Executive Magazine

The Subprime Crisis and the Middle East

by Executive Staff February 27, 2008

written by Executive Staff

The US subprime crisis is having little impact on the Middle East financial sector; in fact the crisis turned out to be quite an opportunity for the region’s financial institutions. To date, the only direct loss reported was by Abu Dhabi Commercial Bank (ADCB), which wrote down $19 million in assets during the third quarter of 2007. A few other firms took indirect hits. One such firm was Emaar Properties. In August 2007, the Dubai-based property developer explained that its US subsidiary unit John Laing Home’s (JLH) third quarter results were lower than expected due to the subprime mortgage crisis and a possible implosion of America’s housing bubble. Emaar was unable to comment on this development for Executive. In a previously conducted interview with Reuters, however, Emaar Property’s chief financial officer, Amit Jain, noted “third-quarter JLH results are going to be lower than earlier estimates — not incurring losses, but profits won’t be high.” News of lower returns for JLH hurt Emaar Properties, as it posted its first decline in profit in the last three years. Its share price dropped to a 28-month low as investors sought out less-exposed options.

This decline came in sharp contrast to the optimism felt by Emaar in 2006 when they purchased JLH for $1.05 billion. While it finalized the deal before mass subprime defaults occurred in the later half of 2006, some analysts did question the rationale behind the decisions to acquire JLH as talk of a US housing bubble made its way into the media. Although American real estate woes have ultimately taken a toll on Emaar Properties, other regional institutions have avoided the same fate because of different asset allocation abroad and a strong domestic market.

Gulf property markets do not appear threatened

The subprime crisis does not appear to threaten Gulf real estate and Gulf investors remain confident in their domestic housing markets. In December 2007, the Khaleej Times noted that the subprime crisis would not hit the UAE’s property sector. The CEO of Rakaa Property, Abdulrahman al-Tassan, explained in the article that the Emirates’ property market has better standards than those in the US. To insure against defaults, the Gulf country makes sure underwriting standards are strict and borrowers undergo background checks before they are issued credit.

Banking on better days

Gulf banks also found themselves in safe waters. Banking institutions keep diverse portfolios in high-grade investments to mitigate risk, ensure positive returns and minimize the risk of defaults. They are also supported by high liquidity and government willingness to intervene if investments turn sour. Standard and Poor’s credit analysts Emmanuel Volland and Mohamed Damak found in a recent study only limited exposure by Gulf banks to US subprime mortgage-related instruments.

The study investigated 20 Gulf banks with the largest exposures to subprime mortgage-backed securities and found that less than 1% of total assets were exposed. Other indicators, such as total exposure to subprime mortgage-backed securities as a percentage of total equity were higher, nearing 10%, but the report took an optimistic tone, saying banks are not exposed enough to warrant any changes in policy, as long as all their subprime exposure remained in equities of high investment grade with ratings of ‘AA’ and ‘AAA’. In an interview with Executive, the analysts maintained that Middle East banks’ exposure to subprime securities is still investment grade.

Still, not all banks have had consistent performance during the subprime crisis. Bahrain’s Gulf International Bank (GIF) saw its Moody’s rating drop from stable to negative on its A2/prime – 1 deposit ratings and A3 subordinated debt ratings because of the bank’s holdings of US mortgage-backed securities. GIF can choose to either change its procedures to bring its ratings back to stable or it can ignore the rating and maintain this exposure to subprime-related securities. Moody’s decision is not likely to have a significant impact on Bahrain as most Gulf banks are supported by governments willing to bailout beleaguered firms and banks.

In step with the US Federal Reserve

Although exposure remains low, Gulf banks and institutions are not moving forward as smoothly as they would in the absence of the subprime debacle and the ensuing credit crunch. The credit crunch is putting recessionary pressure on the US economy, which is currently being countered by the US Federal Reserve. All economies that peg their currencies to the dollar are affected by the Federal Reserve’s monetary policy. The list includes most Gulf countries, except Kuwait, which depegged its currency from the dollar in 2007. The six countries of the Gulf Cooperation Council have begun implementation of the Gulf Common Market (GCM) agreement and are preparing for a common currency to be minted in 2010.

The Federal Reserve’s main short-term worry since the apex of subprime defaults in October 2006, is that a recession in the US might follow resulting in far-reaching implications abroad. To preempt this, the Federal Reserve’s monetary policy is set to grow the economy through a series of interest rate cuts. The interest rate cuts are an attempt by policy makers to encourage lending by making money cheaper to borrow. Firms will, it is hoped, borrow rigorously and thereby promote economic growth. The Federal Reserve cut interest rates to the lowest level in two years when they hit 4.25 % in late 2007. Then on January 22, 2008, US Federal Reserve Chairman Ben Bernanke cut rates again to 3.5%.

The Gulf will have to follow suit, either by changing their pegs or by altering monetary policy to match the US changes. To maintain parity with the dollar and keep regional investors from engaging in interest-rate investment arbitrage on the US market, the central banks of the region must lower interest rates in turn. Although some of the greenback-pegged Gulf economies have revalued their currencies to the dollar, they will also continue to maintain the peg to keep parity with each other’s currencies until the GCC common currency begins.

According to chief economist and head of research at Jadwa Investment, Brad Bourland, Saudi Arabia’s currency peg to the dollar means that Saudi must echo US interest rates. If the Saudi Arabian Monetary Agency allows too much divergence between interest rates, investors will capitalize on the widening spread. Bourland also noted the harm interest rate cuts may have in encouraging inflation in a region that does not need to see any more of it.

Keeping prices and currencies happy

Gulf countries are battling double-digit inflation, because the Fed’s interest rate cuts are putting expansionary pressure on their economies. To counter the pressure, some Gulf central banks have decided to raise their reserve requirements, exercising one of the few sovereign moves the region’s central bankers have left. By raising reserve requirements, the central banks are constricting the economy by keeping more money in the vault and less in the hands of borrowers. Qatar, which is battling 15% inflation, raised its reserve requirement by 50 basis points to 3.25%, which will force banks to stash away more of their capital with the central bank, leading to a contraction in the economy. The move will counter growth without disrupting Qatar’s interest rate parity with the greenback.

Potential Bank Liabilities

Top bank sponsors of commercial paper, 2007

When can the bonds start?

