As regional head of commercial banking at HSBC, Simon Vaughan Johnson has a front row seat to the resuscitation of the Middle East’s biggest corporate players. He recently sat down with Executive to discuss where we should be looking for the first signs of economic recovery in the region.
E What will be the drivers of the recovery?
I look after commercial banking, so the Dubai government is not in my segment. However, we do have customers who are suppliers and contractors to that segment. I’ve been and come back to Dubai – I first saw it when it was pretty simple in 1988, then I came back again in 1991 and returned to live in the UAE again in 1995. I have seen an amazing transformation.
I believe that, in the long term, [Dubai] will absolutely come back again and HSBC as a group (and I personally) also believe that the government will get it right.
Clearly the sharp drop in October [2008] that we saw, particularly in real estate, came as quite a surprise to everybody.
I also think one of the biggest challenges is transparency. If we can help the economy itself and the operators within that economy to be utterly open about their financial position, that will bring in a much stronger foundation. This is particularly true where the larger corporates want to go into the debt markets, where you’ve got to be totally transparent.
E Is this a singular view? Do you think that rhetoric concerning transparency is met by actual intention for improvement?
The only way for transparency to become a reality is if it is driven by the business community. I obviously see a lot of corporate customers and many of them are now bringing in far tighter governance, such as hiring internationally trained financial controllers. These companies are obviously very aware of the need to be transparent, however for it to become broad and widespread you need an environment that encourages transparency or even mandates it. Encouragingly, I do think that there is a broad recognition that greater transparency will be required to be able to access funding.
E Any other predictions as to drivers of recovery?
We shouldn’t forget that Dubai still is the biggest trading hub in the region. That’s not going away. I think it is quite easy to look at the entire situation and think that we are in really dire straits but actually it is specific segments that have suffered, such as construction. Underlying trade, which is a really good indicator of growth, is very stable. They are about to open the largest passenger and freight airport in Jabel Ali. It is going to take a long while for other markets in the region to match such infrastructural strength.
We can see that the government is committed to supporting the economy. For example, there is a very strong push to support small and medium enterprises (SMEs) — a segment that typically is an engine for growth. In fact, we launched an SME fund in the UAE in January, which is a $100 million fund focused on helping predominantly local companies to grow internationally: helping them with foreign exchange risk, with opening letters of credit and that side of it. It’s been incredibly successful and is already over 70 percent drawn just five months after the launch.
The government has been very, very proactive in supporting this segment. As the SMEs develop, that support will increase and build sustainable growth for the Emirates. Additionally, there is strong government support for SMEs in Saudi and?Bahrain as well as Beirut.
E How do you assess the legal tools available in the UAE to resolve disputes and non-performing loans (NPLs)?
The legal aspect is an important issue that needs to be addressed along with transparency. In a developing market, clearly you have higher litigation risk so I would definitely say that the limited access to these tools could feasibly be an issue. But have we been affected by that? Has the system let us down? No. It tends to be that very pragmatic approaches are taken when issues arise, but the lack of certainty does worry the business community.
E Is it a deterrent for international investors that at the end of the line there is no transparent bankruptcy process?
It might be more of a deterrent for people who don’t understand the culture and the way that things work — who don’t have a banking partner with networks in the region. We’ve been around for a very long time. In fact for the first 20 years of our life in the Emirates, there was no other bank. We effectively had a monopoly, so we go back to the early 60s.
So yes, lack of transparency regarding bankruptcy might be a deterrent for a newcomer. However, these newcomers can partner with an advisor who can steer them through the risks and eliminate these risks. If you are into trade and you want to access the Middle East region, you’ve got to be in Dubai, so you need to look at how to overcome these challenges.
E Most of the large international banks in the region are doing some strategic shifting right now. Is HSBC part of this trend as well?
We’re in the throws of a strategic planning exercise. For my business, it’s going to be about trade – about playing to our strengths. Trade has grown and is predicted to grow faster than gross domestic product, particularly in the developing markets.
We believe that from our analytics on trade flows, Middle Eastern and Asian flows are going to continue to grow very strongly, including flows between India, China and the Gulf countries. And if I look across the Middle Eastern countries, in every single country in which we operate, China is a top five trading partner since 2008. So trade is our number one focus.
E How does Lebanon fit into your trade-focused strategy?
Having written a trade plan in 1992 for Lebanon, it’s really interesting to come back and see how the country has developed. If you look at the growth and compare that with the region over the last three years, there has been enormously strong growth of 9 percent since 2008 as an economy.
We project maybe an average of 6 to 6.5 for the next two years at least. It has been very countercyclical. We’re chasing down the opportunities that the present cycle presents.
E Sixty-seven percent of HSBC’s corporate clients are from emerging markets. When did the bank decide that this was the place to be?
I would say in terms of making that a rallying cry or strategic group focus, the shift was about four years ago. But it isn’t new. It’s something that we recognize as very much a differentiator for HSBC group — it is a very important story.
You can’t overlook the fact that the major buyers and the major trading houses previously sat in the US and Europe, and now we see them shifting into Asia. We believe that Asia and the developing markets will increasingly become the engine for growth.
E The Lebanese market is saturated with banks. Do you feel the constraints on growth in this market?
What we are hearing from our customers is that they are thinking very carefully about who they want to partner with. When I was last here, customers were very multi-banked because it was a risk diversification strategy. Typically they’d have [accounts with] three, four, five — up to six or seven different banks.
What you’re hearing now is that the larger names really want to build partnerships and relationships.
Apart from anything else, it’s horribly complicated to manage your pricing and your transactions with multiple banks. Having a single view for effective working capital management gives a clear view of which payments are overdue, it gives them one person to call who can solve issues and ensures that they are represented at both ends of a transaction in case something goes wrong.
What I am noticing is our larger customers wanting to focus in on a smaller number of banking partnerships because of the complexity of running multiple relationships.
