Tuesday, March 24, 2009

C**s, A**s and other crap

There are certain acronyms that instill fear in the heart of any investment banker, keep CFOs awake at night and cause regulators to tear their hair out.

Two of the worst are ABSs (asset-backed securities) and CDOs (collateralised debt obligations). Some of the most poisonous, noxious assets created in the past five years have been ABSs and CDOs, and the fact that no sane person wants to buy them is a large reason why many banks have suffered crippling writedowns.

But the Gulf states (probably led by Saudi) has agreed to buy Gulf International Bank's entire $4.8bn portfolio of ABS, CDOs and other dodgy debt. Why? Who knows. The Saudis move in mysterious ways.

The FT on the bail-out.

In its annual report released on Monday, GIB said it sold its entire $4.8bn portfolio of asset-backed securities, collateralised debt obligations and risky subordinated debt to its shareholders. The deal amounts to a sale of almost two-thirds of the bank’s entire investment portfolio, leaving only about $2.2bn of largely highly-rated government debt.

“It's a pretty big bail-out,” said Robert Thursfield, a director at Fitch Ratings in Dubai. “They've managed to offload a massive chunk of their asset portfolio. They've left the remainder of the investment portfolio as low risk as possible.”

"Where did all the IPOs go?"

Good article from The National on the dearth of initial public offerings.

However, I think the appetite for IPOs could be somewhat better than indicated by the article, given that they are usually priced at par, rather than through a book-building exercise. In countries like Saudi Arabia people still have money, and know that IPOs are invariably underpriced. However, it looks like the article has focused only on the UAE, and there is more to the Gulf than that.

Dubai, Hockey and the economy

So how bad has it gotten in Dubai? Pretty bad it seems. Due to financial constraints Dubai has had to withdraw as host of the Asia Hockey Cup that was to be held in the emirate May 9-16.

From The Star, a Malaysian newspaper:

The Asian Hockey Federation (AHF) secretary general, Tan Sri P. Alagendra, said yesterday that the UAE withdrew as hosts due to the global economic downturn.

“We are happy that the MHF responded positively at such a short notice to stage the tournament as scheduled because we cannot change the dates of competition,” he said.

The tournament offers the winners an automatic berth to the 2010 World Cup Finals. And the next four finishers will get to compete in qualifying tournaments in November.

Alagendra added that Dubai was chosen to host the tournament to give hockey in the Gulf region a boost after Qatar’s successful staging of the 2006 Asian Games in Doha.

“It is unfortunate that they (Dubai) are unable to host it. The Asia Cup is an important tournament for teams eyeing places in the World Cup Finals. Many of them are well into their preparations and we cannot postpone it at this stage,” he said.

Tuesday, March 17, 2009

Buttoning down the hatches

It seems UAE banks are getting ready for a storm, converting the AED70 billion of federal deposits into extra tier II capital. It will help, but some will need more.

Mashreq and RAKBank to turn federal deposits into Tier 2 capital

UAE-based Mashreq Bank and RAKBank said yesterday they would convert their share of the AED70 billion federal government deposits into regulatory capital in a bid to improve regulatory capital ratios. This implies an increase in the cost to 4.5% for Tier 2 capital vs. 4% for the cost of federal funds deposits. Mashreq did not specify how much of the federal deposits it would convert into Tier 2 capital, however, at a meeting Mashreq shareholders approved allowing the board to take 'all necessary actions' to oversee the conversion. RAKBank said it would seek shareholder approval on 8 April to go ahead with the conversion. The moves come after similar approaches taken by banks in the UAE such as National Bank of Abu Dhabi and Emirates NBD.

Monday, March 16, 2009

Qatar's media centre

This is quite interesting, so I'm posting it in its entirety. Sending this out on the day of the grand inauguration of the Qatar Science and Technology Park is pretty ballsy. Remember, Qatar has gotten a lot of kudos for its internationally-oriented media offering, such as Al Jazeera and the Doha Debates.

