Useful Research Tools & Sources on Macro Issues

There are a variety of useful studies and reports available on macro issues.

First the Worldbank's Reports on Observance of Standards ("ROSCs") which cover a variety of topics: Corporate Governance, Accounting and Auditing, Banking Supervision, and eight others.  No coverage on the GCC yet for Accounting and Auditing.  Nor on Banking Supervision. 

There is one Corporate Governance ROSC on Saudi issued this February.  The Central Bank of Kuwait has announced that the ROSC team will be in Kuwait this December.

ROSCs also available through the IMF portal here.

Second, the IMF's Financial Sector Assessment Program ("FSAP") which issues Financial System Stability Assessments ("FSSAs") available here.

Hawkamah Corporate Governance Conference - Important Documents Released

Hawkamah held its Fourth Annual Conference "Building Middle East Markets and Corporate Governance Imperatives" the 9th and 10th at the DIFC, Dubai.   Event was in partnership with the OECD.

As usual, a worthwhile event.

Two solid documents issued:

1. Policy Brief on Improving Corporate Governance of Banks in the Middle East and North Africa Region
   
2. Study on Insolvency Systems in the Middle East and North Africa   

The Study covers 11 jurisdictions:

DIFC, Egypt, Jordan, Kuwait, Lebanon, Oman, Palestine, Qatar, Saudi Arabia, UAE and Yemen.

There are some global comparables on recovery rates (Page 5) based on another study the World Bank "Doing Business 2009".

As you might expect, the MENA region has lower claim recovery rates than other major countries.  Japan at 92.5% , the OECD at 68.6% versus MENA at 29.99%.  Bahrain came in with a respectable 63.2%

Anyway:  A hat tip to Hawkamah.  More evidence of  regional institutions helping develop the GCC/MENA market.

IFC/World Bank Group "Doing Business in the Arab World 2010"

Today the IFC/World Bank Group officially released its annual report on regulations in the Arab World  "Doing Business in the Arab World -2010".  Those watching the GCC press have been aware of the report for a couple of days as it was discussed in several of the UAE papers under headlines calling for reforms of UAE insolvency law.  Here's one link.

This report is part of a larger project undertaken by the World Bank Group to measure regulations affecting the 10 stages in the life of a company - from birth (registration) to death (closure) in 183 countries.   The goal is not only descriptive.  It is as well prescriptive - to encourage reform.

Like many such efforts, it reduces very complex matters to a single number for ease of comparison.  The report ranks countries not only at a macro level (overall ease of doing business) but  at various sub levels (the ten regulations, e.g. starting a business, dealing with construction permits, etc).

Because the ease of doing business is not directly observable or measurable like the amount of rainfall during a year or average daily temperature, one measures it indirectly by using proxy variables.  The WBG has chosen 10 regulatory issues mentioned above.  These are also measured for ease of accomplishment.  That leads to the choice of a second level of proxies.  One then has to specify the relationship and relative weights of the proxy variables (write the equation).  Once the equation is specified, one needs data.

This is a difficult process.  How does one choose the proxies - both at the first and the second levels?  How does one determine the equation and the relative weights of the proxies?  How does one ensure that data across 183 countries is consistent - both in terms of definition and standards for reporting?  For example, if the measure is days to get a license  for a new business, how does the local MOIC  track dates?  From the date of a properly completed application?  But what if there are numerous rejections of an application as incomplete?  Are  those days counted?  Does the clock start ticking from the date the applicant drops off the completed application?  Or the date the MOIC enters it into its records?  What is the quality of the record keeping?  I posted a comment to a blog about Yemen LNG with articles raising doubts about the GDP calculation for the USA and Japan, two countries whose statistical accuracy might be assumed above reproach.

All in all a daunting task.  Because it is difficult does not mean it should not be done.  Because it involves interpretation (there is no single right answer) does not mean it should not be attempted.

Efforts like this are to be applauded and encouraged. That being said, the issues involved should not be overlooked.  The results should be recognized for what they are:  interpretations not facts.

And that gets to perhaps the central issue here:  the report is designed as prescriptive.   A country can reform by using the WB specified equation.  But what if it is mis-specified either with the wrong proxies or the wrong weights?  Reform will be mis-directed. 

There is another issue.  I am a bit uneasy about  the  individual numerical rankings.  Singapore is rated #1 for ease of doing business.  Hong Kong #3.  As a businessman, would I really notice a perceptible difference between the two in the running of my business?  If I could, would it really matter?

I think that such studies should be directional rather than locational.

Instead of individual rankings, determined with apparent Cartesian precision,  countries should be grouped into bands chosen where there is a very perceptible break in "ease".  The difference between Hong Kong and Singapore may be too minor to notice.  That between Singapore and Yemen is probably not. 

Anyways to the report, first the overall rankings for the GCC states for ease of doing business:

(Note:  The report rates 183 countries).