As Middle East central banks follow the increasingly active moves by the Fed to lower interest rates, many firms waited to issue bonds, opting instead to do so once the spread narrows, because bond valuations based on current spreads are likely to be undercut by reactionary interest rate cuts.

According to Dr. Eckart Woertz, program manager of economics at the Gulf Research Center, the main impact of the subprime crisis in the Middle East “has been the widening spreads and assets [that] have been affected. The financing condition is deteriorating, even for companies and issuers.” Looking forward to 2008, he noted that, “There are a lot of potential [bond] issues in the pipeline. Should markets calm down, then they will come to market. It tells of confidence in a fledgling bond market.”

Recent moves include the UAE’s Dana Gas postponement of a $1 billion Islamic bond issuance (sukuk) and Bahrain’s Ithmaar, which delayed sales of their five year bonds valued at $300 million. Abu Dhabi First Gulf Bank also postponed issuing its $3.5 billion Eurobond. Those who went ahead during a market with high spreads lost big. Among them was the Saudi Basic Industries Corp. (SABIC), which had aimed at raising $2.7 billion from a bond issue. In the end, they were only able to obtain $1.5 billion.

Middle East money saves Wall Street

The major players in the Middle East, in particular the Gulf, are the government-owned and operated sovereign wealth funds (SWF). In terms of the subprime crisis, these SWFs may come out on top as willing and able financiers, providing much needed liquidity for Western firms and banks. In January 2008 both Citigroup and Merrill Lynch solicited the help of sovereign wealth funds from Asia, including the Gulf.

In total, these funds manage as much as $2.9 trillion and have invested in everything from telecoms to aerospace. However, their entrée into the banking world has been the most impressive. According to a January 2008 report in the Economist, since the start of the subprime mortgage meltdown Gulf-based SWFs have shifted almost $69 billion into Western investment banks. As the magazine notes, “They have deftly played the role of savior just when Western banks have been exposed as the Achilles heel of the global financial system.”

The largest SWFs include the the Abu Dhabi Investment Authority with $875 billion in assets, various Saudi Arabian funds at together $300 billion, Kuwait’s Reserve Fund for Future Generations ($250 billion), Libya’s Oil Reserve Funds and the Qatar Investment Authority (both $50 billion), and Algeria’s Fond de Regulation des Recettes ($42.6 billion).

The common thread among the MENA funds is that the controlling governments are rich in natural resources, whether petroleum or natural gas. With recent oil volatility working to the region’s benefit, sovereign wealth funds have excess liquidity to diversify long term investments abroad and to provide the credit needed in US markets.

In 1991 Saudi Arabia’s Prince Al-Waleed bin Talal bought $590 million worth of shares in Citicorp. Now those same shares would be worth $5.36 billion. With today’s Citigroup offering 7% dividends on shares bought by the Abu Dhabi Investment Authority (ADIA) and others, it is easy to understand why during fallout of the subprime crisis they did not have to go looking for investors. These appealing terms are coupled with the fact that potential investors were fully briefed on the group’s upcoming forth quarter announcements and share prices are half of what they were last summer. In fact, Citigroup is well positioned to raise even more money from SWFs in the region should upcoming earnings reports bring more bad news, as is expected.

Future trends for sovereign wealth funds

In a report on Sovereign Wealth Funds and Bond and Equity Prices Morgan Stanley’s chief UK economist David Miles explained the difference in the amount of risk sovereign wealth funds are willing to take when compared to more traditional strategies. He suggested that because SWFs have vast assets, their investment patterns display a high tolerance to risk. In comparison, the wealth of more traditional governments is invested in foreign exchange reserves and most of that is sunk into low-risk, low-return instruments like government bonds. Miles added that the unusual appetite for risk and the eminent growth of sovereign wealth funds will likely have an impact on the degree of risk tolerance for investors the world round. He noted that should this occur, there ought to be a resultant effect on asset prices.

GRC’s Woertz noted that sovereign wealth funds “… have a lot of money. They have a serious liquidity problem in the sense that they have too much money. They have problems finding investment opportunities for their liquidity, so they will buy in the US but also in other places. They are not satisfied with just buying treasuries anymore.”

Citigroup’s losses prompted a $12.5 billion cash infusion from SWFs like the Kuwait Investment Authority (KIA). This large cash infusion had been preceded by one in November 2007 from the Abu Dhabi Investment Authority worth $7.5 billion. According to the International Herald Tribune, Citigroup Chairman Robert Rubin had made an eleventh-hour trip to secure the KIA funding. However, the bailout might work to the advantage of Gulf investors. If Citigroup’s shares are now at their low point, then its new Gulf investors will benefit in the long term. And the Citigroup deal is not the only one in the making right now. In December 2007 Zurich-based bank UBS received $1.8 billion from an anonymous Middle Eastern investor.

The following month Merrill Lynch saw share sales to the tune of $6.6 billion, bought by various entities in the region including Saudia Arabia’s Olayan Group, the Qatar Investment Authority and the Kuwait Investment Authority.

Where does the region go from here?

The subprime fallout has not caused any disruption on the Middle East markets, nor has it significantly damaged regional firms or banks. What the subprime crisis brought was a credit crunch desperate for foreign liquidity. Regional firms and banks are beginning to fill in the gap. Only in recent weeks have Western bankers begun to realize that Gulf liquidity is going to provide their cash-strapped markets with the funds needed to rejuvenate business projects and economic growth. Bailout by a mixture of institutional and personal investors for both Citigroup and Merril Lynch is just the beginning of a future trend by sovereign wealth funds and petrodollar beneficiaries to supply the capital demands of US and Western markets.

February 27, 2008 0 comments

Comment

Remembering Benazir Bhutto

by Norbert Schiller February 27, 2008

written by Norbert Schiller

After news filtered out from Pakistan that Benazir Bhutto had survived a suicide attack on the day of her triumphant return last October, I knew deep down that if she were to continue her campaign to become prime minister, her chances of surviving until election day were minimal. Pakistan had changed since the last time she campaigned and now the world, and particularly her home country, was far more dangerous than when she began her political career almost 20 years ago. On December 27, 2007, a little over two months after the first attack, she was killed doing what she was good at, getting close to the people.

