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.

“Boring” IMF Report Contains Interesting Information on Dubai

The typical reaction to a report issued by one of the multilateral agencies is a polite "yawn" as one consigns it to the bin. That is a mistake that both investors and lenders make because these reports often contain important information. Information the IMF gains through its special access to the sources.  And which often is better than that given creditors or rating agencies.

What can be learned from these reports? 

1. Insights into fundamental factors or conditions that can help one look beyond the current hype – whether it's irrational exuberance or unjustified pessimism. From these agencies' autopsies of earlier financial problems, one can develop an insight into the factors that were associated with problems in other countries. Not universal laws. Nor magic equations that infallibly predict the future. But reasonably good early warning indicators that help one identify situations that lead to potential problems or are themselves symptoms of such problems.  One can also develop some ideas about the likely exit path if a problem hits. What happened in other countries? How severe and how long were those problems? And some "back of the envelope" comparative metrics one can use to make directional (but not exact) predictions of the path and severity of a  similar problem in another country.  Or at least set bounds on the severity estimate and likely paths.  This information is not only useful when the crisis hits, but when one is considering whether to make the initial investment.  Or if one has made the initial investment (or loan) when might be a good time to get out. - hopefully before the crisis occurs.   For example of this sort of information see the comparative analysis of real estate crises in four countries on Page 23 which might give some insight into the potential impact on UAE banks.
2. Then robust data on that country with which to apply these insights - or at least as robust as the country is able or willing to disclose.  One can use that data to see if those same conditions that caused problems in other countries are developing in this country. To what extent? Or, if the crisis has hit, what are the new vulnerabilities and exit path? 
3. Finally, other information - facts and judgments. For example, this report contains  an estimate of the amount of debt of Dubai Inc and the Government of Dubai.  The maturity profile. And, as I've noted in earlier posts, sometimes in the diplomatic language of the reports, one can discern the multilateral agency's assessment of problems and it sconcerns.  In some cases pointing out problems.  In other cases pointing out trends that will lead to fundamental changes from past. behavior  As an example of the latter look at the discussion the labor market in structural issues below.

Here's the link to the IMF "Staff Report for the 2009 Article IV Consultation" with the UAE so you can not only follow the analysis below, but also read and "wring" out additional bits of information.  This post long as it is does not discuss every insight or bit of information in the Report.

Pages 38 to 49 contain a special section on the Dubai World Debt Situation. 

Let's take a look at these first as they are likely to be of the most immediate interest to most readers.  But don't skip the section after that which discusses the main body of the Report.  It has some interesting information.  

Now to the topic of keen interest - the Dubai World Restructuring.

