JULY – AUGUST 2017 | ISSUE 197
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Growth amidst uncertainty Ahmed Saud Ghouth,
Chief Executive Officer of Alkhabeer Capital
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Dubai Technology and Media Free Zone Authority
Growth amidst uncertainty Ahmed Saud Ghouth, Chief Executive Officer of Alkhabeer Capital
“Alkhabeer’s successful private equity strategy focuses on investing in defensive sectors.”
INSIDE:
10 CREATING A
WIN-WIN STATE
page 3-4 contents.indd 1
24 TURKEY: REALITY IS BETTER
THAN PERCEPTION
30 INVESTING IN SAUDI’S
CONSUMER STAPLES
42 RENEWABLES: REALISING
THE POTENTIAL
19/07/2017 11:01
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contents
JULY - AUGUST 2017 | ISSUE 197
3
E D I TO R ’ S L E T T E R
C
losing the first half of 2017, most financial institutions in the region have announced their results for the first six months of the year. Several banks made marginal profits while others suffered losses, indicating persistently challenging market conditions that is expected to continue until at least early 2018. The talk of town in last few weeks have been the legality of Dana Gas’ Sukuk. This has been extensively covered in www.cpifinancial.net, with the latest update on the case (at time of publication) featured on page 8 of this magazine.
16
Bracing ourselves for the summer lull, we could expect less activity over the next few weeks. Nevertheless, in a market that is full of opportunities and one that is eager to catch up with the rest of the world, perhaps this year’s summer wouldn’t be too boring. Have a productive read and a fulfilling summer.
The cover interview this month takes a trip to Jeddah, Saudi Arabia, as we speak to Ahmed Saud Gouth, CEO of Alkhabeer Capital on how the company has grown in spite of the tough economic backdrop (page 18). This mid-year issue explores the various factors impacting the financial services industry in the region such as value added tax, capital market initiatives and opportunities as well as alternative investment avenues. Contrary to popular expectations, the market did not slow down this year during Ramadan. Business appeared to have gone on as usual with no signs of decelerating.
10
Nabilah Annuar Editor
BankerMENA CPI Financial
24
30
COVER INTERVIEW
6 News analysis
Nabilah Annuar
18 Growth amidst uncertainty
A subdued growth
COUNTRY SPOTLIGHT
8 News bites
24 Turkey: reality is better than perception
THE MARKETS
CAPITAL MARKETS
10 Creating a win-win state 14 A new HPI for Saudi Arabia
30 Investing in Saudi’s consumer staples
LEGAL PERSPECTIVE
16 Boosting and incentivising investments www.bankerme.com
JULY – AUGUST
2017 | ISSUE 197
195 MAY 2017 | ISSUE
om www.bankerme.c
Growth amidst uncertainty Ahmed Saud Ghouth,
storm 30 Riding out the
equity: 40 ESG in private focal from fringe to
Get the next issue ofEast Banker Middle before it is published. Full details at: www.bankerme.com
Growth am uncertaintyidst
Ahmed Saud Ghouth
Chief Executive
62 Elevating cybersecurity another level management to
,
Officer of Alkhabeer
Capital
Get the next issue Banker MiddleofEast before it is published.
Full details at: www.bankerme.c om
Dubai Technology
no gain
of LGB BANK
Zone Authority
BANK
18 Egypt: no pain,
eneral Manager Vice Chairman–G
and Media Free
Manager of LGB
Samer A.H. Itani,
Dubai Technology
Vice Chairman–General
An outstandingrecord financial track
INSIDE: page 3-4 contents.indd 1
18/06/2017 14:09
10 CREATING A
WIN-WIN STATE
24 TURKEY: REALITY
IS BETTER THAN PERCEPTION
Zone Authority
“Alkhabeer’s successful private equity strategy focuses on investing in defensive sectors.”
to offer “LGB BANK plans innovative new service and packages, financial solution to address which enable it posed by the challenges the local market.”
and Media Free
Capital
Itani, record Samer A.H.
Officer of Alkhabeer
financial track
Chief Executive
An outstanding
Get the next issue of Banker Middle East before it is published. Full details at: www.bankerme.com • Follow us on Twitter: @bankermena
30 INVESTING IN
SAUDI’S CONSUMER STAPLES
42 RENEWABLE
S: THE POTENTIALREALISING
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page 3-4 contents.indd 3
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contents
4
38
JULY - AUGUST 2017 | ISSUE 197
ALTERNATIVE INVESTMENTS
34 Capitalising on the middle market 38 A new avenue of opportunity IN DEPTH
42 Renewables: realising the potential TECHNOLOGY
46 Data analytics: is this the future of audit?
42
PERSONALITY
50 Michael P. Grifferty, President, Gulf Bond and Sukuk Association
46
50
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34
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18/07/2017 09:34
news
analysis
A subdued growth
in the first six months of 2017, a 72 per cent decline year-on-year and the lowest annual start for issuances in the region since 2004. There were five initial public offerings which raised $603.3 million and accounted for 60 per cent of the region’s ECM activity in the first half. Dubai-based oil and gas production services firm ADES International Holding raised $243.5 million on the London Stock Exchange in May, the region’s largest IPO for the year so far. Follow-on offerings accounted for the remaining 40 per cent of activity.