Robert Ménard, director-general of the Doha Centre for Media Freedom, today (16 March) sent an open letter to Her Highness Sheikha Mozah. He reminded her of her commitments and welcomed the progress reported, but condemned promises that had not been kept.

Your Highness,

I was shocked to learn of the murder of a young Afghan journalist a few days ago in the city of Kandahar. A car blocked the one he was travelling in and one of its occupants shot him dead. Javed Yazamy was 23 and worked with Western media correspondents when they came to Afghanistan. He was known to the Taliban because he had often arranged for foreign journalists to meet them. He had received threats and was seeking political asylum in Canada.

Unfortunately there is nothing more we can do for Yazamy except give financial aid to his family, and we are doing that. But it is our responsibility to provide shelter for other journalists under threat. We must let them come to Doha. The Doha Centre's facilities were designed for that purpose. Yet despite the grave dangers facing several journalists and months of repeated requests, the Qatari authorities are still refusing to give them the necessary visas.

It is part of the Centre's job to give protection to journalists before it is too late. I do not know why the Qatari authorities are against providing temporary shelter to men and women whose lives are threatened. That is a matter they must settle with their own conscience. But I will not abandon any of the principles on which the Doha Centre is based and will not go back on any of the commitments I made - and you made - when the Centre was founded. The Centre serves no purpose at all if we cannot act to save lives. Nothing is more important.

This is particularly regrettable because your office has just given us two pieces of news that will please journalists and, more generally, those working to defend media freedom. The director of your office, Dr Al-Kubaisi, said Qatar would soon ratify the United Nations International Covenant on Civil and Political Rights, Article 19 of which concerns freedom of opinion, expression and information.

In addition, Dr Al-Kubaisi told the Centre that the Qatari authorities had agreed to a journalists' union being started. Although it must be set up by Qatari journalists, those of all nationalities will be able to join. This is vital because many foreigners work for the country's media.

These are two very good pieces of news as we near World Press Freedom Day, to be held in Qatar on 3 May. They show that Qatar is willing to open up to real diversity of news. Everyone should be pleased.

However, for several months now some people close to you and others you have appointed to senior positions at the Centre have done their utmost to disrupt our efforts, trying by all possible means to restrict our independence and our freedom to speak and act, and therefore our credibility. This is no longer tolerable.

I solemnly ask you to ensure respect for and guarantee the values and principles on which the Centre was founded, and which should be a source of pride for Qatar.

I assure you of my greatest consideration.

Robert Ménard


Dubai is drowning in debt and defaulting fleeing expatriates, and across the United Arab Emirates rigid visa and labors law mean people who lose their jobs have to leave within a month. But how do the authorities react?

Yes, by clamping down on an apparent rise in lesbianism - cough - "masculine women".

BBC World: The UAE government has launched a campaign against what it describes as masculine behaviour among women.

Under the slogan "excuse me I am a girl", it has launched a series of workshops, lectures and TV programmes.

The aim, the UAE authorities say, is to help women avoid what is seen as "delinquent behaviour".

That is how the social affairs ministry in the emirates describes what would in some other societies be known as homosexuality or transvestitism.

Officials from the ministry told the local press that "masculine behaviour" among young girls was first spotted in special care homes.

Dubai, meanwhile, is concerned about the behaviour of the tourists that are no longer coming in droves.

DUBAI, United Arab Emirates (AP) — A peck on the cheek in public? Probably OK. Steamy embrace? Get a room.

That's the message coming from Dubai authorities in their latest struggle to tame public behavior in this glitzy Gulf city state that sells itself as a place where the Middle East meets the wild West.

Dubai revealed the new behavior guidelines last weekend in the local media, though it remains unclear if they will become law.

The instructions — touching on topics from miniskirts to angry outbursts — could sharpen existing "suggestions" for modest dress and decorum and give police more leeway for fines or arrests in places such as beaches and malls.

Meanwhile, the real problems just keep on mounting. It's like Nero fiddling with public decency laws while Rome burns.