1. Page 39 Paragraph 6 "Dubai Inc. dominates the economy of Dubai (Annex Box 1). Dubai Inc. is a network of commercial companies and investment arms owned directly or related closely to the Ruler of Dubai, his family, or the Government of Dubai (GD). At its simplest, Dubai Inc. consists of three holding companies, Dubai Holding (owned by the Ruler), Dubai World, and the Investment Corporation of Dubai (both owned by the GD). A few other companies are owned jointly. Each holding is present in Dubai's growth engines and this overlap has fostered competition as well as duplication. Each holding has choice assets with solid earnings, as well as start-ups requiring large amounts of capital upfront, particularly in property.3Dubai's private companies are mostly owned by old merchant families. The private sector is fairly small and dependent on Dubai Inc.'s business." What this suggests is that the collapse of the Dubai development model (leveraged real estate development) and the sharp decline in many (but not all) foreign assets are going to have a serious effects on Dubai until there is a turnaround in Dubai Inc's fortunes.  Probably not a near term event.
2. That's reinforced by Paragraph #8 on Page 40 "DW's real estate interests are concentrated in Nakheel Properties, Limitless World, and Istithmar World. Nakheel's focus is Dubai; Limitless World, a more recent company, has comparatively more overseas real estate ventures; and Istithmar World is an investment arm with several overseas property-related interests. Although consolidated financials of Dubai World are not public, Nakheel and Limitless likely constitute about half of Dubai World's assets, the rest being held mainly by DP World, JAFZ, and Istithmar. Nakheel's remaining interests in overseas properties were transferred to Istithmar in September 2008." Assuming the statement that troubled real estate assets are roughly 50% of Dubai Inc's holdings, there is going to be a substantial ongoing drag on the Emirate.  Cashflow from existing projects is likely to be negative - diminished cash from operations eroded by heavy financing  charges.  And limited opportunities to sell the assets.   As  new projects are likely to remain stalled.  Since property and construction have represented 25% of economic activity, a slowdown in new projects will be another stress on Dubai.  Even assuming a relatively quick agreement with creditors on a restructuring, these problems are going to weigh on Dubai. Talk of any sort of a rebound in 2012 seems very premature. 
3. On Page 41, you'll find a handy chart showing the companies belonging to each of the three holding companies: Dubai Holding, Dubai World, and ICD. And the following pages contain some additional information on the various entities in each of the three.
4. On Page 45 there is a breakdown of DW debt between local and foreign banks. "Information on debt within the DW standstill perimeter has become clearer than on debt of DW's consolidated or Dubai Inc.'s debt. At this time, and after the payment of the Nakheel 09, the standstill perimeter is about $22 billion (in local and foreign currencies), of which $12 billion is in the form of syndicated loans, $7.5 billion corresponds to bilateral loans and $2.5 billion to bonds. The share held by national banks is 45 percent of the total ($10 billion), of which 2/3 is to Dubai-based banks (6 percent of their book) and 1/3 to Abu Dhabi banks (3 percent of their book). The national banks also hold 80 percent of the Nakheel 10 and 11 sukuk bonds. The debt subject to negotiation is owed by Nakheel, Limitless, and by DW at the holding company level (DW Holding, DW Group Finance), the largest component being at the holding company level. The extent and form of the needed debt restructuring will become clearer as the negotiations between DW and its creditors progress."  This quantifies the UAE bank exposure and raises some questions about market access.  Was this exposure built up in the last few years as foreign creditors reduced appetite for DW debt? Were local banks "stuffees" on deals the market wouldn't absorb?
5. Page 49 has IMF estimates of the Emirate of Dubai's Debt with a breakout of Dubai Inc's debt.  And then a further allocation within the constituent parts of the Dubai Inc . The headline number which you've probably read elsewhere is some US$109.3 billion for the Emirate.   That is 130% of the Emirate's GDP - not a comforting ratio.  But the IMF estimate does NOT reflect all liabilities.  There are amounts due to contractors for work already performed.  Advance payments taken from customers for real estate purchases.  So the total amount of Dubai's liablities is likely to be much more.  The debt burden measured in US$ or in terms of percentage of GDP is therefore much more.  All of which implies a severe economic burden to unwind the position - to pay down the debt.  To de-leverage.   In an article today, The National estimates another US$ 60 billion.  Whether that's the right number or not isn't clear.  Unfortunately, the financial statements of DW, DH and ICD  are not available.  Otherwise one could use these to round out the liability estimate.   So with the caveat that US$109.3 billion may be significantly understated, let's drill down to see what additional ew can learn.  First a look at the overall composition of debt among the various Dubai Inc entities and the Government of Dubai.  A boom built on a "credit card".
   

Entity	Total Debt (US$ Billions)	Percentage
Dubai World Entities To Be Restructured	US$ 14.35	13.1%
Other Dubai World (DW Ports, etc)	US$ 11.69	10.7%
Dubai Holding	US$ 14.79	13.5%
ICD	US$ 20.40	18.7%
Other Dubai Inc	US$ 24.35	22.3%
Dubai Inc Total	US$ 85.59	78.3%
Government of Dubai	US$ 23.70	21.7%
Total All Govt Related Dubai Debt	US109.29	100.0%

Now an estimated maturity profile (amounts in US$ billions) to outline cashflow demands on Dubai.  For the DW entities to be restructured, their problem is a near term two-year window of "bunched" maturities.  This occurs at a time when there are much heavier cashflow demands on other Dubai Inc entities. It doesn't seem that there are resources that could be taken from other entities in the Group to tide over Nakheel, Limitless and Istithmar.  And with these sort of amounts, a clear need for refinancing.  The Emirate remains dependent on banks and investors - probably foreigners as the Central Bank of the UAE tamps down on credit from local banks.  At best higher margins.  At worst limited access which in itself might tip other entities into restructurings.  A difficult situation to navigate.

