#196 - June 2017 by CPI Financial

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contents

JUNE 2017 | ISSUE 196

E D I TO R ’ S L E T T E R set a new benchmark for the asset management industry (pg. 16). This month’s instalment of Banker Middle East also covers an array of topics including a country focus on Lebanon (pg. 22), an overview of sovereign wealth funds (pg. 32) and private banking (pg. 36). As usual, we hope you have a productive read. Wishing you a blessed Ramadan, and Eid Mubarak in advance.

deposits, investment accounts, insurance policies and financial transactions belonging to the individuals and entities cited in the joint terror lists issued by Bahrain, Saudi Arabia, UAE and Egypt. On a lighter note, despite the fasting month, business seems to continue as usual for the financial sector in the region. We’ve heard news of a merger in Oman, new Sukuk issuances from Meethaq and NCB Capital as well as an assurance from KPMG that banks in the region that have been resilient despite margin pressures, increased impairment charges and higher funding costs—all this can be found on www.cpifinancial.net. The cover story for the month features Union Bancaire Privée as they demonstrate how they’ve

Nabilah Annuar Editor

BankerMENA CPI Financial

COVER INTERVIEW

6 News analysis

Nabilah Annuar

16 Setting a new benchmark

Qatar—isolated

COUNTRY SPOTLIGHT

8 News bites

22 Reviving Lebanon

THE MARKETS

SPECIAL REPORT

10 A new divergence at the top

28 The Qatari quagmire

LEGAL FOCUS

SOVEREIGN WEALTH FUNDS

12 Keeping in check

32 Regional trends www.bankerme.com

An outstanding ﬁnancial track record Samer A.H. Itani, Vice Chairman–General Manager of LGB BANK

Focusing on the fundamentals Shailesh Dash, Founder & Board Member of Regulus Capital

fundamentals Founder & Board Shailesh Dash,

14 Regional

regulatory update

Member of Regulus

on 24 Iraq: hanging

Get the next issue ofEast Banker Middle before it is published. Full details at: www.bankerme.com

Capital

54 Creating a diverse

bond market

and Media Free

Focusing on the

Zone Authority

investors “We try to present with attractive investments in this region instead.”

Dubai Technology

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MAY 2017 | ISSUE 195

ISSUE 194 APRIL 2017 |

om www.bankerme.c

60 The blockchain

conundrum

“LGB BANK plans to oﬀer new service and innovative ﬁnancial solution packages, which enable it to address the challenges posed by the local market.”

An outstanding ﬁnancial track record

Get the next issue of Banker Middle East before it is published. Full details at: www.bankerme.com

Samer A.H. Itani, Vice Chairman–General Manager of LGB BANK

18 Egypt: no pain, no gain

30 Riding out the storm

40 ESG in private equity: from fringe to focal

Dubai Technology and Media Free Zone Authority

he month of June began dramatically with news of the political dispute between Qatar and neighbouring countries making headlines on a bright Monday morning. This was followed by a series of events that completely cuts Qatar off from any sort of link to the GCC countries involved. Qatar is reported to be open to talks to solve the issue and as such, several governments including the US, Kuwait and Turkey have stepped up offering to mediate the dispute. The repercussions of these actions on Qatar’s financial sector and economy are extensively covered in this issue on pg. 6 and pg. 28. Most recently, the Central Bank of Bahrain instructed all financial institutions in the country to freeze and seize any bank accounts, assets,

62 Elevating cybersecurity management to another level

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JUNE 2017 | ISSUE 196

PRIVATE BANKING

36 UAE remains a bright spot for private banking

IN DEPTH

42 Corporate Palestine harnesses individual expertise EVENT

46 New frameworks for risk management?

TECHNOLOGY

48 Leveraging fintech opportunities in the Middle East 50 Banking on mobility in the GCC PERSONALITY

54 Jahangir Aka, Head of Client Group—Middle East & Africa, Neuberger Berman

www.bankerme.com Chairman SALEH AL AKRABI Chief Executive Officer ROBIN AMLÔT robin@cpifinancial.net Tel: +971 4 391 4681

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Editor - Banker Middle East NABILAH ANNUAR nabilah.annuar@cpifinancial.net Tel: +971 4 391 3726

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Editors MATT AMLÔT matt@cpifinancial.net Tel: +971 4 391 3716

Managing Editor GEORGINA ENZER georgina@cpifinancial.net Tel: +971 4 391 3728

NIKHIL NIDHAN nikhil@cpifinancial.net Tel: +971 4 391 3717

WILLIAM MULLALLY william@cpifinancial.net Tel: +971 4 391 3718

DANIEL BATEMAN daniel@cpifinancial.net Tel: +971 4 375 2526

JESSICA COMBES jessica@cpifinancial.net Tel: +971 4 364 2024

MOHAMED MAKSOUD mohamed@cpifinancial.net Tel: +971 4 433 5320

London Bureau ISLA MACFARLANE isla@cpifinancial.net Tel: +44 7875 429476 Chief Designer BUENAVENTURA R. JALUAG, JR. jun@cpifinancial.net Tel: +971 4 391 3719

Caring for your career

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news

Qatar—isolated Qatar’s diplomatic dispute with regional neighbours to carry severe financial and economic repercussions if not resolved soon

Monday morning in the first week of June 2017 marked a dramatic turn in GCC’s history books as Saudi Arabia, UAE, Bahrain and Egypt renounced its diplomatic ties with the State of Qatar due to the government’s alleged breach of the Riyadh Agreement, its interference with the affairs of regional states as well as supporting terrorism. This was followed by similar announcements from Yemen, Libya (its eastern-based government severed ties with Doha), Maldives and Jordan (the country scaled back its diplomatic ties with Qatar). Since these announcements, chaotic scenes were captured across the region when land, sea and air routes were closed to Qatar. Food security also became an issue—residents in Qatar rushed to supermarkets to stock up on supplies. The Qatar Stock Exchange was down more than seven per cent on the first day of these announcements with all 44 stocks in the red—this however slowly recovered over the following days. According to reports (at time of publication), the dispute hasn’t

substantially affected natural gas lines and currency flows yet. A prolonged economic isolation would also jeopardise Qatar’s efforts to diversify away from hydrocarbons and become a regional services and manufacturing hub. According to Fitch, Qatar’s tourism, trade and hospitality sectors would suffer from a loss of visitors from the Gulf. A general weakening of economic sentiment could hit the retail and real estate sectors. Domestic demand would suffer from the emigration of nationals from the countries imposing sanctions. The dispute has resulted in a rating downgrade from S&P as it lowered its long-term rating on the country to ‘AA-‘ from ‘AA’ and placed it on CreditWatch with negative implications. This follows Moody’s outlook revision on Qatar from stable to negative last month, on the back of an expectation of a sluggish growth trajectory and rising external debt. S&P’s rating downgrade reflects its opinion that the situation will exacerbate Qatar’s external vulnerabilities and could put pressure on its economic growth and fiscal metrics.

On the banking side of things, S&P expects these events to have the potential to destabilise nonresident deposits and provoke an outflow. Although this potential outflow may not pose immediate and significant issues for Qatari banks, it could mean that government support would be needed in some form to offset any potential major outflow, including the potential use of Qatar Investment Authority’s assets, in addition to the central bank’s contingency reserves. S&P now consider risks to external financing lines to the whole economy, including foreign direct investment, portfolio flows and to the financial sector to be elevated, and this could lead to pressure on Qatar’s pegged monetary arrangement. Qatar’s fiscal and current account deficits could widen as related revenues from regional trade diminish. Debt of government-related entities (GREs) account for approximately 85 per cent of GDP and there is currently no indication that Qatar’s main trade partners (Japan, South Korea, China, and India), who purchase the bulk of Qatar’s LNG production, will reconsider their existing trade arrangements. According to S&P, these four countries account for 55 per cent of Qatar’s total exports. Qatar is expected to continue with its substantial infrastructure development. However economic growth is projected to slow down, not just through reduced regional trade, but as corporate profitability is damaged because regional demand is cut off, investment is hampered, and investment confidence wanes.

(CREDIT: WHITEPUDICA/SHUTTERSTOCK)

analysis

A thorough report on Qatar is featured on page 28.

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MobileMobile Banking Banking Corporate Corporate 27x21 27x21 Ad.pdfAd.pdf 1 12/13/16 1 12/13/16 12:36 12:36 PM PM Mobile Mobile Mobile Banking Mobile Banking Banking Corporate Banking Corporate Corporate Corporate 27x21 27x21 27x21 Ad.pdf 27x21 Ad.pdf Ad.pdf Ad.pdf 1 1 12/13/16 1 12/13/16 1 12/13/16 12/13/16 12:36 12:36 12:36 PM 12:36 PM PM PM

CMY

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news

bites

Growth among sovereigns remain subdued ten years on from crisis Notwithstanding an ongoing cyclical growth recovery, the growth outlook for Moody’s rated sovereigns remains subdued when compared with the growth achieved in the decade before the financial crisis. Between 2008 and 2017 (F), real growth for Moody’s rated sovereigns averaged 2.9 per cent for Moody’s, compared to 4.3 per cent from 1998 to 2007. Looking ahead, Moody’s expects global growth of 2.8 per cent for 2017 to 2018. According to a recent report by Moody’s, since the crisis, government debt metrics have deteriorated across both advanced and emerging market economies. Between 2007 and 2017F, the median increase in sovereign debt was 15 percentage points due to a combination of spending during and after the crisis and the revenue impact of subdued growth since the crisis. Moody’s expects debt-to-GDP ratios to average 54 per cent globally in 2017-18, compared with 37 per cent in 2007-2008.

Middle East sovereign investors put major asset allocation decisions on hold Invesco in its fifth Invesco Global Sovereign Asset Management Study, found that geo-political uncertainty and limited options to increase risk asset allocations are causing sovereign investors in the Middle East and globally to make fewer allocation changes than at any point in the last five years, despite target return gaps increasingly widening. Middle East and other sovereign investors see low interest rates as the greatest tactical asset allocation factor driving increasing allocations to real estate as sovereigns look for alternative sources of income generation. However, the longer term implications are less certain with expectations of a gradual return from quantitative easing to quantitative tightening. Instead Brexit and the US election results are expected to grow in importance for future allocations (set to increase in importance by +82 per cent and +68 per cent respectively), as the implications of political shifts on investment performance becomes clearer.

RATINGS REVIEW Entity

Abu Dhabi

Bahrain Egypt

LT IDR/LT ST IDR/ST Rtg (FC) Rtg (FC)

F1+

BB+

LT IDR/LT Rtg (LC)

ST IDR/ST Rtg (LC)

Country Ceiling

F1+

AA+

BB+

BBB+ B

Country

UAE

Bahrain Egypt Iraq

Iraq

B-

Kuwait Ras Al Khaimah Turkey

F1+

AA+

Kuwait

AA+

UAE

BB+

BBB-

Saudi Arabia

A+

F1+

A+

F1+

Qatar

F1+

AA+

Turkey Saudi Arabia Qatar

Lebanon

B-

B B

Under Review

B-

KEY Positive Negative Evolving Stable

OUTLOOK

B-

Lebanon

WATCH

Alizz Islamic Bank proposes merger with United Finance Company Oman’s United Finance Company has been approached by Alizz Islamic Bank proposing the possibility of a merger. The Board of United Finance Company has approved engaging in a dialogue with Alizz Islamic Bank to explore the possibility of merger, subject to it being on a full cash acquisition basis. Any such merger would be subject to requisite regulatory and other approvals.

GFH withdraws from potential acquisition of SHUAA Capital GFH has withdrawn from the potential acquisition of SHUAA Capital due to both parties not reaching agreed acquisition terms and not receiving initial regulatory approval. In a statement to the the Dubai Financial Market, both parties have agreed to postpone the discussions regarding the acquisition for the time being.

New insurance accounting standard brings greater comparability for investors and analysts IFRS 17 was 20 years in the making and heralds an end to the lack of comparability in the insurance sector. Due to take effect on 1 January 2021, IFRS 17 will give users of financial statements a completely new perspective, bringing greater transparency and comparability for investors and analysts, said KPMG in a recent commentary. Separate presentation of underwriting and finance results will provide added transparency about the sources of profits and quality of earnings.Premium volumes will no longer drive the ‘top line’ as investment components and cash received are no longer considered to be revenue. Accounting for options and guarantees will be more consistent and transparent. These have the potential to reduce the cost of capital for leading insurers. Greater comparability could facilitate merger and acquisition activity, encourage greater competition for investment capital and help gain the trust of investors.

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the

markets

A new divergence at the top Khalid Howladar, Managing Director at Acreditus provides a recap of GCC sovereign credit ratings Proactive policy responses, deficit reduction and economic diversification are some key drivers for the UAE’s rating stabilisation. (CREDIT: SHUTTERLK/SHUTTERSTOCK).

UWAIT, UAE AND QATAR

Last week was a busy one for GCC sovereign ratings: UAE and Kuwait were both stabilised by Moody’s at Aa2/Stable but Qatar was downgraded to Aa3/ Stable, consistent with S&P’s recent AA outlook change to negative on the 3 March 2017, and Fitch remains at AA/Stable. This short article provides some insights into the credit drivers of recent actions.

DEBT/SUKUK—AN IMPORTANT (AND STILL CHEAP) TOOL FOR PUBLIC FINANCES As a result of the price shock, 2016 was a breakout year for GCC credit with cheap, QE driven USD liquidity compressing GCC spreads— overriding the impact of the region’s weakening fiscal and economic fundamentals. This has helped fund

over $70 billion of debt/Sukuk, with each issuance oversubscribed multiple times and often pricing tighter than guidance. Indeed the Sultanate of Oman managed to price its seven-year Sukuk at mid-swaps + 235bp, from initial guidance of about 270bp despite being downgraded to BB+/ Neg by S&P on 12 May. It remains investment grade however with Moody’s at Baa1/Stable and now (recently) Fitch at BBB/Stable— creating a very unusual divergence in opinions that provide investors with a good spread of risk scenarios. Despite the recent volumes however, bank financing continues to dominate and the absence of local capital markets (and much needed institutional investors) continues to reduce the resilience of economies to shocks and changes in external risk perception of the region.

DOWNSIDE OIL SCENARIOS HAVE MODERATED BUT ASSET CORRELATION REMAINS HIGH For all of the GCC credits, despite ongoing diversification, oil prices are the key risk driver that drives a very high level of asset correlation across the region. Thus, stabilisation of oil prices in the $40-60 range is an obvious key credit positive, driving reduced fiscal deficits and even a return to modest surplus in some cases. This recovery has helped reduce the material tail risk of a sustained $30 oil prices of early 2016 and moderated the downside risk scenarios for the rating agencies. US Shale remains the biggest constraint on prices despite renewed signs of global growth although the ‘low hanging’ production gains seem to be ‘picked’. The chart from Rystad Energy, shows how dramatically extraction costs have fallen. However, in the May edition of the Oil and Gas Financial Journal they note that more investment is required for shale production to meet the expected demand or “call on shale”. Acreditus believes this should help support

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markets

DEVELOPMENT IN WELLHEAD BREAKEVEN PRICES FOR KEY SHALE PLAYS USD/bbl 100 90 80 70 60 50 40 30 20 10 -

98 85 81 73 66

Bakken Eagle Ford Niobrara Permian Delaware Permian Midland

39 38 34 33 29

2013

2015

2014

2016

Source: Rystad Energy NASWellCube

GCC FINANCIAL ASSETS AND LIABILITIES IN 2016 Percentage of GDP 300 250 200 150 100 50 0 Saudi Arabia

Bonds outstanding

Kuwait

Oman

Stock market capitalisation

UAE

Qatar

Banking assets

Bahrain

Source: Moodys/S&P

price stabilisation in the $40-60 range well into 2018, especially when coupled with the extended and (newly) targeted OPEC cuts to US supplies that should hopefully dent the very transparent levels of US inventories.

