Norton Rose Survey on Middle East Lending

You may have seen some references to this survey in press articles.

The Middle East survey, which really seems to be focused primarily on the UAE and the GCC, is part of a larger NR global survey "Global Financial Recovery:  A Matter of Perspective".  The ME Section is pages 58 through 64.

As with all exercises of this sort, it's utility is a function of the selection of the group asked to participate and then those who actually did.

MEED MENA Real Estate Report

حقل الأحلام الكويت

If you build it, he may not come after all.

 

AlQabas has a summary of a recent Middle East Economic Digest ("MEED") report.

Pretty much the report can be summarized in the table below.

CITY	Median Office Rent Per Square Meter	Average Commercial Vacancy	Median Residential Monthly Rent
Abu Dhabi	$51	3%	$3,500
Amman	$16	10%	$   800
Cairo	$39	0%	$   800
Doha	$50	20%	$3,000
Dubai	$38	38%	$1,900
Jeddah	$25	10%	$1,000
Kuwait	$42	40%	$2,000
Manama	$24	10%	$2,000
Muscat	$23	5%	$1,110
Riyadh	$33	20%	$1,500

 

As mentioned in the article, it's important to remember that these are median rates for a city. There may be more than one market in a city. So, for example, Shaykh Zayed Road may be booming in Dubai with strong occupancy and rental rates, while other areas are really depressed.

On that latter score, I'd invite my Arabic reading audience to comment if I've translated the terms معدل and متوسط correctly. I'm reading these to be Arabic for the statistical terms "mean" and "median" respectively.

And finally anyone who'd care to comment about the rental rates.

DFSA Calls for Audit Improvements

Apparently heeding the comments of  The Rageful Cynic on this blog,  Paul Koster, CEO of the DFSA called for improvements in local auditing as reported by Tom Arnold at The National.

“Are auditors doing enough in that respect? I don’t think so,” said Mr Koster. “I think one of the key areas where auditors right now can gain momentum in the level of trust they provide to the financial market is to increase the level of scrutiny and scepticism in regard to the judgement of management in valuations.”

There's the usual commentary as well about the  need for auditors to get more training so they can understand complex financial instruments.

But the most telling quote of all is at the end of the article.

Auditors speaking to The National have previously accused Gulf companies of using similar accounting practices to mask bad assets and called for greater safeguards to avoid such methods.

Accounting in the GCC is based on IFRS which is a principles and not a rules based approach (the latter being the system in the USA).

Under a rules-based system, the accountant and auditor merely ticks the boxes.  If enough boxes are ticked, the transaction passes the test.  Form may over rule substance.

Under a principles-based accounting system, accountants and auditors are to look behind the form of a transaction to the substance.  The Lehman Repo 105 was a very clear scheme to get around the rules.

That local auditors are whining about violations and doing nothing to stop their clients is a very clear indication that the problem isn't training.  It isn't greater skepticism (or scepticism).  It isn't a lack of scrutiny.  

Very simply put, it's a lack of professional ethics.

Insights into the GCC Markets from Markaz’s “Golden Portfolio” Report

In April 2008, Markaz issued its first report on the "Golden Portfolio" – the various stocks held by GCC government owned enterprises ("GOEs"). On 7 September it updated its analysis with data as of 5 July 2010.

The report tracks the holdings of 51 GCC GOEs in GCC stock markets.

The following two charts summarize the macro snapshot (original chart on page 2 of September 2010 report).

First, the number of companies in which investments are held.

COUNTRY	NUMBER OF GOEs	NUMBER OF COMPANIES HELD	TOTAL NUMBER OF COMPANIES	PERCENT
Saudi Arabia	10	47	140	33.6%
UAE	10	29	110	26.4%
Qatar	8	18	45	40.0%
Kuwait	10	42	194	21.6%
Bahrain	9	20	44	45.5%
Oman	14	23	127	18.1%
TOTAL	51	179	660	27.1%

Second, the value held expressed in US$ billions.