Entity	2010	2011	2012	2013	2014	Beyond
DW To Be Restructured	US$ 5.2	US$ 4.6	US$ 1.9	US$ 1.1	US$ 0.3	US$ 1.3
Other DW	US$ 0.2	US$ 2.0	US$ 5.7	US$ 0.5	US$ 0.0	US$ 3.2
Dubai Holding	US$ 3.5	US$ 3.2	US$ 0.8	US$ 0.5	US$ 2.1	US$ 4.6
ICD	US$ 2.0	US$ 5.8	US$ 5.7	US$ 3.0	US$ 0.1	US$ 3.8
Other Dubai Inc	US$ 4.7	US$ 8.8	US$ 4.9	US$ 1.8	US$ 0.6	US$ 3.6
Total Dubai Inc	US$15.5	US$24.4	US$19.0	US$ 6.9	US$ 3.2	US$16.5
Govt of Dubai	US$ 0.0	US$ 0.0	US$ 0.0	US$ 1.8	US$21.9	US$ 0.0
Total Dubai Govt Related	US$15.5	US$24.4	US$19.0	US$ 8.6	US$25.1	US$16.5

Note: Amounts do not add exactly due to rounding.

Now to the rest of the report.

1. Page 4: "With foreign investor confidence shaken and international capital markets less accessible, Abu Dhabi's policy of selective support to Dubai will play an important role in limiting contagion to the U.A.E. economy and the banking system." The key takeaway here in case anyone out there missed it is that Abu Dhabi is not writing a blank check to bail out its neighbor. And that reason for that is clear. In fact there are 109 billion reasons. 
2. Page 6: "The crisis unfolded with differential impact on Abu Dhabi and Dubai. It highlighted three key issues: (i) the contrast between growth based on hydrocarbon resources and that based on nonhydrocarbon diversification funded by maturity-mismatched leverage; (ii) the spillover effects and financial support structures in the federation; and (iii) the volatility of markets in response to a lack of information disclosure and transparency. In particular, the debt announcement undermined the widely held market perception of implicit government support, including from Abu Dhabi."  
3. Page 11 contains a series of charts that provide in graphic terms (sorry for the pun) an indication of the nature of the problem and some potential early warning indicators. First is the dramatic increase in foreign borrowing from BIS banks. The second is a chart showing the explosion in local borrowings beginning in 2004 where the growth curve moved from roughly a 6 degree angle to over 60 degrees. As noted in Paragraph #38 on Page 20 some US$ 100 billion of credit above the trend line was extended. Third is a dramatic rise in short term borrowings. Anyone familiar with the Asian Crisis of 1997 would recognize this pattern.  It's very similar to what happened in Thailand.  If that lesson had been assimilated, perhaps Dubai would not have crashed.  Or at least those who paid attention would have avoided the collapse.
4. Paragraph #21 on Page 13 brings home the point that while the IMF is projecting 0.5 percent growth for the UAE in 2010, that growth is going to be very uneven. Abu Dhabi's growth will be propelled by a significant public works program.  Dubai is going to stagnate.  Footnote 2 on Page 7 gives an indication of the growth differentials. If these 2009 statistics are any guide to the future, Dubai will experience negative growth again in 2010. Very roughly  8% or so negative assuming Abu Dhabi repeats 2009's 6% growth and using a very crude 60/40 split.
5. Page 14 contains a box with a detailed discussion of the  mechanics of the Dubai special insolvency regime for Dubai World. It also raises two questions as to whether its decisions will be recognized outside the Emirates (I'm guessing they will unless they seem to be overly slanted towards the borrower) and whether the special tribunal will enforce foreign judgments against DW entities. If the intent is that the tribunal is applying "global standards", then it should enforce foreign judgments - again presuming they are reasonable.  If one wants to play in the Premier League, one has to follow the rules.
6. Page 16 some quotes on the Dubai model of development. "Even though Dubai has achieved an impressive degree of diversification and has become a major trading and services regional hub, recent events call into question the sustainability of enhancing growth through large-scaled and highly leveraged property development. The Dubai authorities recognized that the recent events require a reassessment of Dubai's real estate sector to ensure the economic and financial viability of the emirate's corporate sector. As a result, over the medium term real growth was likely to be slower but more sustainable than in the period preceding the crisis. The authorities were of the view that Dubai had a top quality infrastructure, and that its hospitality, trade and logistics engines should continue to benefit from Asia's pull. Although the scope of the restructuring was still being defined, the focus would be on refinancing the property sector."  The question is what replaces the old model.  The implications for growth seem to be clear.  Less growth. Normal commercial activities are not going to deliver the growth that a speculative property boom did.   Less growth also has a negative implication for debt service abilities.  For the rise of asset values.
7. Page 18 a confirmation that the Dubai crisis has strengthened Abu Dhabi's hand. "The authorities emphasized that the crisis had encouraged greater cooperation between the federal and emirates levels of government and between the emirates themselves. Going forward, Abu Dhabi would continue to support Dubai in its efforts to achieve a viable position. However, the Abu Dhabi authorities emphasized that Abu Dhabi was not legally liable for DW debt and that any decision to extend support would be made on a case-by-case basis. In this regard, they stressed that they did not want to create moral hazard by supporting potentially nonviable corporations, but would provide support if necessary to limit contagion to the .A.E. economy and banking system." Greater co-operation will mean more centralization. Abu Dhabi will benefit from that. And "moral hazard" probably also encompasses the hazard to Abu Dhabi's check book given the size of Dubai's obligations. 
