Saudi Stock Market Weekly Report - 20-May-2009

M&A activity in MENA region down by 66% in first quarter, says Ernst & Young

Mergers and acquisitions deals in the in the Middle East and North Africa region went down by 66% in the first quarter of 2009 compared to the same period last year.

This was revealed in Ernst and Young’s quarterly Middle East update on mergers and acquisitions, which compiles publicly available deals and values across the region.

The update revealed that M and A activity had fallen both in terms of number of deals and disclosed values. A total of 140 deals were announced in the first quarter of 2008 against 47 in the first quarter of 2009.

UAE withdraws from monetary union

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UAE to withdraw from the GCC common currency
No official justification was
given
Lack of convergence trades suggests market impact should be limited

UAE walks away
Events
The UAE state news agency reported today that a senior official from the UAE foreign ministry said that the UAE has decided to withdraw from the Gulf Monetary Union. The central bank governor added that the UAE would keep its currency pegged to the US dollar and monetary policy would remain the same.

Implications
The withdrawal of the UAE is a serious setback for the prospects of the Monetary Union. The UAE is the second largest economy in the Gulf Cooperation Council (GCC) and holds great prominence in the region. With the UAE’s decision to withdraw, it now leaves four out of the six GCC countries to enter into the single currency. Oman decided to withdraw from the very beginning. Therefore, it remains questionable as to whether or not this will proceed.

No official comments have been made to justify the decision. However, there were growing concerns in the UAE over the dominance of Saudi Arabia in the GCC common currency area. Different GCC countries were expected to host different institutions. However, with the GCC secretariat already based in Saudi Arabia and with the decision to host the GCC central bank in Saudi Arabia as well, UAE concerns intensified. This led to the UAE expressing its reservations over the decision in public, shedding doubts over the prospects of the common currency. The decision to walk away should therefore not come as a big surprise.

We estimate that UAE trade with the rest of the GCC is about 10% of total trade. The common currency agenda was mainly led by politics rather than economics. Hence, the economic cost of the UAE’s withdrawal should be limited.

Market impact
Markets were not convinced that the introduction of a common currency was imminent. Convergence trades never kicked off. We, therefore, believe that market impact will be limited. It is also important to note that the central bank governor mentioned that the currency will remain pegged to the USD. Not joining the common currency will give the UAE greater flexibility to manage its currency in the future. However, given the current economic downturn, we do not believe that currency reform is high on the agenda at the moment.END

Dubai moves to calm investors after finance chief switch

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A top Dubai official moved to assure investors that the emirate, hard hit by the financial crisis, was committed to meeting its financial obligations, one day after Dubai's ruler dismissed his finance chief.

The surprise dismissal of Nasser al-Shaikh as the emirate's finance head triggered questions among some investors as Dubai and its constellation of government-controlled companies effort to restructure and meet looming debt needs.

"The government is firmly committed to sustainable fiscal policies and to adopt actions that are appropriate for the current circumstances taking into account the scope of the global crisis, meeting Dubai's financial obligations and future development requirements," said Mohammed al-Shaibani, aide to Dubai's ruler, in a statement issued late on Tuesday.

Porsche woos Mideast investors

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The corporate saga surrounding Volkswagen and its largest shareholder, Porsche, took another twist on Tuesday when it emerged that Porsche’s chief executive Wendelin Wiedeking had spoken to several Middle East funds – some from Abu Dhabi and Qatar – about taking a stake of up to 25% in the carmaker.

Pearl Dubai plans projects with MGM

MGM Mirage and Pearl Dubai have announced plans to develop Bellagio, MGM Grand, and Skylofts hotels, as well as branded residences at Dubai Pearl – a $4 billion (Dh15bn) world-class, fully integrated luxury development in Dubai

Pearl Dubai will own and finance the 250-room Bellagio hotel, 350-room MGM Grand hotel, and 30-suite Skylofts hotel, while MGM Mirage Hospitality will manage and provide technical services for the three new ventures. The agreement includes the development of Bellagio luxury residences, in addition to featuring world-renowned dining, entertainment, spa and convention that complement the luxury brand of the hotels.

Abdul Majeed Ismail Al Fahim, Chairman of Pearl Dubai, said: "Our alliance with MGM Mirage reflects our commitment to forging world-class partnerships with premium brands that are renowned for their operational excellence. The project's entertainment elements will help complete the vision of making the Dubai Pearl – a true landmark that will deliver an unforgettable experience through its diverse components and unmatched services."

S&P has Kuwait at stable

Standard and Poor's yesterday awarded sovereign credit rating of "AA-/A-1+" to Kuwait, supported by its rich resource endowment which enabled the country build strong external and fiscal balance sheet position in recent years.

The outlook is stable. "In our view, these strengths comfortably balance some short-term risks linked to the decline in oil prices, oil production cuts and lower non-oil real GDP growth, and increased contingent liabilities from the financial system," S&P's credit analyst Luc Marchand said.

Net external assets – primarily the accumulation of oil revenues held externally through Kuwait's sovereign wealth fund – are projected to reach 425 per cent of current account receipts (CARs) in 2009, underscoring robust external balances. On the fiscal side, the government's net asset position is similarly robust, projected at about 250 per cent of GDP by year-end.