The volume of deals saw a dip in the first half of 2017, nevertheless debt capital markets continue to show steady progress INVESTMENT BANKING FEES
M
iddle Eastern investment banking fees was estimated to have reached $462.1 million over the course of the first six months of 2017, according to a market analysis by Thomson Reuters. This is 15 per cent less than the value of fees recorded during the same period in 2016. Underwriting fees for debt capital markets (DCM) totalled at $136.9 million, while fees for equity capital market (ECM) transactions was recorded at $39.7 million. Fees generated from completed M&A transactions accounted at $98 million. Syndicated lending fees declined to a three-year low at $187.6 million. DCM fees accounted for 30 per cent of the overall Middle Eastern investment banking fee pool, the highest first-half share since 2001. Syndicated lending fees accounted for 41 per cent, while completed M&A advisory fees and equity capital markets underwriting fees accounted for 21 per cent and nine per cent, respectively.
deal to have been announced thus far, boosting inbound M&A to $6.6 billion, the highest first half total in 11 years. Domestic and inter-Middle Eastern M&A declined 46 per cent year-on-year to $2.8 billion, while outbound M&A activity dropped 13 per cent to $8.3 billion. Energy and power M&A deals involved by Middle Eastern entities accounted at 41 per cent of by value, while the financial sector dominated by the number of deals made. Six of the largest ten deals announced in the region thus far were energy deals, the largest being Saudi Aramco’s Saudi Refining unit’s $2.2 billion payment to Royal Dutch Shell in the breakup of their oil refining joint venture Motiva Enterprises.
DEBT CAPITAL MARKETS Boosted by Saudi Arabia’s $9 billion international Islamic bond in April and Kuwait’s $8 billion debut international bond sale in March, Middle Eastern debt issuance reached $57.4 billion in the first half of 2017, 53 per cent more than the proceeds raised during the same period last year and by far the best annual start in the region since records began in 1980. Saudi Arabia was the most active nation in the Middle East accounting for 21 per cent of activity by value, followed by Kuwait with an 18 per cent market share. International Islamic debt issuance increased 50 per cent year-on-year to reach $31.4 billion for the year thus far.
EQUITY CAPITAL MARKETS Middle Eastern equity and equityrelated issuances totalled at $1 billion
First quarter Middle Eastern Investment Banking fees by Product $800
50%
46%
45%
$700
40%
The value of announced M&A transactions with Middle Eastern involvement reached $20.1 billion in the first half of 2017, eight per cent more than the value recorded over the corresponding period last year. US chemical maker Tronox’s $2.2 billion acquisition of a Saudi Arabian titanium dioxide business is the largest
Fees (US$ mil)
$600
M&AS
30%
$500 28% 25%
$400 $300
14%
$200 4%
$100 $0
4%
20% 11%
10%
7%
15% 13%
M&A
ECM
15% 10%
4%
5%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Thomson Reuters
30% 25%
20% 19% 18% 20% 14%
35%
DCM
Syn loans
0%
% of Total Middle Eastern IB Fee Pool
6
% Change
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page 6 News Analysis.indd 6
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Where banking is more personal
bleed guide.indd 1
14/06/2017 11:22
news
bites
8
A surge in IPO floats in the GCC following the launch of the NOMU in Saudi Arabia A positive start to the year as Q1 of 2017 saw a record high in number of IPOs (10) issued during one quarter in the GCC within the past five years. The Saudi Stock Exchange (Tadawul) launched the first parallel market (NOMU) in the GCC, aimed at smaller cap companies providing the possibility for companies to transition to the main market after a period of time. The launch of NOMU was marked by the successful listing of seven IPOs. Meanwhile on the primary exchange front, the first and largest regional offering in Q1 2017 was by the Investment Holding Group, which operates various contracting businesses. The company listed on the Qatar Stock Exchange and offered 49.8 million shares, raising proceeds of $138 million. IHG is the first Qatari IPO on QSE since 2014. The second offering was by Al Jazira Mawten REIT fund on Tadawul offering 11.8 million shares and raising $31 million. The fund invests in developing real estate to generate rental income. The third and final listing was by ENBD REIT on Nasdaq Dubai offering 94.6 million shares and raising proceeds of $105 million. The fund invests in a diversified portfolio of Shari’ah-compliant real estate assets in the UAE. The IPO is the first to list on a Dubai exchange since March 2015.