8. Page 20 gives some idea of the credit growth that lead to the crisis. " The U.A.E. financial system entered the global crisis exposed to a highly leveraged economy. The system is bank-based and focused on the domestic economy. Commercial banks expanded credit very aggressively during 2004–08, generating about $100 billion of credit above the underlying trend growth. Credit growth was the fastest among emerging markets by a good margin, and the capital base was disproportionately low for such growth (figure 4). During this period, banks by and large did not retain sufficient profits to maintain capital buffers, despite their exposure to an economy with significant leverage. Nevertheless, banks remained highly rated throughout 2004–08, in part reflecting perceived support from governments and in some cases government ownership. In addition, banks' liabilities (deposits and interbank loans) have been under 3-year blanket federal government guarantees since September 2008."  Hence the Central Bank of UAE initiatives to force banks to retain capital by limited cash dividends for 2009 and imposing tighter provision requirements.
9. Pages 23 to 25 present stress tests of the banking system for various haircuts. Paragraph 41 on Page 23: "However, the DW debt situation has increased the need for additional capital as these contingencies have become more likely to materialize. The uncertainty created by the prospective debt restructuring implies that banks may need material capital buffers above the regulatory minimum to maintain adequate ratings for dealing with market counterparties. To illustrate, assuming that banks need at least a 14 percent CAR, the additional capital needs would be about $6 billion or 2.7 percent of GDP. 5he possibility of a principal haircut on the DW debt subject to the standstill cannot be ruled out, an outcome which would have a significant effect on banks' provisioning. As an illustration, staff estimates that the capital top up could reach 3.4 percent of GDP for a 25 percent haircut and 4.3 percent of GDP for a 50 percent haircut of DW debt subject to the standstill."  Something every equity investor in UAE banks should be considering in terms of anticipated performance. As well as something for foreign counterparty banks to consider in terms of the amounts, types, and tenors of credit they extend.  While the UAE has demonstrated a very strong intent to support its banking system, a careful creditor always looks at the underlying strength of the obligor. 
10. Page 24 provides an assessment of the quality and capacity of the Central Bank of the UAE as a regulator. "While the extra capital need appears manageable, the exercise underscores the importance of contingency planning, supported by intensified supervision. The global financial crisis is testing the CBU as a regulator, as it did with many other regulators. The DW standstill has increased the potential for surprises and, consequently, the need for a more pro-active supervisory approach and effective enforcement. The CBU could for example use more systematically its power to block dividend distributions in the interest of building larger capital buffers. There may also be a need to re-assess how exemptions to large exposure limits are granted in the case of GREs. Finally, CBU inspections follow a traditional model of rolling examinations of individual institutions, whereas the current situation suggests the need for simultaneous cross-firm examinations of specific risks such as sectoral concentration, name-lending, or deteriorating funding standards. In the latter case, the CBU's limited resources, including for off-site analysis, hinders such an approach." A clear criticism of a failure to control banks' exposure to groups like DW.  The Central Bank of the UAE has taken the IMF's advice.  It has limitied2009 cash dividends.  Paragraph 45 on Page 25 details other measures it is implementing: a 1.25% general reserve on risk weighted assets and the new 90 day non accrual rule. 
11. Pages 26 and 27 discuss three structural issues. Labor markets and the need for uptiering skills. As this unfolds, it's likely that labor will be imported from different countries than it is now.  This is going to have some strong implications for those countries, e.g., a decline in worker remittances, loss of safety valve for unemployment, etc.  The need for long term financing and the lack of adequate local financing sources. Until markets for term financing can be developed, a dependence on foreign financing will remain - probably with the same short tenor preference on the part of foreign banks and investors which was in part responsible for the current crisis.  Inadequacy of data that limits the government's ability to monitor the economy and formulate policy. This issue is also related to debt management since each Emirate has been responsible for its own finances.  Without co-ordination (ideally central direction) there is a potential for problems.