In the summer of 1988, while a young Benazir was preparing to accomplish what no Muslim woman had done in modern history, I was covering the last days of a brutal eight-year war that began with no warning and was about to end the same way. The day the Iran-Iraq War ended, the few journalists still covering the war, including myself, were caught completely off guard. After a year and a half of being totally immersed in the Gulf conflict, we found ourselves with nothing to do. The agency that I worked for was also at a loss and, after looking around for other news events in the region, decided to send me to Pakistan to cover the elections.

It was hard not to get swept up in the Benazir Bhutto craze. She was young, only 35, beautiful, warm and inviting. And the foreign media could not get enough of her. When she toured the country we camped out in the same places that she was staying and followed her relentlessly throughout her campaign. Her tactics were the same up until the day she died: get as close to the people as possible. Day in and day out we raced around the countryside in 4×4 Pajeros covering her every move. When she reached a village she would stop, open the sun roof and with a megaphone address the crowd gathered around her vehicle. And then she would close the sun roof and race on to the next village. Everywhere we went throngs of supporters would line the way. If someone wanted to kill her back then, there would have been ample opportunity.

Occasionally, I would follow the campaign of her arch rival, Nawaz Sharif, but that was nowhere near as exciting and it seemed that nobody abroad was really interested in him. However, my own lack of interest in him changed after an unusual incident that brought us closer together. While he was taking a walking tour through a part of Lahore and I was back-peddling in front of him, I suddenly fell through an open manhole on the street. He quickly reached down with some of his aides and pulled me out. Noticing that I was covered in blood he stopped his campaigning, summoned his medical team to attend to me and waited in a nearby residence until I was bandaged and fit to continue before he carried on. After that incident, I made it a point to cover his campaign as well.

When it was announced that Benazir Bhutto’s Pakistan Peoples Party (PPP) had swept the majority of seats in the National Assembly I was in Rawalpindi, just south of the capital Islamabad. The city erupted in celebrations and fireworks and it took me hours to get back and file my images at the office in Islamabad.

Shortly after Benazir Bhutto’s election victory I was sent back to Pakistan to cover the South Asian Association for Regional Cooperation (SAARC) summit. This event was to be bigger than normal because the meeting not only brought together all the countries of the sub-continent, but more importantly it was the first time in 16 years that the leaders of Pakistan and India would meet one on one again. The sight of Benazir Bhutto walking alongside Rajiv Gandhi represented a chance for change and reconciliation. The last time such a high level meeting occurred was in 1972, at the signing of the Simla Agreement when Benazir’s father, Zulfikar Ali Bhutto and Rajiv’s mother, Indira Gandhi, had met and agreed to settle all their differences peacefully.

Sixteen years later, a new generation of leaders, part of the same dynasty, was meeting yet again. As before, they agreed never to attack each other’s nuclear facilities, to promote cultural exchanges between the two countries and to eliminate double taxation on international civil aviation transactions. In the same spirit as their parents, Bhutto and Gandhi signed the same vows their parents had done years before.

After only 20 months Benazir Bhutto was removed from office by Pakistan’s then President Ghulam Ishaq Khan over an alleged corruption scandal. She would, however, come back and hold the office a second time between 1993 and 1996.

In a weird twist of fate Benazir Bhutto’s death signals an end to a relationship between India and Pakistan that began in 1972 and was strengthened again in 1988. Benazir’s father, Zulfikar Ali Bhutto, was executed in 1979 after a controversial trial where he was accused of being behind the murder of one of his opponents. Indira Gandhi was assassinated in 1984, and her son was killed in 1991. Sixteen years later Benazir Bhutto would suffer the same fate.

Norbert Schiller’s latest book Arak and Mezze: The Taste of Lebanon was published last month.

February 27, 2008 0 comments

Financial Indicators

Global economic data

by Executive Staff February 7, 2008

written by Executive Staff

Part-time employment as a % of total employment

In 2006 countries showed a mixed percent of their workforce employed as part-time employees. OECD data refers to part-time employment as persons who usually work less than 30 hours per week in the main job (35 hours for Japan). The split which separates those with a large chunk of part-time employees is not easily definable and countries do not share similar economies, policies, histories, or geographic locations. OECD countries oscillate around the group’s total of 16.1%. The Netherlands’ workforce is comprised of the most part-time employees at 35.5%, followed by Australia and Switzerland at 27.1% and 25.5%, respectively. The economy with the lowest percent of part-time labor compared to the total workforce is the Slovak Republic where only 2.5% of employees are considered part-time. Other performers at the low end of the ranking include Hungary, with 2.7%, the Czech Republic, at 3.3%, and Turkey, at 7.9%.

Women as a percent of total part-time employment

Although the preceding graph of part-time employment as a percent of the total workforce did not show any direct trend, the data as it pertains to women is useful for economists, policy-knacks, and company directors as woman seem to overwhelming make up a country’s part-time labor. In fact, all OECD countries see woman as over 60% of their part-time labor. The OECD total of 72.1% is unnaturally high, but perhaps for good reason. Woman are indeed facing new struggles as the nature of employment changes and two people are often needed to support a family. To be there for their children, women must have more free time at home, but while their children are at school during the day, women are able to take on part-time work. Luxembourg’s place as a bustling banking center might likely show favorable employment plans for part-time female professionals, accounting for the European country’s high score of 93.1% for woman as a percent of total part-time employees. Korea, with 58.5% and Turkey, with 58.6%, might rank lower because of traditional values over the woman’s place in a household or at least the man’s place as an owner. The culture of employing women is undoubtably one of pragmatism, which might explain why OECD countries, considered the world’s strongest economies, show such high figures.

Consumer price increases (as %)

OECD annual inflation rates in 2007 remained relatively low, but some developing economies are nevertheless showing the expected hot flashes of a bustling market. The OECD total of 2.4% consumer price increase is dwarfed by Turkey, whose economy is heating up with 10.9%, a number they will need to cool down as they continue talks with EU negotiators over eventual accession talks. The Celtic Tiger Ireland is also showing economic growth’s effects on inflation, where consumer prices have jumped by 5.1%. Besides Japan, which in fact registered a deflation of 0.1%, Europe’s mature economies of France with 1.2%, Switzerland with 0.2%, and Norway with 1.1%, are reporting very stable price increases.