Despite the decline in oil prices, the Kuwait budget should again record a surplus of 12.3 per cent of GDP in fiscal 2009-2010.END

West sees Islamic finance as a panacea for global crisis

According to Malik S Sarwar, CEO of the recently formed New York-based Sarwar Wealth Advisors, the world has plunged into a deep crisis primarily because of the greedy and complicated products otherwise known as derivatives.

Out of the crisis has thus emerged a desire for Islamic banking, a term which proves to be more than just a latest buzzword. The Western World is now looking at it as a "panacea".

"The western regulators and banks, by and large, are very keen," Sarwar told Emirates Business. "There is an appetite to understand this because of the crisis and also because of the growth in Muslim Americans, Muslim British and Muslim European population."

Deficit-free Dubai budget expected next year

Dubai is expecting a deficit-free budget next year as the emirate moves to slash its operational expenses. It is also planning to decrease its fees to further stimulate the economy but is not contemplating any salary cuts for government employees, Emirates Business has learnt.

According to Nasser bin Hassan Al Shaikh, former director-general of Dubai Department of Finance, Dubai has incurred a Dh4.2 billion deficit this year because of its decision to push all its infrastructure projects.

Talking to Emirates Business before his appointment as Deputy Director of Foreign Affairs at Dubai Ruler's Court, he said the deficit, which has been the result of increased public spending (Dh37.7bn) at a time when non-oil GDP growth is slowing and the price of oil is at low levels, is only 1.3 per cent of the emirate's overall GDP and is thus manageable.

Air Arabia deviates from dividend policy

Sharjah-based budget airline Air Arabia has deviated away from its dividend policy announced through its initial public offering (IPO) document two years ago.

The management has said that the dividend distribution will be not less than 25 per cent of the earnings, whereas the first dividend distribution from the 2008 earnings exceeded 90 per cent of the earnings at Dh509.727, the company made for the same period.

"We were very surprised by the board's decision to pay out 10 fils per share dividend in respect of 2008, equivalent to a 91.5 per cent payout ratio of the earnings per share," said Andrew Light and Hasnain Malik, the Citigroup analysts who prepared a report on Air Arabia.

Spending picks up in Saudi Arabia

The Finance Ministry of Saudi Arabia approved projects worth USD10.83bn in the first quarter of 2009, double the amount from Q1 last year. The minister of finance mentioned that the funds have been allocated to infrastructure, public services, education and health sectors. The minister also said that the current crisis was a “crisis of confidence” and that economic indicators supported an optimistic view of the economy.

Saudi Arabia has increased government spending significantly, especially on infrastructure projects and on social services. Higher expenditure will help pick up some of the slack in the economy in the short term. But there are also longer term benefits. Improved infrastructure and the focus on education can help create jobs for Saudi’s young population and can also improve productivity. GDP per head in Saudi Arabia is estimated at around USD19k, which is one of the lowest in the region. It is therefore important to note that the authorities are also using government expenditure to insulate the poorer part of the population from the impact of the economic crisis. Saudi Arabia has adopted counter cyclical policies, both on the fiscal and monetary policy fronts. With money supply growing by 15.8% y/y in March this year, liquidity is tighter than 2008, but still adequate. This should help Saudi Arabia to continue to grow in 2009.

Green shoots of recovery? More like lawn mulch

Soros Fund Management, the investment arm of the billionaire George Soros, reported last week it was re-weighting in favour of US retailers such as Macy’s and Home Depot, while Warren Buffett’s Berkshire Hathaway announced it was raising its stakes in two banks, Wells Fargo and US Bancorp. Those announcements followed by only a few days remarks by Jean-Claude Trichet, the famously restrained president of the European Central Bank, that the recession had “reached an inflection point”. He was joined in this hopeful prognosis by Tim Geithner, the US Treasury secretary, who ventured that the US financial system was finally beginning to heal itself.

It is unlikely that Mr Soros and Mr Buffett are keying their investment decisions to the commentary of technocrats such as Mr Trichet and Mr Geithner, who have a clear interest in talking up the markets. While the latter insist on seeing “green shoots” perforating the gloom, the former understand the wisdom of averaging down in a market such as this, rather than waiting for the elusive bottom. That was particularly true last week, when an onslaught of bad news trampled those proverbial seedlings into mulch.

Suddenly, every economic indicator is at its worst level since Detroit was selling cars. The euro zone’s GDP declined 2.5 per cent in the first quarter, extending its most severe contraction since the Second World War. For the year to March, European industrial production shrank by 20 per cent, the fastest rate of decline on record. The European Bank of Reconstruction and Development now estimates a 5.2 per cent contraction in European output, compared with a growth forecast of 0.1 per cent in January. In the US, consumer prices last month tumbled at their fastest rate since 1955, while retail sales posted their fourth consecutive monthly decline. Unemployment is at its highest level in 25 years and will get worse before it gets better.

Loan guarantee official

The Federal National Council passed a bill Tuesday to regulate the Government’s guarantee of interbank loans.

