition of some private contractors appear to be unfounded, the overbuilding is another issue. For how much property can the UAE absorb with its economy still spluttering from the unexpected recession this year?

Empty towers?

Those developers still proceeding with large projects are gambling that the market will be greatly improved when their towers are completed. If they stay empty and buyers default then the balance sheets of the developers and their bankers’ patience will be sorely tested.

For the moment it is the state-owned realty companies Nakheel and Limitless that are the focus of the resolution of the Dubai debt crisis. But there are many concerns about the other players whose debts are less but whose challenges are just as big in a falling market.

The good news is that by the end of 2010 the position should be much clearer, with the original Debt crisis resolved and the position of the other players better known. But this is a Day of Reckoning that can not be avoided.

For Flight 2010, seat belts are still required

So this is Christmas, as John Lennon sang, and for columnists that means it’s time for a year-end wrap-up, and a peek ahead at what the new year has in store.

This column dutifully observed this particular rite as 2009 approached. In the interest of full disclosure, it bears revisiting some of those predictions to see how they fared.

Thankfully, no reports have surfaced of fisticuffs in Abu Dhabi between housewives and workers over taxis, defying a forecast printed in this space that a scarcity of public conveyance would lead to violence. The addition of thousands of taxis and buses, combined with the impact on demand of the global economic crisis, appears to have ensured peace on the streets.

Finance ministry on the defensive

The Minister of State for Financial Affairs defended the UAE’s handling of the financial crisis before the Federal National Council (FNC) as it hammered out a Dh43.6 billion (US$11.87bn) national budget for next year.

“The federal government has endured many crises throughout its 38 years, but this financial crisis is the worst, despite the denial of officials in this regard,” Obaid Humaid al Tayer said.

Mr al Tayer came under a barrage of criticism from members of the advisory body who questioned the ministry’s request for the same budget allocation as last year – about Dh228m – although only 70 per cent of it had been spent this year.

Sovereign wealth funds on the hunt

After months of relative silence, sovereign wealth funds, the huge, state-owned vehicles that export-rich countries use to invest their reserves, are on the prowl again.

"[Funds] are researching deals and trying to get things lined up," says R.P. Eddy, CEO of Ergo, a research firm that advises some of the world's biggest sovereign wealth funds. "They're standing on the edge of the pool and waiting to see who's going to jump in first."

Sovereign wealth fund managers have reason to be hesitant. A notoriously secretive bunch with an estimated $3 trillion in assets, they have received unwanted attention over the last couple of years for making public missteps.


The rail industry brought an early holiday gift to Wall Street – the first year over year climb in rail traffic. The AAR reported total volume was 0.3% higher than 2008’s very depressed levels while intermodal traffic surged 9.4% higher than 2008’s levels. The comparisons to 2007 provide a bit clearer picture, however, and are still showing how weak the overall economy is. Total traffic is down 11.6% compared to 2007 while intermodal is down 8.7% from 2007. This was a sharp improvement over last week’s data.

The mixed picture in freight is reflected by the huge discrepancies in various industries:

Eleven of the 19 carload freight commodity groups were up compared with the same week last year, with double-digit increases seen in metallic ores (50.9 percent), motor vehicles and equipment (28.1 percent), grain (22.8 percent), grain mill products (21.4 percent), chemicals (13.9 percent), metals (13.1 percent) and nonmetallic minerals (12.7 percent). Declines in commodity groups ranged from .1 percent for petroleum products to 31.6 percent for the miscellaneous category of all other carloads.

As we’ve expected for many months, the rail data has seen a sharp improvement, however, it’s important not to read into the 2008 comps too much. The economic stall of Q4 2008 provides very easy comps and I am a bit surprised this data did not turn sharply positive in November. Nonetheless, there is certainly improvement here albeit marginal.

Shehab Gargash’s view of Dubai stocks in 2010

For an assessment of the outlook for Dubai shares in 2010 ArabianMoney spoke to leading local analyst and the CEO of Daman Investments, Shehab Gargash.

He thinks 2010 a ‘tough call’ and ‘not as upbeat as people hoped for six months ago’. There is ‘floor finding’ ahead with the ‘Dubai debt the big X-factor in the crystal ball’.

