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Investment Dar shows how Kuwaiti investments went wrong

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The financial problems of Kuwait’s Investment Dar are a classic illustration of how investors can get carried away buying prestige assets in an oil boom when borrowing money is only too easy and neglect fundamentals.

It is not as though the 50 per cent shareholder in Aston Martin, and proud owner of the Australian continent on Dubai World’s The World archipelago of offshore islands, is alone. Kuwati investment companies blossomed in the recent oil boom with more than a hundred launched, and many of them are now in deep financial trouble.

Government rescue?

Investment Dar is just arguably the most high profile. Late last week the group announced it would be seeking government support under the $5.2 billion Financial Stability Law established last year.

It explained ‘although terms of a restructuring plan have been approved by more than 80 per cent of Investment Dar’s banks and investors, a small minority have continued to resist supporting the plan’.

The group is now seeking to borrow around $1 billion to refinance its $3 billion debt. Its shares have been suspended since last April following a failure to produce 2008 financial statements on time, and late last year Investment Dar defaulted on a $100 million Islamic bond, the first default of its kind by a major financial institution.

The Kuwait central bank has appointed a temporary supervisor to monitor the debt restructuring process, and news that 80 per cent of creditors had accepted an agreement to reschedule debts over five years first came last December. So Investment Dar’s fate is clearly a matter of national concern.

Yet this is clearly shutting the stable door after the horse has bolted. The quality of the investments made in the oil boom is the real problem.

Poor investments

Aston Martin makes great cars, but was any thought given to how such luxury car sales might hold up in a recession? The Dubai World project The World always looked commercially risky, and is now also a part of the $22 billion debt restructuring at Dubai World.

Kuwait occasionally pays off all the bad debts of its citizens with a munificent gesture from its oil wealth. But this kind of approach to debt carries a moral hazard. Investors start to think that they can never go wrong because the government will always pick up the tab.

But no amount of money will turn lead into gold when making an investment. And from the follies of the boom years, investors in Kuwait and the rest-of-the-world now have to go back to basics.

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Written by Peter Cooper

March 14, 2010 at 9:24 am

Logic to Zain cashing out of African telecoms for $10.7bn

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Kuwait based telecommunications giant Zain says it is considering the sale of most of its African businesses following a $10.7 billion offer by Bharti Airtel of India, and is entering exclusive negotiations until March 25th.

The offer comes only two weeks after Zain CEO Saad Al Barrak resigned. The brilliant Mr. Al Barrak built up Zain from its roots as MTC and has been the key force in its development since 2002. His resignation has not been explained.

Zain a big success story

A logical supposition would be that Mr. Al Barrak was opposed to the break up of Zain. This correspondent can well remember Mr. Al Barrak’s email requesting an interview many years ago, a rare event among leading Arab businessmen who usually prefer to have journalists run after them.

But are the dominant shareholders of Zain, the Kharafi family, right in wanting to cash out of Africa at this point? Operations are at a relatively early stage with seemingly excellent growth prospects, although unprofitable at the moment.

Perhaps that is the point. Many investors in Africa have stuck around long enough to see their investments trashed by politics and misgovernment. Sometimes it is wise to sell out while hopes are highest, and not to wait to find out if they are misplaced.

Then again Zain shareholders might be taking a view on global stock markets and the current high valuations given to telecom groups. If stock markets correct and begin to reflect a longer depression in global business activity then the value of their telecom assets in Africa will suffer.

Opportunity or future disaster?

We can imagine Mr Al Barrak’s view. He sees the low mobile penetration rate in Africa as one of the last great opportunities in the telecoms sector. That is what he told me five or more years ago. Clearly Bharti Airtel must share this vision.

Yet if Zain is to conclude a deal on its African operations then it had better get a move on. For if global stock markets take another tumble it will be very difficult to close a deal like this, and the opportunity may be lost.