Saturday, March 14, 2009

Two interesting FT articles on Dubai

Here's one on why the amount lent to Dubai by the federal government simply isnt enough.

“The amount is purely notional – in no way does it cover the extent of the Dubai banking losses,” says Jeff Chowdhry, head of emerging market equities at F&C Investments. “The banking sector is a house of cards that could come down due to the real estate market.”

According to the central bank, UAE banks had assets of nearly $400bn in January. Much of it is tied to the property sector in some form, either as direct property investment or as loans to contractors, developers and homeowners.

Given the parlous state of the real estate market and the phenomenon of redundant expatriates absconding from consumer loans, banks in the UAE could be sitting on a mountain of losses, most of it in Dubai, says Mr Chowdhry.

The second one is a comment piece by a former Reuters hack in the Middle East:

News of Dubai’s death has been greatly exaggerated. Its fundamentals as a regional hub of shipping, services, people, trade and capital have not changed. “Disneyland Dubai has crashed,” as one Dubai-based banker put it, referring to headline-grabbing property projects, “but the core business model of Dubai remains sound.”

Dubai’s property bubble popped. Its hubris also (thankfully) popped. Its core business model, however, did not. Property corrections and over-leveraged state entities can be fixed. Becoming a poor environment for trade would be far more dangerous. When the world growth engine restarts, city-states such as Dubai will flourish. In the meantime, Dubai will serve as a vital, if somewhat clogged, artery in world trade. The battered but still battling hub city will rise again.

"Qatar in a league of its own"

According to Deutsche Bank at least. However, it adds that despite current account and fiscal surpluses, and the "whopping" 29% real economic growth forecast this year, the headline figures "mask weaknesses in the non oil economy".

Despite this rosy outlook on growth Qatar has not been
left unscathed from the global financial crisis. The
stockmarket has been one of the worst performing in the
region (and the world) so far this year and the government
has recently announced it will buy the investment
portfolios of banks listed on the DSM in an effort to stem
the decline in prices. This comes 3 months after the
government announced that it would start injecting capital
into the country’s main banks via the QIA. While Qatar has
been proactive on this front they are one of very few
central banks aroud the world that have not cut rates
since the financial crisis intensified through Q4 08. The
Qatar Central Bank’s (QCB) overnight lending facility has
been unchanged at 5.5% since 2006 and the overnight
deposit facility unchanged at 2% since May 2008. With
inflation remaining the highest in the region at 13.2% YoY
for Q4 08 real rates remain deeply in negative territory in
Qatar. It is also likely that inflation will come down more
slowly than in the rest of MENA given the bumper growth
rates projected.

The fact that Qatar feels the need for such extensive measures could also indicate that they expect trouble with the loan books down the line.

More generally, this is what Deutsche Bank has to say about the wider Middle East:

The countries expected to bounce back quickest from the current downturn
are those where real estate booms were more contained, exposure to foreign
bank financing is low and fiscal and monetary policy responses have been
appropriate. Egypt and Saudi Arabia top our list. We put UAE firmly at the

ESCA on Arkans case

Looks like the Emirates Securities and Commodities Authority has finally acted on Arkan. And not before time. Lets hope this shows an increased willingness to clamp down on this sort of manipulation. It is common everywhere in the world, but far more so in the Gulf.

The National, March 10: Arkan Building Materials share prices extended their downwards run by dropping more than 9 per cent on the Abu Dhabi Securities Exchange (ADX) Tuesday, after four investors found guilty of violating trade rules were banned from buying the stock.

The Securities and Commodities Authority (SCA) said it was suspending four investors from buying shares across UAE markets for a year starting March 1, because of manipulation of Arkan stock.

Share prices of Arkan, an Abu Dhabi-based construction firm, have fallen 30 per cent since Feb 25, when the market regulator announced the investors’ suspensions.

Arkan shares fell 9.94 per cent on the ADX yesterday to close at Dh4.71 (US$1.28).

“In light of the investigations that were carried out... and the violations of SCA regulations uncovered during those investigations, the authority has decided to suspend the... investors,” Reuters quoted the regulator as saying.