COUNTRY	VALUE OF GOE INVESTMENTS	TOTAL VALUE OF MARKET	PERCENT
Saudi Arabia	$109.7	$314.6	35%
UAE	$ 28.3	$ 97.2	29%
Qatar	$ 26.0	$ 97.7	27%
Kuwait	$ 11.7	$ 90.9	13%
Bahrain	$ 3.5	$ 16.4	21%
Oman	$ 2.7	$ 16.7	16%
TOTAL	$182.0	$633.5	29%

This data gives an idea of the relative government presence in local markets. It also shows the relative sizes of markets.

But if you drill deeper into the information on the country tables, what you learn is that: 

1. In Saudi Arabia, 5 companies held by GOEs account for 38% of total market cap. One company SABIC over 21%. 
2. In the UAE, 5 companies held by GOEs for roughly 42% of market cap. One company, Etisalat, almost 23%. 
3. In Qatar, 7 companies held by GOEs for 47% of market cap. One company, Industries Qatar, for 15%. Another Qatar National Bank for another 15%. 
4. In Kuwait, 8 companies for almost 44%. (If you're wondering, the group does not include NBK which is a market heavy weight in its own right). With Zain at 19%. 
5. In Oman, 5 companies for 35%. One, Omantel, for 14%. 
6. In Bahrain, 4 companies for a whopping 69% of the market. One, Batelco, for just short of 20%.
   

By contrast Exxon Mobil (the largest single stock) represents roughly 2.6% of the NYSE's US$11.7 trillion in July 2010 market value. HSBC just short of 7% of the LSE's US$2.7 trillion of value.

"So what?" you might ask.

1. Modern portfolio theory ("MPT"): Where a handful of companies dominate the market, market risk may be swamped by specific risk. What sense does it make to use the tools of MPT, e.g., CAPM, betas, etc in this context? 
2. Conflict of Interest: But there's more. Where the government has significant holdings in companies, even if this shareholding is less than a majority, it may exercise effective control. In such situations, companies may be managed with national strategic goals more important than maximizing shareholder wealth. 
3. Liquidity: Government strategic holdings reduce free float. The consequence is reduced trading which limits price discovery, increased share volatility (small transaction "tickets" have a disproportionate effect on price) and limited liquidity (the ability to exit one's position).
   

The implications are pretty clear but I think often not really thought through by market participants. And so probably not fully reflected in prices.

Bank Stress Tests in the GCC?

Bank Run 1933  USA National Archives  (In the Public Domain)

Tom Arnold over at The National reports that "Gulf governments have been urged to follow the EU and introduce stress tests of regional banks’ capacity to withstand financial shocks."

With some not unexpected remarks about the need for "transparency and disclosure"

“Stress tests would be welcomed but critical to their success would be having correct systemic inputs to make sure the assumptions going into stress-testing were sensible,” said Raj Madha, a senior banking analyst at Rasmala Investment Bank.

“We need fuller disclosure for stress testing to be independently verifiable.”

As usual, let's take a closer look.

Before my usual joyous descent into the details, an uncharacteristic exploration of the relevant meta topic. Framed as a question.  Just what do serious minds out there think these tests are designed to do?  If the national banking system is insolvent and unsafe, do they really expect the national regulator to start a bank panic or crater the economy by publicly announcing this?  Exercises like this are designed to reassure markets not disrupt them.  Purpose - as they say - informs practice.

Now to the details.  

There are three key areas in stress tests:

1. The definition of stress
2. The test methodology
3. The interpretation of the results

First and foremost is the definition of the stress.  

As the Grey Lady reported regarding the US stress tests:

But analysts say the administration’s worst projections, which it describes as unlikely, are not much more dire than what many private forecasters already expect.

As the less than politically correct folks over at EurActiv put it about the EU tests:

"Some scenarios that should be included will not be included, at least in what will be publicly revealed, which will be sugar-coated to avoid market panic," according to an informed source close to policymakers.

Putting aside for the moment the goal of the exercise (reassurance), there is a very tricky "technical" problem here.  It is possible to define stress so that no bank passes or all pass.  With a very broad range of outcomes "in between".  

Just what is the right scenario - particularly when it will have policy implications (the need for banks to raise additional capital, for the authorities to "rescue" or shutter banks or some combination thereof) and market reactions (exuberance or panic).  There is no easy answer.  

