A scar on Bahrain’s financial marketplace
Bahrain’s civil unrest — which had a one-year anniversary this week — has taken a toll on the local economy and left a deep scar on the Gulf state’s aspiration to become an international financial hub.
A new paper from the Sovereign Wealth Fund Initiative, a research programme at Center for Emerging Market Enterprises (CEME) at the Fletcher School at Tufts University, examines how the political instability of 2011 is threatening Bahrain’s efforts in the past 30 years to diversify its economy and develop the financial centre.
Asim Ali from University of Western Ontario and Shatha Al-Aswad, assistant vice president at State Street, argue in the paper that even before the revolt, Bahrain lagged in building the foundations of a truly international hub in the face of competition from Dubai and Qatar.
Unlike DIFC (Dubai International Financial Centre) and QFC (Qatar Financial Centre), Bahrain insists upon local labor; currently 70% of employees in its banking and financial services industry are Bahrainis. Bahrain’s reluctance to hire non-resident talent has made Dubai…an alternative for those investors looking for a centre with more flexible labor practices such as DIFC provide… The constraints – a lack of formalized institutional and regulatory structure, along with an ad hoc business environment, underdeveloped infrastructure, and under-supplied skilled workforce – have negatively affected its growth and potential to become the financial gateway in the Middle East.
Then came the crackdown of protesters.
Its ruling Al-Khalifa family unleashed a ferocious extra-judicial crackdown against the opposition. It appeared the standard axiom of Gulf ruling families – securing legitimacy and counter-acting political opposition through redistribution of oil wealth – was sorely insufficient to address citizens’ grievances. These led not only to international opprobrium of the Bahrain government but also made foreign businesses reconsider Bahrain as a financial center – with many foreign business shifting workers and operations to Dubai… Indeed, confidence in Bahrain as a financial hub took a major blow along with its image as a stable, tolerant and liberal state.
It remains to be seen what impact last year’s pro-democracy uprising will have on the state of Bahrain and its ambition as a regional financial gateway– especially at a time when Dubai (DIFC) and Qatar (QFC) remain serious contenders to become dominant financial centers in the Middle East.
Bahrain had shown perseverance and strength in building its financial center, but democracy efforts and human right violations were able to threaten the hard work of more than 30 years.
Bahrain’s sovereign wealth fund Mumtalakat, which is leading the country’s efforts to diversify its economy away from the hydrocarbon sector, suffered a series of ratings downgrades last year as a result of sovereign downgrades. Mumtalakat is rated triple-B.
Who were the investment winners and losers in 2009?
Let’s not beat about the bush: the winners in this year’s investment stakes were those who cashed out early in the financial crisis, looked at hugely oversold stock markets in March and jumped back in. The losers were those who spent too much time thinking about it or, worse, thought it was a good idea to put all their money in Dubai stocks and Greek government debt.
For the winners, it all had to do with market timing. Buying MSCI’s emerging market stock index at its March 3 low brought gains of close to 110 percent. It was “only” a bit above 72 percent for the full year. World stocks as a whole gained around 30 percent for the year and nearly 75 percent from the March low.
Gold bugs grabbed a bit of the spotlight because of the record nominal highs for the metal. But with a gain for spot gold of around 24 percent, you would have done much better buying oil, which gained more than 75 percent.
Now for the losers. Two types, really — those who found themselves clobbered by a Black Swan (a surprise) such as the Dubai debacle and those who were too slow to recognise the market recovery. Entering the global stock market at the beginning of June, for example, would have meant gaining around 22 percent — not bad, but a pittance of what was available by taking the risk earlier.
There were also, of course, less mainstream plays that did well — going long Sri Lankan stocks, for example. So what were your winners and losers?
Can the euro zone survive Greece?
Wolfgang Munchau, co-founder and president of Eurointelligence, has raised an uncomfortable prospect for investors in Greece. In a Financial Times column today, the long-time Europe commentator argues that Brussels may not be willing to bail Greece out if it were to default on its debt à la all-but sovereign Dubai World is about to.
The EU’s authorities, rightly or wrongly, are more afraid of the moral hazard of a bail-out than the possible spillover effect of a hypothetical Greek default to other eurozone countries. If faced with a choice between preserving the integrity of the stability pact and the integrity of Greece, they are currently minded to choose the former.
Munchau reckons that outright default is unlikely, but wonders whether the current spread between Greek and benchmark German bonds really reflects the risk that investors are taking. It is currently around 178 basis points after recovering from a blow out on Dubai worries last week.
The overriding problem is that consecutive Greek governments have been unable to force through the kinds of reforms that Europe and others have long called for and which being a euro zone member really entails.
Even when Greece qualified for the euro zone back in 2000, it was said that it had made it without having to take the harsh steps other had. Promises were made, but when it comes to austerity, the Greek public won’t hear of it. Greeks take to the streets with a speed and passion that makes French unions look positively Thatcherite.
Greece’s new government is probably going to get a diplomatic pasting from its EU partners when its budget is discussed later this week. So Greece may well be on a collision course with Brussels, which sometime in the future may have to decide whether it is going to be sugar daddy or stern patriarch.
The underlying issue, of course, is whether the euro zone could take the strain of a default within its family. U.S. states can suffer huge difficulties without the future of the dollar coming into question. But what about the still-young euro?
Dear Jeremy,Mr Almunia answered the question today. The EU will not allow Greece to default. It is pretty clear that Greece is being singled out for allow me to say reasons that are quite suspect. It is not as if Spain, Portugal and some of the other Eastern European states have not got similar or even worse probelms. Obviously, the speculators are enjoying the ride. So, lets not reward them by gracing their views.
A black swan in the desert
Just when investors were settling down to lock in a few of the year’s profits and put their feet up for the end of the year holidays, a black swan has come waddling out of the desert to put everything on edge.