“The suspension only includes the purchase operations listed in licensed markets in the country.”

The SCA also investigated employees at brokerage firms trading in Arkan stock from April 1 last year.

Arkan shares rose 39.5 per cent between Feb 5 and Feb 11 to an all-time high, bucking the trend during the property downturn.

Since Jan 1 last year, the ADX general index has fallen 48 per cent, while Arkan shares have risen 24 per cent in the same time.

“That’s strong outperformance, which looks odd, especially as there’s no news that came from the company to explain why the firm was performing in this manner,” said Ali Khan, the managing director of the investment bank, Arqaam Capital.

At the time, analysts said a small group of Abu Dhabi investors had been propping up shares.

“Arkan shares saw extraordinary growth earlier this year without good reason, as the building materials sector is expected to slow down,” Ayman el Saheb, the director of operations at Dubai-based Darahem Financial Brokerage, told Reuters. “So there were whispers in the market that something was amiss.”

Arkan posted a net loss of about Dh450m in the fourth quarter of last year as it booked losses on equity investments and the value of its steel inventory declined.

A Gulf tragedy

For once, a decent editorial by that paradigm of journalism, Gulf News. However, the stagnation, or regression, of Kuwaiti politics is a tragedy for the wider Gulf. Whenever someone voices support for democracy elsewhere in the region, the authorities can merely point to the example of Kuwait as an example of how democracy could be a step backwards from the autocratic systems prevalent elsewhere.

Gulf News, March 10: The ongoing political turmoil in Kuwait is disappointing as it will have a knock-on effect on the democratic process. If the various political groups fail to reach an amicable agreement, the rift would set the country back on many fronts.

Once again a hardline lawmaker has submitted a request to subject the prime minister to an inquiry, the third of its kind within a single week.

Islamist lawmaker Mohammad Hayef has accused Prime Minister Shaikh Nasser Mohammad Al Ahmad Al Sabah of abdicating his responsibility by allowing the demolition of a couple of mosques built on illegal land.

Last week another request was submitted making out a case against Shaikh Nasser over allegations of mismanagement, breach of the constitution and failure to adopt appropriate economic policies.

The three requests for the prime minister to be quizzed in the space of a week is a first for a Kuw-aiti prime minister.

As it is, Shaikh Nasser's Cabinet has been under immense pressure since his appointment in 2006 with disputes in the parliament leading to the resignation of four of his previous Cabinets.

Such instability on the political scene is diverting attention from the real issues facing Kuwait. If the current imbroglio continues, there is a big likelihood that the parliament will be dissolved by the Emir.

Such a state of affairs would be most undesirable given that barely two months have elapsed since the new parliament was elected.

There is a responsibility by all those who are part of the political scene in Kuwait to support and enable the democratic process.

The endless cycle of bickering in parliament represents an abuse of the system.

It is in no way a constructive process that promises to find solutions to serious issues. It is high time this meaningless recrimination is brought to an end.

Tuesday, March 3, 2009

Anyone for plastics?

Bad news comes in threes. For a long time the three largest companies in the Gulf were Emaar in Dubai, Sabic in Saudi, and Industries Qatar in, well, Qatar.

The troubles of the first have been well-documented, but Sabic and IQ have been hammered by falling petrochem prices as well. Sabic and IQ (this week) have now reported about 95% drop in profits in the fourth quarter. Ouch.

HSBC downgrades crude oil price forecast

HSBC has lowered its oil price forecast for 2009, but thinks that further OPEC cuts should provide some support in 2010.

HSBC: Short term demand omens look bleak but OPEC cutbacks should provide some support. We downgrade our 2009e Brent forecast to USD50 from USD75. For 2010 and beyond we expect accelerating decline rates and project deferrals to lead to a tightening of, the market, just as occurred after 1986. We upgrade our 2010e Brent forecast to USD75 from USD60.

Worried about UAE banks

The more I think about the United Arab Emirates banking system, the more I fret.