10 [Value]
300
8 6
200
157 105
100
138
4 2
1
-
1
UAE
KSA
-
12 [Value]
500 471
400
400 274
300
0
8 6 4
200 100
10
2
[Value] 1
1
-
Q1‘16 Q2‘16 Q3‘16Q4‘16 Q1‘17
QATAR
Value (USD million)
600
Number of IPOs
Value of IPOs (USD million)
400
GCC quarterly IPO activity
Number of IPOs
Value of IPOs (USD million)
GCC Q1 2017 IPO activity by country
Number
Value (USD million)
Source: PwC
Number
Source: PwC
RATINGS REVIEW Entity
Abu Dhabi
LT IDR/LT Rtg (FC)
Bahrain Egypt Iraq
ST IDR/ST Rtg (FC)
AA
F1+
B
B
BB+ B-
Lebanon
B-
B B B
LT IDR/LT Rtg (LC)
ST IDR/ST Rtg (LC)
Country Ceiling
AA
F1+
AA+
B
B
BB+
B-
B
B
BBB+ B
B-
B-
Country
UAE
Bahrain Egypt
Iraq
Lebanon
AA
F1+
AA
F1+
AA+
Kuwait
A
F1
A
F1
AA+
UAE
BB+
B
BBB-
F3
BBB-
Saudi Arabia
A+
F1+
A+
F1+
AA
Qatar
AA
Turkey Saudi Arabia Qatar
Kuwait Ras Al Khaimah Turkey
UR
Under Review
F1+
AA
F1+
KEY Positive Negative Evolving Stable
AA+
OUTLOOK
WATCH
Dana Gas asserts speculation over its Sukuk ‘categorically untrue’ Dana Gas released its full statement to Sukuk bondholders after much speculation over the lawsuit it brought against the possible non Shari’ahcompliance of its Sukuk. “To summarise, we hope we have set the record straight and addressed some of the misleading press coverage out there that states that Dana Gas is seeking to use the legal status of the current Mudarabah Sukuk as a negotiating ploy. This is categorically untrue. The steps we took to protect the Company’s reputation and assets are in measure with the amount of value at stake, concerns raised by the aggressive communications and threat of default received from the Sukukholders’ representatives, the Trustee and Delegate in late May, and the legal issues of the current Sukuk,” Dana Gas said. “We are seeking a consensual solution and to put a legal, enforceable structure in place for the benefit of all stakeholders. The commercial deal will need to reflect the improved bond market conditions and the Company’s vastly improved credit since the current Sukuk was launched five years ago. It goes without saying that any deal needs to obtain the approval of Shareholders who, in the Company’s view, will not accept unreasonable terms. That said, the Company is determined to act in the best interests of all its stakeholders, and remains open to direct, frank and constructive engagement. We appreciate that this was a lot of information to absorb all in one go, so we will be posting the script from this call on our website in both English and Arabic. The Company will keep updating the market as the process evolves,” it concluded.
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page 8-9 News Bites new.indd 8
19/07/2017 11:52
news
bites
SEDCO Capital launches new investment strategy combining Shari’ah principles with ethical investment
Hasan al Jabri, CEO, SEDCO Capital
S
EDCO Capital, one of the largest asset managers in Saudi Arabia, has launched a new investment strategy called Prudent Ethical Investing (PEI) that integrates its Shari’ah-compliant investment approach with ethical investing. PEI stresses the importance of due diligence and transparency around investment structures, processes and reporting while also integrating the analysis of environmental, social and governance criteria in the investment process. The strategy seeks to avoid high financial risk and aims to enhance longterm risk-adjusted returns. Commenting on the launch, Hasan al Jabri, CEO of SEDCO Capital, said, “We have pioneered a Prudent Ethical Investment approach that ensures we invest in companies that have strong governance, clear structures, and a prudent level of leverage. In short, while we target strong returns and performance, we ensure that our investments benefit society, comply with Shari’ah and ESG investment principles, while avoiding excessive leverage and non-transparent investment structures.”
Al Jabri, who has been developing the PEI approach since 2013, recently oversaw the publication of a seminal SEDCO Capital white paper, entitled ‘How can Responsible Investors Benefit from Islamic Criteria?’ which looked at the performance of responsible investments, Islamic investments and unconstrained portfolios across the US, Europe and Asian equity markets. The research showed that Shari’ahcompliant portfolios have outperformed unconstrained and responsible investment strategies over the last decade on an absolute return and risk-adjusted basis across all analysed markets. Christian Gueckel, Chief Risk Officer at SEDCO Capital and author of the white paper, added, “Our analysis has shown that sector exclusions and balance sheet constraints cause a distinct return profile for Islamic portfolios. The lower financial leverage and better cash conversion result in a bias to quality and growth which adds a prudence element to Islamic portfolios. Our results show clearly that responsible and unrestricted investors would have performed better using Islamic criteria.” SEDCO Capital was the first Saudi asset manager and the first fully Shari’ah-compliant asset manager to become a signatory of the United Nations Principles of Responsible Investing (UNPRI), an initiative started by former UN Secretary General Kofi Annan. This principle-based framework called for the incorporation of environmental, social and governance variables when analysing risk for any investment.