Those 67 "boring" pages were packed with a lot of information and, as well, hopefully some lessons useful for future investment decisions - both at the underwriting as well as the monitoring stages.  And there's still more to "mine" from the report.

The National: "Dubai to Take a Hit on Debt Exposure"

Frank Kane over at The National newspaper in Abu Dhabi with an update on developments in the  Dubai World restructuring saga.   

The title carries a pretty strong implication that there will not be 100% recovery for the lenders.  Not from the assets of Nakheel and other subsidiaries to be restructured.  Nor from the Shaykh up the road in Abu Dhabi.   And certainly not from his less rich brother in Dubai. 

It sounds like the intent is to offer several restructuring options.  Another sign of less than a full recovery.  No doubt with the tenor of each and certainty of repayment inversely related to the offered recovery amount. 

That's coupled with the news that the DFSF will after all not require that its loans have priority over other lenders'.  As you'll recall that's been a sticking point with lenders.  Having DFSF ahead of them in priority of repayment would make the haircut even larger.  It's unclear to me why this was ever raised in the first place.  Didn't DW realize this would provoke howls of outrage from the lenders?  What were they thinking?  

Or was the strategy to create a controversy to distract the banks?

The step by the DFSF is a way of making the pain of the banks a bit more palatable.  And the retreat could be tactical.  Give the banks a victory on this issue.  Then hit them with the haircut, noting that the DFSF was also subject to it.

One can look at any potential "hit" to DFSF from several perspectives.

Of course, if the DFSF is pari passu with other creditors then it will be subject to the same menu of restructuring options.  One would expect that the DFSF will be willing to take the longer tranches and be more patient with ultimate recovery, including losses.  As a governmental entity,  it will not face the same constraints that commercially oriented lenders will face with regulatory authorities' capital requirements, Basel II, the strictures of IFRS, shareholders, etc.  So it's pain on these scores will be less.  And unlike the lenders who made a bone-headed underwriting decision, the Fund stepped in to save the day so its losses are calculated and done for the "greater good".