Ok, very rough calculations, but according to the UAE central bank stats for January, the UAE banks have total assets of AED1.466 trillion, or very nearly $400 billion. Lets assume - charitably - that 20% of that is money lent to the property sector in the country. (in reality it is much more as the 20% cap seems to work separately for real estate companies, construction companies and morgages, and many banks have thus in reality exceeded a 20% exposure.)

That makes $80 billion exposed to real estate, minimum. Given a minimum 30% drop in real estate prices that means that assets should extremely conservatively be marked down by $24 billion. Non-performing loan provisions of banks was at AED26.1 billion in January, or $7.1 billion. This would indicate that NPL provisions should more than treble, but is still maneagable.

However, a more realistic scenario would be an estimate that half of banks' assets are directly exposed to real estate in some form or fashion. Given that a 50% drop in asset values (everything from mortgages, direct property ownership and stakes in developers, contractors and related companies) is likely, if not conservative, that could mean losses of $100 billion right?

Even Abu Dhabi would blanch at the cost of that bail-out.

Sunday, March 1, 2009

A good story from a CNBC journalist, via Sharewadi. Lest we forget, schadenfreude over Dubai is understandable, but few cities in the Gulf have done as much to change perceptions of the Arabian peninsula abroad, even if it did become a byword for excess.

Salzman: From Dubai To Don't Buy
By Marian Salzman

As its mad dash to become the premier tourist and business magnet comes to a screeching halt, Dubai is emerging as a concentrated, exaggerated microcosm of the financial and cultural tensions among nations across the globe right now. As the mood has swung heavily from “do buy” to “don’t buy,” the glitzy Gulf emirate is facing a steep downturn in fortunes and an upturn in woes. But its troubles aren’t all about money. A couple of pretty severe missteps have tarnished its otherwise eager attempts to bridge the gap between the traditional Islamic culture of the Gulf and the freewheeling, secular cultures of the global mainstream—raising international ire.

There’s more than a little global schadenfreude in the air regarding how the economic crisis is hitting Dubai. An acquaintance of mine described it as “the poster child for the demise of opulence,” via Twitter. “Easy come, easy go,” Tweeted another, dismissing Dubai as a handy two-syllable symbol for pre-2008 “extravagance and indulgence.”

After all, it was less than two years ago that wealthy tourists luxuriated in the seven-star Burj Al Arab hotel as the New York Times reported on migrant laborers toiling nearby in “a Dickensian world of cramped labor camps, low pay and increasing desperation.” These men were working without unions or fair practices as they built the ground beneath a city scrambling to greater and greater heights of wealth and opulence.

While neighbors Abu Dhabi and Saudi Arabia got rich peddling petroleum, Dubai reaped the rewards of credit-fueled spenders lapping up extravagant purchases and lavish entertainment. But the influx of expatriates drawn in by Dubai’s jaw-dropping expansion spree has now turned into an outflow. While early 2009 saw more than four times as many foreigners as locals in Dubai, the population is projected to fall by 8 percent this year, owing to lost jobs and stalled projects. Where real estate prices raced upward during Dubai’s boom years—when ostentatious shows of wealth were accepted and even celebrated—property values are predicted to dive as much as 60 percent in 2009. On an exclusive manmade palm-shaped island, the Palm Jumeirah luxury apartments can already be had for half what they were once priced.

If all of that weren’t painful enough, an altogether different kind of reputation bungling emerged recently, from a seemingly promising and decidedly non-bling place—Dubai’s first annual International Festival of Literature. Priding itself as the "first true literary festival in the Middle East," the event hoped to encompass a range of world-renowned writers but ran into cross-cultural problems when it banned a forthcoming novel by British journalist and author Geraldine Bedell for its references to homosexuality. Esteemed Canadian author Margaret Atwood was compelled to pull out of the festival and announced on her Web site that, “as an International Vice President of PEN—an organization concerned with the censorship of writers—I cannot be part of the Festival this year.”