9
The global financial crisis in 2007 highlighted the downside of excessive leverage and the robustness of the Shari’ah investment universe, which proved sturdier and less volatile to market conditions and shocks. SEDCO Capital’s white paper found that over the analysed period from 2006 to 2016, the global Islamic portfolio outperformed the global conventional portfolio by an annualised three percentage points and its Sharpe ratio improved by more than 40 per cent. The trend towards ethical investing which focuses on ESG (environmentally friendly, socially responsible and governance driven) investing has been on the rise over the past decade. SEDCO Capital’s research paper shows how both ethical and Shari’ah compliant investment can embrace a sustainable economic development model and how these two forces have been merged to create the new concept of PEI. SEDCO Capital has set the standard for this investment approach and in demonstration of its appeal, it is now seeing global partners follow its lead. “We now see PEI as a pathway to propel our business forward with new partners and new projects,” said Al Jabri. “Our partners will benefit from a better understanding of how our investment methodology will meet both their performance requirements as well as ESG and responsible investment principles.” SEDCO Capital has seen a sharp rise in the number of investors seeking out its PEI investment products. International investors can choose from over 14 SEDCO Capital Shari’ahcompliant investment strategies in Luxembourg with total AUMs of $1.8bn. Shari’ah-compliant asset managers are now recognised globally as providing exceptionally strong platforms. Link to the whitepaper: https://papers.ssrn. com/sol3/papers.cfm?abstract_id=2918849
Alizz Islamic Bank halts merger talks with United Finance Company Oman’s Alizz Islamic Bank has ‘decided not to pursue’ the merger with United Finance Company and to stop discussions. In a statement to the Muscat Securities Market, Alizz Islamic Bank said that ‘based on the recent decision of United Finance Company dated 20 June 2017 to decline Alizz Islamic Bank offer for exploring a possible merger of the two institutions through a combination of a share swap and cash’, its Board of Directors has terminated the merger talks.
www.bankerme.com
page 8-9 News Bites new.indd 9
18/07/2017 08:58
the
markets
10
(CREDIT: MICHAELJAYBERLIN/SHUTTERSTOCK)
Creating a win-win state
Will value-added tax be a game changer in the UAE? Dr Allen Baby, Faculty at Emirates Institute for Banking and Financial Studies, Dubai, tackles this question
O
ver four decades, the UAE has transformed itself from a small $14 billion economy in 1975 to a $370 billion force to reckon with today—a true economic miracle. While the period saw oil prices go through the troughs and peaks, the country’s economy managed to sail ahead due to the strategic diversification efforts and bold economic reforms.
THE RATIONALE BEHIND TAXATION Although the UAE’s economy is largely diversified today when compared to its peers in the GCC region, oil continues to make up nearly 65 per cent of government revenues. A 2017 analysis by the International Monetary Fund (IMF) has estimated the fiscal breakeven oil price for the UAE a price level that would eliminate the country’s fiscal deficit—at around $71 per barrel.
OIL PRICES: LOWER FOR LONGER? With clean energy bringing an unprecedented disruption to a market dominated by hydrocarbon fuels, there is a growing consensus in the energy sector today that low oil prices are here to stay for the foreseeable future. Given this context, policymakers have started to realise the fallacy of depending on hydrocarbon revenues in the long run. Solar power prices have fallen by more than 80 per cent in the past few years, challenging more conventional sources of energy. In 2016, China doubled its solar capacity in just one year, and the UAE recorded the world’s cheapest solar energy bid at 2.42 cents per kilowatt-hour—a clear testament to the tremendous potential clean energy holds. A Bloomberg analysis
has indicated that if the electric cars segment continues to grow at the current rate, it could off-set the demand for nearly two million barrels of oil per day by 2025— an equivalent of the current supply glut. With long-term structural changes in the dynamics of the energy market, governments must embark in a new direction to make it through the turbulent times and emerge stronger once the storm blows over. The strongest economies of today are of countries that have adopted bold economic reforms at some point in their history, despite all odds. A prime example of a bold reform is the upcoming introduction of valueadded tax (VAT) in the UAE. IMF estimates that the move will increase government revenues from non-oil sectors by as much as 2.7 per cent of non-hydrocarbon GDP.
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page 10-12 The Markets.indd 10
18/07/2017 08:59
the
markets
INDIRECT TAXES & VAT An analysis of the global taxation principles shows that indirect taxes are perceived to be unfair and regressive, as they do not discriminate between the rich and the poor, requiring equal contributions from everyone regardless of income. For instance, if a bottle of water is purchased, irrespective of whether the person is rich or poor, they would pay the same tax on it. In case of direct taxes, the poor are generally excluded from the tax slabs or the slabs are low and a rich person would pay more tax based on his higher income. The only way to mitigate this unfavourable perception is to keep the tax rates reasonably low and exempt basic goods and services from taxation so that the move does not hurt the common man. This is the fundamental rationale behind setting the VAT at a low rate of five per cent in the UAE. The wellknown Laffer curve theory suggests that lower tax rates increase
VAT to increase government revenues from non-oil sectors by
2.7%
of non-hydrocarbon GDP Average contribution of VAT to government revenues in emerging and developing commodity exporters is
5
%
of the GDP
productivity and generate significant government revenues. The success of similar measures in countries such as Singapore and Canada has amply proven the accuracy of this premise. A study by IMF shows that implementation of VAT has been successful in diversifying the revenue base of comparable economies with large commodity resource base. The average contribution of VAT towards government revenues in emerging and developing commodity exporters is around five per cent of the GDP.