Trillion passenger-kilometers

How mobile are citizens in OECD countries? Very, according to one composite score this accounts for passenger transport on rail, buses and coaches, and private cars. The scores, in trillions of passenger-kilometers, are indicative of how on the move some countries are and how they stack up against others. The US rises far above all other OECD members, with 7.4 trillion passenger-kilometers, perhaps because of the country’s close to 300 million population or because of the “go-go-go” nature of Americans. Japan, with 1.222 trillion passenger-kilometers and Germany with 1.0289 trillion rank second and third among OECD countries. The least mobile citizens come from Greece, Hungary, and the Slovak Republic, perhaps attributed to income, geographic location, availability of transport, or just being content with remaining still.

February 7, 2008 0 comments

Banking & Finance

Hedge funds – Riding the bull.

by Executive Staff February 3, 2008

written by Executive Staff

The Middle East is a well-established routine milk run for international managers of funds and sophisticated financial vehicles. Investable wealth and a regional community of high net worth individuals made for attractions that representatives of international investment houses would eagerly compete for.

Of course, gallant Arab investors have for many years been welcomed also as holders of corporate stakes, be it as buyers into European car makers and chemicals manufacturers in the 1970s, or as rescuers of ventures in distress, such as Paris Disney or Citigroup in the 1990s. In this sense, new international acquisitions by state-backed Arab entities and sovereign wealth funds — one of the most recent being the takeover of 51.4% of New York-based Och-Ziff Capital Management by Dubai International Capital — continue a successful tradition.

Stock markets in the Gulf region and North Africa did not appear to be fully transparent and, until a few years ago, were largely underpowered. Legal regulations on foreign investments were prohibitive in some markets, dubious in others. Foreign funds operators had little expertise and market information was tough to come by, not to speak of other barriers to entry.

Nowadays, however, with economic burdens hanging over the US and other developed markets and investors in search of new safe havens, investments into the Middle East have growing appeal for hedge fund managers based in London and, one suspects, places like Geneva and New York. Executive learned from managers of two major hedge fund groups in London that they are quite bullish on the region which is increasingly covered under Europe, Middle East, and Africa (EMEA) funds.

The Middle East: a natural hedge

The emerging market fund house Baring Asset Management, which manages around $4 billion in EMEA equities both long only and alternatives, has been active in Middle Eastern markets and set up its hedge fund in November 2005. Paul Graham, director in Baring’s alternative business, is very positive on the region’s stock markets, whose performance during the fourth quarter of 2007 he found compelling. “In the third quarter of 2007, Gulf countries put in some very strong returns (when global equity markets were really struggling) so in that sense they are a great hedge. Their intra-correlations remain quite low, particularly when compared to other emerging markets in the EMEA universe where correlations to developed markets have become disturbingly high; the Gulf states have decoupled as it were.”

Graham considers the Middle East very much to be a burgeoning market but still at the very early stages of development. “In five years time, the markets will have changed but it’s a slow process — they’re very deliberate and very slow,” he said.

While this development is important and should not be rushed, it leaves little in the way of current trading opportunities. “The EMEA focused hedge fund environment is still a growing universe and the derivative instruments in these markets are very shallow,” Graham said. “The Baring EMEA Absolute Return Fund takes exposure on an opportunistic basis because quite frankly we can only take exposure to the blue chip names in the more developed markets like Kuwait, UAE, Qatar, Bahrain and Saudi [Arabia].”

Kuwaiti financial services lure hedge funds

Other more nimble hedge fund managers are attracted to the region from an investment perspective and not just as a hedge. Marina Akopian, co-fund manager at Hexam’s EMEA Absolute Return hedge fund that is part of the massive Resolution Asset Management, is very bullish on the region this year. “For us, if you’re talking relative to other markets it’s a clear overweight this year with very strong fundamental reasons attached — oil prices will remain high, strong economic growth will continue and although the region is facing challenges to diversify we think they’re doing it quite well,” she said. Hexam EMEA Absolute Return Fund was set up in August 2006 and is a 50/50 joint venture between Resolution Asset Management and six fund managers headed by Akopian. Currently it manages $25 million and allocates 12% of its fund to the Middle East.

The country exhibiting the strongest GDP growth in 2007 was Qatar (14.2%) and is strongly favored by Akopian, but she also sees opportunities in Kuwait. GDP growth in these countries is translating into the domestic economy. It is a very similar story to what has been seen in Russia recently: the transfer of oil revenues into a domestic consumption and infrastructure boom which will benefit stocks in financial services, construction and telecoms.

And it is perhaps the financial stocks that are most attractive to Akopian but only in certain countries in the Middle East. This year she sees more opportunities in Qatar and Kuwait than in the likes of Lebanon and Jordan. As she explained, “It’s more of a bottom up approach translated into the companies I can find on the stock market. Although GDP growth in Jordan is very healthy (6% in 2007) and things are stabilizing on the economic front, bottom up I don’t see the same interesting companies I can see in Kuwait.”

Of those opportunities in Kuwait Akopian is most drawn to financial services, since a large part of the credit facilities that Kuwaiti residents use are going into this sector, like consumer loans and the purchase of securities.

The outlook, however, is not entirely positive. As Gulf markets have been plagued by inflationary pressures which many Western analysts do not see going away any time soon, currency pegs and interest rate decisions by central banks in the region are on the watch list. Also of note, Arab stock markets last month appeared to be less uncoupled from international trends than desirable from a pure hedge point of view.

There is no question that the interest of hedge funds and asset managers has been awakened by strong developments in Kuwait and other countries with increasing economic diversification. According to a report published by Cerulli Associates, total managed assets in the Middle East at the end of 2007 amounted to more than $1.6 billion. The report focused on Saudi Arabia, Kuwait, Bahrain, Qatar, Oman, the UAE and Egypt. Most notable in the report was its forecast for mutual fund growth, which it predicted to expand by $100 billion in five years to $200 billion. Hedge funds are not the ones to miss an opportunity and their interest will be roused further when see more diversified and deeper markets in which to trade.