Festival organizer Isobel Abulhoul seemed to plead for acknowledgement of the steps forward the event is taking, saying they are “helping to bridge the gap between East and West. … I would hope that anyone informed and interested in the differing cultures around the world would both understand and respect the path we tread in setting up the first festival of this nature in the Middle East.”

Another disastrous attempt at censorship hit the international sports news tickers last week when the U.A.E. denied a visa for Israeli tennis player Shahar Pe’er, preventing her from competing in the Women’s Dubai Tennis Championships and resulting in a record fine to the organizers, who had said they were concerned that citizens still angry about the Israel-Gaza situation would have been antagonized by an Israeli in the competition. The Wall Street Journal revoked its sponsorship upon the decision and Andy Roddick announced he was dropping out of the men’s tournament there.

But Abdel Bari Atwan, editor-in-chief of Al-Quds Al-Arabi, a U.K.-based Arabic-language newspaper, also appeals for patience: “We should encourage (Dubai] to be ambitious because they are opening up, and they are really trying to modernize their society. … It takes time."

As the world has become embarrassed by its own behavior, Dubai has clearly become a scapegoat of sorts. Not that it’s to blame, but it’s a convenient place to project disdain.

But the emirate is much more than testament to an era of inflated egos and cheap credit. And it risks becoming a sad, failed monument to a new vision of the Middle East—moderate and modern, ambitious and open-minded, bridging East and West, Islam and the rest of the world. It probably aimed too high and too fast; it has certainly tried to take short cuts on the long road to success and status mapped out by big little players such as Singapore.

Economically Dubai is in much the same predicament as the rest of the world, except that it has private wealth and some oil-rich family members. As most countries do, it will have to overcome the consequences of mistakes made. However, it would be a shame if Dubai’s aspirations come to nothing. The world needs more willingness to open up and reach out among cultures.

Late last week, in an apparent turnaround, the U.A.E. announced it would grant a visa to Israeli tennis player Andy Ram for this week’s men’s tournament in Dubai. It’s fodder for debate whether the nation saw the error of its ways, or simply couldn’t afford another slap on the wrist that would jeopardize its economy further.

In this era of great need for acknowledging mistakes and moving forward with solutions, Dubai has in its grasp the potential to emerge as a leader and symbol for change.

EFG-Hermes also unimpressed

EFG-Hermes sounds a wise cautious note on Dubai's debt, despite highlighting their "optimistic" scenario.

Our Overall View Unchanged: Despite the more positive undertones of Mr Shaikh's message (Dubai's finance department director general), for the time being we prefer to keep with our base case view, i.e. that the government would do better to utilise the full USD20 billion of the bond programme. This is partially due to a lack of general disclosure which we believe warrants a less than optimistic stance. In addition, we are also aware of small inconsistencies in the message being delivered by the government. For instance, Marwan bin Ghalita (Chief Executive of RERA) stated that real estate developers would not need to draw on the bond programme. This is in contrast to additional comments made by Mr Shaikh that real estate companies would be among the main beneficiaries of state aid.

§ Stock Market Impact: The stock and CDS market reactions to Mr Shaikh's comments have been largely muted. This is in line with our expectations and corresponds to what we have stated before. Given the current high levels of uncertainty, investors are unwilling to take state level reassurances at face value. What is required instead is either concrete action (such as the announcement of the bond programme itself) or a detailed level of information disclosure.

"Small inconsistencies" in the government's communication? Huge, glaring gaps and deliberate obfuscation more like it.

Saturday, February 28, 2009

A while ago, Yusuf al-Qaradawi said that the world should switch to an Islamic finance system, as its divine ordinances would prevent speculation, boom and bust. It seems Standard & Poor's, the rating agency, partially agrees.

Islamic Financial Institutions (IFIs) "didn't invest in the structured products that have hampered many conventional banks' financial profiles and performance," said Standard & Poor's credit analyst Mohamed Damak in a report, titled Rated Gulf Islamic Financial Institutions And Takaful Companies Have Shown Resilience To Global Market Dislocation, But They Are Not Risk Immune. "And most IFIs should be equipped to weather the financial downturn and keep the effects on their financial profiles at manageable levels."