IMPACT OF VAT ON THE BANKING INDUSTRY
Dr Allen Baby, Faculty at Emirates Institute for Banking and Financial Studies, Dubai
Upon the implementation of VAT in the UAE, the banking industry is expected to feel a multidimensional impact. Certain banking transactions will fall within the ambit of the tax law. While the original financial intermediation part of the banking business, which includes deposits and loans, and margin based products like
11
trading in shares, bonds, forex etc. are exempt under the law, certain services would be taxable. Select fee-based financial services, for instance agency services, custodial services, advisory services, asset management services and brokerage services, will also be subject to VAT. While the related costs will largely be passed on to the clients, banks might have to bear at least some of them. On the other hand, the introduction of VAT could indirectly open a world of opportunities in SME financing. As mentioned earlier, SMEs account for 90 per cent of registered companies in the UAE. However, the cumulative amount of bank finance this vital segment receives represents less than four per cent of total loans. This is mainly due to the high levels of risk banks face in lending to SMEs due to the lack of transparency in small business financials and frequent instances of artificially inflated figures. The implementation of VAT in 2018 and corporate income tax in the future could significantly increase transparency in business through compelling companies to improve their bookkeeping and reporting standards. As an invoicebased tax system that requires proper documentation, VAT could make reporting bogus sales and inflating financial statements a thing of the past. A more transparent climate is anticipated to prevail that will encourage banks to take a chance on financing more SMEs, given the reduction in the associated risks. Adopting VAT is a bold and forward-looking move that has the potential to change the foundations of fiscal policy in the UAE and enable the country’s diversified economy to grow from strength to cont. overleaf
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page 10-12 The Markets.indd 11
18/07/2017 08:59
the
markets
12
cont. from page 11
strength regardless of the oil prices. In the long run, the introduction of VAT will be a win-win solution for the government, companies and consumers alike.
The chart below from IMF indicates the structure of Government revenues in GCC countries. This indicates the high level of dependency on oil revenue, despite the diversification efforts. OIL AND NON-OIL FISCAL REVENUE, 2014 (Per cent of total government revenue) 100 90 80 70 60 50 40 30 20 10 0
IMPACT OF VAT ON BUSINESSES The introduction of VAT on goods and services in the UAE will affect businesses in the country in various ways. While the consequences could be negative at first, given the low tax rate and the fact that most of the costs will be passed on to the end consumers, the step is unlikely to have any significant impact on the profitability or competitiveness of businesses in the long run, especially for large companies. However, nearly 90 per cent of companies in the UAE are small and medium-sized enterprises (SMEs), operating primarily in the trading sector. VAT could pose a real challenge for the SME segment, as the cost of compliance can be much higher than the direct financial implications of the tax. SMEs often lack full-fledged finance departments and will most likely need expert help in calculating and filing their taxes. They will also need to acquire suitable tax software to facilitate recordkeeping. This could hike up their operating costs, resulting in a negative impact on their margins in the near term. Some companies, such as small service providers, may have to bear the costs themselves, as their clients may not be willing to absorb the increase by paying more for the services. The initial guidelines from the Ministry of Finance specify that companies with a turnover of $100,000 and above must register for VAT in the first year, while the second year will see the limit lowered to $50,000.
a eri Alg
in hra Ba
q Ira
it wa Ku
ya Lib
tar Qa
an Om
Source: IMF
ia tes ab ira Ar Em di u b Sa ra dA ite Un
n me Ye
Oil revenue
Non-oil revenue
IMF Recommendations on the Revenue options for UAE and its impact. (Reference: IMF report – 15/220, UAE, 2015) ILLUSTRATIVE MENU OF OPTIONS FOR FISCAL ADJUSTMENT Expenditures Total Water and electricity subsidies Other transfers Capital transfers Containing growth in other expense
Estimated gains in 2015-20 1/ Comments IMF staff Authorities 9.0 13.4 1.1 1.1 Removal of water and electricity subsidies 1.1 3.1 Slowing growth in other transfers 3.5 5.8 Lowering capital transfers to Abu Dhabi GREs 3.3 3.3 Stabilizing other expense in real terms
Revenues
Estimated gains once fully implemented 1/ IMF staff-proposed revenue options
Total CIT VAT Excise tax
7.4 4.1 2.7 0.6
Applying the CIT of 10 per cent (to UAE, GCC and foreign companies Introducing a five per cent VAT Introducing a 15 per cent excise tax on automobiles
1/ In per cent of non-hydrocarbon GDP
Source: IMF
The average contribution of VAT towards government revenues in emerging and developing commodity exporters is approximately five per cent of the GDP. VAT REVENUE, 2014 (or latest) (In per cent of GDP)
10
10 7.8
8
7.9
8
6.7 6
EMOE 1/ 3.8
4 1.5
2 0
0.0 E UA
Source: IMF
4.2
4.8
5.1
6
5.3
4
1.8
2
0.0 C GC
a a a n re bia ali eri esi sta po str on kh lom ga Alg za Au Co Ind Sin Ka
a ssi Ru
ru Pe
ay rw No
ile Ch
0
1/ Emerging and development oil exporters (include Algeria, Botswana, Chile, Colombia, Indonesia, Kazakhstan, Mexico, Mongolia, Nigeria, Peru, Russia, Trinidad and Tobago, Venezuela and Vietnam).