The total "hit" taken by lenders can be assumed to be an economic benefit to Dubai - money it would not have to pay to the lenders to make up for any shortfall in assets.  Say the DFSF provides $10 billion to the restructured companies bringing total restructured debt to $32 million.  If there is a 30%  haircut, its gain is 2/3 of the 30% .  That of course ignores the losses that will be felt in the local banks in which it has an ownership interest.  

On the other hand wise and brave lenders out there should be applying any cashflow from the companies against principal.   Those banks from jurisdictions that levy income taxes and allow provisions and write-offs as expenses will also get an offsetting benefit courtesy of the tax payers in those jurisdictions - assuming of course that they actually pay enough taxes.  And where jurisdictions don't allow provisions/write offs as an expense, then reducing interest income (by applying payments to principal) could be a way of generating an expense for tax purposes.

Another bit of news is that DW's expectations now appear to be to reach a comprehensive deal in a couple of months to four months.  My guess is that it will be the latter.  If the restructuring menu has several options, that will be more working parts for the banks to negotiate over.  And then of course more choices to be made with consequent time required to evaluate each.  

The Central Bank of the UAE and Abu Dhabi are being "kept part of the dialogue, like many other constituent parts of the UAE. When the time comes for a proposal, nothing in it will be a surprise to Abu Dhabi."  Which implies of course that in the past they were surprised perhaps unpleasantly by the goings on in the Emirate "down the road from them" with its debt management or perhaps more appropriately mis-management.

Finally, many of the themes sounded by the "government" source in the article are from the script recently recited by the Lord, the Deputy, the IMF, and the Financial Times.  Transparency, fairness, equal treatment, etc.  I guess the bully pulpit can have an effect. 

IMF Public Information Notice on Article IV Consultations with the UAE

The IMF released today the Public Information Notice ("PIN") on its Article IV Consultation with  the UAE Government.  The PIN begins with a review of the country's condition and then Executive Board recommendations.  The latter are the heart of the PIN in terms of getting an understanding of what the IMF considers the major issues and the solutions (at least in broad terms).

The recommendations are written in diplomatic language.  So criticism is indirect.  Areas for improvement may be "noted", "stressed", "emphasized".  The tone of these words suggests both the size of the shortcoming and the intensity of the Executive Directors' recommendations.   Also there is "on the one hand but on the other hand" mechansim which is a polite way of raising issues. First, the IMF praises something as having been done well, then it turns to the meat of issue by raising that which has not been done or not been done well.  One can of course also look at the positive statements as an assessment of the achievements of the country.   Like all other such reports, it's best to look at several years to get a sense of progress made, recurring or unsolved issues and new issues that may have emerged or where the emphasis may have changed.  Interpreting PINs is an art not a science so one should have a bit of healthy skepticism about the absolute accuracy of one's analysis.

That's my introductory tafsir.  There is also an IMF prepared guide to the defining what certain terms used in relation to the Directors mean.  This is useful in determining how many directors held a particular view.  For example, in this PIN, you will note that it says that "most directors" agreed that the US$ peg made sense.  That means 15 or more.  Here's a list of the 24 current Executive Directors.

So what were the recommendations and what might we infer (note that word: infer not know for certain)?