However, the agency does warn that IFIs are exposed to the liquidity crunch as well. It is particularly acute for IFIs as there are less short-term instruments with which to manage liquidity. I'd add that an absence of long-term instruments is also a problem. Virtually all sukuk, or Islamic bonds, have been short or medium term, and the banks could really do with some 10-20 year issuance.

S&P's does mention the real estate risks, but this is where I feel the nascent industry could well face some very, very serious problems. Islamic finance is, at its core, asset-backed finance, and while most IFIs are conservative, they have all piled into real estate, and have lent a lot to contractors, developers and homeowners, all of which are struggling right now. Watch this space...

But $10 billion just isnt enough

This from Barclays Capital. Interestingly, they too seem to think that $10 billion will be enough to tide Dubai over, even though they are calling for further measures "to strengthen financial stability" in the UAE. This would presumably mean an expansion of the capital injections into the Abu Dhabi banks to include all UAE banks. 

But this is the problem. Dubai needs more money. $10 billion wont even cover its repayments this year, let alone the billions that the parastatals owe to contractors. Profits will be scarce if not non-existent this year, especially for companies such as Nakheel and Emaar, so they are dependent on the government to step up to the plate. The cost of bailing out the non-bond debt of Dubai Inc could even match the $80 billion of foreign credit exposure.

Again, $10 billion isn't nearly enough. Presumably the brighter sparks in government realise this, so why the ambiguity on the second $10 billion tranche? The first underwriting tranche may well signal that Abu Dhabi stands behind Dubai, but will they still do so when the cost of the bail-out soars? Will Abu Dhabi put its good money into bad firms like Nakheel, Emaar, or Dubai Holding's various satellites?

BarCap: This week’s announcement by the Dubai Government of a $20bn bond issuance cleared much of the uncertainty surrounding Dubai’s debt refinancing in 2009. The UAE central bank’s subscription to the first USD10bn tranche should help repay much of the nonbank sovereign and quasi-sovereign foreign currency debt maturing over the next 12 months. (which we estimate at USD 11.5bn)

It also confirms in our view the indisputable support to Dubai and its government-owned institutions by the federal level, backed by Abu Dhabi. This prevents possible default scenarios, in spite of the sharp slowdown in growth witnessed there. While the timing of the second tranche and its expected investor base remain unclear, we expect this move to drive credit spreads tighter and help ease the pressure on some of Dubai’s major banks, whose exposure to Dubai Inc entities is significant.

We also look out for further measures by the authorities in the next few weeks aimed at bolstering liquidity in the financial sector, by having the federal Ministry of Finance release and possibly expand the size of the third and final facility tranche. Following Dubai’s debt placement with UAE’s central bank the authorities may follow up with measures to strengthen financial stability.

Tuesday, February 24, 2009

What decoupling?

The Investment Bank Formerly Known as Merrill Lynch (or Banc of America Securities - Merrill Lynch, for now) predicts that economic growth in the Gulf will fall from 6% in 2008 to nothing this year, with real economic contractions in Saudi Arabia (-0.2%), the United Arab Emirates (-0.6%), and Kuwait (-1.8%). Growth will rebound to staid 2.5% in 2010.

Now, a lot of the economic contraction in Kuwait and Saudi Arabia (and partially the UAE) will be due to OPECs production costs, but thats still going to feel very painful after the growth rates of recent years.

By the by, ML analysts estimate that every 100,000 oil barrel a day OPEC production cut will reduce GDP growth by about 0.3 percentage point in Saudi, 1.5 percentage points in Kuwait, and 1 percentage point in the UAE.

If anyone has ice water running through their veins, the former investment bank recommends Qatar and Saudi as their "top macro picks".

Addendum: JPMorgan has a rosier take on the GCC. It forecasts regional growth at 1.8% this year.

Monday, February 23, 2009

Godlike management?