No doubt regulators weigh carefully the potential implications of their choice of scenarios.  Use of a dire scenario may be taken by the market as the authorities' assessment that that outcome is likely.  And thus  become a self fulfilling prophecy.

Then there is the test process itself.

Given what might be described by some uncharitable souls (but definitely not AA) as "soft ball" downside scenarios, the banks are asked to grade themselves by coming up with projected loan and other losses.   Much better than an "open book" test.  

The banks could I suppose base their answers on the same internal models that served them so well prior to the subprime crisis.  Models whose worth has been tested and proven.  Well, if not exactly proven,  certainly tested!

A much surer method is to send in a team of flinty-eyed no nonsense examiners to each bank and do the work oneself.  An assurance of consistent methodology and standards as well as the opportunity to look closely at individual portfolios.  And strictly confidential.  This methodology is not applicable here as this is really not the purpose of the stress tests. 

Then there is the grading of results.

The "pioneer" of national stress tests after the Subprime or global Financial Crisis (Yes, it's still lower case "g") was of course the USA.   As the Washington Post reported:

"Some major banks managed to wrest concessions from the government in closed-door negotiations over their "stress tests" that helped them put the best face on their results, financial analysts, industry officials and sources said."

As the article notes, various mechanisms for remedying capital deficiencies were concurrent with the announcement.   Recognition of to-be-concluded sales, conversion of rescue "loans" to equity, and on and on.  All announced so that the impact of negative results would be muted.

Prodded by Spain, the EU will be releasing the results of its stress tests.  Unlike the US's tests, these will be "pass/fail"  (no quantification of capital shortfalls).  An innovative adaptation of one of the more remarkable advances in the theory of higher education. 

So, now that we're clear on the process, hopefully there's a bit more understanding of what stress tests for GCC banks would mean.  And more importantly what they would not.   

This takes us full circle back to the introductory calls for  شفافية  in any GCC stress tests.  An apparent sign of some concern about the integrity of the process in the GCC.   It's unclear if that is a relative or absolute judgment on the GCC as compared to the USA or the EU.   In any case, I'm fairly confident that the GCC will be able to match the "developed" world closely enough for it not to affect the purpose of the exercise.

Credibility will be another matter.  Short of declarations of financial Armageddon,  local regulators announcements are likely to be dismissed as less than  كلام  شريف .   Which in itself poses a rather fundamental problem.

And for those who haven't had their fill on this topic, a link to papers at a 2006 IMF Experts Forum on the topic of bank stress tests.

GCC Refuses to Revive Free Trade Agreement Talks With EU

AlQabas reports that the GCC has rejected recent European attempts to revive the trade talks.  The key issue is the right of states to impose export duties.  And the key focus is the petrochemical industry where the GCC have a cost advantage - not only in terms of low feedstock costs but also newer technology.

The GCC has rejected the latest European proposals stating that while both sides recognize the right to impose export duties, the GCC wants that right constrained by WTO regulations and agreements.

Free trade negotiations have been going on for some 20 years and were suspended late 2008 over this issue.

The GCC did sign a free trade agreement with the much smaller four member European Free Trade  Association (Iceland, Liechtenstein, Norway and Switzerland)  in 2009.

New IMF Report on "Topography" of GCC Banking System

Available here.

IMF Report: Impact of the Global Financial Crisis on GCC Countries and Challenges Ahead

May Khamis and Abdelhak Senhadji co-ordinated a team comprising Maher Hasan, Francis Kumah,  Ananthakrishnan Prasad, and Gabriel Sensenbrenner to prepare this report - which is well worth a read.

As I've mentioned before (and am likely to do in the future), reports like this are not only interesting "autopsies" but can serve as diagnostic tools for investors and lenders during underwriting stage as well as later during the all important monitoring phase.  The second best thing to knowing whether to get into an investment is knowing when to get out.  Not in the sense of calling the market top, but recognizing when the car is racing towards the brick wall.  Studies like this can provide some useful (and very common sense) warning indicators.

Here's the link to the study.