1. Saudi Arabia  (#13 in World Rating) 
2. Bahrain           (#20)
3. UAE               (#33)
   
4. Qatar              (#39)
   
5. Kuwait           (#61)
   
6. Oman              (#65)

Drilling a little bit further into the report, here are the rankings for investor protection with world ratings again in parentheses:

1. Saudi Arabia   (# 16)
2. Kuwait            (# 27)
3. Bahrain           (# 57)
4. Oman /Qatar   (# 93)
5. UAE                (#119)

Had I been asked to come up with ratings based on personal experience, I would have a different order.  For the record, the rating is determined by equal weights of the following three index proxies: disclosure, director liability, ease of shareholder suits.

Rankings for contract enforcement:

(The report includes details on the average time to settlement and the average cost of enforcement - lawyer's fees, etc. - measured as a percentage of the claim.)

1. Qatar               (# 95) 
2. Oman               (#106)
3. Kuwait             (#113)
4. Bahrain            (#117)
5. UAE                 (#134)
6. Saudi Arabia    (#140)

This ranking is based on three equally weighted variables: number of legal steps, average number of days to a settlement and the cost of enforcement as a percentage of claim.  It seems to me that outcome of the case would be a very important measure. Legal procedures might be very simple (a few steps), get completed quickly (say 60 days), and cost relatively little as a percentage of the claim.  But,  if  the result is unjust,  how is the contract enforced?   That gets back to my comment about the difficulty of measuring abstract qualities.  How does one measure a just decision?  Clearly, the plaintiff and defendant are likely to have quite opposed views.

As one of my lawyer friends says the clearest commentary on the state of GCC legal systems is that both the DIFC and QFC use as a major selling point the fact that  their centers have their own imported law and judges separate from the local on-shore legal system.  That is hardly a ringing endorsement for local justice.  And it is coming from a governmental or quasi-governmental authority in the country!

One might well criticize local courts.  I know that I could easily recite a list of complaints and anecdotes.

That being said, I would not want to bring a lawsuit in Texas.  Texaco could testify more eloquently  (perhaps 10 billion times more!) than I could about the legal system in that state.  Or a bank  I know that tried to foreclose on an office building loan, only to have the judge dismiss their case on the grounds that under Texas law a lender may not take a debtor's primary residence.  Seems the borrower moved a bed into the building  the night before the trial and claimed it as his home!  

IFC Lists US$100 Million Sukuk on Nasdaq Dubai and Bahrain Stock Exchange

On 4 November 2009,  the International Finance Corporation, the private sector lending and investing arm of the World Bank Group, registered a US$100 million Sukuk ("Islamic Bond issue") on Nasdaq Dubai and the Bahrain Stock Exchange.

Those watching the financial news have seen this story develop from earlier announcement (October) to today when the deal was done.  Here's the press release from Nasdaq Dubai.

Deal details: 

1. Issuer:  Hilal Sukuk Company Cayman Islands, a special purpose vehicle created for this transaction.  
2. Obligor:  International Finance Corporation ("IFC")
   
3. Annual Profit Rate (Coupon):  3.037 percent per annum payable semi-annually (May and November). 
4. Final Maturity:   May 2014.

Deal "firsts":

1. First Sukuk issued by IFC.  
2. First Sukuk issued by a non GCC financial corporation for term funding.
   
3. First IFC listing in Dubai and Bahrain Stock Exchange.  
4. First use of Nasdaq Dubai's central securities depository (electronic certficate form).
   

The prospectus for the transaction is here for those interested in more detail.  And as well the fatwa as to Shariah compliance.

There is a convenient transaction diagram in Section 1 which is a good introduction to those not familiar with the structure.

The key issue with a structure like this is the nature of the certificate holders' rights in the Trust Assets (the assets whose cash flow is the sole source of repayment of the Sukuk).

Often there is confusion on this topic.

Is the right to the assets themselves? 

Or the right to the cashflow from the assets?

If the transaction is truly collateralized by the assets, the certificate holders may upon a default take possession of the assets and sell them to a third party.

A few sections from the prospectus appear to settle this question.

1. Page 11 Risk Factors Limited Recourse:  "Furthermore, under no circumstances shall any Certificateholder or the Trustee or the Delegate, as the case may be, have any right to cause the sale or other disposition of any of the Trust Assets except pursuant to the Purchase Undertaking and the sole right of the Trustee and the Certificateholders against IFC shall be to enforce the obligation of IFC to pay the Exercise Price under the Purchase Undertaking."
2. Page 15 Transfer of the Investment Assets:  "Nevertheless, the Certificateholders will not have any rights of enforcement as against the Investment Assets and their rights are limited to enforcement against IFC of its obligation to purchase the Trustee’s rights, title and interest in and to the Investment Assets pursuant to the terms of the Purchase Undertaking. Accordingly, any such restriction on the ability of IFC to make a "true sale" of the rights, title and interest in and to the Investment Assets to the Trustee is likely to be of limited consequence to the rights of the Certificateholders."

Should investors be worried?

The World Bank Group carries the highest investment grade rating.  It is owned by the countries of the world.

If there is a future problem with the creditworthiness of the World Bank, it will be reflective of extremely serious global problems.  In that case collection of this bond will be among the least of investors' worries.