KUWAIT, UAE & QATAR— THREE OF A KIND? In the case of Kuwait (Aa2/Stable, AA/Stable, AA/Stable) the slower pace (and perhaps need) of reform is broadly offset by an incredible balance sheet (KIA assets estimated at 550 per cent/GDP $600 billion) with government debt trending to 35 per cent of GDP. Public spending in the country has continually lagged its peers so the improved pipeline of projects should provide improved growth opportunities going forward. The UAE/Abu Dhabi (Aa2/Stable, AA/Stable, AA/Stable) balance sheet

is also strong (ADIA assets estimated at 155 per cent/GDP $580 billion) with UAE debt/GDP trending towards 20 per cent (Dubai’s debt is a component of Moody’s UAE rating). A key stabilisation driver has been the effectiveness of policy responses thus far, market engagement and corporate rationalisation efforts. The economic diversity of the country is also key and all these positive trends—amongst the strongest in the region—look set to continue. For Qatar, (Aa3/Stable, AA/ Neg, AA/stable) despite sizable QIA reserves (estimated at 200 per cent/ GDP $300 billion), it has regularly tapped the market to leverage its strong credit profile. This (likely) helps improve the overall returns/ profitability and diversification of the sovereign balance sheet. As such, government debt/GDP looks set to trend to the 50 per cent level.

In addition to the above, the Qatar banking sector’s foreign liabilities have climbed dramatically, outpacing foreign asset growth—hence confidence sensitivity is climbing for the system. Foreign liabilities have climbed to 33 per cent of GDP ($51 billion) up from 22 per cent a year ago (in 17 February) and is mostly composed of interbank liabilities and non-resident deposits. With expected US interest rate rises and attractive investment opportunities in a recovering Europe, the funding environment will be tighter in 2018, hence market transparency and investor communications around downside risk scenarios are key to moderating potential systemic risks and possible contingent impact on Qatar. This was also a key factor in S&P’s March rating action. Finally, also key and perhaps more fundamental is Qatar’s ‘corporate strategy’ or what Moody’s describes as “Uncertainty over the sustainability of Qatar’s growth model beyond the next few years.” Front-loaded infrastructure capex and recent expenditure is the current and primary growth engine but it seems Moody’s needs more tangible efforts, strategies and communication around what happens after. Nonetheless, despite the downgrades, international investor appetite for GCC credit remains strong and Qatar’s is still a AA/Aa credit for all agencies which puts them amongst the highest rated sovereigns globally.

The author, Khalid Howladar is the Managing Director and Founder of Acreditus, a ratings, risk and Islamic finance advisory. He was formerly head of Moody’s GCC Banking team and Global Head of Islamic Finance based in Dubai, UAE.

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legal

focus

Keeping in check Banker Middle East catches up with Bryan Stirewalt, Managing Director, Supervision at Dubai Financial Services Authority (DFSA) to discuss the current state of financial regulation at the DIFC and in the wider GCC

ow do you view the development of the supervisory landscape in the region?

We believe that all regulators in the UAE and the GCC strive for consistency with global best practises, and we continue to see harmonisation of regulations and supervisory practises in the future. The UAE is a vibrant hub for financial services and trade, which sets it apart from many emerging markets. Logistics for global trade and trade finance alternatives in the UAE are, in my opinion, more advanced than many emerging markets.

Bryan Stirewalt

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legal

focus

How do supervisory efforts in the DIFC compare on a global platform? The DFSA compares well with all other regulators around the globe in terms of how we regulate the various business models in the DIFC. We are committed to adhering to core principles and international best practises for supervision and regulation that emanate from the major standard setters and other leading regulators of the financial services industry. We are actively engaged with the Basel Committee on Banking Supervision, the International Organisation of Securities Commissions, the International Association of Insurance Supervisors and the International Forum of Independent Audit Regulators.

What is the DFSA’s approach to assisting financial institutions in implementing new regulations such as the Basel III and IFRS 9? The DFSA has been and continues to be fully committed toward the implementation of the International Financial Reporting Standards (IFRS), including the new and revised IFRS 9, which will come into force in 2018. In the DIFC, the majority of the financial institutions engaged in the activity of providing credit, operate as branches. Therefore, the impact of IFRS 9 will be absorbed at the parent entity level. From our continuous communication with these entities, as well as their home regulators, we believe that they are well positioned to deal with the new standard. We are watching closely for guidance from the Basel Committee on loan loss provisions and their relevance to capital calculations.

Basel III has a set of implementation target dates, which we aim to meet. We must tailor the text of our regulations to be consistent with Basel III, while recognising the business models that are present in the DIFC. The DFSA has taken a proactive approach to the implementation of Basel III and IFRS 9. For the larger DIFC community, we have prepared and delivered outreach sessions and work closely with industry associations. At the same time, we are also working towards training the DFSA staff internally. The DFSA Supervision staff is available to authorised firms to answer any questions which they may have on these revised standards.

What is the DFSA’s approach to regulations such as the digital payments and virtual currency law? We recognise the importance of new technologies, including payments providers and virtual currencies, to consumers of the financial services industry. In particular, we see a major benefit to improving financial inclusion goals around the globe. We have received a number of enquiries from the industry about the regulation of these activities and instruments. The DIFC’s strategic location is important to act as a gateway to the MENA region and across Africa. We should recognise that not all financial services activities require regulation, and we should be a risk-based regulator even for those financial services that do require regulation. This assessment will continue as a matter of normal course of business for the DFSA.

What can the banking and finance community in the DIFC expect from the DFSA this year? From a supervisory focus we can expect more attention to liquidity management at DIFC—regulated firms. Where these firms adopt group policies and procedures, they need to ensure that these policies are appropriately tailored to the DIFC entity’s unique environment. Firms will also need to have adequate stress testing and contingency planning around liquidity management. In addition to a continued focus on financial crime, anti-money laundering and counter terrorist financing risks, we will also be expecting firms to pay particular attention to managing operational risk arising from cybersecurity concerns. International standard setters are on record in their commitment to slowdown the issuance of new standards and move toward focusing on implementation. At the DFSA we will continue to monitor the development of international standards and right-sizing these to the firms operating in the DIFC. Update of capital rules and introduction of the leverage ratio and net stable funding ratio are some of the Basel III reforms that are not yet completed.

What is the DFSA’s view on fintechs? Fostering an environment for innovation is a new strategic theme for the DFSA, which is directly related to fintech. We certainly want to be part of Dubai’s greater vision of becoming an information-based society and a smart city. The creation of the FinTech Hive at the DIFC, for example, is an exciting new avenue of development in the DIFC. Our approach to fintech is to ensure that what needs to be regulated

cont. overleaf

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focus

cont. from page 13

is regulated, and regulated with a ‘right-touch’ approach. Balancing regulations with risk and the impact of a firm and its activities, has been a continuing exercise for the DFSA and our risk-based approach to supervision. Fintech, in that regard, is not different. As part of our plans to deal with innovative financial service providers, we are creating a new team to oversee the activities of fintech firms. This team, although in its formation phase, is already working towards concluding the consultation papers we issued on crowdfunding and our innovation testing licence (ITL), a framework designed to test these new business models as well as regulations. This is an important initiative and I can say that the amount of work that has gone into it has been substantial. I should note that we received some very constructive commentary from the industry covering these papers and the team is in close contact with the industry for this purpose. We will conclude these papers as well as the fintech regulatory framework in conjunction with our operational reviews in the near term.

What are some of the other areas of focus for the DFSA? With a backdrop of the current regulatory, economic, global and DIFC environment and taking into consideration the DFSA’s risk tolerance, the DFSA Business Plan for 2017/18 highlights four key regulatory priorities—financial crime, conduct, alignment with international standards and fintech. Our key areas of supervisory focus include governance arrangements—we continue to assess the governance of firms, which starts with the Board and senior management of the firm. Subject to the nature, scale and complexity of its activities,

From a supervisory focus we can expect more attention to liquidity management at DIFC regulated firms. Where these firms adopt group policies and procedures, they need to ensure that these policies are appropriately tailored to the DIFC entity’s unique environment. – Bryan Stirewalt, Managing Director, Supervision at Dubai Financial Services Authority (DFSA) – we would expect firms to have a robust risk management framework with adequate systems and controls, whether to monitor financial, conduct, financial crime or operational risks. This includes appropriate remuneration practises and incentives as this will have an important influence over the firm’s culture. We continue with our risk-based supervision of all firms in respect of financial crime risk. We published a report outlining the findings from our trade finance thematic review in late 2016 and propose to publish the findings from our recent financial crime thematic review in the third quarter of this year. The DFSA will also be working with other UAE authorities as they prepare for any future mutual evaluation assessment by the FATF. We will later publish findings from our client classification and suitability thematic review. This is an important area of focus for conduct of business risks given differences in how firms document their client’s knowledge, experience and understanding of financial products and services. Other areas of supervisory focus include product governance requirements, the safeguarding of client assets, and ensuring firms have strong systems and

controls around the offering of OTC leveraged products to retail clients. Operational risks including cyberrisks are high up the list, if not at the top, of the concerns for governments, international standard setting bodies, regulators and the private sector including financial institutions. We will be designing our regime in this area. Financial risks continue to ensure relevant firms that carry prudential risks have adequate systems and controls around capital, liquidity and leverage to conduct their business in a prudent manner.

What is your outlook on the development of financial regulation in the region over the next five years? We see continued harmonisation in the development of financial regulation over the next five years. We are actively engaged with the fintech firms that are innovators in the financial services sector, and we see innovation as a key focus for our development as well. As does the private sector, we need to carefully examine what data we collect and how we use that data to become smarter and more efficient as a regulatory body.

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5/3/16

5:03 PM

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Corporate and Institutional Banking

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cover

interview

Setting a new benchmark Michaël Lok, Co-CEO Asset Management at Union Bancaire Privée comprehensively discusses the bank’s investment strategies in manoeuvring through challenging times

an you describe UBP as well as the Bank’s growth strategy over the past few years?

Michaël Lok

As a family-owned and therefore independent Swiss financial institution, UBP is particularly wellplaced to look after the diverse needs of its global client base. Through organic growth and successful acquisitions, UBP has built on our specific areas of expertise to offer a comprehensive service to understand and then meet the complex needs of both private and institutional clients. With our long history of careful risk and balance sheet management, we have maintained a strong capital base with a Tier 1 Ratio of 24.3 per cent (as at 31 December 2016). This strength underpins a bank that is innovative, responsive and driven by the clear objective of preserving clients’ capital while still delivering returns and growing assets under management. UBP has consistently understood that standing still is never an option. Since the early 1990s, we have progressively expanded through a proactive acquisition policy. With the private banking market undergoing such rapid change, the ability to identify acquisition targets, complete the deals, manage the

risks and then integrate the acquired companies and clients into UBP’s existing investment platform is vital for success. A key focus at the heart of this expansion is the commitment to ensure that quality client service is the absolute priority throughout. The continuing high levels of client retention are a clear indicator that UBP knows how to manage change and yet deliver consistently high standards of service. Major structural changes provide the constant backdrop to today’s international private banking and asset management markets. UBP’s history has always involved the early anticipation of change rather than simply the reaction to it. To achieve significant long-term growth in these markets, providers simply have to be agile at all times and capable of adjusting their business models rapidly. UBP’s governance is ideally suited to such an environment as the owning family are closely involved in its commercial development and risk management, and together with its highly entrepreneurial managers and specialist staff the Bank can quickly adjust to market movements. These are now UBP’s main strengths, and they have helped to deliver one of the fastest growth rates of any private bank over the last five years.

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Where does asset allocation fit into UBP’s offering? The ways in which UBP structures its investment platform have also undergone major change over the years. The shock of the 2008 crisis altered the way in which private banks go about their core investment management business. The traditional “open architecture” model for providing investment solutions to clients had clearly reached its limits. The main drawback of this method was that it led to a loss of control over assets, which were no longer held directly by the client’s bank, but instead by third parties. UBP’s response was to create its own model to combine in-house capabilities with a refined openarchitecture structure. However, from a client point of view, nothing is ‘off the shelf’ and UBP offers the ability to select from various investment models and frameworks. As an essential part of this, UBP has put asset allocation strategy back at the heart of its investment platform, as the main source of value creation. The main objectives of this approach are to define risk levels within the private banking business and to ensure the liquidity, transparency and clear ownership of assets under management. In the wake of the 2008 crisis, UBP has recruited and retained investment teams covering institutional and private banking clients. These specialists and experts have worked to develop innovative funds and mandates that deliver strong returns and make the most of UBP’s investment skills. UBP is perfectly prepared to ignore the trend and follow its own independent judgement. A clear example of this was the pre-crisis asset allocation switch to cash and the early adoption of alternative investment strategies as far back as the 1970s.

OUR KEY FIGURES As of 31.12.2016

ASSETS UNDER MANAGEMENT

CHF

118.3* billion BALANCE SHEET TOTAL

CHF

30.8 billion NET PROFIT

CHF

176.4 million HEADCOUNT

1,665 TIER 1 RATIO

24.3% SHARE HOLDER’S’ EQUITY

CHF

2.1 billion

* of which CHF 92.3 bn in Private Banking (PB) and CHF 26 bn in Asset Management (AM). CHF 7.8 bn is managed by AM on behalf of PB clients. Source: UBP

One major development in today’s markets is the increasing interaction between private banking and asset management activities, particularly for clients in the strategically important UHNWI segment. At UBP, UHNWIs can talk regularly to dedicated specialists and experts, and so benefit directly from their expertise and asset management capabilities. As a result, UBP does not merely distribute products to these clients but instead takes the time to create customised solutions matched to meet their specific requirements.

How extensive is the range of investment options available from UBP? As a company that looks to the future, UBP has developed comprehensive expertise spanning all sorts of asset classes. The active bond management business has grown rapidly in the last few years, particularly in the high-yield and emerging debt segments. In equities, there has also been impressive growth in assets under management, with our team in Geneva covering Switzerland and the London office taking care of the rest of Europe. In convertible bonds, where market conditions have been difficult since 2015, UBP’s Paris team is a market-leader in Europe. In addition, UBP maintains a leading position in alternative investments with a particular expertise in developing customised mandates. By providing a compelling offering in the alternatives space it has been possible to bring about a significant change in client asset allocations. With interest rates at low or negative levels, it is essential to consider the full range of options to protect and grow client wealth. cont. overleaf

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in our various locations around the world, believing strongly that forging these close links creates value.

How does UBP apply its business model in the Gulf region?

Michaël Lok, Co-CEO Asset Management at Union Bancaire Privée

How does UBP balance expansion with regulation and risk? Overall, UBP has adjusted well to the major structural changes that have taken place in the last few years. Our private banking business has grown significantly taking full advantage of market consolidation by making acquisitions of varying sizes. The 2015 acquisition of Coutts International showed that UBP is more than capable of handling large deals and enabled the Bank to take its strategy to the next level in Asia and beyond. In international private banking, entry barriers are changing. Banks previously based their business on banking secrecy, but must now be much more competitive in terms of investments and risk management. Innovation, including the design of ‘blue sky’ investment solutions, has become vital to win new clients and thereby expand assets under management.