Someone seems to be doing something right. Arkan Building Materials is currently trading at 60 times its earnings, and is at the time of writing the fifth largest company in the UAE by market capitalisation, only beaten by Etisalat, Mashreqbank, National Bank of Abu Dhabi and Emirates NBD.

Even given its relatively small freefloat of 30 per cent or so of its shares, making it a bulky, illiquid stock, that is pretty odd. Far be it for me to proffer suggestions as to what is behind its sterling performance.

Hedge fund capital in MEA $1.5b last year

This just in. Hedge funds had $1.5 billion invested in the Middle East and Africa last year, according to Hedge Fund Research.

MIDDLE EAST/AFRICA: Despite losses in 2008, hedge fund capital invested in the Middle East and Africa has grown from less than one half of a percent of Emerging Markets hedge fund capital in 2002 to over two percent, or nearly $1.5 billion of invested assets. More than 20 funds have an exclusive, dedicated focus on investing in the region, and are located in these markets while also attracting investors globally. These funds have an average asset size of nearly $75 million, second in average size only to Russia among Emerging Markets hedge funds.

I wonder how much of that $1.5 billion was shorting Gulf companies such as Sorouh, Industries Qatar and Sabic? Still, $75 million doesnt exactly make them big hitters, and with leverage probably negligible, perhaps the negative effect on regional stock markets was exaggerated.

WAM hit the African & Eastern

WAM, the official UAE news agency, is as usual succinct and incisive in its analysis of the federal bail-out of Dubai. (Highlights highlighted)

WAM Dubai, Feb. 23, 2009 (WAM) -- Business and economic personalities believe that the launching of US$20 billion long term bond programme by Dubai Government, reflects the UAE economy's high-level of credibility and refutes the allegations surrounding the government's ability to live up to its financial commitments.

They said Dubai is highly dynamic to a level that it is capable of surmounting any economic crisis. They lauded the UAE Central Bank for taking the step to fully subscribe half of the total bond. They said by taking such a step the Central Bank wanted to issue a clear message to all doubting Thomasses that the protection of the UAE national economy is uniform and never discriminate against any emirate. Some of them believe that local governments and local and foreign banks would subscribe for the remaining half to make the whole initiative a great success.

They said the fixed interest rate on each paper is close to the one fixed on US government bond and this shows that that the risk rate of Dubai's bonds is comparatively lower. They therefore expect this move to reflect positively on local bourses and banks in the shortest possible time.
Government of Dubai Sunday launched a $20 billion bond programme to meet its financial obligations and press ahead with development projects. The first issuance of US$10 billion was fully subscribed by the UAE Central Bank. The bond is an unsecured fixed rate paper yielding 4 per cent per annum and has a five year maturity.

This issuance will provide Dubai Government with the necessary liquidity to substitute the liquidity that has dried up globally in the last 12 months or so and accordingly meet all upcoming financial obligations that are needed by the administration.

Major UAE Arabic dailies, which run reports on the issuance of the bond, all agreed that the Dubai government move was timely and a step in the right direction as it reflects the strength of the emirate's economy and its ability to continue to honour all its obligations and commitments.

So, why the bail-out, if Dubai is so "dynamic" it can surmount any economic challenge? And does anyone want to trade my US government bond for "comparatively lower" risk Dubai Inc debt?

This will certainly erase refinancing doubts over Dubai, but anyone who thinks Dubai is out of the woods yet is mad. Bankruptcy may have been averted, but a grim recession is still on the cards.

The interesting part is this:

Commenting on the move, the Secretary General of the Dubai Economic Council (DEC) said the long-term bond programme is a best international practices particularly in the light of the current global meltdown stemming from the global financial crisis, adding that the programme will deepen the UAE bond market which, for a long time now, is being advocated by a number of reputable economic experts and personalities.

Lets hope so. Who knows, maybe this could still prove a long-term boon if the regional debt markets are developed further. Sovereign issuance would surely help by setting a benchmark, but you would then need private investors taking part, not just the UAE central bank dictating the yield.