Saudi Stock Market Weekly Report - 13-May-2009

Dubai: no green shoots in the desert

Image via Wikipedia

Dubai was emblematic of the excesses of the boom. Yet at a time when people in the West are talking about the "green shoots" of recovery, the once glossy playground of the United Arab Emirates remains barren of clear turnaround signs.

Humbled Dubai is still resolving its gargantuan debt issues. The resource-scarce emirate publicly began to confront its financial problems only last November, when it revealed that its sovereign debt and that of government-affiliated companies amounted to $80bn. Of this, roughly $19bn requires refinancing by 2010, according to various rating agencies.

Significant progress has been made. Dubai launched a $20bn bond programme in February. Half of this was fully subscribed to by the UAE central bank. The move was effectively a partial bail-out by the UAE's federal government, based in the neighbouring resource-rich emirate of Abu Dhabi. The central bank also agreed to underwrite the remaining $10bn.

Nakheel to pay a fraction of debts

Image via Wikipedia

Nakheel is one of the most high-profile developer in Dubai, with the government-backed firm responsible for the famous palm-shaped islands and ‘World’ and ‘Universe’ island developments.

But last month NCE revealed that the developer was close to bankruptcy, with analysts estimating that it owed consultants up to £200M.

Last week the Dubai government bailed it out with cash from a successful bond issue worth £13.3bn (US$20bn), with neighbouring Abu Dhabi buying half the offering.

GCC – Catching the train

Abu Dhabi has announced that it start considering offers for its metro system by the end of the month. The UAE capital plans a 130 km city wide metro system. This announcement comes amidst a flurry of massive investments projects in various rail projects that total USD 100 billion according to MEED. Dubai itself is opening in September the first phase of a USD 4.4billion metro project while the UAE federation is mulling a plan to establish a 340 km light rail and tram network system in the whole country. In the meantime Bahrain has announced today a plan to build a 184km network in three phases on the tiny island. Saudi has similar plans and the whole GCC had earlier announced that it would establish a 1940 km regional railway linking the 6 participating countries.

In the short term, investment in such projects will help drive growth and pick up some of the slack in the economy. But such projects will also have a longer term impact on the economy. Investment in infrastructure can lead to higher rates of growth and improved living standards. Good infrastructure can improve total factor productivity which is the level of economic output which is not the direct result of increasing inputs in the economy. Productivity gains in GCC economies should be the main driver for growth for years to come. Also improved infrastructure can lead to greater efficiency, a better diffusion of technology and higher levels of competition. It is also worth noting that the correction in the housing market, especially in the UAE, will make it easier for investment flows to refocus on sectors that are in need of funds and that can potentially help the economies achieve higher and smoother rates of sustainable growth.

Green Shoots or Yellow Weeds? (Registration required)

Many commentators are suggesting that the recent data from the manufacturing, housing market, labor markets suggest that the ‘green shoots’ of an economic recovery are blossoming. While there do seem to be some signs of improvement, ie that the pace of contraction has slowed, the most recent data may still suggest that the global economic contraction is still in full swing with a very severe, a deep and protracted U-shaped recession.

Although the outlook for global manufacturing and service sectors is still consistent with a significant fall in global GDP, the pace of contraction began to slow towards the end of Q1, even in Europe and Japan which have lagged the U.S. and China. Globally, surveys suggest that the manufacturing outlook has improved from the freefall of the end of Q4 2008 and early 2009. Some emerging economies like China may now be experiencing expansion based on government investment, but those of most advanced economies remain well in contraction territory. In part, inventory adjustment following the sharp destocking could contribute to a revival in demand, but a real increase in end user demand needed for a sustainable fast-paced recovery could be far off.

Another necessary condition for a global recovery is a bottoming in not only the U.S. but also global housing markets. So far in most markets, housing prices seem far from their bottom and the outstanding inventory continues to be very high.

Private banking now focusing on wealth preservation

Earlier this year Bank Sarasin-Alpen (ME) launched a $100 million (Dh367m) GCC Equity Opportunities Fund to invest in the region's stock markets. The asset management company is planning to launch a similar fund focusing on the Mena region before the end of the year.

The company is busy looking for investment and expansion opportunities and is keen to acquire more human capital. "I am very bullish because there is plenty of business still to be done," said Rohit Walia, Executive Vice-Chairman and CEO, Bank Sarasin-Alpen (ME) and Alpen Capital (ME). "That is why we have launched a fund that nobody else has launched. That's why we are still hiring people – they are better assets to acquire than balance sheets."

Crisis has fundamentally changed capitalism

The global economic crisis has "fundamentally changed" capitalism and the way governments and businesses view the world. That is the main conclusion to be drawn from an Economist Intelligence Unit report commissioned by Dubai Holding.

The report, Risk and Regulation: A new era for capitalism, is based on the findings of a survey of 418 global senior executives. The survey found that almost 60 per cent of respondents believe that capitalism is entering a new era of lower risk tolerance, higher regulation and slower growth.