UBP is perfectly prepared to ignore the trend and follow its own independent judgement. – Michaël Lok – Transparency and compliance with ever more stringent and proactive regulations have to take priority and we also make efforts to ensure that risk levels are fully aligned with client profiles. UBP takes a comprehensive approach, with a wide-ranging investment platform that enables all clients to benefit from the same high quality of products and advice wherever they live. We put clients in touch with our specialists and experts

Naturally, the same approach is used in the Gulf region. Using our overall investment strategy as the starting point, UBP can develop investment solutions specifically for clients in the Middle East. We have a particularly well-developed business in structured products, with solutions and risk profiles that are well suited to clients in this region. The business has grown, especially since 2015, while keeping sound risk management at the centre of the investment process. Individual mandates are also one of UBP’s strengths for clients in the Middle East. With these customised mandates, private and institutional clients can gain privileged access to UBP’s entire investment platform. Depending on the areas of expertise involved, they may be managed by institutional asset management teams or private banking investment teams. The GCC countries are therefore a particularly attractive market for UBP. With an agile and responsive global investment team which includes staff based in Dubai, UBP can be quickly on hand to address specific client needs in these countries. The GCC market is highly competitive but offers real opportunities, particularly in a number of UBP’s areas of expertise including forex, direct bond investments, single hedge fund allocation and direct investments in private equity projects. UHNWI clients can have regular and direct access to the UBP Advisory team and receive individual recommendations in real time. cont. on page 20

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What should private and institutional clients make of the prospects for the rest of 2017 and thereafter? It is clear that the overall economic environment looks much more positive and is certainly better than things appeared at the start of 2016. Back then, recession fears fed turbulence in the markets and there was also political uncertainty with the emergence of an aggressive populism. Oil prices, which are so important for the Gulf countries, fell sharply as a result of these macroeconomic concerns. However, at UBP, we maintained our positions, expressing the view that investors should ride out the volatility as 2016 offered the potential to be a transitional year. In 2017, there is growing evidence that economic growth is becoming more synchronised around the world. In fact, for the first time since the 2008 crisis, all regions should see growth, particularly across emergingmarket countries. Growth seems robust in the US, is accelerating in Europe and Japan, and recovering strongly in emerging markets. Earnings forecasts are buoyant and valuation levels are fair, except in the US where they have risen to historic highs following the election of President Trump. Central banks are maintaining a light touch on the accelerator and their proactivity and support remain crucial in the current environment.

Describe some of the risk factors and challenges facing markets today. How should investors consider positioning themselves? Overall, financial markets have welcomed the brighter outlook, and have rallied strongly in the first few months of 2017. The two main risks were that faster US growth would

lead to rapid interest rate hikes and an excessively strong dollar. Those risks have not yet materialised and markets seem to have priced in most of the good news arising from the stronger growth outlook for national economies and individual companies. It is reasonable to assume that we have entered a trading range potentially limiting the short-term upside. To drive additional returns, particularly in the second half of the year, the improvement in the European and Japanese economies, and the recovery in emerging markets, will have to keep going. A slight slowdown in growth would not necessarily be bad news, since it would avoid stress on yield curves and the US dollar. The credit market, however, is showing a build-up of risk and appears relatively expensive after several years of repricing and strong returns. Spreads are now at historic lows, and there is a strong case to take profits in this segment of the bond market. Carry strategies remain justified, but there is merit in unwinding them gradually over the next few months. In the equity market, investors may choose to consider reducing positions after the recent rally, but any consolidation is likely to

be limited as the fundamentals are currently strong. UBP advises maintaining exposure to risk, along with cash reserves in order to seize on tactical opportunities as they arise. Oil prices are unlikely to be as volatile as they were in 2016, and a range of $45–$60 seems fair given the fundamentals. The gold price rose sharply in early 2017 but has recently seen a significant correction because political risk in the Euro zone has diminished: Europe’s Franco-German core has been strengthened by Emmanuel Macron’s election victory in France, despite the UK triggering the Brexit process. All of these “house” views are adopted by UBP’s asset management and advisory teams. They are applied locally, in line with our clients’ requirements. Risk management and comprehensive compliance are key priorities for UBP. It is central to the investment process, to ensure that investments are suited to clients’ risk profiles as the regulators require. Real transparency and close ties with clients play a crucial role in our governance and business model, and represent values and qualities that are displayed by all of our people as they work to deliver the personal service that clients expect.

UBP in Dubai UBP’s commitment to the Middle East and Africa has led the Bank to establish a presence in Dubai since more than 10 years to provide its clients with a local presence and geographical and cultural proximity. UBP’s subsidiary, based in the Dubai International Financial Center, boasts a team of some 30 professionals, including relationship managers and investment advisors. In 2016, UBP was awarded “Best Private Bank in the MENA region” at the Banker Middle East Industry Awards, and in 2015 the Bank received the award for “Best Managed Advisory Service 2015 (UAE)” from CPI Financial. Source: UBP

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Reviving Lebanon An aerial view of Beirut (CREDIT: DIPLOMEDIA/SHUTTERSTOCK).

Despite geopolitical risks that continue to loom over the country, the formation of a new government gives renewed hope for the nation

ollowing a 29 month presidential absence in the country, Lebanon came together and finally elected their president in October last year. Signalling a likely boost in economic sentiments, the election of President Michel Aoun is expected to restore executive power to the Lebanese government which could ease economic policymaking and restore some level of confidence.

ECONOMY For the fifth year in a row, Lebanon remains the largest host (on a per-capita basis) for displaced Syrians. According to the World Bank, the protracted Syrian conflict has continued to exacerbate the country’s vulnerabilities and remains an impediment to the return to potential growth.

The situation has significantly strained already weak public finances in a situation of limited international assistance. Nevertheless, in 2016, Lebanon’s real GDP growth marginally accelerated to reach an estimated 1.8 per cent, from 1.3 per cent in 2015. Lebanon’s traditional growth drivers—tourism, real estate, and construction—have received a significant blow and the IMF believes that a strong rebound is unlikely based on current trends. In the absence of a turnaround in confidence, or a resolution of the Syrian conflict, growth is unlikely to return to potential (four per cent) soon. Inflation also declined sharply in 2016 on the back of lower oil prices, but should return to trend (about two per cent) by 2017.

On the fiscal side, low oil prices have helped secure a primary surplus of 1.4 per cent of GDP in 2015, and the IMF projects a similar surplus (1.1 per cent) in 2016. Public debt is however high (138 per cent of GDP in 2015) and without decisive corrective action, Lebanon’s debt burden will increase further. In the absence of fiscal reforms, an increase in tax revenues in 2016 from a marginally improving economy was unable to offset higher expenditures, leading to an increase in the overall fiscal deficit to an estimated 10 per cent of GDP and a small primary surplus at 0.1 per cent of GDP. With subdued GDP growth and high interest rates, such a surplus remains insufficient to prevent the debt-to-GDP ratio from continuing on its unsustainable path, reaching an elevated 157.5 per cent by end-2016. According to the World Bank, on the external front, a pickup in imports of merchandise goods combined with deteriorating exports led to a worsening of the goods trade balance. Additionally, after being cont. on page 24

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GFH has researched and identified unique opportunities which have ensured the growth and diversity of the groupâ&#x20AC;&#x2122;s asset base. The employment of deep market insights, innovative thinking, and investment intelligence, has ensured our portfolio develops in accordance with our strategy, and is capable of delivering remarkable performance. gfh.com | Invested with insight

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largely unaffected by lower oil prices in the past two years, remittances declined by 0.5 percentage points (pp) to 5.5 per cent of GDP in 2016 due to spending cuts in the GCC countries. As a result, the already sizable current account deficit is estimated to have widened to an estimated 21 per cent of GDP, which is among the largest in the world, exposing the country to significant financing risks. As such, the economy is structurally and heavily dependent on capital inflows to finance its current account deficit. Faced with weaker capital inflows last year, Banque du Liban (BdL) financially engineered a swap that was able to boost its foreign exchange reserves and capitalisation in local currency at commercial banks. As a result, gross foreign exchange reserves at the central bank rose by 11.1 per cent by end-2016 to reach $34 billion after registering a decline of 5.4 per cent in 2015.

RISKS Security and political challenges continue to be Lebanon’s primary concerns. The World Bank suggests that should there be no further financial engineering by the central bank to boost capital inflows, Lebanon can once again be vulnerable to a slowdown in net foreign asset accumulation in the face of persistent and sizable fiscal and current account deficits. If financial engineering persists, then it will be subject to a combination of declining positive returns and increasing associated risks. As such, unless foreign currency financing needs are reduced, balance of payment pressures will re-emerge. More generally, a frail macrofiscal framework, underpinned by unsustainable debt ratios and

persistent and sizable fiscal and current account deficits, exposes the country to significant refinancing risks, explained the World Bank. Attracting sufficient capital, and in particular deposits, to finance larger budgetary and current account deficits could prove challenging based on recent commercial banks’ deposit growth data.

BANKING AND FINANCE Lebanon’s banking system plays a critical role in securing sustained, broad-based economic growth. Noting IMF’s recent Financial Sector Assessment programme findings, the authorities’ close oversight of the financial system was commendable, but there is a need for continued vigilance. In particular, the IMF stressed the benefits of measures that would introduce forwardlooking capital planning; strengthen regulation and supervision by, among others, aligning loan classification rules and sovereign risk weights with international good practise; and support liquidity risk management.

OUTLOOK Lebanon’s economic prospects over the medium term are highly affected by geopolitical and security conditions, which remain volatile. Potential growth is contingent on the resolution of the Syrian conflict in a manner that does not compromise the structure and stability of Lebanon, as well as on the resumption of the domestic political process. Based on this, the World Bank has forecasted growth to remain around 2.5 per-cent annually over the medium term. In 2017, higher oil prices is expected to lead to an increase in government transfers to the loss-making public electricity company, likely inducing a small widening in the fiscal deficit.

More expensive fuel imports will in addition further enlarge Lebanon’s import bill. A stronger real estate sector as well as a continued increase in tourist arrivals are expected to lead to a pickup in economic activity in 2017. Following the conclusion of the IMF Executive Board’s Article IV consultation with Lebanon, the organisation stressed that a sustained and balanced fiscal adjustment is essential. Lebanon has healthy primary surpluses, but without further adjustment, Lebanon’s public debt burden will continue to rise, adding to existing vulnerabilities and ultimately crowding out essential public investment and social spending. The IMF also urged the passage of a budget for 2017. The country needs immediate reform in the electricity sector, which remains a large drain on the budget and a key bottleneck to improved competitiveness and equity. The international organisation highlighted that there is significant scope to increase revenue equitably, including by improving compliance and broadening the tax base, starting with fuel taxation. Monetary policy should remain geared to supporting the peg and although the BdL’s recent financial operation has successfully bolstered BdL’s gross international reserves and banks’ capital, it was not a sustainable solution to Lebanon’s funding needs. BdL should draw up medium-term strategy to improve its balance sheet. The IMF also called for the authorities to advance structural reforms. In addition to electricity reform, they stressed the need for legislation to reinvigorate private investment, including in the oil and gas sector; and for better service provision and stronger safety nets.

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LEBANON

in numbers POPULATION

GDP GROWTH

4.6 million 1m

10m

2.5%

Source: International Monetary Fund; World Economic Outlook Database (April 2016)

MACRO OUTLOOK INDICATORS (annual per cent change unless indicated otherwise)