Then Zain will be stuck with African telecoms for the long-haul. Perhaps an eagerness to sell is understandable, and Bharti Airtel is overpaying at the top of the market.

This would be the second largest overseas acquisition ever by an Indian company. Tata Steel paid $12.9 billion for UK steel group Corus in 2007. Whether it proves a good buy only time will tell.

Written by Peter Cooper

February 15, 2010 at 10:38 am

Posted in Banking, Kuwait, Media

Looking back 30 years to see into the future

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At the Davos World Economic Forum participants are often encouraged to peer 30 years into the future. But what about looking back 30 years and recalling the dreams of that time for the future and using that as a guide as to what might or might not be achieved in the future.

This correspondent will return to Oxford University for a meeting of alumni in June after an absence of 30 years. What did the world look like then and what did we dream about?

Actually there were not so many dreamers among the spires then. Students were an apathetic lot and seldom went to meet our famous visitors. I liked to meet as many as possible and frequently ended up in one-to-one conversations.

Cold War days

At that time the world was split into the two camps of the Cold War, and Eastern Europe remained behind the Iron Curtain. Even the thought of this ever changing looked impossible.

The Middle East was a major source of tension, then as now. There was the Iranian Hostage Crisis after the revolution, the invasion of Afghanistan by Russia and the second oil price shock of 1980 – which very few analysts would have expected to be the start of 20 years of low oil prices.

In England the two party system seemed about to end with the rise of a new centre party. The leader of the conservative students in Oxford, a chap called William Hague remembers the leader of the liberal faction as a major rival. His political career blossomed, mine was already over.

But then as now the world faced a serious recession. The 1980-2 recession was probably the worst until the current day. Yet we survived, although it made getting jobs difficult for graduates at the time. Indeed, the Thatcher Revolution succeeded in reviving the British economy, albeit after a very painful start for many of us.

But over 30 years the extent of change depends very much on where you are sitting. In places like Oxford or my home town Salisbury time has stood still. Russia and Eastern Europe are transformed beyond belief, and this peaceful transition is the greatest achievement of the European Union perhaps.

Middle East progress

In the Middle East the tensions remain. But some cities have made amazing progress. Dubai was a small town in 1980, now it is a global hub city with the world’s tallest building. Other countries have gone backwards.

So where would that leave us 30 years in the future when I hope to be among the survivors going back to my old university again? The lesson seems to be that some things do change and others change very little.

Geopolitically you would have to think a split between the USA and China might be the new axis of political power. It would be wrong to write-off America. We used to do that in 1980. China I am less sure about.

One of my young colleagues from Oxford went to Japan in the 1980s and came back after the market crash of 1990. Japan became very important but never surpassed the USA. China could yet just be a significant power rather than a bipolar giant by 2040. Its crash is yet to come, and all that glitters is not necessarily gold.

European Union

Europe ought to be far more important by 2040. The expansion and consolidation of the European Union is an understated achievement of the past three decades. If it continues and embraces Russia, to a greater or lesser extent, then this is a formidable economic and cultural power bloc, substantially larger than the US and second only to China in population.

Just as we used to write off the USA in 1980, today people overlook Europe. It is a very large, rich and well-educated continent. China has a very long way to go to catch up.

The Middle East should also enjoy dynamic change, if only because a fast growing, young population will demand it, and the oil and gas wealth should pay for it. The hope must be for a more peaceful outlook with the oil and gas reserves developed to the point that an economic transformation of the region occurs.

Cities like Dubai, Abu Dhabi and Doha are already feeling this phenomenon. It ought to become more widespread. Will it actually happen? Given that the world needs the energy resources of the region this has to be inevitable, one way or another.

Written by Peter Cooper

February 4, 2010 at 9:03 am

Gulf leaders avoid the World Economic Forum in Davos

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In recent years Gulf business leaders have been prominent participants at the World Economic Forum in Davos, Switzerland. Not so this year, with the honorable exception of a big delegation from Bahrain.