1. Commended on actions taken in face of global crisis but noted that DW restructuring poses significant challenges to the economy.  Not just a statement of fact but setting the stage for further comments.  And note this is the first topic addressed and you will see it as a sub theme or motivator for most of the recommendations. 
2. Directors agree on the fundamental strengths of UAE economy but it will be important to have balanced and sustainable growth.  Translation:  No more indoor sky mountains and other uneconomic fripperies.  No artificial real estate booms.
3. Re the DW restructuring they want a speedy, orderly, cooperative, and predictable approach to debt restructuring.  The implication here is that they don't see this taking place at present.
4. They underscored that the process should seek to enhance transparency and information disclosure and ensure comparability of treatment among creditors.  Concern about some creditors being favored over others.  Perhaps the Nakheel Bond? Perhaps a worry about side deals for UAE banks?  And as we have heard before "transparency".  So some of this is forward looking - not an admonition regarding sins of the past but an encouragement not to sin in the future.
5. Emphasized need to restructure GREs.  The language here is strong.  "Emphasized" "vigorous".  Basically the message is to kill non economic GREs. And again probably pretty clear which Emirate's GREs are of primary concern.
6. Then a push for updated provisioning etc with banks. And I'm reading a strong concern about shortcomings in regulation of systemically important banks.  In other words how the heck did some of the large banks get such large exposures to DW?  As well as rather poor regulations.  The CBB UAE has already taken steps to address some of these issues and new regulations are expected in the very near future.
7. The comment on greater co-ordination rationalization of investment decisions at the Federal level.  It's doesn't take a crystal ball to figure out that they are commenting primarily on one Emirate's "investment" decisions.
8. Directors stressed the need for increased transparency of economic and financial data, including financial accounts and business strategies for GREs. Together with improved corporate governance, Directors concluded that these steps would contribute to facilitating access of viable GREs to capital markets.  The clear implication is that they feel that GREs are not up to standard on these issues.  The recent article in The National about the mess in Dubai World's entities is precisely the sort of thing they were referring to.  Also note the choice of the adjective "viable".  That implies to me that the Executive Directors think there are some non viable GREs.
9. And finally a recommendation for improvement in national accounts.  Pretty much a standard mantra for the IMF.  And as has been demonstrated recently, even in Europe there is some fudging of national statistics.

Dubai Rescheduling: "The Murky Gulf"

 

Speakers' Corner Hyde Park

Copyright Heniz-Josef Lucking

Creative Commons Attribution-Share Alike 2.5 Generic license. 

I almost burned my hand earlier today when I picked up my copy of the FT. Luckily I was still wearing my mittens. It's cold here.

It's been more than a few hours since that encounter.  So now the FT is safe to handle.

It didn't take me long to find the source of the heat - there are scorch marks on the editorial page.  

The Murky Gulf indeed.

Of late lots of people have been mightily exercised about transparency.  A Lord, A Deputy, the IMF (a topic for a separate post) and now the FT adds its voice to the chorus.

Certainly, there could be more transparency in Dubai as some might even wish for in the management of the finances of certain members of the EU.  And perhaps even on the other side of the "pond".  Kalaam sharif is not only a good idea from a business perspective but an ideal shared across many borders as this phrase suggests.  It's the right thing to do.  Despite what follows in this article, make no mistake AA is partisan of transparency.

But I think all this hub bub over transparency is a bit misplaced.   

Many of the current critics of Dubai would be silent on the issue of transparency if the Shaykh up the road wrote a check and paid off the foreign bankers.  I don't recall any jeremiads when Shaykh Khalifah put his pen to cheque book for Nakheel.  No demands for transparency on that transaction.  Demands, if any, were more likely that he keep his cheque book out.  

The fundamental issue, I believe, is that the handwriting has appeared on the wall.   And it seems to say:   "Mene, Mene, Tekel Parsin".  Which as any good banker knows means "Long tenor.  Probable loss.  Haircut rather short". 

And so the Lord and the Newspaper no doubt have many good reasons, perhaps as many as 5 billion, to raise the banner of transparency.

It's also a bit of a stretch to bring this topic up now.  Did anyone - even those naive financiers who believed and perhaps still do in the "Implicit Guarantee" - think that Dubai was a paragon of disclosure when they entered the market?  A modern financial Athens on the Creek?  Do they also believe that the PRC is one?

Did they miss L'Affaire Philip Thorpe in 2004?  Were they asleep when the Head of Dubai Customs was jailed much earlier for some rather serious wrongdoing and then miraculously pardoned?  Was this the first foreign country they ever did business in? 

The most economical and profitable due diligence is done before one makes a loan or investment.   Think of it as one's annual physical.  Later due diligence often turns out to akin to an autopsy - interesting but not particularly useful to the subject.