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page 10-12 The Markets.indd 12
19/07/2017 11:53
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1
5/3/16
5:03 PM
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Corporate and Institutional Banking
bleed guide.indd 1
18/06/2017 12:00
the
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14
Within the Central region, Riyadh was the most expensive city with an average property price of SAR 2,948 per square metre. (CREDIT: ANDREW V MARCUS/SHUTTERSTOCK)
A new HPI for Saudi Arabia SIMAH reports the Kingdom’s House Price Index for the first quarter
T
he Saudi Credit Bureau (SIMAH) has published its new House Price Index (HPI) for the Kingdom of Saudi Arabia. The index was built from a sample of over 40,000 property records supplied by some of the Kingdom’s leading mortgage providers and measures changes in residential property prices quarter on quarter, from a base point of 100 set in Q1 of 2013. Values above 100 denote that residential property prices have increased, on average, since Q1 2013; values below 100 denote an average drop in residential property prices since Q1 2013. The Index was built using a technique called Hedonic Regression, the same statistical technique used in other countries, such as the UK, Australia and the US. By the end of Q1 2017 the overall HPI for Saudi Arabia had risen to 83 from the previous quarter index of 74.
This marks the first observed increase in the average value of residential property prices since Q4 2015. The average price of residential property fell steadily in 2016, from an index of 90 in Q1 2016 to a low of 74 in Q4 2016. Despite the increase observed in Q1 2017, the HPI is still tracking below the original base point of 100 set in Q1 2013, denoting an overall fall in average residential property prices since that date.
Commenting on the HPI results, Nabil Al Mubarak, SIMAH’s CEO, said, “SIMAH is delighted to launch the Saudi House Price Index, which has been developed using a robust sample of high quality residential property data and utilising international best practise statistical methodologies for the development of such indices. We believe that this index, which SIMAH will publish each quarter, will quickly become an important and leading economic indicator for policy makers,
Growth from House Price Index (Base Year: 2013 Q1) 120 100
100
95
95 87
80
86
97
96
98
99
106
104
105 90
86
83
79 74
60 40 20 0
2013-Q1 2013-Q2 2013-Q3 2013-Q4 2014-Q1 2014-Q2 2014-Q3 2014-Q4 2015-Q1 2015-Q2 2015-Q3 2015-Q4 2016-Q1 2016-Q2 2016-Q3
2016-Q4 2017-Q1
Source: SIMAH
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the
markets
15
House House PricePrice IndexIndex (HPI) (HPI) 40,000 40,000
Growthfrom fromHouse House Price Price Index : 2013 Growth Index(Base (BaseYear Year: 2013Q1) Q1)
property were used to build thethe index, propertyrecords records were used to build index, supplied byby some leading mortgage providers supplied some leading mortgage providers
Q1 2013 Q1 2013
HPI
takes into account
takes into account
apartment and duplex)
20
1
-Q
13
measures changes in residential property measures changes in residential property prices quarter quarter, from a base prices quarter onon quarter, from a base pointpoint of of100 100set set in in Quarter Quarter 1, 1,2013 2013
Different residential Different residential property property types (e.g. villa, land, types (e.g. villa, land, apartment and duplex)
100 95 100 95
2
Q
3-
1 20
87 87
3
Q
3-
1 20
4
Q
3-
1 20
97 97
95 95
86 86
1
-Q
14
20
2
Q
4-
1 20
3
Q
4-
1 20
4
Q
4-
1 20
106 104 105 90 106 104 105 90
99 99
98 98
96 96
The most expensive property type by The most expensive property region Q1 2017 duplexes in type byinregion in were Q1 2017 were the Western region, with anregion, average duplexes in the Western with of anSAR average of SAR price 3,717price per sq. meter 3,717 per square meter
1
-Q
15
20
2
Q
5-
1 20
3
Q
5-
1 20
4
Q
5-
1 20
1
-Q
16
20
86 86
2
Q
6-
1 20
79 79
3
Q
6-
1 20
83 83
74 74
4
Q
6-
1 20
1
-Q
17
20
Thelowest lowestprice price observed The observedininthe the quarterwas was land land in quarter in the theNorthern Northern region average price of SAR regionwith withanan average price of SAR 397 square 397 per per sq. metermeter
Central region represented the highest average price per
Different regions (e.g. Central, Different regions (e.g. Central, including Riyadh, Eastern, Riyadh, Eastern, Northern,including Southern and Western)
Central region represented the highest average price square meter in the country and within the Central region, per square meter in the country and within the Central Riyadh was the most expensive city with an average property region, Riyadh was the most expensive city with an price of SAR 2,948price per square meter average property of SAR 2,948 per square meter
Northern, Southern and Western)
Values above 100 100 denote that residential property prices have Values above denote that residential property prices increased, on average, since Q1 2013; values below 100 denote an have increased, on average, sinceprices Q1 2013; below average drop in residential property sincevalues Q1 2013
100 denote an average drop in residential property prices since Q1 2013
Percentages types measured Percentagesofofproperty property types measured
Apt. 4% Duplex Villas 21% Lands Lands 15% Apt. Duplexes 60% Villas
Source: SIMAH
The upwards trend in average residential prices, coupled with the increase in mortgage enquiries and new loans written, reflects that consumers are starting to actively invest in property once again after a slow and difficult market in 2016. – Nabil Al Mubarak, CEO, SIMAH –