"This report is an important contribution to the debate about the lessons to be learned from the global economic crisis. Although we are still in the midst of the economic fallout, now is the time to question many of the assumptions that have underpinned the global financial system and grasp the opportunity to change things for the better," said Ahmad bin Byat, Chief Executive Officer, Dubai Holding, in a statement.

Regional SWFs' global role to continue

The region's sovereign wealth funds may have incurred substantial losses due to the crisis but the funds will remain influential in capital markets.

According to the IMF, despite their losses and greater domestic focus, SWFs' relative size and influence in the global market will remain large. They are also likely to continue to maintain a longer-term investment strategy than most other investors.

"SWFs have a long-term role to play," Masood Ahmed, Director of the IMF's Middle East and Central Asia Department told Emirates Business. "Some of them are using small amount to invest in domestic markets but in the long run they have a well-defined mandate and purpose, which they are pursuing and should be pursued. I don't see that being diverted away."

'Dubal's Saudi Arabian smelter not cancelled'

Dubai Aluminium Company Limited (Dubal) yesterday denied reports that its Saudi Arabian smelter in King Abdullah Economic City is 'either cancelled or on hold'.

A senior Dubal official told Emirates Business the project is still on the table and the pre-feasibility and potential downstream industry studies have been completed. He also added that the region is going to emerge as a leading player in the production of aluminium.

Dubal and Mubadala Development Company signed an MoU with the Saudi Arabian General Investment Authority (Sagia) and Emaar Economic City regarding the green-field development of the $5 billion (Dh18.3bn) plus aluminium smelter complex, to be managed by Emal International.

Gulf is the first stop for rail firms

Overseas companies involved in the rail industry are turning their attention to the Middle East, eager to win deals as governments plan far-reaching projects covering city tram and metro lines, as well as heavier freight routes.

“This region is the place to be at the moment,” said Ala Ghanem, the regional director of business development at Invensys Rail Group, based in the UK.

“There are so many projects coming up, and they are bold projects – very big and very ambitious.”

Islamic banks shining in Bahrain

Bahrain’s Islamic banks increased assets by 50 per cent to US$24.6 billion (Dh90.35bn) last year despite adverse market conditions, according to figures issued by the country’s central bank.

“Bahrain is well positioned to remain at the forefront of developments through the application of prudent regulatory standards,” said Rasheed al Maraj, the bank’s governor.

Analysts said the growth probably occurred in the first half of last year and attributed much of it to Islamic finance being relatively new rather than any perceived benefits compared with conventional methods of financing.

Aldar to meet debt investors

Real-estate developer Aldar will talk to regional and international investors this week but says it has no immediate plans to sell bonds.

Bankers say Aldar may only be “testing the water” and would not proceed with a bond sale if they felt could not achieve the correct pricing or if investor demand was insufficient.

“Aldar will be conducting a set of international fixed income investor meetings,” the company said in a statement to the Abu Dhabi Securities Exchange today. It did not elaborate further.

Nakheel likely to resolve issues with $3.5bn bond

Nakheel made headlines around the world with its Palm island projects and the planned Hong Kong-sized Waterfront development, while its advertising billboards dotted around Dubai asked “What next?”

What next is the question now being asked by investors as one of the Middle East’s largest property developers contends with a US$3.5 billion (Dh12.85bn) Islamic bond due in December, which helped fund projects that included the world’s biggest man-made islands.

How the sukuk is handled will serve as a key test for the credit ratings of state-controlled companies in the emirate and could affect their ability to raise money on international markets. It is also widely seen as an indicator of how Dubai will cope with its overall debt burden, estimated at $70bn.

Masdar, E.ON and DONG Energy give green light to build world's largest offshore wind farm

DONG Energy, E.ON and Masdar, a wholly-owned subsidiary of the Mubadala Development Company (Mubadala), have today announced that they will invest €2.2 billion in building the first 630MW phase of the London Array offshore wind farm in the Thames Estuary.

Once complete, the scheme will be the the world’s largest, and the first 1GW, offshore wind farm. The project will supply enough power for around 750,000 homes – or a quarter of Greater London homes - and displace the emission of 1.9 million tonnes of CO2 every year.

Today’s announcement comes after the UK government’s recent proposal to increase its support for offshore wind power. The partners are satisfied that the project is now financially viable and are now keen to push ahead with construction and to produce the first renewable power in 2012.

Facebook sets tone in Iran's electoral contest

As they struggle to compete with an Iranian president who has the support of a state apparatus, leading candidates in June's election are resorting to Facebook.

Of Iran's 70m population, 47m have mobile phones and 21m access to the internet. Moreover, 60 per cent are younger than 30 and obsessed with technology.

About 475 people registered for the June 12 presidential election. But only three are serious contenders hoping to deny Mahmoud Ahmadi-Nejad, the fundamentalist president, a second term. They are MirHossein Moussavi, prime minister from 1981-89; Mehdi Karroubi, a former reformist speaker; and Mohsen Rezaei, former commander of the Revolutionary Guards.