Archive for the ‘Banking’ Category
It has long been an anomaly that a relatively small country like the UAE has three stock markets – the Abu Dhabi Securities Exchange, Dubai Financial Market and Nasdaq Dubai – and the logic for consolidation is overwhelming.
Now with the merger between the Nasdaq Dubai and Dubai Financial Market in its ‘very final’ stages, according to officials, there have also been talks about making this a three-way merger.
This is clearly a decision to come from the government level. The ADX is 100 per cent government owned and the DFM has only listed 20 per cent of its stock. In December the DFM announced an agreement to buy Nasdaq OMX’s remaining stake in the Nasdaq Dubai in a $121 million deal.
The merger of the Nasdaq Dubai and DFM is actually more complicated than merging with the ADX from a regulatory standpoint as the two Dubai exchanges have different regulators, the Emirates Securities and Commodities Authority for the DFM and the Dubai Financial Services Authority for the Nasdaq Dubai.
Nasdaq Dubai stocks are also quoted in dollars and not the local UAE currency the dirham. After the merger Nasdaq Dubai listed companies will have a choice over whether to trade in both currencies, although the fixed peg to the dollar effectively makes the dirham a dollar proxy in any case.
UAE bourse a big step
But the creation of a unified UAE stock market is a far more important step. It would mark a decisive breach with the past and the disappointing performance of UAE bourses since their crash of late 2005. There would be a sense of a new start, and a start from a low point.
This would also be more than a symbol of the new unity of purpose in the UAE since the savage credit crunch first struck in autumn 2008 and the country dipped into recession last year for the first time in more than a decade.
For global investors a unified UAE stock market would look far more attractive. It would be a deeper and more liquid market. The potential for initial public offerings would be considerable. And this flow of funds into equities would assist the nation in a rapid recovery from last year’s recession.
Mortality is the biggest enemy of all investors and the managing director of the Abu Dhabi Investment Authority, Sheikh Ahmad bin Zayed Al Nahyan who died in a tragic glider accident last Friday, was arguably the greatest investor of all time with the world’s largest sovereign wealth fund under his control.
A five day search ended yesterday with an announcement from the Emirates news agency WAM that divers had discovered his body in the lake south of Rabat in Morocco where his glider crashed. Flags will be kept at half mast across the UAE but there will be no closure of government offices.
Sheikh Ahmad was a younger brother of the UAE President Sheikh Khalifa bin Zayed Al Nahyan, and listed by Forbes magazine as the 27th most powerful man in the world.
His recent efforts to increase the transparency and openness of the formerly secretive ADIA had been widely praised (see this article) and his death at just 41 years old is a major loss to the nation.
The Government of Dubai has sacked the entire board of Nakheel, the developer of the Palm islands trilogy and other ambitious real estate developments, whose $24.8 billion debt mountain is now the subject of intense restructuring negotiations.
Nakheel chairman Sultan Ahmed bin Sulayem has been replaced by Mashreqbank vice-chairman, Ali Rashid Lootah. Other new board members appointed yesterday include Khalid Mohammad Salim Bakheit, Khalil Eisa Ahmed Awad, Adel Khalifa Al Shaer and Ebrahim Hussain Al Fardan.
CEO Chris O’Donnell was also dismissed from the board, and his position is now subject to the approval of the new board. No CEO could continue without the support of a new board.
The dismissal of the old Nakheel board was not unexpected in the wake of the proposal made to reschedule the group’s $24.8 billion debts last week. Indeed, the banks were bound to insist on new board, management team and business plan for Nakheel before they agree to the new terms.
The banks will want no confusion as to what the loans are for, or who is in charge of fulfilling this plan. So far the indications from banking sources over their reaction to last week’s rescheduling proposal has been mixed, with some banks concerned about the unequal treatment of Nakheel bond and loan creditors.
Solid proposals for the future of Nakheel, of which changing the board is a first step, are likely to go a long way to convincing the banks that the proposals are worth supporting.
Aidan Birkett, the chief restructuring officer or administrator, has said the new debt deal will put Nakheel on ‘a stable financial footing’. But the banks will hardly be writing blank checks for Dubai to pursue more mega projects with their money. A solid business plan is needed, most likely with management not associated with the previous excesses.
It is not clear if the banks will be able to reach a settlement before the next $980 million Nakheel bond that falls due on May 13 or whether Dubai will again have to dip into the funds it received from Abu Dhabi to pay this debt.
Some more news on management structure and business strategy might speed things up.
The latest report from the World Gold Council, ‘Gold in the Year of the Tiger’, concludes that Chinese gold consumption could double in the next decade if its economy continues to grow at a rapid pace.
China is presently the world’s second largest gold consumer after India with 11 per cent of global demand. Last year China consumed more gold than it produced: 423 tonnes versus 314 tonnes with investment and jewelry the main sources of demand for the yellow metal.
1970s gold boom
But in the 1970s gold boom the Middle East was the market that drove gold prices higher and higher. The region is still a huge gold market and consumed 250 tonnes last year, admittedly down 28 per cent on the year before due to the economic recession that hit Gulf expatriates especially hard.
However, it is one thing to read the official statistics about gold. The real market for physical gold is quite different both globally, and locally in the Middle East.
In November 2008 ArabianMoney reported on a record $3.5 billion purchase of gold by Saudi Arabian investors (click here). Many of these gold deals go unreported and are metal deals between individuals, often of very substantial size.
Rumors of gold hoards buried in the Arabian desert may not be so wide of the mark. But the scope for con-men to hone such stories into believable investment opportunities is legendary and due diligence is called for in any such transaction.