banks and mortgage lenders and consumers across the country.” “The upwards movement in residential property prices across the Kingdom in Q1 2017 reflects what we have observed in terms of mortgage activity and which is described in the SIMAH Mortgage Credit Index, which we also recently published. The upwards trend in average residential prices, coupled with the increase in mortgage enquiries and new loans written, reflects that consumers are starting to actively invest in property once again after a slow and difficult market in 2016. The relaxation of maximum loan to value criteria set by SAMA from 70 per cent to 85 per cent has also had a positive bearing in terms of average residential property values,” he added. The HPI also takes into account the difference in prices for different residential property types (eg. villa, land, apartment and duplex)
and different regions, (eg. central, including Riyadh, eastern, northern, southern and western). The most expensive property type in Q1 2017 were duplexes in the western region, which had an average price of SAR 3,717 per square metre. The lowest price observed in the quarter was land in the northern region, which had an average price of SAR 397 per square metre. On average, the central region represented the highest average residential property price per square metre in the country and within the Central region, Riyadh was the most expensive city with an average property price of SAR 2,948 per square metre. In the HPI, villas comprised 60 per cent of the property types measured, followed by land at 21 per cent, apartments at 15 per cent and duplexes at four per cent. SIMAH’s HPI for Q2 of 2017 will be published in August 2017.
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16
perspective
An aerial view of Cairo, overlooking the Nile. (CREDIT: ATDIGIT/SHUTTERSTOCK)
Boosting and incentivising investments
Dr Abou Shoka, founder of Cairo-based law office, Abou Shoka Law, sheds light on Egypt’s recently passed Investment Law
E
gypt’s long-awaited investment laws were passed in May, marking an important step in Egypt’s aim to attract international investment back into the region, which promptly fell away following the 2011 Arab Spring. This article will look at what this new law entails, and whether it has gone far enough in its aim to attract foreign investment, in particular from the Middle East. Egypt occupies an important position in the MENA region.
Connecting North Africa to the Middle East, the country has previously been considered a key hub for international investment. Unfortunately this new legislation only skims the surface of what Egypt has to offer businesses in the Middle East. The main elements of the new law include offering tax incentives for foreign investors, and also cutting red tape. While this latter aim is easily promised, it is rather more difficult to accomplish. Previously, up to 70 government agencies would get involved to grant a company a permit.
Dr Abou Shoka
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perspective
The new law creates a so-called ‘onestop shop’, in which one single body (General Authority for Investment and Free Zones) manages all the paper work. Also, importantly, authorities will have a 60-day deadline in which they will need to provide investors with the necessary authorisation; non-reply within this period will be considered an approval and the requested license will be issued accordingly. This will help ensure investors aren’t put off with the country’s awfully lengthy administrative processes, however there are still many other delays that can crop up. Egypt has a lot to offer in terms of a large customer base and cheap labour, but clogged-up bureaucracy has been a major block in attracting investors back to the region, and this isn’t going to get better overnight. In terms of tax incentives, companies setting up in certain specialist sectors (such as electricity and renewable energy), or in underdeveloped areas, can get between 30 to 70 per cent off their tax bills for the first seven years. In addition, the new law includes provisions returning to investors the price they pay for land for industrial projects, as long as production is started within two years. While this sounds good in theory, in reality the administrative process of ironing out the details of this law will likely take many months. It is crucial that Egypt does not keep missing the opportunity to do more, as it has so far, because potential investors will go elsewhere. At times, Egypt is competing with the likes of Dubai, and its independent international jurisdiction, the Dubai International Financial Centre (DIFC). This set-up has been hugely successful in providing an independent legal and regulatory framework for foreigners to use for
Going forward, Egypt’s focus needs to be on creating a system that will compete with the likes of Dubai; tightening up on its AntiCorruption Strategy to regain foreigners’ trust; and work at improving the government’s administrative process further. – Dr Abou Shoka – civil and commercial matters. It is understandable that many businesses in the MENA region would opt for Dubai over Egypt, because they can then operate independently of most local laws. Ideally, Egypt would follow a similar model to Dubai’s DIFC if it is serious about competing for business in the region. While Egypt still has a long way to go to be the most attractive option for businesses in the area, things have certainly been looking up in the last few months. Not only did the cabinet approve the country’s first-ever bankruptcy law in January this year, but adding to this, at the end of last year key reforms needed to attract investors from the Middle East were made, when the Egyptian government finally floated the pound, following a $12 billion deal with the International Monetary Fund.