And here are my comments on early warning indicators.

1. Page 10 - "Non Productive" Sector Lending.  When bank loans are being excessively funneled into construction, real estate and securities purchases, you know that there are problems ahead.   Particularly if this continues for more than a year to two.
2. Page 11 Figure 7 - Excessive Credit Growth.  Growth above the growth in GDP.  Amounts over  12 to 15% per annum for more than a couple years.  Also Figure A3 on page 55.
3. Page 15 Figure 14 - Leverage.  As companies take on more debt, they have less flexibility in a downturn. When the "boom" is caused by lending to non productive sectors, to finance punting in securities, when the downturn comes it's going to be a hard landing.
4. Page 26 Figure 24 - Increased Reliance on Foreign Banks for Financing.  This is a double edged sword.  Usually this financing is denominated in foreign not local currency.  When the downturn comes the borrowers are even more hard pressed to replace or refinance as foreign investors are generally the first to turn tail and run.  With GCC currencies generally pegged to the US Dollar the issue of replacing foreign currency borrowings is less than say it would be in Argentina.
5. Page 55 Figure A4 - High Loan to Deposit Ratios.  A clear sign of a lack of real liquidity in the banking sector and a vulnerability to depositor withdrawal or failure of lenders to provide financing.

And some interesting slides.

1. Page 31 Box 2 highlights the vulnerabilities of neighboring labor exporting countries on declines in the GCC markets as well as potential changes in labor needs.  You'll see that Yemen and Jordan are particularly exposed as remittances are a significant portion of their GDP from remittances - 7%.
2. Page 33 - Kuwait Investment Companies on and off balance sheet assets represent 100% of GDP and 56% of Kuwaiti banks capital.  A rather scary thought given the profound distress in the investment company sector.
3. Pages 49-52 Annex I - GCC Country policy responses.
4. Pages 59-65 Annex II - A rather "optimistic" view of the state of regulation in the GCC.

GCC Monetary Union: Meeting to Discuss Unified Banking Regulations and Supervision

Officials from Bahrain, Qatar, Kuwait and Saudi Arabia met in Riyadh today to discuss plans for unified banking regulations and supervision in the GCC states adhering to the Gulf Monetary Union.  At present Oman and the UAE have "excused" themselves from participation in the GMU.

Hopefully this process will lead to a raising of standards and supervision in some countries rather than bringing down the leader in that field to a lower level.

Gulf Bank NPLs' Predicted to Soar in 2010

As per Dubai's Khaleej Times, both S&P and UBS are predicting a rough 2010 for Gulf banks due to increased non performing loans ("NPLs").  Kuwait, Bahrain, and the UAE are expected to be the hardest hit with Saudi and Qatar banks enjoying better fortunes.

UBS estimates that currently 12.2% of HSBC UAE's loans and 9.5% of Standard Chartered UAE's loans are non performing.  It also predicts that for UAE banks as a group NPLs will reach 15%  and remain high during the next three or so years.

On the other hand, the CB UAE sees the NPL ratio climbing to 6.4% (up from 4.4%) in 2010.

Clearly, both scenarios can't be right. 

I'm betting on an increase - fueled by the knock on effects of the Dubacle on the corporate sector as well as personal loans.  There is a time bomb in the GCC with the latter.  Banks have been imprudently lending to consumers and allowing them to pile on unsustainable amounts of debt. 

Adnan Yousif Predicts Banks May Recover 60% on AlGosaibi and Saad Loans

Zawya Dow Jones interview with Adnan Yousif Monday on the sidelines of an Abu Dhabi conference.

1. Anticipates 60% recovery as both groups have assets.
2. Arab banks hold the largest share in the loans estimated as we've heard before at about US$20 billion.
3. Arab banks have "turned the page" on the two Groups through taking sufficient provisions.

He also commented on Dubai World situation saying that the lenders were primarily Emirati and international banks.  Not much exposure among other Arab banks.

With respect to loans to the Government of Dubai, he said the problems were not of inability to pay but rather temporary cashflow problems which will be overcome.

