ON THE RIGHT PATH
By Gordon Platt
For the Gulf Cooperation Council (
), there have been setbacks on the road to a common currency, which
now appears unlikely to be introduced anytime in the next five
years, but progress in developing world-class capital markets in
the Arab Gulf is happening at an accelerating pace. The eurozone
crisis is reason enough for the GCC states to pause for reflection
about the lessons to be learned from Europe's debt problems before
plunging ahead with plans to unify what has until now been a fairly
loose economic and political bloc. Meanwhile, in the seven years
since Saudi Arabia created its Capital Markets Authority, the
kingdom has made significant advances in the way its markets
operate and their accessibility to global investors. Bahrain, Qatar
and the UAE have all made strides in creating modern financial
centers. The Kuwaiti financial sector came under great stress
during the global financial crisis, but it has recovered, and the
country is moving ahead with plans to create a regional financial
and trade center. Oman, which has hosted many annual summits of the
GCC, is helping to link the region with the fast-growing markets of
India and China.
The relatively young Islamic finance industry is benefiting from
global demand for an ethical form of investing. After nearly three
years of deliberations, the first globally standardized master
agreement has been published for privately negotiated Islamic
hedging products. It will take time for the agreement to be
universally accepted, but it represents a major breakthrough in
Islamic financing and risk management. Shariah, or literally "the
path to the well," is getting more crowded.
The economy of Dubai will continue to struggle due to overbuilding
in the property sector and the initial mishandling of the Dubai
World debt crisis. A recent restructuring agreement has helped to
clear the air, and a new sense of realism and traditional Arab
prudence is coming to the fore. A new legal and regulatory
infrastructure is being put in place. It is exciting to contemplate
how far the GCC financial markets will advance in the next three to
Frontier markets crack the door open for global
The six member countries of the Global Cooperation Council (
) are opening up gradually to global investors and attracting
growing amounts of foreign direct investment (
). However, the oil-rich countries of the Arab Gulf are still
classified as frontier markets, and in the eyes of many
institutional investors, this makes them more risky than emerging
markets, despite their high GDP per capita ratios.
If any of the GCC countries-Saudi Arabia, Qatar, Bahrain, Kuwait,
the United Arab Emirates (UAE) and Oman-were to be upgraded to
emerging markets status by New York-based MSCI, they could attract
significant new inflows from investors who benchmark the MSCI
Global Emerging Markets Index. Qatar and the UAE were under review
this year for a potential reclassification to emerging markets.
Following discussions with the investment community, however, MSCI
announced in June that these two countries would have to wait for
at least another year, along with South Korea and Taiwan.
In the case of the UAE, the recent economic and financial turmoil
may have slowed progress toward introducing a planned increase in
foreign ownership limits and a true delivery-versus-payment (DVP)
settlement model, MSCI said in a release announcing its decision.
Investors are hopeful that there won't be any further delay, it
said. "Investors would also welcome a public road map from the
regulator and the exchanges providing visibility on the timetable
for implementation of these changes," according to MSCI.
In Qatar, much as in the UAE, global investors need to create
separate custody and trading accounts and shuttle assets between
them because local brokers have unlimited access to the trading
accounts. This issue needs to be addressed to meet emerging markets
standards, MSCI says.
Most of the GCC markets meet the size and liquidity requirements to
be upgraded. "However, the need to set up and operate with a
dual-account structure is still a major concern to a number of
international institutional investors and is incompatible with
general emerging markets standards," MSCI says.
Still, investors are eager to participate in the growth in the
region, where oil and gas revenues are fueling government spending.
"GCC governments have implemented a variety of measures to boost
private-sector activity and encourage foreign investment, and their
success in this has been recognized by a number of surveys that
rank global business environments and competitiveness," says Keith
Savard, director of economic research at Riyadh-based Samba
Financial Group. "More significantly, foreign direct investment
into the region has surged over the past five years," he says.