Until the financial crisis smashed the oil boom in autumn 2008 the Gulf countries were frequently added to the BRICs – Brazil, Russia, China and India – as the motors of future global growth. That optimism has now cooled and Russia is also often dropped off this list.

Oil price crash

Indeed, the downturn in hydrocarbon prices hit both Russia and part of the Gulf very hard. Not that oil and gas prices are that low today. It is the voracious borrowing that accompanied the boom in Russia and the GCC that now weighs on these economies.

It is therefore not surprising that delegations from these countries are keeping a low profile, or not attending Davos at all. Why remind the many creditors in the audience of your existence when it is best if they forget about your troubles?

However, those gathered in Davos to be told that the future lies with China, India and Brazil ought to reflect a little further. Did not the appearance of sheikhs a couple of years ago signal that the oil boom was almost over?

You put your trust in emerging market at your peril. They are great investments when they are down on their luck. Post-1998 Asia comes to mind. But by the time business leaders are appearing on stage in Davos the game is likely almost up.

Emerging problems

China, for instance, had to spend the equivalent of half its GDP in the first half of 2009 to sustain its economic growth record. Private sector borrowing in India is also off the scale. Have people forgotten the legendary default record of South America?

It will be no surprise to the readers of ArabianMoney that we think this is where the next shoe will drop in the fall-out from the global financial crisis. This is the investment theme of yesterday, not the way to make money today, although when these markets have crashed again of course they might be a very good place to invest. We see China as the sell of the year, not a buy (see this article).

Actually, Gulf stock and real estate markets look far closer to attractive investment valuations than Brazil, China and India – a theme that this website will continue to pursue.

Written by Peter Cooper

January 28, 2010 at 10:39 am

Can the Mideast power global growth if the UAE is in recession?

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The International Monetary Fund now says that the UAE economy contracted by 0.7 per cent in 2009, placing the second-largest Arab economy in recession, and told The National newspaper that ‘in 2010 overall GDP growth will be a bit flat’.

IMF regional director Dr. Masood Ahmed said: ‘Within that, we expect some continued contraction in Dubai and positive growth in Abu Dhabi. In 2010, we believe that the restructuring in the real estate side of Dubai will continue to be a drag on growth’.

Mideast forecast up

And yet at the same time the IMF is raising its forecast for economic growth in the Middle East from 4.2 to 4.5 per cent, one of the highest global growth rates outside China.

This is not the first time that the IMF’s growth projections for the UAE and the Middle East have failed to add up (see this article). Now is it not fair to assume that if the UAE is in trouble for 2010 then so is the rest of the Middle East?

Dr. Ahmed puts the IMF revisions for the UAE down to the Dubai World debt restructuring and the continuing drag of the local real estate crash on the national economy.

Its optimism about 2010 for the wider region is based on an average oil price of $76 a barrel. Forecasting oil prices is of course notoriously difficult but this appears to be a simple projection of current prices forward.

Oil price outlook

There are some big caveats here. What happens if the world goes into a double-dip recession? What happens if the liquidity fueled Chinese growth engine comes off the rails? Then oil prices could take a tumble and the IMF forecast again prove inaccurate.

Is there a better GDP growth estimate on offer? Probably not but it is well worth understanding the inherent problems and uncertainties surrounding such forecasts which may not be very good guides to the future in current circumstances.

To be fair the IMF is duty bound to make its prognostications. But it could at least try to explain how it can see the Middle East as a power house of global growth for 2010 when we are not going to see any growth in the UAE. Both statements are unlikely to be correct.

Written by Peter Cooper

January 27, 2010 at 10:28 am

Patience will pay dividends for Arabian investors

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How boring to have to convey the message that patience is likely to pay dividends for investors in 2010. But being dynamic and opportunistic can be a hell of a bad idea if you are jumping in the wrong direction. Better to wait and see where the markets are going first.