February 3, 2008 0 comments

Banking & Finance

IPO Watch – Enthusiasm remains

by Executive Staff February 3, 2008

written by Executive Staff

Companies based in the Middle East and North Africa raised close to $15 billion in 2007 through initial public offerings (IPO), according to statistics from Zawya Investor. This equals almost 6% of the global IPO market which raised around $255 billion by the end of November 2007. According to a report published by Ernst & Young in early December, this IPO performance for the incomplete year already has surpassed the previous full-year record of $246 billion set in 2006. Analysts say it is good news because it shows a new spirit of innovation in the region and a continued momentum by local companies to become global players.

But wait, what about fears of a recession in the US and a global slowdown, uncontrollable swings on global stock markets and tightening credit conditions across the world. Would this perhaps create a sense of pessimism about the year ahead for the Middle East IPO market? The nervousness of investors showed in reported requests to postpone the trading debut of PetroRabigh, the Saudi petrochemicals joint venture between Saudi Aramco and Japan’s Sumitomo Chemical Co. A $1.2 billion IPO for 25% of the company was covered 3.48 times by demand in early January, especially from retail investors who subscribed at an issue price of $5.60 per share.

As petrochemical stocks suffered in the Saudi Stock Exchange market scare on January 20 to 22, Saudi media wrote of requests by retail investors who asked to delay the start of trading because they feared losses if the stock came in on negative sentiment — but when PetroRabigh shares started trading as originally scheduled on January 27, they opened at $11.50 and closed the first day at $13.90.

Given that the outlook for the largest stock markets remains jittery and whole choruses of US economic experts are singing opposing chants on the are-we-in-recession question, it would be unfair to ask for a consensus on the IPO expectations in Arab countries during 2008. There are reassuring signs such as the PetroRabigh story but there also are justifiable reasons to see the IPO mill grinding slower than some might think. In a massive hint at the length of time which some of the highly touted IPOs of state-owned corporate gems could take, the chairman of UAE carrier Emirates Airlines, Sheikh Ahmed bin Saeed al-Maktoum, said in an interview that a flotation should be expected up to two years after government approval of partial privatization through IPO. Last autumn, media reports quoted top managers at the airline that a huge Emirates IPO would happen in the first quarter of 2008.

Some regional research houses and market experts continue to support an optimistic outlook and claim that 2008 is set to be another record year citing a flurry of new IPO announcements in January which flooded the halls of the region’s stock markets — generating excitement not just for local investors but also for foreign ones.

Saudi Arabia, which boasts the region’s largest stock market, through the Saudi Capital Market Authority (CMA), announced two new IPOs with a combined value of $4.5 billion. Inma Bank, the country’s Islamic development bank, will be offering a whopping 1.05 billion shares or 70% of its capital in an IPO between April 7 and 16. With Samba Financial Group as the lead manager, the share price will be set at $2.67 for a total value of $2.80 billion.

CMA also announced that Zain Saudi Arabia, a subsidiary of Kuwait’s biggest mobile operator, Zain Group, will float 700 million shares or 50% of the company’s capital to the public from February 9 to 18. Share price will be set at $2.67 for a total value of $1.86 billion.

Meanwhile, the UAE had promised more IPO action for 2008. But in January, only two announcements were made. The first being Damas, the UAE’s largest jewelry chain, said it has confirmed plans to launch an $272 million IPO in the first half of 2008. Although the venue of the listing has not been confirmed, sources say the company will list on the Dubai Financial Market and possibly a dual listing on a foreign exchange as well. The second firm is DEPA United Group, which said it will launch a $500 million IPO in the second quarter of 2008. The joint lead managers for the interiors contracting company are Morgan Stanley and UBS. The company is expected to list on the DIFX.

Moving to the North Africa, the number of scheduled IPOs in Morocco for 2008 is expected to be around 10 on the Casablanca Stock Exchange, according to BMCE Capital Bourse. One of the largest rumored so far is the Chaabi Lil IskaneChaabi Lil Iskane real estate firm which is expected in the second quarter of 2008. Another potential for second half of 2008 is Delta Holding while Credit Agricole Morroco, will float its shares at the end of 2008.

Whether the region’s stock markets can ride out the storm of a global slowdown and a US recession is a question on the minds of many investors. The answer isn’t clear, but given the unprecedented high oil prices and economic liberalization across the region, substantial growth in all major sectors and unheard of interest in the region by foreign investors, observers who spoke to Executive said that local stock markets in general and the IPO market in particular, will continue to flourish in 2008. They claim that the turbulence in the US markets has not dampened the enthusiasm or the development drive in the region. The say that even if oil prices drop by $20 in 2008 the MENA region will continue to experience significant economic growth for many years to come.

February 3, 2008 0 comments

By Invitation

Authoritarian CEOs are out, inclusive CEOs are in

by Bahjat el-Darwiche & Rabih Abouchakra February 3, 2008

written by Bahjat el-Darwiche & Rabih Abouchakra

CEOs today must work cooperatively with a variety of stakeholders, including proactive boards, involved investors and other vocal constituencies.

There has been a dramatic shift over the past decade in the role of the CEO in corporations across the globe. The time of the “authoritarian” CEO, who roamed the corporate landscape not so long ago, has passed, as we enter the era of the “inclusive” chief executive officer.

Whereas Authoritarian CEOs answered only to themselves, the power of today’s CEO is not as absolute: Boards of directors are becoming more critical and more closely involved in setting strategy, and are far more likely to insist that CEOs deliver acceptable shareholder returns and demonstrate ethical conduct. Boards are increasingly prepared to replace CEOs in anticipation of disappointing future performance, instead of merely as punishment for poor past performance. At the same time, large shareholders like private equity firms are taking a more active role in decisions that were once the sole purview of the CEO.

The emergence of this more demanding environment has accelerated CEO turnover. Our recent studies reveal that annual turnover of blue chips’ CEOs across the globe increased by 59% between 1995 and 2006. In those same years, performance-related turnover — cases in which CEOs were fired or pushed out — increased threefold. Whereas, in 1995, only one in eight departing CEOs was forced from office, last year, nearly one in three left involuntarily.

This new era will require new skill sets and impose new responsibilities on both chief executives and board members. Today’s inclusive CEOs must be willing to engage in dialogue with investors, employees, and government; to surround themselves with managers and advisors who complement their own capabilities; and to maintain transparency in their communications about financial results and compensation.
Boards are adapting

The last decade has witnessed two fundamental shifts in the ways corporate boards address CEO selection and oversight: Boards are becoming less tolerant of poor performance, and they are increasingly splitting the roles of CEO and chairman.