For those who don't know, Adnan is Chairman of the Board of the Union of Arab Banks as well as President/CEO of the AlBaraka Group.  He and his brothers (who use the surname Abdul Malik) are among the region's distinguished bankers.

Saudi Zain and the Mobile Market in Saudi Arabia

If you're following Saudi Zain, a couple of articles from the Saudi Gazette.

One on growth in the mobile phone market - a reminder that the number of subscribers is just one bit of the revenue equation, the other being spend per customer.

And another on competition in the market in Saudi.

And one on a promotion by Mobily.

And finally a brochure on Markaz's report on the GCC referred to in the second SG article.

When the Ratings Get Tough, the Tough Change the Ratings Standards: S&P Announces A New Ratings System for the GCC

As we are informed by The National, Standard and Poor’s (S&P) yesterday launched a regional credit-ratings system through which companies in the Gulf will be judged against each other, instead of against their global peers.

Officials at S&P said the regional ratings will generally be higher than their ratings on a global scale.

Don't measure up to Global Standards?

No problem, try our new GCC "meter stick".  At just 500 mm long, you're suddenly twice as tall.

And with all great ideas, there are many applications.

1. Criticized by Lord Peter and Deputy Neal about your transparency?  Remind them that on a regional scale your transparency certainly beats that of some other countries in the area.
2. Your stock not doing so well since you announced that US$700+ million loss?  Inform your shareholders that you're beating the performance of Enron and Lehman Brothers shares.
3. Smart aleck boggers attacking your business model?  Remind AA that you're innovative business model has held up quite nicely when compared to those of The Investment Dar or The International Banking Corporation.
4. Distressed about a Turkish coffee stain?  Recall that your spouse's former roommate once washed the oil filter and pan from his car in the kitchen sink.

GCC Secretary General Update: GCC Central Bank & EU-GCC Free Trade

Asharq AlAwsat reports on comments by Abdulrahman Hamad AlAttiyah, the Secretary General of the GCC, from a Qatari-Saudi business conference this Saturday.

1. The first meeting of the GCC Central Bank is scheduled for 30 March in Riyad.  The Governors of the Central Banks of Bahrain, Kuwait, Qatar and Saudi will attend.  Discussions will focus on legislative, institutional, and procedural aspects related to the currency union and the single currency.  More technical meetings will follow to continue the steps necessary to launch the single currency.
2. He remains optimistic that the UAE will join the single currency project and will be able to quickly catch up.
3. The EU has presented some new proposals in a bid to reinvigorate the stalled EU-GCC Free Trade negotiations (which began in 2008).  Their proposals have to do with a more flexible less time bound approach to the issue of customs duties, including those on exports.  The GCC is studying and will revert.

There were also some points on the GCC railway:

1. Project is in the detailed study/technical drawings after having obtained agreement in principle.
2. HQ for the organization to supervise the railway has not yet been chosen.  

And some news from the Qatar-Saudi businessmen's conference which 300 businessmen attended:

1. 2008 trade between Qatar and KSA was some SAR6.2 billion (US$1.65 billion).
2. The number of joint Q-KSA projects in the Kingdom through June 2009 was 16 with capital of SAR6.1 billion.
3. Various speakers called for increased co-operation.
4. Ahmad Al San'i (Saudi businessman) called for creation of a joint company in which the two governments should invest to promote business in Qatar and Saudi.
5. Picking up on that theme, Khalid AlMuqayrin, (another Saudi businessman) called on the SWFs of the two countries to invest at least 5% of the value of their holdings in the two countries so that "there would be a direct return to the two countries and their citizens rather than having all their investments far from the region which don't have a direct impact on citizens".

GCC China Economic Forum - Inaugural Meeting Bahrain 23-24 March

 

The GCC-China Economic Forum will hold its inaugural meeting this March 23-24 in Bahrain under the patronage of Bahrain's Prime Minister, HH Khalifa Bin Salman Al Khalifa.  Among the topics for discussion is the finalization of Free Trade Pact talks.

Trade and economic relations between the PRC and the GCC states are increasing.   Something that is in the political and economic interests of both sides.  Something that gives both sides greater options vis-a-vis certain other powers in the Western end of the Eur-Asian continent and in the Americas.  An earlier observation here. 