The law, announced last October at the height of the financial crisis, was intended to free up lending between banks after credit froze in the wake of the collapse of Lehman Brothers. But bankers said the latest move was now a formality because lending had already resumed.

Under the law, the Ministry of Finance will be able to guarantee lending between banks operating in the UAE, including foreign banks with local branches.

Defendant pleads not guilty in Deyaar bribe case

A former board member with the property developer Deyaar yesterday pleaded not guilty to accepting a Dh11.75 million (US$3.2m) bribe in a property transaction.

SA, 40, a UAE national, who appeared before the Dubai Criminal Court of First Instance, also denied a charge of dealing in Dh16m worth of illegal interest payments with a second defendant, IJ, 43, an Emirati businessman. IJ failed to appear before the court.

According to the bill of indictment and witness statements, S A masterminded a deal worth Dh415.8m involving the purchase and resale in September 2007 of a plot of land in Dubai Marina that had belonged to the Dubai Ruler’s Architectural Office.

Iran missile threat not seen in six years

The EastWest Institute on Tuesday published a joint US-Russian assessment of the threat from Iranian nuclear weapons and missiles which concluded that Tehran would need at least six years to develop a nuclear warhead that could be placed on a missile.

A group of 12 prominent Russian and US scientists concluded that Iran would need six to eight years to develop a ballistic missile that could carry a 1,000kg payload 2,000km. The unprecedented study was commissioned as tensions between Washington and Moscow grew amid George W. Bush’s plan to install a missile defence shield in Europe. Retired General James Jones, now the US national security adviser, was one of the leading proponents of the study before he entered government.

UAE's Aldar Properties eyes dollar bond

Abu Dhabi's Aldar Properties ALDR.AD moved closer to tapping the capital markets through a bond issue, saying on Tuesday it would guarantee a possible dollar-denominated bond issued by a special purpose vehicle.

Ratings agency Standard & Poor's said it assigned the Aldar benchmark bond, which would be issued by a special purpose vehicle called Atlantic Finance Ltd., an A- rating, while Moody's assigned the notes a rating of A3.

Specialist finance publication IFR said Aldar, Abu Dhabi's largest real estate developer, had issued price guidance for a five-year issue of 9 percent, with no guidance on size.

UAE's Dana in leap with Iraq gas deal - analysts

UAE's Dana Gas DANA.AD could transform itself from the Gulf region's largest private gas company into a mini-multinational energy player if its plan to pump gas from northern Iraq into European homes comes to pass.

Dana, whose shares have risen 15 percent in two days, stands to sell more gas at a higher price with its scheme to kick-start the Nabucco pipeline, providing a big boost to earnings -- but the project still faces some hurdles, analysts say.

"If this project was genuinely going to export gas, then we would expect the gas to be sold at higher prices in the European market relative to selling gas domestically in Iraq," said Scott Darling, an analyst at bank Nomura.

Grisly Video May Slow Nuclear Pact

The emergence of a videotape depicting a grisly beating administered by a member of the royal family of the United Arab Emirates has complicated a U.S. effort to create the Arab world's first nuclear energy program, officials said.

The Obama administration had been preparing to send a U.S.-UAE energy accord to Congress for review. Then came the tape. Screened for a stunned congressional audience last week, it shows a robed sheik heaping sand into the mouth of a writhing Afghan merchant pinned to the ground by uniformed police.

The sheik later slams a board with a protruding nail into the Afghan's naked backside. In a gruesome conclusion, a black SUV is driven over the victim's bruised and bleeding body.

Saudi Arabia delays elections for two years

Saudi Arabia has postponed local elections for two years in a bid to curb potential gains by organised Islamist blocs, as well as putting off debate about the highly sensitive issue of the participation of women, analysts say.

The cabinet said on Tuesday that it would extend the four-year terms of the current municipal councils for two years to allow time to ”expand the participation of citizens in the management of local affairs” and to draft new regulations. It did not provide details on what the new regulations would contain.

The ultraconservative kingdom held its first national election in 2005 when male voters selected half the seats of 178 municipal councils. The poll was seen as a tentative step towards democratic reform, as well as a response to western pressure as the nation found itself under intense scrutiny following the September 11 2001 attacks on the US.

Dubai minister removed on internal differences

The shock removal of Dubai’s de facto finance minister this week came as the result of an internal battle between him and a senior adviser to Dubai’s ruler, Sheikh Mohammed bin Rashid al-Maktoum, officials indicated on Tuesday.

The vacuum of information surrounding the departure of Nasser al-Shaikh, Dubai's department of finance chief, has set the Dubai rumour mill alight. But senior Dubai officials said on Tuesday he had fallen foul of a senior adviser to Sheikh Mohammed as Mr Shaikh gained a higher profile through his efforts to combat the effects of the global economic crisis.

Mr Shaikh, along with Omar bin Sulaiman, Dubai International Financial Centre governor, has recently led efforts to stem the crisis that has engulfed the emirate as its real estate market crashed and the global recession slowed other core elements of the economy, from trade to tourism.