Projected growth for 2017 and annually over the medium term

2014 2015 2016 e 2017 f 2018 f 2019 f Real GDP growth, at constant market prices 1.8 1.3 1.8 2.5 2.6 2.6 2.1: Country/Economy Profiles Private Consumption -1.9 7.1 4.0 -3.0 0.1 3.1 2.1: Country/Economy Profiles Government Consumption 2.0 -0.3 7.1 -2.5 0.9 -0.6 2.1: Country/Economy Profiles 2.1: Country/Economy Profiles 2.1: Country/Economy Profiles Gross Fixed Capital Investment 5.5 -8.6 5.8 1.4 2.2 3.8 2.1: Country/Economy Profiles Source: World Bank’s Lebanon Economic Outlook 2.1: Country/Economy Profiles Global Exports, Goods and Services 3.2 -2.3 6.7 4.9 4.6 5.1 Competitiveness 2.1: Country/Economy Profiles Global Competitiveness Index Index April 2017 st st / 138 2.1: Country/Economy Profiles Imports, Goods and Services -1.5 1.2 9.7 3.1 0.4 4.4 Competitiveness Global Index 2016-2017 edition 2.1: Country/Economy Profiles Global Competitiveness Index 2016-2017 edition / 138 st 2.1: Country/Economy Profiles Global Competitiveness Index st 2.1: Country/Economy Real GDP growth,Profiles at constant factor prices 1.4 2.6 3.2 2.4 2.6 2.6 Competitiveness Global Index 2016-2017 edition / 138 st Global Competitiveness Index 2016-2017 edition / 138 st Global Index Agriculture 4.5 0.6 -19.0 2.5 0.0 -0.7 Competitiveness 2016-2017 edition / 138 st 2016-2017 edition / 138 Source: International st Monetary Fund; World Economic Outlook Database (April 2016) Indicators, 2015 Key Global Competitiveness Index Monetary Fund; World Economic Outlook 2016-2017 edition Industry 11.0 0.7 Database -22.9(April 2016)3.4 2.5 2.6 Competitiveness Indicators, 2015 Source: International st Key // 138 Global Index 2016-2017 edition 138 COMPETITIVENESS Global Index Source: International st Monetary Fund; World Economic Outlook 2016) Indicators, 2015 Key Global Competitiveness Index Services -0.7 3.2 Database 10.1(April 2.7 2.8 Competitiveness 2016-2017 edition Source: International st Monetary Fund; World Economic Outlook Database (April 2016)2.3 // 138 Indicators, 2015 Key 4.6 11236.8 2016-2017 edition Source: International st Monetary Fund; World Economic 4.6 OutlookGDP Database (April 2016)(US$) 138 per capita Population (millions) Indicators, 2015 Key 11236.8 2016-2017 edition GDP per capita Population (millions) Source: International Monetary Fund; World1.2 Economic Outlook Database (April 2016)(US$) / 138 Indicators, 2015 Key Inflation (Consumer Price Index) -3.7 -0.8 3.8 2.7 2.0 2016-2017 edition / 138 Source: International Monetary Fund; World Economic 4.6 OutlookGDP Database (April 2016)(US$) Indicators, 2015 Key 11236.8 per capita Population (millions) Source: International Monetary Fund; World Economic Outlook Database (April 2016) Indicators, 2015 Key 4.6 11236.8 per capita (US$) Population (millions) 0.07 51.2 Current Account Balance Source: (% of GDP) -25.4 -17.1 GDP -20.9 -20.2 -19.2 GDP (US$ billions) GDP (PPP) % world GDP -19.2 4.6 11236.8 GDP per(April capita (US$) Population (millions) International Monetary Fund; World Economic OutlookGDP Database 2016) 0.07 51.2 Indicators, 2015 Key GDP (US$ billions) (PPP) % world 11236.8 GDP per capita (US$) Population (millions) Source:(% International Fund; World Economic 4.6 Outlook Database 2016) Indicators, 2015 Key Financial and Capital Account of GDP)Monetary 27.9 23.5 GDP 16.7(April 8.1 GDP 11.8 9.6 4.6 11236.8 0.07 51.2 Source: International Monetary Fund; World Economic Outlook Database (April 2016) per capita (US$) Population (millions) Indicators, 2015 Key GDP (US$ billions) (PPP) % world GDP 4.6 11236.8 Source: International Monetary Fund; World Economic OutlookGDP Database (April 2016) per capita (US$) Population (millions) 0.07 51.2 Indicators, 2015 Key GDP (US$ billions) (PPP) % world GDP 3.8 0.07 51.2 Net Foreign Direct Investment (% of GDP) 3.6 3.6 3.7 3.8 3.9 GDP (US$ billions) GDP (PPP) % world GDP 4.6 11236.8 capita (US$) Population (millions) 0.07 51.2 GDP (US$ billions) GDP per (PPP) % world GDP 4.6 GDP 11236.8 Performance overview GDP per capita (US$) Population (millions) 0.07 51.2 GDP (US$ billions) GDP (PPP) % world GDP 4.6 11236.8 Performance overview per capita (US$) Population (millions) Fiscal Balance (% of GDP) -6.6 -8.2 -10.0 -9.5 -9.8 -9.4 0.07 51.2 GDP (US$ billions) GDP (PPP) % world GDP 4.6 11236.8 GDP per capita (US$) Population (millions) Performance overview 0.07 51.2 GDP GDP157.5 (PPP) % Debt(US$ (% ofbillions) GDP) overview Rank / 138 Score (1-7) Trend145.6 149.4 166.2 GDP 170.4 173.6 Performance 0.07 51.2 GDP (US$ billions) (PPP) 2012-13 % world world GDP2013-14 Distance from best GDP Edition 2014-15 2015-16 2016-17 Performance overview 0.07 51.2 GDP (US$ billions) (PPP) % Rank / 138 Score (1-7) Trend Distance best Edition 2014-15 2015-16 2016-17 Performance overview Primary of GDP) 2.6 from 1.3 GDP 0.1 2012-13 0.9 GDP 1.2 1.5 0.07 51.2 GDP (US$Balance billions)(% GDP (PPP) % world world GDP2013-14 Performance overview Rank / 138 Score (1-7) Trend Distance from best Edition 2012-13 2013-14 2014-15 2015-16 2016-17 Performance overview Source: World Economic Forum’s Global Rank 101 / 138 Score3.8 (1-7) Trend Distance from best Edition 2012-13 2013-14 2014-15 2015-16 2016-17 Rank 91 / 144 103 / 148 113 / 144 101 / 140 101 / 138 Global Competitiveness Index Rank / Management 138 Score3.8 (1-7) TrendPractice. Distance from best Edition 2012-13 2013-14 2014-15 2015-16 2016-17 Rank 91 / 144 103 / 148 f=forecast 113 / 144 101 / 140 101 / 138 Performance overview Global Competitiveness Index Source: World Bank, Macroeconomics and Fiscal Global Notes: e=estimate, Competitiveness Report 2016-2017 101 Rank / 138 Score (1-7) Trend Distance from best Edition 2012-13 2013-14 2014-15 2015-16 2016-17 Performance overview Rank 91 / 144 103 / 148 113 / 144 101 / 140 101 / 138 Rank 101 / 138 Score3.8 (1-7) Trend Distance from best Edition 2012-13 2013-14 2014-15 2015-16 2016-17 Global Competitiveness Index Performance overview Rank 101 / 125 138 Score3.8 (1-7) Trend Distance from best Edition 2012-13 2013-14 2014-15 2015-16 2016-17 Rank 91 / 144 103 / 148 113 / 144 101 / 140 101 / 138 Performance overview Global Index SubindexCompetitiveness A: Basic requirements 3.6 Score 3.9 3.8 3.7 3.8 3.8 Rank 91 / 144 103 / 148 113 / 144 101 / 140 101 / 138 Global Competitiveness 101 3.8 Subindex A: Basic requirementsIndex 125 3.6 Score 3.9 3.8 3.7 3.8 3.8 Rank 101 / 138 Score3.8 (1-7) Trend Distance from best Edition 2012-13 2013-14 2014-15 2015-16 2016-17 Rank 91 / 144 103 / 148 113 / 144 101 / 140 101 / 138 Global Competitiveness Index Rank 101 / 125 138 Score3.8 (1-7) Trend Distance from best Edition 2012-13 2013-14 2014-15 2015-16 2016-17 Rank 91 // 144 103 // 148 113 // 144 101 // 140 101 // 138 SubindexCompetitiveness A: Basic requirementsIndex 3.6 Global PERFORMANCE OVERVIEW Score 3.9 3.8 3.7 3.8 3.8 Rank 101 / 125 138 Score3.8 (1-7) Trend Distance from best Edition 2012-13 2013-14 2014-15 2015-16 2016-17 Rank 91 144 103 148 113 144 101 140 101 138 Global Competitiveness Subindex A: Basic requirementsIndex 3.6 Score 3.9 3.8 3.7 3.8 3.8 1st pillar: Institutions Rank /119 138 Score 3.3 (1-7) Trend Distance from best Edition 2012-13 2013-14 2014-15 2015-16 2016-17  Subindex A: Basic requirements 125 3.6 Score 3.9 3.8 3.7 3.8 3.8 1st pillar: Institutions 119 3.3  Rank 91 / 144 103 / 148 113 / 144 101 / 140 101 / 138 Global Competitiveness Subindex A: Basic requirementsIndex 125 3.6 101 3.8 Score 3.9 3.8 3.7 3.8 3.8 Rank 91 / 144 103 / 148 113 / 144 101 / 140 101 / 138 Global Competitiveness Index 101 3.8 Subindex A: Basic requirements 125 3.6 1st pillar: Institutions 119 3.3 Score 3.9 3.8 3.7 3.8 3.8  Rank 91 / 144 103 / 148 113 / 144 101 / 140 101 / 138 Global Competitiveness Index Subindex A: Basic requirements 125 3.6 101 3.8 1st pillar: Institutions 119 3.3 1st pillar: Score 3.9 3.8 3.7 3.8 3.8  2nd pillar: Infrastructure Index 117 2.7 Rank 91 / 144 103 / 148 1st113 / 144 101 / 140 101 / 138 Global Competitiveness  101 3.8 1st pillar: Institutions 119 3.3 pillar:  2nd pillar: Infrastructure 117 2.7  Institutions3.7 Subindex A: Basic requirements 125 3.6 1st pillar: Institutions 119 3.3 Score 3.9 3.8 3.8 3.8  Subindex A: Basic requirements 125 3.6 1st pillar: 3.7 Score 3.9 3.8 Institutions 3.8 3.8 1st Institutions 119 3.3 2ndpillar: pillar: Infrastructure 117 2.7   Subindex A: Basic requirements 125 3.6 1st pillar: 3.7 1st Institutions 119 3.3 Score 3.9 3.8 3.8 3.8 2ndpillar: pillar: Infrastructure 117 2.7   3rd pillar: Macroeconomic 136 2.3 12th pillar: 2nd pillar: Subindex A: Basic requirements environment 125 3.6 1st pillar: 3.7  Score 3.9 3.8 Institutions 3.8 3.8 2ndpillar: pillar: Infrastructure 117 2.7 Institutions  3rd pillar: Macroeconomic 136 2.3 12th pillar: 2nd pillar:  1st 1st7pillar: 119 3.3 2nd pillar:Institutions Infrastructure environment 117 2.7  Innovation Infrastructure Institutions  1st pillar: Institutions 119 3.3 7 1st pillar:  Innovation Infrastructure 2nd pillar: Infrastructure 117 2.7 3rd pillar: Macroeconomic environment 136 2.3 12th pillar: 2nd pillar: Institutions   1st pillar: 1st pillar: Institutions 119 3.3 2nd pillar: Infrastructure 117 2.7  3rd pillar: Macroeconomic environment 136 2.3 12th pillar: 2nd pillar:  6  Institutions 4th Health and primary education 52 6.0 1st pillar: Institutions 119 3.3 7  Innovation Infrastructure  4th 3rd pillar: Macroeconomic environment 136 2.3 12th pillar: 2nd pillar: Institutions  and primary education 52 6.0 1st6 7pillar:  Innovation Infrastructure pillar:Health Infrastructure 117 2.7 3rd pillar: pillar: Macroeconomic environment 136 2.3  12th pillar: 2nd pillar:  2nd 1st7 pillar: 2nd pillar:Health Infrastructure 117 2.7 Innovation Infrastructure 5  Institutions 6 3rd Macroeconomic environment 136 2.3 4th pillar: and primary education 52 6.0 12th pillar: 2nd pillar: 1st5  7  2nd pillar: Infrastructure 117 2.7 Innovation Infrastructure 3rd Macroeconomic environment 136 2.3 Institutions 6pillar:  12th pillar: 2nd pillar: 11th pillar: 3rd pillar: 4th pillar: Health and primary education 52 6.0 1st pillar:  Subindex B: Efficiency enhancers 72 4.0  2nd pillar: Infrastructure 117 2.7 7 Innovation Infrastructure  11th pillar: 3rd pillar: Institutions 6 4th pillar: Health and primary education 52 6.0 Subindex B: Efficiency enhancers 72 4.0 4 7  5 Innovation Infrastructure Business Macroeconomic 3rd Macroeconomic environment 136 2.3 Institutions 12th pillar: 2nd pillar: 6 4th pillar: Health and primary education 52 6.0  4  5 Business Macroeconomic 11th pillar: 3rd pillar: 3rd pillar: pillar: Macroeconomic environment 136 2.3 12th pillar: 2nd pillar: Subindex B: Efficiency enhancers 72 4.0  6 4th Health and primary education 52 6.0 sophistication environment 7 5 Innovation Infrastructure  11th pillar: 3rd pillar: 3rd Macroeconomic environment 136 2.3 12th pillar: 2nd pillar: 3 6 4th pillar: Health and primary education 52 6.0 Subindex B: Efficiency enhancers 72 4.0 4  sophistication environment 7  Business Macroeconomic 5th pillar: Higher education and training 66 4.5 Innovation Infrastructure 5 3rd pillar: Macroeconomic 136 2.3 11th pillar: 3rd pillar: 12th pillar: 2nd pillar: 3   4 Subindex B: Efficiency enhancersenvironment 72 4.0 7 Business Macroeconomic 5th Higher education and training 66 4.5 Innovation Infrastructure 5  11th pillar: 3rd pillar: 6 4th pillar: Health and primary education 52 6.0 4 sophistication environment Subindex B: Efficiency enhancers 72 4.0 7  Business Macroeconomic 2 Innovation Infrastructure 5 3 6 11th pillar: 3rd pillar: 4th Health primary education 52 6.0 sophistication environment 4 Subindex B: Efficiency enhancers 72 4.0 5th pillar: pillar: Higher and education and training 66 4.5  2 Business Macroeconomic  3 11th pillar: 3rd pillar: 6 4th pillar: Health and primary education 52 6.0 sophistication environment Subindex B: Efficiency enhancers 72 4.0 5th Higher education and training 66 4.5 4  10th pillar: 4th pillar: 5  Business Macroeconomic 3 6th Goods market efficiency 55 4.4 6 4th pillar: Health and primary education 52 6.0 1  sophistication environment 4 2  5th pillar: Higher education and training 66 4.5 10th pillar: 4th pillar: Business Macroeconomic 5  6th Goods market efficiency 55 4.4 11th pillar: 3rd pillar: 3 1  Market size and primary Subindex B: Efficiency enhancers 72 4.0 2 sophistication environment 5th pillar: pillar: Higher education and training 66 4.5 5  11th pillar: 3rdHealth pillar: 3 Market size Health and primary Subindex B: Efficiency enhancers 72 4.0 4 sophistication environment 10th pillar: 4th pillar: 2 Business Macroeconomic 5 5th pillar: Higher education and training 66 4.5 6th Goods market efficiency 55 4.4 3 education 11th pillar: 3rd pillar:  1  4 Subindex B: Efficiency enhancers 72 4.0 10th pillar: 4th pillar: 2 5th pillar: Higher education and training 66 4.5 Business Macroeconomic 6th Goods market efficiency 55 4.4 education 11th pillar: 3rd pillar:  1  Market size Health and primary 7th pillar: Labor market efficiency 104 3.9 Subindex B: Efficiency enhancers 72 4.0 sophistication environment 4 10thBusiness pillar: 4th pillar:  Macroeconomic 2 6th pillar: Goods market efficiency 55 4.4 3 Market size Health and primary 1  7th pillar: Labor market efficiency 104 3.9 4 sophistication environment  10th Business pillar: 4th pillar: 5th Higher and training 66 4.5 2 Macroeconomic education 6th pillar: Goods education market efficiency 55 4.4  3 Market size Health and primary  1 sophistication environment 5th pillar: Higher education and training 66 4.5 10th pillar: 4th pillar: education  3 6th pillar: Higher Goods marketefficiency efficiency 55 4.4 7th Labor market 104 3.9 Market size Health and primary sophistication environment  1  10th pillar: 4th pillar: 2 5th pillar: education and training 66 4.5 education 6th market efficiency 55 4.4 3  7th pillar: Goods Labor efficiency 104 3.9 9thsize pillar: 5th pillar: 1   Market Health and primary 8th Financial market development 69 4.0 2 5th pillar: Highermarket education and training 66 4.5   education 7th pillar: Labor market efficiency 104 3.9 9th pillar: 5th pillar: Market size Health and primary  8th pillar: Goods Financial market development 69 4.0 10th pillar: 4th education pillar: 2  Technological Higher 6th pillar: market efficiency 55 4.4 education 7th Labor market efficiency 104 3.9 1   10th9th pillar: 4th education pillar: 2 Technological Higher 6th pillar: Labor Goods market efficiency 55 4.4 education pillar: 5th pillar: 1  Market size Health and primary 7th pillar: market efficiency 104 3.9 8th Financial market development 69 4.0 readiness and training 10th pillar: 4th pillar:   6th Goods market efficiency 55 4.4 9th pillar: 5th pillar: Labor efficiency 104 3.9 Market size Health and primary  1 8th Financial market development 69 4.0 and training 10threadiness pillar: 4th pillar:   Technological Higher education 9th pillar: Technological readiness 72 4.0 6th pillar: Goodsmarket market efficiency 55 4.4 education 9th pillar: 5th pillar:  1  7th Market size Health and primary 8th pillar: Labor Financial market development 69 Technological Higher education  9th pillar: Technological readiness 72 4.0 education  9thsize pillar: 5th pillar: 7th market efficiency 104 3.9 Market Health and primary readiness and training 8th pillar: Financial market development 69 4.0  Technological Higher education  education 7th pillar: Labor market efficiency 104 3.9 9th pillar: 5th pillar: readiness and training  8th Financial market development 69 4.0 9th pillar: Technological readiness 72 Technological Higher education education   9th pillar: 8th pillar: pillar: 6th pillar:5th 7th pillar: Labor market efficiency 104 3.9 readiness and training market development 69 4.0  9th pillar: Technological readiness 72   Technological Higher education 10th pillar:Financial Market size 76 3.5 8thmarket pillar: 6th pillar: 7th pillar: pillar: Labor market efficiency 104 3.9   8th readiness andpillar: training 9th Technological readiness 72 4.0 Technological Higher education Financial Goods market  10th pillar:Financial Market size 76 3.5 9th pillar: 5th  8th market development 69 4.0 readiness and training 9th pillar: Technological readiness 72  Financial Goods market 8thmarket pillar: 6th pillar:  9th pillar: 5th pillar: 8th pillar: Financial market development 69 4.0 readiness and training development efficiency  Technological Higher education 9th pillar: Technological readiness 72 4.0 10th pillar: Market size 76 3.5 8th pillar: 6th pillar: 9th pillar: 5th pillar: 7th pillar:   8th Financial market development 69 development efficiency Financial Goods market 9th Technological readiness 72 4.0 Technological Higher education  10th pillar: Market and size 76 3.5 8thmarket pillar: 6th pillar: 9th pillar: 5th pillar:  7th pillar: Subindex C: Innovation sophistication factors 52 3.8  8th pillar: pillar: Financial market development 69 4.0 readiness and training Financial Goods market  Technological Higher education Labor market 10th pillar: Market and size 76 3.5 8thmarket pillar: 6th pillar: Subindex C: Innovation sophistication 52 3.8  development efficiency readiness and training 9th pillar: Technological readiness factors 72 4.0 Financial market Goods market Technological Higher education Labor market 10thpillar: pillar:Technological Market size readiness 76 3.5 7th pillar:  8thmarket pillar: 6th pillar:  development efficiency readiness and training efficiency 9th 72 4.0 Financial Goods market 7th pillar: Subindex C: Innovation factors 52 3.8  8th pillar: 6th pillar: 10th pillar: Market and sizesophistication 76 3.5 development efficiency readiness and training efficiency  Labor market 9th pillar: Technological readiness 72 4.0 Financial market Goods market 10th pillar: Market and size 76 3.5 Subindex C: Innovation sophistication factors 52 3.8 7th pillar:   11th pillar: Business sophistication 50 4.2 development efficiency Labor market 9th pillar: Technological readiness 72 4.0 Financial market Goods market   Subindex C: Innovation and sophistication factors 52 3.8 8th pillar: 6th pillar: 7th pillar: efficiency 11th pillar: Business sophistication 50 4.2 development efficiency Labor market  10th pillar: Market and size 76 3.5 8th pillar: 6th pillar: Subindex C: Innovation sophistication factors 52 3.8 7th pillar:  efficiency development efficiency Financial Goods market Labor market 10th pillar: Market and size 76 3.5 8thmarket pillar: 6th pillar: 7th pillar: Subindex C: Innovation sophistication factors 52 3.8 11th pillar: Business sophistication 50 4.2  efficiency  Financial Goods market Labor market 10th Market size 76 3.5 8thmarket pillar: Middle 6th pillar: Subindex C: Innovation and sophistication factors 52 3.8 11th Business sophistication 50 4.2  Lebanon East North Africa development efficiency  12th pillar: Innovation 58 3.4 Financial market Goods Labor market 10th pillar: Market size 76 3.5 7th pillar:   11th pillar: Business sophistication 50 4.2 Lebanon East and andefficiency Northmarket Africa development efficiency efficiency  12th pillar: Innovation 58 3.4 Financial market Middle Goods market  7th pillar: Subindex C: Innovation andsophistication sophistication factors 52 3.8 11th pillar: Business 50 4.2 development efficiency efficiency  Labor market Subindex C: Innovation and sophistication factors 52 3.8 7th pillar: Lebanon Middle East and North Africa development efficiency 11th pillar: Business sophistication 50 4.2 12th pillar: pillar: Innovation 58 3.4 Labor market   7th pillar: Subindex C: Innovation and sophistication factors 52 3.8 Lebanon Middle East and North Africa 11th Business sophistication 50 4.2 efficiency 12th pillar: Innovation 58 3.4  Labor market  Subindex C: Innovation and sophistication factors 52 3.8 Lebanon Middle East and North Africa efficiency 12th pillar: Innovation 58 3.4 Labor market  Source: World Economic Forum’s Global Competitiveness Report 2016-2017 Lebanon Middle East and North Africa 11th pillar: Business sophistication 50 4.2 efficiency 12th pillar: Innovation 58 3.4   12th 11th pillar: Business sophistication 50 4.2 efficiency Lebanon Middle East and North Africa  pillar: Innovation 58 3.4  Lebanon Middle East and North Africa 11th pillar: Business 50 4.2 12th Innovationsophistication 58 3.4   11th pillar: Business sophistication 50 4.2  12th problematic Source: World Economic Forum, Executive Opinion Survey 2016and North Africa Lebanon Middle East Most factors for doing business pillar: Innovation 58 3.4  Source: World Economic Forum, Executive Opinion Survey 2016and North Africa Most problematic factors for58 doing Lebanon Middle East pillar: Innovation 3.4 business  12th Lebanon Middle East North Africa 12th problematic pillar: Innovation 3.4 Source: World Economic Forum, Executive Opinion Survey 2016and  Most factors for for58 Lebanon Middle East pillar: Innovation 58doing 3.4 business  12th problematic World Economic Forum, Executive Opinion Survey 2016and North Africa Most Corruption Source: World Economic Forum, Executive Opinion Survey 2016 Most problematic factors factors for16.7doing doing business business Source:

Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon Lebanon

101 101 101 101 101 101 101

Corruption Most problematic factors for for16.7 doing business 15.8 Government instability Corruptionproblematic 16.7 Most factors doing 15.8 Government instability Most factors for doing business business Corruptionproblematic 16.7 14.0 Inadequate supply of infrastructure Corruption supply 16.7 15.8 Government instability www.bankerafrica.com 14.0 Inadequate of infrastructure Most problematic factors for doing business Corruption 16.7 15.8 Government instability bureaucracyfactors for 11.1 Inefficient government Most problematic doing business 15.8 Government instability Corruption 16.7 14.0 Inadequate supply of infrastructure 11.1 Inefficient government bureaucracyfactors for Most problematic doing business Corruption 16.7 15.8 Government instability 14.0 Inadequate supply of infrastructure Most problematic factors for doing business 8.9 Policy instability 14.0 Inadequate supply of infrastructure 15.8 Government instability 11.1 Inefficient government bureaucracy 8.9 Policy instability Corruption 16.7 15.8 Government instability

Inadequate supply of infrastructure Inefficient government bureaucracy Corruption Poor work ethic in national labor force Inefficient government bureaucracy Inadequate supply of infrastructure Policy instability Corruption Poor work ethic in national labor force Government instability Inadequate supply of infrastructure Inefficient government bureaucracy Policy instability Corruption Government instability Insufficient capacity to bureaucracy innovate Policywork instability Inefficient government Poor ethic in national labor force Government instability Insufficient capacity to innovate Inadequate supply of infrastructure government bureaucracy Policy instability Poor work ethic in national labor force Government instability page 26Inefficient Infographics.indd 26 Inadequate supply of infrastructure Inflation Poor work ethic in national labor force Policy instability Insufficient capacity innovate Inadequate supply oftoinfrastructure Inflation Inefficient government bureaucracy Policy instability Poor work ethic in national labor force

14.0 11.1 16.7 5.5 11.1 14.0 8.9 16.7 5.5 15.8 14.0 11.1 8.9 16.7 15.8 4.7 8.9 11.1 5.5 15.8 4.7 14.0 11.1 8.9 5.5 15.8 14.0 4.3 5.5 8.9 4.7 14.0 4.3 11.1 8.9 5.5

Ranked 101 out of 138 for macroeconomic competitive environment

Source: World Economic Forum, Executive Opinion Survey 2016 Source: World Economic Forum, Executive Opinion Survey 2016 Source: World Economic Forum, Executive Opinion Survey 2016 Source: World Economic Forum, Executive Opinion Survey 2016 Source: World Economic Forum, Executive Opinion Survey 2016 Source: World Economic Forum, Executive Opinion Survey 2016 Source: World Economic Forum, Executive Opinion Survey 2016

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special

report

(CREDIT: ZENOBILLIS/SHUTTERSTOCK)

The Qatari quagmire A thorough examination of the consequences of Qatar’s isolation

n an unprecedented move in the GCC’s history, a group of governments including Saudi Arabia, United Arab Emirates, Bahrain, Egypt, Libya, and Yemen, moved to cut diplomatic ties, trade, and transport links with Qatar on 5 June 2017. Unlike events in 2014, the measures include a blockade of land, sea, and air access and the expulsion of Qatari officials, residents as well as visitors from those countries. The situation has caused S&P Global Ratings to lower its longterm ratings on Qatar to ‘AA-’ from ‘AA’ and placed all its ratings on the country on CreditWatch negative. Fitch Ratings and Moody’s maintains its ratings (‘AA’/Stable; Aa3 stable) on Qatar, respectively. Fitch in a statement highlighted that if the dispute persists, the economic and financial implications for Qatar would be more serious, but any potential rating impact would depend on several factors, including Qatar’s policy response and the maintenance of broad domestic

political stability. The level of damage to the Qatari economy will depend on the duration of the dispute and the scope of measures that affect trade. Similarly, Moody’s in a report also said that although it does not expect disruptions to Qatar’s ability to export oil and gas via sea routes, imports might become costlier and tourism from the region will likely suffer. If the situation persists, it will negatively affect the sovereign’s credit strength, primarily through higher funding costs, the potential crystallisation of contingent liabilities on the government’s balance sheet and a likely drain on foreign exchange reserves.

SANCTION OF UAE BANKING OPERATIONS Central Bank of the UAE has issued instructions for freezing accounts, deposits, investments of designated terrorists and terror organisations. Banks and other financial institutions operating in the UAE have been instructed to search for and freeze any accounts

or deposits or investments held by individuals or entities designated as terrorists or terrorist organisations, reported national news agency, WAM. This was agreed during a Cabinet Resolution on 8 June 2017, according to a circular issued by the Central Bank of the UAE. In another circular, the Central Bank advised banks and other financial institutions operating in the UAE to apply enhanced customer due diligence for any accounts they hold belonging to six Qatari banks. A bank press statement said the two circulars were issued based upon UAE Cabinet Resolution 18/2017 designating 59 individuals and 12 entities as terrorists or terrorist organisations. At the same time, a number of financial institutions based in Qatar that have held accounts for these sanctioned individuals and entities have been identified. These banks are—Qatar Islamic Bank, Qatar International Islamic Bank, Barwa Bank, Masraf al Rayan, Qatar National Bank, and Doha Bank.

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BANKING SYSTEM In an extensive report on the current situation of Qatari banks, S&P has lowered its long-term rating on government-related entity, Qatar National Bank (QNB) to ‘A’ from ‘A+’ and put all its ratings on QNB, The Commercial Bank, Doha Bank, and Qatar Islamic Bank (systematically important banks) on CreditWatch negative. This follows its downgrade of the sovereign’s ratings. Recent events may result in an outflow of external funding for Qatari banks over the next few months, depending on how the situation

evolves, explained S&P. The banks’ current liquidity profiles should help them absorb a moderate drop in external funding. Overall, according to S&P’s estimates, Qatari banks’ net external debt totalled about $50 billion at the end of April 2017. The authorities in Qatar are highly supportive of the banking system and government support will be given should it be needed. However, if the situation is not resolved relatively quickly, it might exert further pressure on banks’ credit quality. Due to this, S&P placed its ratings of the four

Qatari banks on CreditWatch with negative implications. External system-wide debt has risen sharply over the past few years, reaching QAR 454.3 billion on 30 April 2017, with a significant portion coming from Europe and Asia. According to S&P’s estimates, on the same date, banks had a net external debt position of QAR 182 billion, representing 23.5 per cent of domestic loans compared with 13.2 per cent at year-end 2015. The average tenor of these funds is relatively short (less than one year). Over the same period, cont. overleaf

The UAE’s decision to cut ties with Qatar has not been hasty or without justification, but rather following extended and ongoing attempts to reform Qatar’s behavior

Riyadh Agreement Points

Reason Behind Cutting Off Diplomatic Ties With Qatar

Measures Taken By The UAE

Qatar’s Government also continues to propagate and promote the ideology of extremism and terrorism, from Al Qaeda to the Muslim Brotherhood, across its media channels

Prohibits UAE citizens from travelling to Qatar, wether to reside or transit

End all forms of interference in the internal affairs of GCC countries and other countries No citizens of the GCC shall be naturalised The removal of all GCC-hostiles figures, whom are convicted by governments, away from its territories End all incitement and provocations that are practiced by Qatar’s media End Qatar’s support to the Muslim Brotherhood

Qatar has failed to live up to its commitment under the Riyadh Agreement and its supplementary accord signed in 2014

Forbid all religious figures in Qatar from using mosques and Qatari media outlets as tools for incitement against GCC countries Halt all incitements and provocations against Egypt

Qatar’s Government continues its interference in the internal affairs of the UAE and other countries

Qatar’s Government continues in its support for terrorist organisations in Libya, Syria, and Yemen

Prohibits the entry of Qatari citizens into the UAE, or their transit through UAE territories Qatari residents and visitors are given 14 days to leave the UAE

The UAE will shut all air and seaport routes within 24 hours with regard to incoming or departing Qatari traffic Bans the crossing of all Qatari transport vehicles, incoming or departing

Source: UAE Ministry of Foreign Affairs & International Cooperation

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cont. from page 29

banks’ lending to government and government-related entities increased by a similar amount, and those funds were generally used to finance Qatar’s sizable ongoing infrastructure programme. The external funding structure of Qatari banks are dominated by bank liabilities and nonresident deposits which comprise 89 per cent of the banking system’s gross external debt as at 30 April 2017. The maturity of most of these liabilities are relatively short term, typically less than 12 months. A portion of the non-resident deposits are at longer tenors. QNB, The Commercial Bank, Doha Bank, and Qatar Islamic Bank collectively accounted for approximately 85 per cent of the banking system’s assets at yearend 2016. Based on this, external funding from the GCC into these banks represented only eight per cent (QAR 75 billion or $20.6 billion) of the total. Among these four banks rated by S&P, the least exposed to outflows from the GCC is Qatar National Bank, while the most exposed is Qatar Islamic Bank. Comparing the volume of outflows with the four banks’ liquidity positions at year-end 2016, according to the rating agency’s projections, a 100 per cent withdrawal of the GCC funds have no substantial impact. The four banks have the capacity to withstand such outflows, although one bank would likely have to use its investment securities portfolio to boost liquidity. None of the banks would require external support in this scenario. Additionally, in a situation where there is a withdrawal of all GCC funds and another 25 per cent of funds from other countries, S&P reports that these banks also have the capacity to withstand such a scenario, but in this case two of the

QATARI BANKS’ NET EXTERNAL DEBT HAS RISEN SIGNIFICANTLY (Bil. $) 250

(%)

200

150

100

2015 Net external debt (left scale)

*As of April 30, 2017. Source: Qatar Central Bank

Domestic credit (left scale)

Net external debt/domestic credit (left scale)

QATARI BANKS’ COMPOSITION OF EXTERNAL FUNDING* Debt securities (10%)

2017*

2016

Other (1%) Nonresident deposits (42%)

LESS THAN 10 PER CENT OF RATED QATARI BANKS’ LIABILITIES CAME FROM GCC IN 2016 (% of total) 60 50 40 30 20

Due to banks (47%)

10 0

Qatar

GCC

Europe North Others America

*As of April 30, 2017. Source: S&P Global Ratings

Source: Qatari banks’ financial statements at year-end 2016.

said banks may need to use their investment securities portfolio to do so. Even assuming a 20 per cent haircut on the value of those investment portfolios, the banks should be able to continue operating without requiring the intervention of the Central Bank of Qatar. An escalation of the situation could include restrictions on capital flows, explained Moody’s in a commentary, which would be negative for Qatari banks’ liquidity and funding. Tighter domestic liquidity in 2016 drove banks to increase foreign funding, which correspondingly drove the

RATED BANKS’ LIABILITIES BY GEOGRAPHY AT YEAR-END 2016 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

QNB Qatar GCC

QiB

Doha

Europe North America

CBQ Others

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increase in Qatar’s total external debt to about 150 per cent of GDP in 2016, according to the agency’s estimates, up from around 111 per cent in 2015. In a scenario of a rapid loss of confidence from international investors and depositors from other GCC countries, the government might have to step in to support domestic banks. In such a scenario, Qatar’s government debt burden would likely rise beyond Moody’s current baseline projections of around 48 per cent of GDP in 2017 and debt affordability metrics would weaken. Although Qatar has reasonably strong financial buffers—total assets managed by the Qatar Investment Authority were estimated at almost 200 per cent of GDP in 2016—not all of these assets are liquid and external. Therefore, a pick-up in foreign investment outflows would drain foreign-exchange reserves from their current level of $34.8 billion and weaken Qatar’s external liquidity position.