IMF Study on Spillover of Global Crisis on MENA Emerging Markets and GCC

The study finds that most of the slowdown in MENA Emerging Markets (Egypt, Jordan, Lebanon, Morocco, Pakistan, and Tunisia) and the GCC is due to the Global Crisis.  Or, as those of us who are less politically correct refer to it, the "Western" Financial Crisis.  

There is a logic here beyond the equations:  MENA is a samak saghir in terms of the world economy.  And in a variety of ways is linked to the Western/World economy. And so likely to be buffeted by storms in the West.

What I think is interesting about this study is what it says about the impact of the GCC in MENA Emerging  Markets.

Using the Financial Stability Index for his study, Moriyama-san finds that it increased from -0.3 (22005 through 3Q08) to 4.0 (4Q08 through 1Q09).

His analysis (Table 2) decomposes the latter FSI:

1. "Advanced" Economies Direct:  1.8
2. "Advanced" Economies Indirect through the GCC:  1.1
3. GCC Other than Advanced Economies:  0.3
4. Other Factors:  0.8   

No big surprise that Moriyama-san found that "Advanced" Economies were responsible for about 75% of the effect.  But, what's remarkable is that the GCC's role was about 35% - as the "Advanced" Economies fallout on its economy was transmitted to the MENA Emerging Markets countires as well as a lower amount for GCC factors not related to the "Advanced" Economies.  

Explaining in part Patrick Seale's comment about the center of political gravity in the Arab World shifting to the East, though one would also have to recognize the impact of the financial arrangements surrounding the Camp David Accords which have re-directed Egyptian foreign and economic policy.

Markaz Analysis of GCC Banks

 Markaz has published another of its insightful research pieces.  This one is on the GCC banking sector in 2009.

Here's sample paragraph.

The year 2009 can truly be declared as a year of provisioning. The 61 banks in the GCC region are estimated to provide a whopping USD9.4 bn in provisions during 2009, a 40% jump from 2008 and a 5-fold increase from the modest level of USD 1.8 bn for 2007. As a percentage to loans, we forecast provisioning to hit 1.3% in 2010 as compared to 0.8% seen between 2003-2009.

Markaz provides a macro GCC analysis and then individual country and bank details looking at provisions, loan growth, and the loans to deposits ratio.

A very good review.

INSOL - First MENA Conference in Dubai

INSOL International, the International Association of Restructuring, Insolvency and  Bankruptcy Professionals, will hold its first ever MENA conference in Dubai.

While given recent developments the choice of Dubai might bring a smile to more than a few faces out there, the conference has been long in the planning.  And as usual when there is an initiative to improve corporate governance, one finds Hawkamah involved.   They have been working closely with INSOL over the past few years to analyze the state of creditors' rights as well as the legal regime for corporate reorganization, bankruptcy reform in the area. 

In that vein you'll recall that the IBRD/IFC "Doing Business in the Arab World -2010" survey gave the UAE the lowest marks among the GCC states in insolvency and recoveries.  Earlier post here.

New Addition to Links - LSE / Kuwait Programme on Development, Governance and Globalisation in the Gulf States

A new addition to the roll of Interesting Blogs and Other Links:    Kuwait Programme on Development, Governance and Globalisation in the Gulf States.

This looks to be an excellent source of information on a variety of topics concerning the GCC.

And as Kristian Ulrichsen noted in a comment to my earlier post, they also offer seminars in London.  BTW in addition to co-ordinating academic content, he is also a post doctoral fellow who seems to specialize in GCC security matters.

Here's a link to their "Events" page.

And finally a tip of AA's virtual tarboush to the Kuwait Foundation for the Advancement of Sciences who is the "founder of this feast".

LSE Study on Nationalism in the GCC

This is part of the Kuwait Project on Development, Governance and Globalisation in the Gulf States being undertaken by the LSE.   The report is available here. 

Here is a description of the Kuwait Project.

There are more interesting publications from the Project available here.

And more to come judging by the list of proposed and in-process papers listed.

This looks like an excellent source of information and analysis on the GCC.