Our research shows that CEOs who deliver below-average returns to investors don’t remain in office for long. Last year, a CEO in North America who delivered above-average returns to investors was almost twice as likely as one delivering sub-par returns to remain CEO for more than seven years. In contrast, in 1995, CEOs who delivered substandard returns to investors were just as likely to achieve long tenure — a perverse situation that reflected the durability of the Authoritarian CEO. The Middle East is catching-up fast with global CEO turnover rates as rapid-growing economies are bringing new pressures to corporate management and governance in the region.

The other major trend has been in governance, with both a shift toward separation of the roles of chairman and CEO and a shift toward chairmen who haven’t previously served as a company’s CEO. Splitting the roles of CEO and chairman while the former CEO stays on as chairman is a bad idea for three reasons: First, knowing that the former CEO will remain involved as chairman sometimes leads the board to embrace a candidate who was a great number two, but who’s unlikely to become an effective CEO; second, most chairmen who were CEOs protect their protégés, reducing the likelihood that the new CEO will be fired for poor performance; and third, some chairmen who weren’t really ready to give up their executive responsibilities go to the opposite extreme, firing their successor at the first sign of trouble and reassuming the chief executive position.

Inclusiveness, engagement, and involvement

With the board of directors more deeply engaged and owners actively involved in governance and strategy, inclusiveness is the most critical new attribute for the CEO, starting with the ability to take into account the concerns and suggestions of investors, employees, and government. Given the unrelenting pace of change in global business today, stakeholders may see threats and opportunities sooner than the board and management team do. Listening to stakeholders increases the likelihood that a company will act quickly and effectively.

Transparency about results is another indispensable element of inclusiveness. Several CEOs have been dismissed in the last few years because of inadequate transparency — with regard to both the board and shareholders — about their compensation.

Including board members in the development of strategy — not merely asking them to approve a strategy developed by management — is the best way to gain the board’s confidence and buy-in. It’s an effort well worth making: Board backing is invaluable to CEOs who may face investor challenges while waiting to see if a new strategy will pay off.

The board of directors, in turn, must embrace deeper engagement. Because of intensifying global competition and ever-higher expectations about corporate performance, companies now need the board of directors to proactively offer suggestions, to debate threats and opportunities, to push back aggressively if management is heading in the wrong direction, and to make informed judgments.

Deep engagement requires directors to participate in dialogues with customers, channel partners, suppliers, and employees — not different in concept from the traditional role of the ideal director, but completely different from the usual practice. These dialogues in turn require directors to devote time beyond the quarterly board meetings, probably earning compensation greater than what they receive today.

Involved investors are also becoming the norm. Authoritarian CEOs survived because investors weren’t actively involved in the governance of publicly traded corporations, limiting themselves to selling off stock when they lost confidence in a company’s CEO. Today’s involved investors include not only members of family-controlled businesses, but also private equity buyout firms, raiders, and hedge funds that take a stronger hand in the actual running of the companies they’ve invested in.

New era challenges

Going forward, boards of directors will need to encourage constructive disagreement and debate, abandoning consensus habit as a vestige of the authoritarian age. They must also be proactive in grooming and retaining a sufficient bench of candidates for the chief executive position, and be creative and adaptable in searching for outside CEO candidates when necessary. In addition, they’ll have to address such new-era governance challenges as balancing the interests of active institutional shareholders — hedge funds and buyout firms, for example — against those of other investors.

This new age of corporate governance is still taking shape, with many of the rules of the new era still unclear and some probably yet to be written. What is clear is that all the constituencies interested in the health and welfare of the corporation — CEOs, boards of directors, investors, consultants, regulators, legislators, and the business press — should say goodbye to the era of the authoritarian CEO and prepare for change.

Bahjat El-Darwiche and Rabih Abouchakra are principals at Booz Allen Hamilton

February 3, 2008 0 comments

By Invitation

Global footprints of sovereign wealth

by John Defterios February 3, 2008

written by John Defterios

The last month will likely go down in the financial record books as the one which redefined how the world looks at sovereign wealth funds (SWFs). It is also part of a bigger geo-economic shift underway, which lends itself to the East-East moniker, meaning the wealth and trade belt from the Middle East to China.

While we have been covering the power of these government funds, where they are seeking to make a mark and the new emerging players within this space, it is only now that these funds are flashing on the global radar.

It is challenging to get hard figures on the total government investment funds under management, but there are a handful of Western banks attempting to do so. Standard Chartered Bank places the value at around $2.2 trillion dollars. I personally think this is off the mark since the Abu Dhabi Investment Authority may have more than half that amount itself.
SWFs — Big & Getting Bigger

$2-3 trillion dollars in assets

$10-15 trillion dollars by 2015

Bigger than private equity

(source: Standard Chartered, Morgan Stanley)

More eye-popping clearly is the path ahead. If oil stays in the range of $60-$80 a barrel over the next five years, the amount will surge to $10-$15 trillion. To provide some context, the current sum is already bigger than the global private equity pool, which made all the headlines in the past two years with record buyouts.

Is this a new phenomenon? Certainly not. The Kuwait Investment Authority (KIA) can trace its roots back to 1953; the Abu Dhabi Investment Authority (ADIA) to the mid-

1960s. While they traditionally deployed assets in government bonds and currencies, that trend has changed over the past five years and accelerated in the last six months.

Chris Wheeler, banking analyst at Bear Sterns, points to global wealth surveys to illustrate the point that liquidity from record oil prices has to find a home. “A lot of excess funds are being generated which the SWFs are having to invest somewhere and they are finding interesting opportunities in difficult times in the banking sector.” Wheeler, like many others, believes the often talked about recession in the US will lead them to more bargains in other sectors.

This must sound familiar. Saudi Prince Al-Waleed bin Talal bought stakes in Citigroup back in 1991 at the equivalent of $2.75 a share. Even at the mid-twenty range it is today, he is (excuse the cliché) smiling all the way to the bank. He obviously thinks this latest downturn created a similar opportunity and so did others who jumped in this week. They are not traders, but investors who hold their stakes for years, sometimes decades.