FINANCIAL MARKETS Following the announcements from Saudi Arabia, UAE and Egypt on 5 June, the Qatar Stock Exchange plunged approximately 7.7 per cent to reach its lowest level since early 2016, with many stocks declining by the maximum 10 per cent permitted by regulation. Nevertheless the days that followed saw a slight but steady recovery of the stocks. The initial financial market reaction has been relatively manageable—yields on Qatar’s most recent 10-year international bond (issued June 2016) rose 20 basis points to 3.36 per cent on Monday and narrowed slightly to 3.35 per cent on Tuesday, and the Qatar Exchange Index decreased by a total 9.8 per cent from its closing the

previous week. But a prolonged or deepening rift between Qatar and its GCC neighbours would potentially have a more marked financial effect and increase funding costs for the sovereign and other Qatari entities, said Moody’s in a recent commentary. This strength was also demonstrated in Qatari bonds— S&P’s ‘A’ ratings and stable outlooks on the $4.415 billion senior secured bonds issued by Qatarbased Ras Laffan Liquefied Natural Gas Co. Ltd. (II) (RLII) and Ras Laffan Liquefied Natural Gas Co. Ltd. (3) (RL3) are—at the time of publishing—unaffected by the economic and diplomatic tension.

ECONOMY Given its geographical proximity to Saudi Arabia and the UAE, Qatar’s dependence on imports from those countries is sizable. In 2016, according to IMF statistics, around 14 per cent of Qatar’s total imports came from those two countries, with about 25 per cent of all food and basic goods’ imports, as well as construction materials, such as those used in preparation for the 2022 FIFA World Cup. Moody’s in a report suggested that a prolonged disruption of trade links could require using potentially more costly alternatives, which in turn would increase inflationary pressures. From an export perspective, the UAE is by far the largest recipient of Qatari exports, receiving about five per cent of total exports, in addition to being a major transit hub for trade to other parts of the world. However, given that the majority of Qatar’s exports are hydrocarbon and predominantly natural gas, which is predominantly exported by sea to countries that did not take action on 5 June, Moody’s expect a limited

effect on foreign-exchange inflows in the balance of payments and on government revenues. Even though the UAE announced that it will close its maritime area to Qatari vessels, tankers carrying Qatari gas will be able to use Iranian and Omani waters to reach the Indian Ocean.

INSURANCE Qatar’s insurance market remains dominated by national insurers. With the exception of Qatar Insurance Company, they are largely single market players with limited overseas exposure. Similarly, most GCC insurers concentrate on their domestic market with limited premium exposure to Qatar; although some may have assets invested in the country. As such, A.M. Best in a report conveyed that the impact on an insurer’s business profile is likely to be negligible. Of greater concern are insurers’ exposures to Qatar’s stock and real estate markets, as many will have sizeable exposures to, and concentration within, the domestic equity and real estate markets. This is likely to create volatility, particularly over the short term, of risk-adjusted capitalisation and operating performance. Additionally, restrictions on airspace, land borders and sea transportation are likely to impact the marine, aviation and transport insurance lines. Reduced economic activity could also result in declining insured amounts for property and business interruption insurance. Over the short term, A.M. Best expects a limited impact on the credit quality of insurers. However, if the situation persists over a longer period, then the economic repercussions on Qatar may be more severe and its effects could begin to impact the insurance sector.

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sovereign

wealth funds

Regional trends In the shifting regional dynamic of sovereign wealth funds, what is the future outlook? Ihab Khalil, Partner & Managing Director at The Boston Consulting Group Middle East writes

overeign wealth funds (SWFs) in the Middle East control over $2 trillion in assets under management (AuM) of SWFs (conservative estimates—typically stated at cost and not market value—is above $2 trillion). Such financial power and prominence indicates that SWFs are a collective power source of capital for global asset classes, and, more critically, they have evolved to be major catalysts for local governments to drive their agendas and diversification efforts. Despite Middle Eastern SWFs being amongst the oldest and most prominent globally, we have witnessed a recent slowdown, due to a number of regional challenges including a decrease in hydrocarbon inflows with pressure to fund government shortfall, political instability, and the trend of lower returns and higher volatilities. The imperative focus for governments in the region will modernise the transition to the 21st century, adapt to emerging investment trends and market realities, and support governments, not only financially but also in terms of the strategic agenda to deliver on the long term in 2017 and beyond. Some of the largest SWFs are found in this region, particularly the GCC, including Abu Dhabi Investment Authority in the

Ihab Khalil

Sovereign wealth funds in the Middle East control over

$2 trillion in AuM of SWFs

United Arab Emirates and Kuwait Investment Authority in Kuwait, which ranked fifth and sixth respectively in terms of size. The Public Investment Fund in Saudi Arabia is the anchor SWF in the

Kingdom. These also rank in the top Sovereign Wealth Funds according to the Sovereign Wealth Fund Institute. SWFs are key players in local markets as they own substantial assets on behalf of the governments, including some of the region’s most prominent national champions. Some of the Middle East SWFs and government-owned funds own up to 40 per cent of the market cap in their respective public markets. SWFs typically aim to double their assets every ten years to beat inflation and generate real growth. The targets differ significantly by mandate; the liquidity provider’s key metric is cash returns and capital preservation, while the asset optimiser aims to maximise the total shareholder return on an asset-by-asset basis, while maintaining an overall profitable portfolio. The economic development will have to show success by kick-starting sectors, attracting investors, generating positive returns and other strategic metrics. Where a government has the capacity for multiple mandates in terms of SWFs, two prominent models have emerged. The first ensures full, legal segregation between the entities to create clarity and focus management, for example, a government may have separate mandates for monetary authority, sovereign wealth funds, and investments. The second model offers single player entities multiple roles with clear organisational segmentation and governance segregation.

CLEAR SEGREGATION OF SWFs In the past, there has been a clear segregation of distinct mandates of SWFs globally. Budget equalisers and liquidity providers typically act as buffers with sufficient assets to cover budget shortfalls over the medium term—usually up to six months. Budget cont. on page 34

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equalisers and liquidity providers form an essential part of government’s liquidity and liability management and discipline. Their assets tend to be highly liquid and invested in low risk assets such as fixed income. Future Generations Savers are a SWF’s vehicle to invest excess financial resources to generate long-term capital growth for future generations and often supporting or diversifying the sources of government income. These are highly regulation oriented, and generally constrained by legislation to maintain discipline. Future Generations Savers invest globally and outside their core markets and diversify across asset classes, usually investing through external managers. Having said that, several Future Generations Savers have started to internalise capabilities to lower costs and maximise efficiencies. More specifically, many have started to build internal investment capabilities to reduce costs, often leveraging on a consolidated set of selected strategic partnerships. Moreover, a number of SWFs have started to revise their own operating models to bring several middle office functions internally to lower operating and mitigate information costs. Asset optimisers are typically vehicles that enable governments to optimise their own assets, maximising value and shareholder returns, and often monetising this value at one point in time. In practise, they do not have an asset allocation strategy, rather maximising value at the asset level through disciplined governance, portfolio synergies, and leveraging government’s own access to generate growth opportunities. Rigorous portfolio companies’ governance and management frameworks are typically involved to ensure right intervention and active ownership. Economic or sectoral development act like venture capitals (VC) for

As hydrocarbon revenues collapsed, several of these players are looking to formalise and evolve their SWF landscape. – Ihab Khalil, Partner & Managing Director, The Boston Consulting Group Middle East – governments, directly or indirectly supporting diversification efforts, leveraging the government’s financial resources directed internally to jump start or unlock sectors otherwise too risky or with too high financial barriers for investors to tap. The ultimate objective remains to be commercial returns, with high risk appetite. They play a critical role to lower the risk threshold of investors and attract strategic players to co-invest locally. Specialised infrastructure and developmental vehicles cater to the wide expansion of the utilisation of ‘SWFs’ that we are witnessing, even by governments with minimal resources. The objective is to present foreign investors and sovereign partners with commercially oriented vehicles to optimise deal structures and mitigate government bureaucracy.

THE MIDDLE EASTERN MANDATE Historically, Middle Eastern players have been mandated primarily with locking capital for future generations. As hydrocarbon revenues collapsed, several of these players are looking to formalise and evolve their SWF landscape. A number of trends should be observed and these include emphasis on formalising the broader

reserve management framework and linking it with the debt, investment, fiscal policies in order to create rulebased systems with clear segregated objectives. These will target and match the forward looking needs of the budget. Specifically, we see a push to formalise asset liability management (ALM), forecasting functions and the budget equalisation mandate. The region is also witnessing constraints in terms of funding and limited market liquidity, which is forcing governments to reconsider their SWF portfolio. In addition to this, Future Generations Savers are under pressure with sustained and expected low-return environment. Many are revisiting the strategic asset allocation, shifting to riskier asset classes, and moving directly in-line with other peers internationally in order to boost returns. In addition, we are also witnessing an increased focus on formalising the asset optimiser mandate for local assets to support value creation and potential monetisation by sponsoring large corporations to become national champions through capital support, access to markets leveraging G2G relationships and strategic partnerships to become disciplined active investors. The mandate to create sectors is emerging strongly particularly in Saudi Arabia, essentially creating vehicles to kick-start new sectors in line with topdown economic agenda. While we are witnessing an emerging trend when it comes to investing in innovation and disruptive sectors, we have to consider the SWF outlook and anticipate performance over the long term. These investments come hand in hand with highly volatile risks however, triumphs largely contribute to the necessary returns and capabilities that can positively be used to help the economy.

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5706 Al Hilal

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Casa-2017 ad 21x27 E Final.pdf

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14/06/2017 30/04/2017 11:29 17:03

private

banking

UAE remains a bright spot for private banking Bruno Daher, CEO of Credit Suisse Middle East and North Africa, conveys his optimism on the private banking sector in the UAE

he year 2016 was marked with a series of unexpected events—from Britain’s vote for Brexit, the results of the US elections and the growth of populist movements across Europe. While all of these events projected dissatisfaction with the status quo, they had a seismic impact on global markets. Further into 2017, the global markets are again embroiled in a state of ambiguity and complexity— with the ongoing Brexit negotiations

Bruno Daher

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and several elections in Europe this year. In addition, uncertainty on Donald Trump’s agenda and his ability to fully enact his policies are leading investors to tune into a ‘wait and see’ mode. It is only fair to say that volatility and uncertainty are the main characteristics that define today’s global economies. Taking a closer look at regional economies, the challenges have been mainly centred on the impact of low oil prices and structural reforms— which is now viewed as the ‘new normal’. On a more positive note, the GCC countries continue to exhibit a robust growth trajectory in non-oil sectors—especially with these countries pursuing strategies to rebalance growth towards more productive public spending and strengthening non-oil fiscal balances to preserve wealth for future generations. Among GCC nations, the UAE has remained relatively resilient in the face of low oil prices as it has navigated this challenge better than its neighbours, aided by economic diversity and high competitiveness. The country’s economy is expected to gather strength this year, with preparations for the Dubai 2020 World Expo giving domestic demand a much needed boost. The recovery in oil prices should also give a corresponding impetus to the UAE economy. According to IMF’s latest forecast, UAE’s economic growth will accelerate to 4.4 per cent in 2018, with the global recovery seen gathering momentum in 2017.

WEALTH ACCUMULATION IN THE REGION The Middle East is a growth region for wealth creation with wealth increasing by 162 per cent since 2000, well above the global average of 119 per cent, as per the Credit Suisse

Private wealth in the UAE is projected to record a CAGR of

14.1% $1 trillion and reach almost

in 2020

Global Wealth report. Wealth per adult has also increased by 67 per cent, in line with the global average. Another example that highlights the region’s wealth potential is the number of millionaires, which is expected to reach 460,000 by 2021, with Saudi Arabia and the UAE expected to lead this growth. According to a recent study by Boston Consulting Group—private wealth in the UAE is projected to record an annual growth rate (CAGR) of 14.1 per cent and reach almost $1 trillion in 2020. Private wealth held by ultra-high-net-worth households in the UAE is also expected to see a substantial rise of 20 per cent over the next five years. In addition, the UAE has attracted 2,000 more ultrarich individuals through millionaire migration, clearly outpacing other GCC countries in this space. These examples clearly show that, despite a modest economic growth forecast, there is an impressive and rapid upward trajectory when it comes to wealth creation in the region. Supported by this steady growth in wealth, the private banking business is also witnessing a boom in the region, particularly in the UAE.

One of the key reasons for the strong growth in wealth is that the UAE has a highly developed infrastructure, a world-class regulatory framework, as well as a stable pool of banking talent. The fact that the UAE is the commercial and business centre in the Middle East naturally solidifies its position as the regional hub for private banking activities as well. Furthermore, the UAE’s strategic location combined with its political and economic stability makes it a very attractive market for High Net Worth Individuals not only based in the region but also across the globe. Another emerging trend working in UAE’s favour is that post-Brexit UK businesses are eyeing Dubai for overseas expansion—which indicates there would be an increasing influx of entrepreneurs looking to set-up shop here over the next few years—this again bodes well for wealth managers in the UAE.

CATERING TO THE CHANGING ATTITUDES OF HNWIS The financial crisis of 2008 and the impact of low oil prices highlighted the importance of asset allocation and diversification to regional clients. This is where wealth managers and advisors like Credit Suisse have played a significant role; advising and guiding clients to diversify and effectively manage their risks. However, as the region continues to develop, the needs of regional private banking clients are becoming increasingly varied. Even within the region, clients differ from one country to the next. This poses as a key challenge for wealth advisors. In recent times, there has been a significant rise in private wealth management advisory or bespoke services in the UAE due to several factors. cont. overleaf

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cont. from page 37

One reason is the growing private wealth and increasing number of millionaires and entrepreneurs in the UAE. Secondly, given the challenging economic situation, there has been a shift in wealth allocation and the risk appetite of HNWIs who are now adopting a more cautious/ low-risk approach. As a result these individuals look to diversify their portfolios and make mature investment choices to optimise risk and return. This shift corresponds to another important factor—the fact that clients in the region display characteristics that are relatively similar to those of emerging markets clients. Regional clients have an entrepreneurial spirit when it comes to doing business, they live in an environment that has strong growth potential and they understand the meaning of risk and return. Therefore, in a period of uncertainty, they seek diversified investment choices and would also like to capitalise on a wide range of opportunities that volatility brings. For instance, we are seeing that the wealth allocation patterns of clients have changed in the last few years. Most clients now have a greater share of their wealth invested into their own business and in cash and deposits rather than a heavy concentration in equities or real estate which was the predominant scenario a few years ago. Also, clients now prefer to keep their assets closer to home, which means that more capital is homebound. Thirdly, in the current economic environment, HNWIs in the region are more interested in growing their wealth so their needs are not always traditional or capital preservation related. And this is a fundamental trait that differentiates them from clients in more mature markets.

