Credit Suisse – Adel Afiouni

Regional debt markets get a clean bill of health

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Credit Suisse held its first Middle East and North Africa Equities Conference in Beirut this month, bringing together more than 40 corporates from around the region. Executive sat with Adel Afiouni, managing director of the bank’s investment division, to discuss debt, Dubai and the financial future of the MENA region.

E  This is the first time you’ve held a conference in Lebanon: why now?

Firstly, Lebanon is doing very well. We took this as an opportunity to bring our clients to Beirut and allow them to see Lebanon’s success story firsthand. Secondly, Credit Suisse is actively present in Lebanon; we have always been committed to the country. Our presence in Lebanon goes back to the 1960s.

On the investment banking side, we have been one of the most committed international banks in Lebanon. Over the past 10 years, we have advised the Lebanese government on international bond issues and liability management transactions and managed many of the Lebanese Eurobonds. Most recently, Credit Suisse was lead manager for Lebanon’s debt exchange in 2009, the largest-ever debt exchange by a non-Latin American emerging market sovereign.

E  It seems that debt capital markets (DCM) have been growing as a result of the financial turmoil. What’s your take on this?

In 2009, we’ve seen bonds issuance out of the Middle East and North Africa increase substantially, leading to a strong growth in the regional DCM. The reason for this was that the market for syndicated banks loans, which is traditionally the main source of funding for local borrowers, was almost shut down, as banks’ liquidity and appetite for lending decreased at the time.

In a way, this was a very positive development because it opened the access to international capital markets to Middle Eastern borrowers, thus diversifying their sources of funding. For example in the first quarter of 2009, Credit Suisse was involved in two landmark transactions: The State of Qatar international debt issue and the Commercial Bank of Qatar debt issue. Both transactions were massively oversubscribed with very high demand from international clients in the United States and Europe. This was a clear indication of strong appetite from the international capital markets for high quality issuers out of the Middle East.

Over the long term, we believe the international debt capital markets will continue to be an important source of funding for MENA issuers. We think we will progressively witness more active markets because more regional corporates are becoming familiar with the need to use the international markets and are preparing themselves for such access. However, as market conditions evidently remain volatile, timing is key for those issuers who are planning to tap the markets.

E  What competitive advantages does the MENA region have over the rest of the world in terms of investment horizons?

Following a tumultuous 2009, the MENA markets are looking attractive in a global context with a strong macroeconomic backdrop facilitating return to growth.

Even if the stock markets are not yet liquid enough, there has been tremendous progress over the last seven years. Further liberalization and opening markets to foreign investors will continue to enhance interest in the region.

As a firm, we have a strong presence in the Middle East, in Abu Dhabi, Beirut, Cairo, Doha, Dubai, Jeddah, Manama and Riyadh, and we are bullish on the Middle East.

We have also continued to expand our range of regional products to support the development of local equity markets and attract further interest from investors.

For example, we have been one of the pioneers in structuring regional investment opportunities with principal protection, and in offering our clients derivatives products on regional equity to assist them in hedging their downside risk or customize their risk return objectives.

E  There’s been a lot of talk about the Middle East deploying significant amounts of capital this year – do you anticipate this happening?

Yes, there is excess cash in the Middle East, especially from Sovereign Wealth Funds, and some large privately owned conglomerates. Those important investors have developed their investment strategies and aim to diversify their asset allocation and build long term sources of revenue. Therefore, as part of those objectives they will continue to deploy capital abroad.

Middle Eastern investors and, to a larger extent, emerging market investors like China, will remain an important source of capital for Western companies.

Credit Suisse can play an important role in this due to its broad network of client relationships globally, by bringing together our MENA clients and our Western clients.

E  Will the region continue to grow and become more established and reputable as a global financial hub?

Certainly. Saudi Arabia is the most obvious example, as it has the largest market capitalization in the region. Regulators in Saudi Arabia have an excellent reputation and have been taking measures to further develop their markets. The potential is huge. Credit Suisse has been developing products (swaps and other derivatives) for our clients to provide exposure to the Saudi market.

International investors are able to purchase such products through our entity and there is very good interest in the Saudi market from those investors. Having said that, Middle Eastern regulators, rightly so, want to avoid excesses and hot money.

Saudi Arabia is cash rich. Even if the stock market will benefit from international investors the authorities are approaching this matter with caution because they want to open their markets to long-term international investors, not to speculators.

E  How do you see an increase in interest rates impacting MENA countries which have significant debt levels?

For one, the significant debt level is not necessarily true for the region in entirety. Those raising capital now are undoubtedly benefiting from lower interest rates. As for rate hikes, I think most borrowers do manage their interest rates risk dynamically and banks such as ours are offering a number of solutions to corporates to allow them to hedge their risk to an increase in interest rates and to optimize their cost of funding.

E  Will Dubai regain its strength?

Dubai is a fantastic story; they’ve done a tremendous job in building the infrastructure and attracting talents and workforce. Dubai will remain a major center in the region. It’s a great hub; you just need to look at Dubai International Financial Center, Dubai Media City, Dubai Internet City, Emirates Airlines and many other success stories.  So people shouldn’t focus on a temporary paradigm shift but look at the long term big picture as well.

E  Exotic products are usually taken up by banks rather than corporates in the MENA; do you see that changing now with new buyers for your products?

Our objective is to provide our clients with customized solutions that meet their risk and return profile. We are using solutions and product ideas that have proved popular with our global clients and adapting those ideas to MENA markets.

Clients, whether banks or corporate, are going back to basics today and prefer simple ideas to more exotic and highly structured products, so we have adapted our offering to take this into account.

For example, as mentioned earlier, we have been one of the pioneers in offering derivatives on regional markets, equity and debt. This has allowed us to create principal protected investment products in local equity.

Those products cater to investors who are seeking regional exposure while limiting their risk on the downside. Those ideas allow broadening the type of investors interested in the regional markets and reach out to risk averse conservative investors as well.