IMF Analysis: MENA Foreign Trade Constrained by Transport and Customs Clearance Problems

Rina Bhattacharya and Hirut Wolde of the IMF have analyzed MENA foreign trade and come to the conclusion that trade is some 86% below what would be expected given the characteristics of these countries' economies.  The non-oil exports of the MENA countries are significantly lower as a share of GDP compared to all other developing regions of the world.  Imports are also lower as a share of GDP compared to the same regions, with the exception of sub-Saharan Africa. This is documented in Figures 1-6 of the study.

The conclusion is that two factors are primarily responsible for trade under performance:

1. Transportation problems 
2. Customs clearance "inefficiencies"

While one might quibble about just how precise the conclusions are (Is it really 86%?  Or is it 83%?), the bigger picture of under performance is less subject to debate.   

And that really is the central message from the study - quite a disturbing one for an area facing a demographic "explosion" and the need to create new jobs.

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.

IMF Researchers Review Lobbying by US Financial Firms - Those with the Most to Spend Have the Least to Offer

Three IMF researchers claim those US financial firms who lobbied the hardest engaged in the least sound activities and had the lowest profitability.

Those who can compete in the market do.  Those who can't lobby for profits.

Study here.

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.

Yemen LNG Makes First Shipment

A bit of good news for this beleaguered country - which is desperately in need of hard currency earnings, not to mention water, peace, progress .....

Most estimates are that over its 20 year or so life the Yemen LNG project will generate US$20 billion for Yemen.  The Yemeni Government's own "conservative projections" estimate US$30 to US$50 billion.

Much needed because oil exports, Yemen's current major source of FX revenues (roughly 90%),  are rapidly running out.  Estimates are for 10 years more production, though the Yemeni Government disputes these figures.

Anyways a few random data points to illustrate the importance of Yemen LNG to the country:

1. In 2003 Yemen exported 450,000 barrels of oil per day.  In January 2009 the total was down to 280,000 bpd.
2. During the first six months of 2009, FX earnings from oil exports were down 75% from the same period in 2008.  Most of that is due to the decline in oil prices, but a worrying 25% drop in volumes exported was also a major cause.
   

So Yemen LNG's first shipment is good news for Yemen.  A substitute for dwindling oil exports.

For those interested in more on Yemen LNG, here's a link to their website.

The project has been "kicking around" since the 1990's.  As one might expect, putting a deal of this magnitude together in Yemen is not an easy task.  The shareholders' group has been a bit of a revolving door - ExxonMobil withdrew after the 1994 civil war.  Enron sniffed around a bit but declined. At one point Hunt Oil (an old Yemeni hand) was rumored to be contemplating withdrawing from the project.  Competition from Qatargas and Dolphin in which Total (the major shareholder in Yemen LNG) has interests also were obstacles.

For those interested in a bit more information on Yemen, two suggestions:

1. Christopher Boucek's "Yemen Avoiding a Downward Spiral" at Carnegie.
2. The IMF's Public Information Notice ("PIN") on  Article IV Consultations with Yemen released this March.
   

Boucek's piece is an overall analysis of all factors - political, economic, and social.   It is also written to promote a particular policy response so factor into your evaluation how that goal may affect his diagnosis and conclusions.

The IMF PIN is focused on economics only.

Some background on the Article IV process and PINs.

Each country that has joined the IMF  (there are 186 or so) undertakes certain obligations with respect to the conduct of its affairs.  A key part of those are reflected in Article IV.   Each year the IMF "consults" with countries about their obligations focusing on Article IV. Member countries have the right to decide how much detail is released to the public about the results of those consultations.

Two other things are relevant to Article IV consultations.

1. Diplomatic Speak:  The position of the IMF is couched in diplomatic language.  Criticisms come in the form of "encouragements" or "strong encouragements".  Issues are described in similar gentle language.  Instead of stating that a member country's economic statistics are deficient, the PIN will speak about improving the timeliness and accuracy of statistics. 
2. Mathhab:  The IMF holds more or less to a certain economic philosophy.  It's important to understand this when reading both their diagnosis and prescriptions. 
   

A second post will follow to hopefully shed some light on the intriguing story of how US$2.8 billion in long term financing was raised for a project finance in a country in Yemen's situation.