Take the FTSE for example: year-end pundits predicted an upside of a few hundred points for 2010 but conceded market volatility would be considerable. So you would see your fortune fluctuate substantially, and lose some nights’ sleep, all for a few lousy percentage points in gain, assuming that the consensus is right.

Market timing

A patient investor would wait for one of these market pull-backs and then either ride a mini-cycle and sell rather quickly, or hold and still have a bigger gain at the end of the year, assuming the consensus is right.

But what if the consensus is wrong? After such a long rally from the lows of last March a big correction is still possible. And if global economies go into a double-dip recession later this year stocks could very well end up at a much lower level than today. Again hardly a reason to risk your capital in stock markets now.

You could argue that certain stock market sectors – energy or precious metals, for instance, will outperform others, or stock pick if you have some special insight. That is almost certainly true but these stock prices will still be affected by the wider market moves.

Trading sideways

Perhaps 2010 will be a year of a sideways trading range in stocks but with high volatility. That is a historic pattern observed previously after periods of violent movements like we have seen over the past two years.

To me this feels like the mid-to-late 1970s. That was the era of high inflation, high energy prices and the precious metals’ price spike. Nominal property prices consolidated but lost ground in real terms due to inflation. People then predicted the end of the US dollar but it refused to die.

Sat in Dubai that makes for an interesting outlook despite the need for patience right now. Arabia has already had its big investment correction, although it might not yet be quite at the bottom if global markets tumble again.

Local not global

So if you think of higher oil prices, low property prices and bombed-out stock markets, the local opportunities for Arabian investors that are coming up could be worth the wait. And perhaps local investments will be far more successful than global investments over the coming few years as in the late 70s.

Arabian stock markets crashed in late 2005 and are thus further ahead in the recovery cycle than the advanced economies, and local property crashes have been far deeper and faster than anything seen in the West. Yet the oil price is around $80 a barrel which is great for local cash flow, and much higher than the price that fueled the last asset price bubble.

Written by Peter Cooper

January 4, 2010 at 9:08 am

Reason to doubt oil price resilience in 2010

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Commodity speculation with cheap money, emerging market demand and a weaker dollar have helped to keep oil prices higher than they should have been in a recession during 2009. There is good reason to think these forces will not sustain oil prices next year.

First, we are seeing signs all over the world of a tightening in monetary policy. From Chinese real estate loan restrictions to actual rate rises in Norway and Australia, and even in the US now the talk is of reigning back the stimulus as the economy recovers.

Faking growth?

Secondly, there are increasing question marks over the real strength of emerging market economies. Have they just been faking it for 2009? Stagnant petrol sales in China, for example, hardly square with the reported rip-roaring growth rates.

And certainly much of the government money pumped into China, India and Brazil has gone into inflating stock market and property bubbles of dangerous proportions. Take away the new liquidity and this will implode taking the real economy with it, ask Dubai.

Third, the US dollar appears to have bottomed out and now be on an uptrend (see this article). All commodities are priced in dollars, so when the dollar strengthens then commodity prices fall.

And perhaps a fourth reason to think oil prices might be lower in 2010 is that global demand is still very weak as a result of the impact of the recession on GDP which will now take several years to recover to former levels, even assuming the recession does not turn out to be a double-dipper.

GCC impact

A falling oil price is of course particularly bad news for the Gulf economies. They have been fortunate in 2009 to enjoy an oil price averaging $61.54 to date compared with the $45 in their national budgets. Otherwise the impact of the global financial crisis would have been even worse.

So what if the oil price averaged $40-50 a barrel in 2010? That is not going to be catastrophic. The price band in the early 2000s was $22-28. But equally it is not very good news for the places like Dubai which have been hardest hit by the recession.

The present big spenders – Abu Dhabi, Doha and Saudi Arabia – are always liable to trim their plans back if the oil price takes a tumble, and that is a reasonable expectation for 2010, unless inflation emerges and renews interest in oil as an inflation hedge.

Written by Peter Cooper

December 21, 2009 at 9:00 am