In the current economic environment, HNWIs in the region are more interested in growing their wealth so their needs are not always traditional or capital preservation related. And this is a fundamental trait that differentiates them from clients in more mature markets. – Bruno Daher, CEO, Credit Suisse Middle East and North Africa – With clients in the Middle East being more sophisticated and knowledgeable than before, they are capable of identifying higher growth opportunities in emerging markets. We believe that while the changing needs and attitudes of regional clients create opportunities for wealth managers; it also has its challenges. Financial advisors who have the relevant experience, strong local presence and most importantly, the right specialists to cover both assets and liabilities requirements, are in a unique position to meet the sophisticated needs of these clients.

AN INTEGRATED APPROACH The Middle East is experiencing an economic trough in the short-term. However, it is clear that strong wealth creation opportunities in the future still exist for the region. The private banking industry in the UAE is also becoming increasingly competitive. The competition exists not only between international private banks but also among local private banks. Both offer different products. However, in today’s dynamic world, wealthy clients have complex financial requirements that are beyond traditional private banking services.

They require more support and advice on complex situations and are looking for wealth advisors that can help them navigate through and take advantage of less favourable economic conditions, whilst offering a strong value proposition that is unique when compared with local players. For instance, a global bank that is able to offer the best of both worlds, including global products as well as customised local solutions. Also, clients in the UAE and the wider region prefer a partner who is able to offer a strong synergy by leveraging collaboration across the different divisions of the bank. Therefore, wealth advisors combining unique strengths and expertise in private banking and wealth management, including asset management services and investment banking, are in a strong position to take a long-term holistic view and provide sound advice to clients in relation to the entirety of their wealth, and in the context of their wealth creation and preservation requirements. Looking ahead, the enhanced value proposition of the integrated banking model and the capability of delivering local tailored products will increase competitiveness in capturing the share of wallet of clients’ local wealth.

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We See What Others Don’t

Asas Capital Ltd. is a Dubai Financial Services Authority (”DFSA”) regulated investment institution, incorporated in the Dubai International Financial Centre (”DIFC”)

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702 South Tower PO Box: 506806 Emirates Financial Towers, DIFC Dubai, UAE Tel: +971 4346 4700 Fax: +971 4386 7557 Email: inquiry@asascapital.com

14/06/2017 04/05/2017 11:21 13:46

- ADVERTORIAL -

UAE Real Estate Services Market

he role that service providers are playing in the real estate industry today is vastly different than just a few years ago as increasing responsibilities have shifted the dynamics of the provider industry and enhanced the benefits of outsourcing as a proposition. Though the GCC real estate has emerged as one of the fastest growing sectors across the globe, the real estate services market is still in its infancy when compared to other developed regions such as Europe, Asia and North America. Nevertheless, it has been gaining significant recognition in recent years, primarily developing on the back of momentous real estate and infrastructure investments. Amongst the GCC nations, UAE has been at the forefront of FM (Facilities Management) adoption and is acting as a benchmark for FM implementation. However, the outsourced FM market in the UAE lags far behind Saudi Arabia, and Asian countries such as Japan and Singapore which have a colossal global share. Nonetheless, the UAE FM industry is expected to grow at 8.5% CAGR between 2016-2021, largely driven by projects such as Abu Dhabi’s emirate-wide ‘Vision 2030’ and ‘Dubai Urban Development Master Plan 2020’. While, the UAE has been the market leader in terms of volume of business for real estate services since long, the segment has started to gain considerable traction in neighbouring countries such as Qatar as well. Consensually, the industry is touted to grow about 20 per cent annually

on average, driven by a burgeoning property market, ahead of Expo 2020 and the FIFA World Cup 2022. With a rapidly growing economy and the highest construction spend in GCC, the UAE real estate services sector contributed about 13.3 per cent to the GDP in 2015. Notably, the UAE real estate services market is characterised by a good mix of both global and regional competitors, many of whom are backed by PE players and large real estate developers, which has resulted in competitive pricing. The sheer size of expected infrastructure investments in the region, particularly in the UAE, is testament to the

abundant opportunities that will be present in the future, and it is only through an organized facilities services market that these investments can be safeguarded and sustained. Apart from upcoming new buildings and infrastructure facilities, the concept of planned preventative maintenance and the maintenance of old buildings and facilities has also started to provide opportunities for the industry. Additionally, in light of the smart city trend which is swiftly becoming the vision for UAE’s future urban living, investment in such opportunities are bound to enhance the valuations going forward. Despite the fact that UAE real estate services industry has huge growth potential, the industry still remains underserved considering the rapid real estate and urban infrastructure development, indicating an underlying opportunity for investments. Currently, the industry is fragmented, and the growing awareness for facilities services requires consolidation, adoption of technology and establishment of trusted supply chain mechanisms that meet new market trends. This is where the regional PE players can play a vital role for the industry’s further development and growth through systematic investments. Though, continued optimism regarding the prospects of the industry are slightly tempered by the current market conditions, including budgetary pressures which can erode margins and weigh in on the cost base, the fluctuations are not expected to be strong enough to topple the industry’s positive momentum.

Shailesh Dash, Founder and CEO, Al Masah Capital Shailesh Dash is an active Entrepreneur & Fund Manager and has promoted several Financial Services, Healthcare, Retail and Logistics companies

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19/06/2017 11:56

T H E

Q U E S T

F O R

E X C E L L E N C E

PRODUCT AWARDS 2017/2018 July 2017 call for nominations • Oman • Bahrain September 2017 call for nominations • Kuwait • Levant October 2017 call for nominations • Qatar November 2017 call for nominations • United Arab Emirates January 2018 call for nominations • Saudi Arabia A list of the proposed categories will be circulated to banks and financial institutions in each country. Institutions may nominate products in as many or as few categories as are applicable. Nominations will be showcased on www.cpifinancial.net in four distinct sections: • Retail • Investment • SME • Corporate Registered readers of Banker Middle East, Islamic Business & Finance, WEALTH, FinanceME and www.cpifinancial.net will cast their votes and select the winners. These awards provide an excellent benchmark for the banking sector and our winners are recognised across the region’s media outlets for their success in this field.

For more information, please contact: OMER HUSSAIN +971 4 391 5419

omer@cpifinancial.net

CPI Financial FZ LLC • PO Box 502491 Al Shatha Tower, Office 1209 Dubai Media City, Dubai, U.A.E. Tel: +971 (0) 4 391 4681 • Fax: +971 (0) 4 390 9576 • www.cpifinancial.net

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in-

depth

Corporate Palestine harnesses individual expertise Nisreen Musleh, Board Member of Arab Islamic Bank (April 2016 â&#x20AC;&#x201C; April 2017), provides an insight into her experience operating in a turbulent market

have recently completed serving a full term on the Board of Directors of the Arab Islamic Bank (AIB), the first Islamic bank to be established in Palestine following the establishment of the Palestinian National Authority. A publicly traded, $75 million business that is rapidly approaching a onebillion-dollar asset base, with nearly 300 professional staff members in the West Bank and the Gaza Strip. The bank represents all that corporate Palestine has to offer. Reflecting on this experience, some insights gained from this valuable opportunity are worthy to share. Although intrigued to engage in this new role, I wondered if my experience would add the envisaged value not being a banker myself. It only took a few board meetings to prove my doubt was misplaced. I founded my own business 15 years ago where I aligned all my know-how in people management and organisational design with a total emphasis on the operational side. My line of business is in professional training and language services, two

Nisreen Musleh

highly competitive sectors. Despite my diverse experience as a business owner and consultant having to deal with various sectors and having profit and loss responsibility, meeting these same business challenges from inside a large corporate structure was enriching in many ways.

I was first introduced to Islamic banking over ten years ago in a seminar at Wharton Business School at the University of Pennsylvania. Like so much else in business, being exposed to something in an academic setting is very different to fully understanding how concepts are practised in the marketplace. During AIB board meetings and committee discussions, especially when the Islamic Shariâ&#x20AC;&#x2122;ah representative joined these meetings, I could see the practicality of Islamic financing modalities. In these board committees, Shariâ&#x20AC;&#x2122;ah-compliant products are aligned to daily financing needs and totally in line with our modern lifestyles. My involvement in Islamic financing has motivated me to learn more about this rapidly growing sector. Islamic financing is not only growing in Palestine, which stands at 12-13 per cent of the banking sector, but is currently growing its market share globally too. This growth can be seen not only in Islamic countries, but in non-Islamic countries all over the world. Globally, Islamic banking claims $2.5 trillion in assets cont. on page 44

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AS EASY AS GCC! THE TAXMAN IS COMING… AND that taxman could be you!

VAT – As Easy As GCC! is a special supplement to be published by CPI Financial with a long-term shelf life as a handy reference guide. of businesses facing the introduction of new tax rules. Omer Hussain | Sales Director Nikhil Mathur | Business Development Manager - Finance ME

in-

depth

cont. from page 42

and operates through 700 banking institutions located in 60 countries. Yet this impressive presence in the market comprises only one per cent of the global banking sector and 20 per cent of the banking sectors in Arab and Islamic countries, clearly indicating significant room for future growth in Palestine and globally. Once sitting in the AIB boardroom, I understood the deep value of bringing diverse individual experiences to the corporate envionemnt. When corporate boards bring together a healthy mix of corporate professionals representing equity interests and professionals from the marketplace, firms become well positioned to maximise their potential combining operational and leadership approaches, while remaining grounded in the communities being served is the backbone of any successful business. At AIB, discussions always revolved around clients, be it internal discussions between departments or talks with external customers. Challenges were addressed in the most professional manner while always being aligned with customers’ needs. I admired this, as concerns for peopleoriented approaches is assumed to be less common in the corporate world and more prevailing in SME settings. Having had this valuable corporate board experience, I now carry the responsibility of passing this knowledge on to business circles, especially familyowned businesses, in order to combine proper structure, group thinking and collective decision-making. Many Palestinian small and medium sized firms are locked into individual and centralised management styles, missing out on all that good governance has to offer. The simple proven idea is that collaborative work is the key driver towards growth. I served as a member in the Audit Committee and the Risk, Compliance and Governance Committee.

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Balancing between operational and leadership approaches while remaining grounded in the communities being served is the backbone of any successful business. – Nisreen Musleh, Board Member of Arab Islamic Bank – Board committees are where the nuts and bolts of corporate governance takes place. Rigorous efforts are vested in these committees to ensure that the backbone of governance is in place. My engagement in these committees brought to life my conceptualised understanding of corporate governance. I have seen various models of governance throughout my education, the first being at the Coca-Cola headquarters in Atlanta, USA, when I was there on a fellowship programme for five months. The issue of governance is thrown around in our culture as if it is a side issue, but is rarely taken seriously. Following my US experiences, I brought all I observed on governance into my business which manages over 50 people, between staffers and outsourced professionals. However, having served in a corporate governance position in Palestine and seeing its significance from the inside of the boardroom, I feel further equipped with new knowledge to act on and share with others. The amount of attention paid to governance at AIB is impressive. The way policies, standard operating procedures, job descriptions and

employee evaluations, just to name a few, are all handled under enlightened leadership to create a room for best practises in our business community. Striving at every turn to reduce decision making based on personal whims and replace this with sound business analytics must become the norm if we are to succeed. We can excel, even under the occupation in which we live. The personal value I gained from serving on the Arab Islamic Bank board was significant. I had the chance to meet and work with thought leaders, operational leaders, action-oriented leaders and conservative leaders as well. This dynamic experience has driven my eagerness to seek further growth through diversity and highlighting the unique positives every person possesses. I have truly enjoyed being the first female voice at the AIB board table. It was refreshing to be able to comfortably occupy my professional space, rather than having to fight for a seat at the table as is the case in so many venues in our community. Seamlessly, being able to freely share my opinions and thoughts, while remaining a full member of the team is a takeaway from this experience that I will pass on to many others. Young professionals seeking to climb the corporate ladder need to embrace diversity of opinion and drive the constructive mindset into each and every discussion.

Nisreen Musleh is currently the Founder and Managing Director of RITAJ Managerial Solutions in Ramallah. She is a board member of the Palestinian Trainer’s Association (PTA) and Americans for a Vibrant Palestinian Economy (AVPE).

- ADVERTORIAL -

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12/06/2017 10:42

event

New frameworks for risk management? The Banker Middle East Roundtable on challenges in liquidity risk management and interest rate risk in the banking book was held in Riyadh, KSA, on 23 May 2017

he roundtable, the latest in the Banker Middle East Knowledge Series, held in association with Oracle Financial Services, was an invitationonly, closed-door event allowing senior representatives from the banking industry in Saudi Arabia to discuss the issues surrounding and impact of the proposed new standardised framework on interest rate risk in the banking book (IRRBB) together with its implications for liquidity risk management (LRM). The event took place at the Four Seasons Hotel, Riyadh, KSA.

SQUEEZE, CRUNCH OR CRISIS? None of the above it would seem! In 2016, the Central Bank, the Saudi Arabian Monetary Authority (SAMA), intervened with public funds, relaxation of LDR and new repo contracts among other measures. Capital surcharges for DomesticSystemically Important Banks (D-SIB) were also introduced in 2016. However, the assembled bankers were quick to dismiss the events of the year, which made headlines as a liquidity crunch, as a problem.

One commented that in the context of domestic liquidity there was never a shortage of funding in the market, “It is just that prices increased because we were managing to a very conservative regulatory ratio. There was never a difficulty in getting funding in the market.” What happened, he added, served to illustrate the short-term nature of lending profiles. Another noted that the liquidity position of all the banks in Saudi Arabia at all times was significantly better than almost anywhere else in the world. What is clear is that among the positive moves from SAMA is the work towards a fundamental change in the creation of a savings culture and the stability of deposits. Banks need to come up with attractive savings products and actively encourage savings. However, this is not simply an issue for banks but also for the asset management and insurance sectors. Lack of instruments remains an issue. Events last year re-emphasised the government’s position as ‘Saudi Inc.’ with the big issue in the market-place being the way the authorities ‘turned off the tap’. Yet this could also have been a positive step longer term as it may have been the genesis of a realisation among retail customers of the need to consider long-term saving for themselves. As one attendee said, “There is anecdotal evidence of a change in attitude.”

OPERATIONAL WORKLOAD The discussion then turned to the issue of how banks are coping with regulations in the liquidity space given the challenges of complying with the existing and ongoing evolution of these guidelines, including existing LCR guidelines; NSFR to be complied by 2018; and intraday liquidity in the beginning of this year. One of the most significant lessons learned from the financial crisis that hit a decade ago was that, around the

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world, banks’ information technology (IT) and data architectures were inadequate to support the broad management of financial risks. Among the responses to this was BCBS 239, the Basel Committee on Banking Supervision’s regulation 239, entitled Principles for effective risk data aggregation and risk reporting. The operational workload is rising and, of course, so is the financial impact. The implementation of IRRBB and FRTB means that banks will need to introduce new internal models, back test, validate, document, etc. Saudi banks face a stringent regulatory environment and there was a plea for SAMA to prioritise its regulation for the medium and long term. That said, it was also recognised by the bankers that they need to be pro-active rather than reactive and one admitted, “No bank, globally, likes regulators to be over-active!” Liquidity, especially within the Saudi banking system, ‘per se, a very local concept’ is derived partly from the probability of default and ‘should not be driven by regulation’.