Actually Mr.Gargash reckons the picture will be much clearer after the results season is over. By then Dubai stocks could be either at a new bottom or clearly on the way back up. But it could go either way, hence the ‘tough call’ for 2010.

Recovery prospects

‘There are two important elements to understanding how soon the recovery will come,’ he says. ‘First, how strong the banks and their balance sheets prove will be a major factor in how fast the private sector will recover.

‘And secondly, while the private sector is well set for a recovery that cannot be said of the public sector with its debt crisis. Going forward we need to see what role the government is going to play in the economy.

‘Perhaps we are going back to the old Dubai business model of co-operation between the government and private sector, rather than the aggressive role assumed by the public sector in the boom.’

Clarification and certainty

Indeed, what Mr. Gargash hopes most for 2010 is that clarification and certainty will emerge in Dubai, and that will put a floor under stock prices. He says the private sector is in fairly good shape, it is the public sector that is over-extended.

‘The public debt is being switched from short-maturity to longer-term debt and a more predictable and coordinated approach. The time is over when every state company did its own thing and we did not have the total picture.’

Summing up the stock market action in 2009, Mr. Gargash points to ‘a tough beginning, aggressive rally’, and then ‘a phase of high volatility’ in the debt crisis.

For 2010 he notes that stock markets are ‘always the first places to show a sign of recovery’, but that ‘uncertainty also always equals volatility’ and that will not go away until the uncertainty has gone.

However, Mr. Gargash is not unduly worried by the prospect of a sell-off in global emerging markets after a very strong rally with the Dubai Financial Market being more locally driven. So it looks as if Dubai stocks will find a bottom in 2010, depending on how long it takes for an adequate resolution of the debt problems.

Relative improvement

Daman’s 43 year old CEO and founder notes that Dubai’s position today is actually a ‘big improvement on a year ago’ when the real estate crash hit home.

At sometime in 2010 it will be time to buy perhaps. And Mr. Gargash thinks market proxy stocks like Emaar and the banks will be worth buying, along with Abu Dhabi real estate companies, the DFM and DP World.

A stock market boom is clearly a long way off. Daman Securities has penciled its own IPO for late 2012, so that might be a period to watch, falling as it does seven years after the last boom and 14 years after the one before that. What goes around comes around!

Technical Trade: Agility Awaiting a Rebound

After the recent negative publicity for Agility, the stock has dived down making it the worst performing stock in the Kuwait Stock Exchange for both Q3 and in December. In Q3, the stock fell 50% versus the KSE index which shed 10% only. After the lawsuit filed against Agility in mid-November (Details), the stock tumbled 37.5%, then it took a breather in mid-December. The breather was short-lived as Agility was hit by yet another shock and shed 24.7% from its December highs as DynCorp International Inc. terminated one of the company’s units as a subcontractor of a logistics program.

Despite that it has been a while since I looked at Agility’s numbers, I do think that much of the bad news is already priced in. Looking at the chart below, the stock has broken its 15, 50, 100 and 200 day moving averages. However, it is approaching strong resistance levels around KD0.600. I recommend taking a position in Agility during the next few trading sessions and exiting that position once the stock rebounds.

Dubai World Exposure to Weigh on Banks in 2010

Dubai's debt crisis will continue to hang over the earnings and credit quality of banks in 2010, Standard & Poor's said in a report on the global outlook for global credit markets.

"Indeed, the fallout from Dubai World's Nov. 25 announcement that it has requested a six-month moratorium on its $26 billion debt payments—subsequently diminished by news of a bailout by Abu Dhabi—illustrated amply the fears of further bank balance-sheet impairment," the ratings agency said in the report.

More than 90 creditors are in talks with Dubai World, once a crown jewel in the business empire of Dubai's ruler Sheik Mohammed bin Rashid Al Maktoum, to reach an agreement on a formal debt standstill for the conglomerate, which has almost $60 billion of total liabilities. Negotiations are expected to be slow.

"This serves as a continued reminder that the impact from deflating property prices globally has yet to fully run its course," S&P added.

Abu Dhabi, the oil-rich capital of the seven-member United Arab Emirates, pumped $10 billion into Dubai's financial support fund last week by buying its bonds. Part of the money is being used to pay off holders of a $3.52 billion Islamic bond issued by Dubai World's real-estate unit Nakheel, known as the developer of three palm-shaped islands..