Like the financial markets, which create buyers and sellers, this market and story will continue to evolve. One of the newer players on the scene, the Qatar Investment Authority, will re-emerge after its participation in the bid for UK supermarket giant J. Sainsbury, and Mubadala of Abu Dhabi has recently put itself on the map with its stake in investment banker The Carlyle Group.

G-8 Wish List

Invest on commercial grounds

Respect national transparency rules

Compete with private sector fairly

(source: OECD, IMF)

As the old and new sovereign funds begin to compete for Western assets, G8 countries are attempting to establish investment standards for all this capital. The US Treasury Department has lobbied to have the OECD, the Paris based think tank for industrialized nations, and the International Monetary Fund in Washington put forth guidelines for best practices and greater transparency.

That effort gathered momentum a few months ago, but the calls for concrete action have faded away, as the need for capital infusions on Wall Street rose rapidly.

The World Economic Forum in Davos provides a good opportunity not only for us to talk to the Middle Eastern and Far Eastern players making waves in global financial markets, but also to those who are trying to regulate their actions.

John Defterios is the presenter of CNN’s Market Place Middle East.

February 3, 2008 0 comments

By Invitation

Cheer up – the Arabian real economy steams ahead

by Imad Ghandour February 3, 2008

written by Imad Ghandour

As I am writing these words, stock markets around the world are witnessing one of the most dramatic free falls in their history. The subprime problem is now snowballing to become a global recession. Banks are hesitant to even lend to each other. Central bankers are panicking. The Federal Reserve dropped its benchmark discount rate by 0.75% — the largest single drop in seven years.

Despite the talk of gloom and doom, I am cheerful.

The markets back in 2000 were hit by the burst of the technology bubble, and then in 2001, they were slammed again by the 9/11 attacks. Thereafter, economic growth slowed considerably. But for private equity, investments made after 2001 yielded excellent returns. As valuations plummeted from their 2000 highs, private equity players in US and Europe were able to close deals post-2001 at bargain prices. The graph below shows CalPers (the largest investor in private equity funds) returns on its private equity portfolio by fund closing year (also known as “Vintage Year”).

Arabia will not be insulated from the black clouds that will be downing on the world financial markets over the next months and years. The reaction from the regional stock markets on Monday, January 21, confirms that Arabia is not as decoupled from the global economy as some people like to think. Even the super-insulated Saudi stock market, Tadawul, dropped by more than 20% over the course of several days.

Yet the Arabian real economy will continue to steam ahead despite hiccups in some sectors. The financial sector will be affected by the global turmoil, but less so than other regions in the world. Real estate may also be affected as global, and even regional, financing sources dry up. Transportation and logistics growth will also slow down as growth of transit shipments and passengers from east to west will be influenced by the probable recession in the US and Europe.

The biggest question will be to what extent oil prices will drop in the wake of a global recession, and consequently, whether oil may drop below $50 a barrel. Oil prices are the biggest determinant of Arabia’s economic growth. Psychologically, they form a leading indicator of GCC economic outlook. They are the main source for financing governments, which are still the main economic drivers for the economy as a whole. Fortunately, GCC governments have accumulated huge reserves, and they will be able to easily weather any short-term drop in oil revenues.

Going back to private equity, the next few months will be difficult for all financial players. But as private equiteers come to grips with the consequences of the downturn, and as new realities settle in, the playground for private equity players in the region will be even greener. On one hand, as a result of dropping oil prices, stock markets’ downturn, and gloomy global economic prospects, valuations will be beaten down to reasonable levels. The market will shift to become more balanced, after being under the mercy of the sellers. Secondly, liquidity, although not easily accessible, will not evaporate. Whatever the severity of the global recession, the region still exports daily $700 million to $1 billion worth of oil. Furthermore, governments’ reserves will continue to trickle down to the rest of the economy — sustaining corporate profits and public investments. Last but not least, global funds will realize that growth in Arabia is more robust than in other regions, and hence, the theory of “Arabia is negatively correlated with the rest of the world” will translate into a shift towards further investment by global institutional investors in Arabia’s stock markets and funds. But this will probably happen after the recession settles in.

Be ready for a tumultuous 2008. Remember: Luck favors the prepared and the courageous.

Imad Ghandour is the chairman of the Information & Statistics Committee Gulf Venture Capital Association.

February 3, 2008 0 comments

Capitalist Culture

The American Empire – Contemplating isolation.

by Michael Young February 3, 2008

written by Michael Young

One of the more interesting subtexts of the presidential campaign in the United States has been the debate over whether the nation should withdraw from most of its foreign entanglements. The issue has not been at the center of voters’ concerns, however it has hit a nerve among them, because the proposal comes at a time when the US is bogged down in Iraq and is uncertain about its role internationally.

The candidate who has gotten the most mileage out of this is the libertarian Republican Ron Paul. He has situated his foreign policy aims between the twin goalposts of the ideas expressed by America’s Founding Fathers and a defense of state sovereignty. As his campaign website explains: “Both [Thomas] Jefferson and [George] Washington warned us about entangling ourselves in the affairs of other nations. Today, we have troops in 130 countries. We are spread so thin that we have too few troops defending America […] We can continue to fund and fight no-win police actions around the globe, or we can refocus on securing America and bring the troops home. […] Under no circumstances should the US again go to war as the result of a resolution that comes from an unelected, foreign body, such as the United Nations.”

Paul’s “republican fundamentalism” — the partial return to the principles of the republic of the late 18th century — is hardly new. Partly that’s because the Founding Fathers sought to achieve the right balance between liberty and stability, and that discussion is ongoing in a country where state power has reached troubling levels. Foreign entanglements, the early leaders of the republic felt, would not only force the US to pursue the more authoritarian (and implicitly more corrupt) ways of “old Europe”; it would, in effect, oblige Americans to behave like a continent from which separation had been a major factor in forging the US national identity.

Much like the Europeans, the US participated in the race for empire at the end of the 1800s and into the early 1900s. With the US the strongest world power after World War II, the republic’s internationalists (after an initial period of American retreat) defended extended American participation in world affairs. That logic was used to justify the open-ended, global commitment to fighting Soviet power that developed into an international cold war.