The unwelcome cygnus atratus came in the form of Gulf emirate Dubai telling creditors of Dubai World and property group Nakheel that debt repayments would be delayed. Fears of contagion spread widely, hitting world stocks, lifting the dollar out of its basement and driving demand for European debt so much that a roughly 6-month trading range for futures was breached.
It all may settle down soon. Dubai says the problem does not apply to its big international ports group. Meanwhile, the emirate is a pretty leveraged place, but fellow emirates and neighbouring countries such as Abu Dhabi, Qatar and Saudi Arabia are pretty flush with cash. They could even step in to help as a matter of solidarity.
At least for now, though, it is showing just how interlinked everything is. Ok, of course, banks get hit when people worry about expsosure. But who would have thought that a European car company would get clobbered by a debt problem in the Gulf?
The issue is those sovereign wealth funds that have been recycling their country surpluses into investments elsewhere. Qatar owns 10 percent of Porsche, Abu Dhabi and Kuwait own 17 percent of Daimler between them. So it is not just investors worrying about their money in the region, it is investors also worrying about where the region’s money is.
Is country risk taking on a new meaning?
Investing is getting very complicated with the intervention of sovereign funds. Once something goes wrong in their countries, they will liquidate assets and update the regional stock markets.I think if those rulers in Middle East are smart, they will step in to snap up the bargains after those overseas investors pull out of the market.
from Summit Notebook:
Dubai returns to fixed income sphere
Dubai returns to the fixed-income sphere for the first time in more than a year after raising about $2 billion from dirham and dollar-denominated Islamic bonds.
Confidence in the emirate had run aground earlier this year as investors bet on Dubai's state-linked entities not being able refinance debt. So far, this year it has met all its obligations and with the fresh issue booking about $6.5 billion from regional and international investors, Dubai's doomsday scenario appears to be vanishing.
With much of the United Arab Emirates' oil coming from the largest of the emirates Abu Dhabi, investors have flocked to the capital this year as appetite for good emerging market debt revives. The spread between Abui Dhabi and Dubai widened at its peak to over 500 basis points in February, but Dubai government efforts to restore confidence -- kickstarted by the UAE central bank buying $10 billion of its bonds -- has helped spreads narrow to about 200 basis points.
Dubai still has a long way go. The next test will be property developer Nakheel resolving its $3.5 billion Islamic bond maturing on Dec. 14 and then a raft of debts in 2010.....but as Harold Wilson once said, "A week's long time in politics."
from Chris Wickham:
Climate change is off the agenda in Dubai
The headline in the Gulf News English language daily reads 'UAE tops world on per capita carbon footprint'.
For a place so reliably bathed in sunlight, the Dubai property explosion seems to have generated enough construction noise to drown out the environmental debate raging elsewhere in the world.
For the first-time visitor, the scale of the global construction superlatives - The Palm, made from reclaimed land jutting out defiantly into the Gulf, the skyscrapers built in a region where there is no shortage of space - is staggering.
The amount of environmentally 'sinfull' concrete poured over the last decade is ncalculable. Billboards lauding the benefits of solar power look like a bit of an after thought.
Climate change was just beginning to take hold as an issue for property developers when the economic downturn struck and put paid to nascent environmental ambitions. "Green is not cheap," says Markus Giebel, chief executive of Dubai property group Deyaar Development. "Dubai was on the right track, but there's no money now. People are thinking about survival."
from Raissa Kasolowsky:
Dubai is super enough, thanks
Dubai has sufficient superlatives – record-setting landmarks unique in their size, cost or concept -- to last it for the next decade – so enough already, says Deyaar CEO Markus Giebel.
“I endorse having the tallest building in the world, the first seven-star hotel in the world, the palm,” he says. “What I don’t endorse are attempts to now outdo these superlatives…they are going to last us the next 10 to 15 years.”
Dubai is home -- amongst other attractions -- to the world's largest indoor ski slope, the world's tallest tower, and the world's first, albeit self-rated, seven-star hotel that also sports its own Rolls Royce fleet and helicopter landing platform. The global financial crisis brought a real estate boom in the emirate to a screeching halt, leading to a raft of new, hugely ambitious projects -- including a 1-km high tower and the world's largest mall -- to be shelved or delayed.
from Summit Notebook:
Green shoots and short attention spans
Coming out of one of the darkest recessions, have we learned the lesson at all? Or are we going to repeat the mistakes of the past again?
Khuram Maqsood, managing director of boutique corporate financing advisory firm Emirates Capital, thinks we may well repeat them.
He says a second wave in the downturn – if it comes at all – is unlikely to come from a new, unseen fault in world markets.
from John Irish:
Mid-East business leaders to discuss economic recovery
Starting Monday, Reuters is inviting business leaders from various sectors in Dubai, Riyadh and Cairo to discuss key challenges facing them in the aftermath of the global financial crisis and the lessons they have learnt.
Is the downturn over or are we set for a double-dip? Will buyers flock back to Dubai's property bonanza or will they stay away for the foreseeable future? Will the oil-reliant economies of the Gulf manage to diversify as they had hoped at the start of the boom in 2002 or will they continue to rest on their barrels of crude? Read this for a preview.
Dubai pride helps Nakheel to save face
By Jason Benham
It’s the property face of the Gulf’s business and tourist hub and the developer of palm-shaped islands visible from space – so Dubai will simply not allow property firm Nakheel to default on its huge $3.5 billion Islamic bonds which mature in December.
Just think of the bad publicity it would bring to the region, and there’s already been plenty of that. Another kick in the teeth is certainly not what Dubai needs. Plenty of critics have joined the ‘bash Dubai” bandwagon and several more are set to join the ranks at some stage.
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