LACK OF DATA One of the problems identified was the difficulty in pricing long-term products in the Saudi market. “There are not enough data points to price long-term lending,” commented one. Another added, “Basel has given authority to the regulator on liquidity but if you look beyond one year, there is no information to price products.” The question was posed: What are the initiatives taken or that should be taken in moving from regulatory-driven to best practice-driven liquidity risk management? This was immediately countered by the statement that ‘SAMA is very good at copying, cherry-picking, best practice around the world’. That said, it was also recognised, perhaps ruefully, that there is ‘a

tidal wave of Basel reforms’ that banks need to cope with. At the same time, they are not waiting for SAMA to implement best practice but one banker did note that SAMA’s stipulation of high minimum capital ratios ‘is inefficient’, adding that it smacked of excessive caution. However, that caution may well be justified with the regulator recognising the high level of concentration risk in the Saudi banking sector, a problem that is not limited to one bank but is ‘systemic’. This issue is among those being addressed by Vision 2030.

READY OR NOT? So, to the bottom line: are the banks’ internal IT systems up to the mark in handling the new and impending management/regulatory and measurement, frequency and reporting challenges? In terms of data management and modelling the answer was a clear ‘definitely not’. While there are obviously financial implications, the operational workload in terms of data management and governance will place greater strain on institutions, putting banks in a situation where they need to invest

heavily infrastructure—not just in IT but also in human capital for professionals capable of developing and maintaining these new models. There is a clear shortage of such risk modellers in the Saudi market. Said one participant, ‘they are not there, which means the banks also face potential problems from the Ministry of Labour given Saudisation requirements’. IRRBB, it was said, will change modelling again. The move from a rules-driven structure based on Basel II to the principles-based Basel III adds a further hurdle to the challenges facing banks infrastructure. Moving from a box-ticking regime to one based on interpretation means that banks ‘need professionals to think more about all dimensions… this is challenging!’ The roundtable concluded with a brief discussion of FRTB. This set of guidelines and requirements issued by the BCBS in 2016 may be viewed as the first semi-formal steps towards a Basel IV. The regulatory environment is only getting more complex and resource intensive. The meeting broadly agreed, again, that investment is required both in infrastructure and in human resources.

The roundtable was attended by: • Thamir Al Hashemi, Head of Risk Strategy & Architecture, Banque Saudi Fransi • Mathew Pearce, Chief Financial Officer, Saudi British Bank • Sanjay Kumar Thakur, Chief Data Officer, Head, Treasury Products Control, Balance Sheet Risk Analytics and FTP Unit, Financial Planning and Control Department, The Saudi Investment Bank • Mohammed Al Omran, Supervisor—Market Risk, Market Risk Management Department, Risk Group, The Saudi Investment Bank • Rupert Rogers, Head of Enterprise Risk Management & Treasury Risk, Alawwal Bank • Adnan Khan, Chief Retail and SME Risk Officer, Al Rajhi Bank • Ashish Asthana, Head of Market & Liquidity Risk, Al Rajhi Bank • Ahsan Kamal, Senior Vice President, Finance, Riyad Bank • Mahesh Narayanan, Senior Sales Manager, Oracle Financial Services • Sudheendra Narayanan, Senior Sales Consultant, Oracle Financial Services Also in attendance as observers were Ghada Al-Sanea and Mohammad Al-Okaili of The Saudi Investment Bank.

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11/06/2017 11:06

technology

Leveraging fintech opportunities in the Middle East Bana Akkad Azhari, Head of Sales & Relationship Management MENA and the CIS, Treasury Services EMEA at BNY Mellon, discusses the potential of fintech to transform the financial landscape in the Middle East, and how banks are helping to drive opportunities in the region

intech investment is soaring. In 2016, global figures nearly doubled to $23.3 billion, from $12 billion in 2014. Yet, Europe and North America still account for a staggering majority of global fintech investment—$15 billion combined— with the Middle East laying claim to only 0.1 per cent. Nevertheless, movement is afoot. Fuelled by the growing influence of a millennial population and rising expectations for efficiency, transparency and accessibility, fintech initiatives are rapidly gaining purchase in the Middle East. Certainly, the potential for fintech to enact real change in the region is huge, with the sector set to grow 270 per cent this year alone. And while it may have been the start-ups that initiated the fintech agenda, banks are now key players driving fintech opportunities in the region.

FINTECH AND TRADE While the past decade has heralded a new “fintech era”, this has been predominantly contained within the payment industry. And to great success—evidenced by the roll-out of everyday solutions for modern banking and the rise of digital banks. For example, Payfort, one of the largest payment fintech companies making its mark across the region, started its own “Fintech Factory” accelerator in 2016. But increasingly, attention is turning to opportunities elsewhere. One such area, with the potential for considerable impact in the Middle East, is trade. Both labour and document intensive, trade arguably has the most to gain from digitisation. Fintech developments can streamline the trade and value chain process—replacing paper-based, time-consuming manual procedures with automation. And this means improved efficiency, reduced costs and accelerated cash flow.

Bana Akkad Azhari

Yet—perhaps most importantly— technological innovation brings with it the prospect of significantly enhanced security and transparency. One of the most promising developments in this respect is distributed ledger technology, such as blockchain—the decentralised, cryptographic database that comprises bitcoin’s infrastructure. Any information entered into a “block” is instantaneously in the public domain; it cannot be changed. Crucially, this affords a level of transparency that is unparalleled across the financial industry. And so, for the Middle East—a region where concern around political and economic risk can be a barrier to trade—the implications are hugely exciting.

ADDRESSING CULTURAL NEEDS However, if the region is going to realise the full potential of fintech, cultural barriers must be addressed.

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technology

businesses are often family-run, meaning they have not deviated much from their founding structures and business methodologies. Naturally, a business culture with established roots such as these will find it more difficult to adapt. And so, convincing these companies— en masse—of the benefits of financial innovation is the first sizeable challenge. Nonetheless, with a young population—60 per cent of people in the UAE are under 25, for example—preconceptions about technological developments are changing. MasterCard’s 2016 Impact of Innovation Study is testament to this, with 59 per cent of UAE respondents stating that mobile phones are their preferred payment device— considerably higher than the 37 per cent of respondents in Western Europe. On the back of this millennial drive, governments are fast recognising the rewards of investing in the fintech market. Lebanon’s Circular 331, a $400 million entrepreneurship investment stimulus lead by Banque du Liban, is one example. Through Circular 331, Lebanon is both directly encouraging investment in financial innovation

In 2016 investment in fintech nearly doubled to

$2billion 3.3 from

$12 billion in 2014

If the region is going to realise the full potential of fintech, cultural barriers must be addressed. – Bana Akkad Azhari – and contributing to changing business practises in the region. Even with governmental stimulus and millennial drive, barriers to progress are compounded by the relative newness and unfamiliarity of the “fintech” brand. Lacking experience and establishment, fintechs are struggling to succeed in the hugely competitive world of corporate finance. And while this could have been detrimental to their success in the region, where the fintechs waver, the banks excel.

COLLABORATION IS KEY Unrivalled in market knowledge, working capital, and client reach, banks are championing the importance of innovation and— crucially—collaboration. Where banks are looking to leverage the tech know-how of fintechs to deliver valueadded digital capabilities to clients, by engaging with banks, fintechs stand to gain much-needed market insight and a comprehensive local clientbase. Certainly, the benefits of joining forces are clear, and bank-fintech partnerships in the Middle East are becoming increasingly prevalent. Such collaboration is helping to drive the opportunities shaping an increasingly technological financial landscape. For example, January this year saw the National Bank of Abu Dhabi (NBAD) collaborate with Ripple, a US-based fintech start-up, to perform the first cross-border payments using blockchain in the region. With 70 per cent of Gulf Cooperation Council (GCC) bankers open to fintech integration, it seems the region is

poised to follow suit in establishing ties with new fintech players. A further example of collaboration is that of local-global bank partnerships. Investing in digital innovation can be a significant challenge for many local banks—particularly when combined with the costs of compliance—and it is here that non-compete correspondent banking alliances can play a key role. In fact, such partnerships are mutually beneficial: local banks can benefit from the technological capabilities and extended reach of global payment specialists, while global banks gain access to the inimitable country-specific insights of local banks. To this end, collaboration is already generating more homegrown innovative solutions, more integration with the rest of the digital world, and more investment from home and abroad. Fundamentally, as the Middle East begins to fully embrace the benefits and opportunities proffered by fintech innovation, it is the banks that are shaping the region’s fintech future. With the right technology and strategic global collaborations in place, this could spur a new, dynamic era of finance in the Middle East.

The views expressed herein are those of the author only and may not reflect the views of BNY Mellon. This does not constitute treasury services advice, or any other business or legal advice, and it should not be relied upon as such.

www.bankerme.com

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(CREDIT: POPTIKA/SHUTTERSTOCK).

Banking on mobility in the GCC Mobility drives digital disruption and customer loyalty in global banking, writes Zaki El Khoury, Head of Sales UAE, Levant, North Africa and Country Manager—Lebanon at Orange Business Services

he global banking industry—including the GCC banking sector—is going through another phase of digital disruption triggered by mobile banking, but where is it heading? Can existing players move fast enough to maintain customer loyalty or will new entrants benefit from this shift in online banking?

The over-crowded GCC banking sector is potentially poised to consolidate through M&A to increase focus on mobile banking to attract and retain younger customers, aligned with the young demographic profile of the region. This reflects a global phenomenon. According to a report by KPMG in collaboration with UBS Evidence Lab,

Zaki El Khoury

there is already an exponential growth of global mobile banking users. They forecast that this level of growth will continue over the next five to 10 years before eventually flattening out as the market saturates. The report identified the key demographic for mobile banking as the mid to late thirties, primarily because they are comfortable with cont. on page 52

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technology and have relatively high economic activity. For those looking to switch banks, mobile banking has already become a key criterion in decision making. While online banking still has an important role to play, digital strategies are increasingly turning to mobile. The functionality offered by mobile banking is increasingly diverse and reflects a desire by banks to differentiate themselves and provide for specific market requirements. This is millennial territory—a segment that is well represented across the youthful population of the GCC. Earlier this year, Emirates NBD launched the UAE’s first digital bank—Liv.—specifically targeting the country’s millennial population, as part of a major investment in innovation and transformation.

MOBILE MONEY—A GLOBAL PHENOMENON Of course, banks in the UAE serve a multicultural and multinational customer base and so money must follow customers across the world, wherever they need it. But this is not just innovation for millennials in the UAE or GCC. Innovation is happening in some surprising places and for some very good reasons. While mobile banking services are being led by banks in the developed world, they are being pioneered by telcos in the developing world. Adoption rates for mobile banking are highest—reaching 60 per cent to 70 per cent—in emerging markets like China and India, rather than the US, Canada and the UK, according to KPMG. The simple reason is that in many developing countries, a large proportion of the population are still not served by the traditional

While online banking still has an important role to play, digital strategies are increasingly turning to mobile. – Zaki El Khoury, Head of Sales UAE, Levant, North Africa and Country Manager—Lebanon, Orange Business Services – banking system. In Sub-Saharan Africa, for example, just 34 per cent of adults have a financial account and in the wider Middle East it is as low as 14 per cent, according to the World Bank’s Global Findex Database. In high-income OECD countries, 94 per cent have an account. In Africa, Orange Money lets consumers and business customers convert their money for storage in an electronic wallet from which they can carry out secure transfers. In some countries, the service offers international transfers. Orange Money was originally intended for people with no access to a bank account, but is currently broadening its scope to people with bank accounts and allows transactions between their mobile and their bank account.

NEW MOBILE RIVALS TO TRADITIONAL BANKING Traditional financial institutions are already facing unprecedented threats from new entrants looking to use technology to disrupt the traditional banking model. Orange is also in talks to create a new bank called Orange Bank together with French insurer Groupama, in a move that targets a new generation of consumers using mobile phone technology. The plan is to open a 100 per cent mobile bank that will offer standard banking services, together with loans, savings and insurance.

MAINTAINING MARKET SHARE High street banks face a huge challenge to maintain market share in face of this digital revolution. According to a survey carried out by international law firm Pinsent Masons and YouGov, almost a quarter of respondents (24 per cent) said they would likely to be banking with an alternative payment provider, such as PayPal, within two years. In the increasingly competitive banking market, it is vital to offer innovative products to win new customers and boost loyalty, to differentiate and drive operational efficiencies. The banking and insurance sector is going through a period of transformation, driven by global economic changes, evolving consumer habits, stringent industry regulation and increasing service-delivery costs. Mobile devices have become key channels for accessing financial information, and consumers are increasingly using social media to find out about banking and insurance services. Developing innovative multichannel services will help attract these increasingly demanding consumers. Every bank in the region should be concerned about cyber security and take it very seriously, adding more layers of security to the data centre, making sure the network is secure end to end. This is one of the key challenges for all the banks here in the UAE— and across the world.

www.bankerme.com

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personality

Jahangir Aka Head of Client Group—Middle East & Africa, Neuberger Berman

have been in financial services for about 20 years. In my early days I thought I wanted to be an engineer, the idea of making things fascinated me. However, my father was a banker and encouraged me to do some internships in banks whilst I was at university. It made me realise banking was very diverse, from trading to lending to corporate and retail, etc. Including the different support and control functions including risk, marketing and HR. I liked that. And so my journey began in corporate banking. Given the broad set of geographies we cover from the Dubai office, I travel a lot, so I do not really have a daily routine. When I am in the office, I like to start early as it gives me time to think and address emails that have arrived overnight. I also use the morning to read and update myself on research. Neuberger Berman (NB) has offices around the world and my job is to bring our capabilities to clients in a very broad region. Hence, the rest of the day I spend a lot of time on the phone, both to clients and internally. There are many aspects, but in the investment business it comes down to people. I am very fortunate that I work with a great group of people; clients and colleagues. Discussions are often intellectually stimulating and you learn something new in every conversation. I am extra lucky as the culture at NB is very collegiate. I have been working for NB for just over two years and it’s not a surprise to me that NB has received accolades for “best places to work in investment management” many times.

Many clients around the world have the same problem, whether a sovereign wealth fund, pension fund, endowment or family office—the search for yield continues. The last couple of years have been very focused on credit and private equity. The biggest weakness in GCC’s financial sector is that we want it to look like the financial sector in other parts of the world. There are many aspects to our regional economy that are different from other parts of the world. We have limited domestic investment opportunities relative to our very large capital base. Hence, we remain an exporter of capital. We have a very large expatriate population base that has no long term residence rights, creating a transient population base, which doesn’t allow retail banking to build long term relationships across the product spectrum, i.e. resulting in huge offshore banking presence. But ultimately we are still young economies, and we shouldn’t rush the creation of trust, which is the critical ingredient to a strong financial services sector. It’s difficult to compare [the GCC and other markets] due to market age and difference in characteristics. We have been developing our debt capital markets, driven by the weakness in oil prices. Sadly, living on debt, whether government or individual, isn’t the long term answer. Development in domestic infrastructure and industry, creates employment and investment opportunity, and invites long term foreign investment. Dubai and broader UAE has set a very high bar for all others in the region to follow. Just catching up across the region will need and create deeper financial markets. My legacy has to be outside of financial services, I just do not know what it is yet. I grew up with the privilege of knowing Abdul Sattar Edhi. He taught us a lot, my favourite quote of his, “People have become educated, but have yet to become human.”

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THE JOURNEY TO SIMPLICITY 50 years ago, we started with a single thread of hope. Even though there were knots and tangles along the way, we persisted until we overcame the complexities to offer simpler banking solutions today. ABK... moving forward over 50 years.

Simpler Banking

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