The World Investment Report 2009, published by the United Nations
Conference on Trade and Development, measured Saudi Arabia's FDI
inflows to be the 14th largest in the world and the highest in the
Middle East and North Africa (
The World Bank rates Saudi Arabia as the easiest place to do
business in MENA, and number 13 in the world. Among Arab countries,
Saudi Arabia is the easiest place to register property, get credit
and start a business. It also offers the world's most competitive
energy prices to investment projects. All six GCC countries score
in the top 50 of the World Economic Forum's Global Competitiveness
Qatar, the fastest-growing country in the GCC, could realize growth
in real GDP of about 16% this year, says R. Seetharaman, CEO of
Doha Bank. "Fiscal policy has played a critical role in cushioning
the impact of the global crisis on the region and in supporting its
recovery," he says. Qatar, which has budgeted the price of oil at
$55 per barrel in the current fiscal year, ending March 31, 2011,
plans to increase spending by 25%.
Qatar's real estate market has remained stable and reliable,
Seetharaman says. "The government is spearheading efforts to create
more opportunities beyond the oil and gas sector," he adds. These
include the Qatar Financial Center, Education City and Sidra
Medical and Research Center, as well as free-trade areas, such as
Qatar Science & Technology Park. Projects such as these can
stimulate demand in the office market, Seetharaman says.
Economies on Steady Footing
Oil prices have adjusted to the possible impact of lower growth in
European countries that have adopted austerity measures to reduce
their budget deficits, says Ali Shareef Al-Emadi, group CEO of
Qatar National Bank (QNB). "Thus, for the time being, unless
Europe's debt problems get worse, the economies of the GCC
countries will not be affected should oil prices trade in the
region of $60 to $70 per barrel," Al-Emadi says.
QNB's first-quarter 2010 earnings rose 25.3% from the same period a
year earlier, with loans and customer deposits each growing by 44%.
"The results reflect QNB's strong ability to capture the rising
demand for credit from large corporations and government agencies,
which was evident from the last quarter of 2009," Al-Emadi says.
"The growth in the first quarter also reflects the somewhat
moderate growth in the first quarter of 2009, when we were in the
midst of the world financial crisis and risk averseness was high
and loan demand was weaker."
The big companies, government agencies and semi-government agencies
that are the primary beneficiaries of record government spending
are clients of QNB. "Given our leading position among Qatari banks
in dealing with these institutions, we stand to benefit the most,"
Al-Emadi says. "QNB is able to accomplish this given the strong
capabilities of our corporate team, the fast turn-around time in
structuring deals, along with our large funding capacity."
QNB Capital, the bank's investment banking arm, was established
three years ago and offers a wide range of services. It was joint
lead manager and bookrunner for Qatar's successful sovereign bond
issues last year, including a $7 billion offering in November. In
addition, it was joint lead manager and financial adviser for the
$1 billion initial public offering of Vodafone Qatar, the region's
largest IPO during 2009. QNB is also providing financial advisory
services on the Shard of Glass project, which is constructing
Europe's tallest mixed-use building on the south bank of the Thames
Meanwhile, the bank is continuing its international expansion. "The
expansion plans for 2010 call for further solidifying our presence
in key markets in which our operations are witnessing strong
growth," Al-Emadi says. "That includes Sudan, Syria and Oman, where
additional branches are to be established during the year."
The sovereign debt problems in Europe indicate that the road to a
solid world economic recovery will be long and challenging, says
Adel El-Labban, chief executive of AUB Group and managing director
of Ahli United Bank, based in Bahrain. With oil prices still well
above the levels factored into the budgets of GCC nations, and with
the focus shifting slowly to government-sponsored infrastructure
projects, the GCC economy is likely to consolidate in 2010, before
reviving from 2011 onward, he says. Latin America and Asia are
currently fueling global demand for oil, he adds. "However, if the
European crisis turns uglier, the region will be impacted by the
contagion effect of such a crisis," El-Labban says.
"There is still a lot of dust in the air in the GCC, which makes it
difficult to accurately value a company," he says. There will be
some deal activity as a result of reduced valuations, but extreme
caution is required, particularly in relation to real estate
assets, El-Labban says.