What certainly seems to have happened among the super-rich of Arabia is that gold has become very popular as a safe haven asset without third party risk. In the wake of global banking and investment crises and scandals the absence of a third party is particularly desirable.
Gold as money
In short, there is nobody between you and your money. Gold is money. The recent rally in global stock markets has also been treated with much skepticism in Arabia. It would be surprising if investors here emerged as net buyers of global equities rather than sellers into this rally.
It would also not be surprising if Arabian investors were secretly amassing gold hoards, and just doing it on the quiet to avoid sending the price up when news of their massive transactions emerged.
Could it be that gold buying from Arabia will outpace China in the future, if it is not already actually doing so behind closed doors? It is perfectly possible, especially if the Chinese economic miracle proves to be yet another bubble waiting to burst.
New official trade figures showed that non-oil imports into the UAE capital declined by 10 per cent in January to $10 billion, confirming that even Abu Dhabi is feeling the impact of the global economic slowdown.
Total non-oil foreign trade in January declined by a lesser four per cent to $15 billion as exports and re-exports actually grew by 21 per cent while imports declined.
Acting director general of the Federal Customs Authority Khalid Ali Al Bustani told Gulf News that this represented an ‘improvement in the balance of trade between the UAE and the outside world during the reviewed period’ and ‘highlights the growing competitiveness of UAE exports despite the repercussions of the global financial crisis’.
However, it is also undoubtedly true that the big drop in imports is also due to a slowdown in real estate and construction in Abu Dhabi, and falling consumer demand for big ticket items like automobiles.
It is something of a myth that Abu Dhabi has not been impacted by the global financial crisis. In particular the sudden stop and real estate crash in neighboring Dubai has impacted private sector construction projects. Credit has become more difficult, and off-plan property sales have dried up.
Not that the Abu Dhabi Government has slowed its expansion program. It is mainly the private sector that is feeling the downturn, although government hotels have seen revenues fall from the boom times.
The big question for this year will be how oil revenues hold up in Abu Dhabi. Last year saw a swift recovery in prices. There is the possibility of a double dip recession this year that would hit oil revenues again.
All the same, Abu Dhabi has huge reserves in its sovereign wealth funds and is one of the few nations of the world to have ample savings for a rainy day. It can also draw down funds to invest when other nations are unable to do so and when asset prices are down.
So whatever the trade figures tell us, and they are a reminder that Abu Dhabi is also a part of a globalized world, there is little cause for concern, unless you are an importer.
Damas, the largest jewelry chain in the Middle East is to close or relocate some of its 450 outlets as a part of a $870 million debt restructuring deal that follows in the wake of a record $3.7 million fine for violating corporate governance standards last week.
Yesterday a majority of the group’s banks agreed to a standstill agreement and officials said a restructuring plan would be implemented at the end of the standstill agreement period. They had previously announced in December that this would involve the closure of some of their 450 retail outlets.
Last week the Dubai Financial Services Authority ordered the dismissal of the Damac board and fined the family owners for violations of corporate governance that amounted to treating the publicly quoted company like a private concern.
The Abdullah bothers, Tawhid, Tamjid and Tawfique have been ordered to repay $99 million and two tonnes of gold that were taken for personal use and property investments.
The Damas scandal is one of many that has rocked Dubai business since the collapse of the real estate boom 18 months ago. Many business arrangements that might never have surfaced have been exposed as lacking in proper corporate governance and are now the source of much embarrassment and public ridicule.
Entrepreneurs who skate on thin ice and make it, are usually regarded as heros. Those who fall through and have to be rescued are seen as national liabilities.
Yet where would Dubai be today without its merchant families, whatever their trading practices? It is actually men like the Abdullah brothers who built Dubai, and most recently they have devoted an enormous amount of time and effort to the highly successful creation of the Dubai Multi Commodities Centre.
That is not to say that wrong has not been done, merely to note that entrepreneurs are rule benders by nature and that their value to a society amounts to much more than some of the people now passing judgment on them.
For where does the wealth of a city like Dubai come from if not its merchant families? If this inconvenient truth is forgotten then Dubai really does have a problem. It is very sad to see Damas closing and not opening jewelry shops.
The calm always comes before the storm. In world financial markets the bears are tired of calling an end to the year-long rally, while even the bulls are beginning to feel that they are skating on thin ice.
The US treasury market weakened on a poor auction result last week. That might be seen as bullish for equities as an alternative asset class but then higher interest rates are the writing-on-the-wall for global asset prices. Rates go up and asset prices go down.
Indeed, this is the whole problem for the bulls. They know that a bubble is being inflated in stock prices by low interest rates. Traders say this is all down to after hours trading by the big banks. Volumes are light and trading thin.
So why would you wade in and commit fresh funds in such an environment? The potential downside is that new money. The potential upside is a few percentage points on the Dow. Treasuries at four per cent might look more attractive, except that the capital at risk is also a factor there.
The result is something of a stalemate with not much happening. Shorts have been almost all covered in a long rally. Nobody really wants to take on the bulls. But then nobody wants to run with them either.
Judging which way the market might turn next is surely not difficult. The bulls are running out of steam while the bears are resting. And given just how far this market appears to be manipulated it will have to be the bank trading desks who decide to put on their short positions and catch the rest of the market snoozing.
How long will that take? If only we knew. But being positioned away from a crash is more sensible than being in the middle of it, unless you go short too.
Realistically this should not take too much longer. We know from past crashes like the one seen in 2008-9 that a rally is followed by a sharp correction, and the longer the rally the sharper should be the correction.
When the bank trading desks have killed every short then they will go short and kill the bulls. It will not be a pretty sight.