Whatever one thinks of American “republican fundamentalists”, and they have long served a valuable role in defining the necessary limits to state power on issues of domestic civil liberties, it’s not clear how realistic their views are when applied to the world today. There is also something remarkably self-centered in their advocacy of liberty at home next to their abandonment of that principle — behind a wall of sovereignty — overseas.

The Middle East is the ideal place to test the theory of American retreat from foreign entanglements. One can make a good case, for example, that advancing democracy by force is a mistake, and that argument has been often used to condemn the Bush administration’s policies in Iraq. Yet at the same time, it is true to say that Arab authoritarianism has been one of the most significant reasons for the expansion of militant Islam — in some cases, as 9/11 showed, a militant Islam that can wreak havoc against the US. If so, doesn’t American respect for the sovereignty of its Arab partners risk provoking blowback against the American homeland?

Paul’s campaign argues: “Too often we give foreign aid and intervene on behalf of governments that are despised. Then, we become despised.” That’s true. But it’s equally true that the US is often despised for not intervening. One could paper the sky with articles written by Arab critics of the US who unfailingly urge Washington to resolve everything from the Arab-Israeli conflict to Arab economic underdevelopment. It’s a case of America being damned if it does and damned if it doesn’t, and the republican fundamentalists have few real solutions to that conundrum.

There is also the matter of stability. Could the international system absorb the shock of a significant American retreat? What would happen in the Korean peninsula if the US pulled its soldiers out? Or Afghanistan? Or Iraq? What would happen if America’s refusal to “get involved” led to actions with a negative impact on global markets and the international financial system? As historians have long recognized, throughout history empires, good or bad, have helped stabilize the international system. As the Scottish historian Niall Ferguson has argued, the US is an empire, whether Americans like it or not, and must embrace its role as defender of a stable liberal political and economic international system, much as the British Empire did during the 1800s.

Not surprisingly, Ferguson is advising John McCain, Paul’s rival for the Republican nomination. That only shows the diversity of opinion within the same political party and how the destiny of the US continues to be a source of considerable national disagreement.

Michael young

February 3, 2008 0 comments

Comment

Trousers down, arms up!

by Paul Cochrane February 3, 2008

written by Paul Cochrane

Over the last few months work and pleasure have taken me from India via the Middle East to Europe and onto North America. That’s a lot of flying, and a lot of security checks.

Out of all the airport security I encountered, it was Western airport security — unsurprisingly — that was the most invasive. It was also the most pointless, despite the rhetoric that it supposedly makes us “feel safer” and that it is necessary to thwart the terrorist threat by having to queue for hours, then shuffle through the metal detector in your socks while holding up your belt-less trousers — after, of course, quaffing whatever drink you accidentally had in your bag.

The biggest irony is that the Middle East (bar Jordan), that hotbed of terrorism and conflict, is one of the easiest regions on earth to pass through airport security. Equally puzzling is why, after nail clippers and a can of shaving cream are removed from my hand luggage in Europe and the States, I can waltz onto the plane with a glass bottle of duty free whiskey — nay hard to smash the bottle of booze and stab someone with, if one was so inclined.

Then there is the idiocy of some of the items given onboard — metal cutlery that could be turned into what the prison community calls a “shiv,” as well a set of headphones that could easily be used as a garrotting wire.

After all, what’s the point of taking away nail clippers? Threaten the stewardess with the forcible clipping away of her finely manicured nails? “Open the cockpit or her nails geddit!”

As a friend once remarked, the most dangerous thing a passenger has is their hands and legs — the limbs of a well-trained martial artist for instance. A ballpoint pen is equally dangerous, as the mob film Casino graphically illustrated when a man is repeatedly stabbed in the neck with a writing instrument.

A vivid imagination as well as Hollywood can give a wannabe killer a lot of ideas, but that is not the point. The point is that there are innumerable ways to kill someone and provoke terror, and there is not much even the tightest security can prevent — just ask a warden at a maximum-security prison about his experiences.

That said, security is of course necessary, but to what degree?

As the head of Lebanon’s Civil Aviation Authority, Hamdi Chaouk, told me, “Technology is so advanced they don’t need to do this, stripping and removing shoes. The EU has not been able to compromise on what people need and security. Who can tell me this security has done something?”

Well, unfortunately, no one can. A team at the Harvard School of Public Health recently found no evidence that X-raying carry-on luggage prevents hijackings or attacks. They also found no evidence that making passengers take off their shoes and confiscating small items prevented any incidents. In fact, of the 13 million seized items by the United State’s Transportation Security Administration last year, most of the prohibited items were nail clippers and cigarette lighters, not guns or explosives tucked inside someone’s socks.

So why all the inconvenience to get on a plane? (While not on a bus or a train?)

It strikes me that the billions of dollars now being spent on security is a great way of making money and creating jobs. Indeed, at New York’s JFK International Airport, seven people were needed to process one line, from the X-ray machine to the pat-down, to the swabbing of laptops. Furthermore, the cosmetics and water bottling sectors (as well as the nail-clipper industry) must be rubbing their hands with glee due to the increased sales that result from the need to replace everything removed from passengers.

But let’s not be flippant. Security is no laughing matter. It’s a $59 billion a year business that by 2015 is set to treble worldwide to $178 billion, according to industry tracker Homeland Security Research. And that prediction is all dependent on another grandiose 9/11 terrorist style attack not happening. If a major attack occurs in the United States, Europe or Japan the security market will increase twelve-fold by 2015 to $730 billion, with the USA accounting for 42% of that expenditure.

That’s good news for the security sector. But the saying “one man’s gain is another man’s loss” is also applicable here. Although some undoubtedly profit from the whole security rigmarole, a report has estimated that for every 624 million passengers that each spend two hours a year waiting in line, the annual loss to the economy is some $32 billion. Furthermore, additional security expenditure means costs are passed down to passengers. It’s no surprise then that people are opting to travel by car, train, boat and bus instead, which is not good news for the airline sector, already hit by rising fuel prices.

So for the benefit of everyone, it should seem a no-brainer that airport security should be taken much more seriously, not for the time consuming joke it currently is.

PAUL COCHRANE is a freelance journalist based in Beirut. For his next trip to Europe or the States he is mulling the option of going by sea.

February 3, 2008 0 comments