17
Since then, foreign cash has been returning, as exchange rates were no longer being artificially inflated. So far foreign investment in Egypt has improved by 39 per cent to $6.8 billion in a six-month period. This is also thanks to the new Corporate Governance Code which was introduced last August as part of Egypt’s Anti-Corruption Strategy to help restore faith in the region. In addition, political unrest has been showing signs of ceasing, and investors are feeling less spooked about doing business in the area. Nevertheless, there is still a lot of work to be done to reduce white. collar crime in Egypt. Egypt has a unique opportunity right now to make the most of a currently bad situation in Europe. Where investors from the MENA region would usually be looking to invest in Europe, the political and economic uncertainty pervading the continent (notably Brexit and the debt crisis), opens up a space for Egypt to woo investors by showing that it is a less risky alternative. Despite the steps in the right direction, and the vague signs of hope, there is still much work that needs to be done. Egypt’s president first spoke of these new investment reforms in early 2015, and the fact that it has taken over two years for the bills to become law reflect poorly on foreign investors’ perception that Egypt is worth the trouble. While the new law is undoubtedly a step in the right direction, this is simply not enough for businesses to choose Egypt as their investment destination. Going forward, Egypt’s focus needs to be on creating a system that will compete with the likes of Dubai; tightening up on its anti-corruption strategy to regain foreigners’ trust; and work at improving the government’s administrative process further.
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interview
Growth amidst uncertainty Banker Middle East sat down with Ahmed Saud Ghouth, Chief Executive Officer of Alkhabeer Capital, to talk about the firm’s seven consecutive years of record growth amidst market uncertainty, including the factors that contributed to this success, and to discuss his outlook for the coming few years
A
lkhabeer Capital, the asset manager specialised in alternative investments, performed well above industry expectations in 2016, achieving outstanding financial results despite the economic uncertainty and geopolitical tensions in the region.
In 2016, Alkhabeer Capital was up six per cent in net income and reported an increase of 10 per cent in assets under management. Can you share with us more information on the company’s financial performance?
Ahmed Saud Ghouth
Alkhabeer’s total operating income grew by 16 per cent to SAR 207 million, while our net profit increased by six per cent to SAR 71 million. Furthermore, our return on equity (ROE) continued its upward trend with an increase of eight per cent, while total assets under management grew by 10 per cent to SAR 4.4 billion, with return on investment rising (ROI) to 12.6 per cent. These record results reflect our ability to quickly and proactively respond to new market shifts. Key highlights of our achievements during the year include the launch of two new real estate funds: we successfully structured and offered
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Alkhabeer Saudi Real Estate Income Fund I, and Alkhabeer Hospitality Fund I, both of which are closed private placement funds that are fully compliant with Capital Market Authority (CMA) regulations. Alkhabeer Capital also executed several complete and partial exits from our funds’ local and international real estate investments. In private equity, we continued the execution of our strategy by investing in the education sector. In 2016, the Alkhabeer Education Private Equity Fund I, which was launched in 2015 as a closed private placement fund compliant with Capital Market Authority regulations, acquired an education company in Riyadh. We also restructured our pioneering WAQF programme in line with our clients’ preferences for structuring and enhancing their Awqaf portfolio investments, and we continued developing our Fund Administration, Custody, and Operations Division. We also started targeting clients to provide custody services, having recognised the opportunity afforded by the new independent custodianship regulations issued by the CMA.
Though 2016 was a difficult year for many companies, Alkhabeer Capital reported record financial results for the seventh consecutive year, and was able to maintain its strong position. How did Alkhabeer achieve these results in the face of mounting challenges and difficulties dominating the sector during the year? Alkhabeer Capital consolidated its business strategy by focusing on managing alternative investments, with a primary focus on real estate and private equity assets. Throughout
Best Companies to Work for
Saudi Arabia
19
2016
Alkhabeer Capital has earned a place on the Great Place to Work Institute’s list for the seventh consecutive year.
Alkhabeer restructured its WAQF programme to enhance the Awqaf portfolio investments.
We expect that the next few years may be even tougher than 2016/2017. The key challenges remain—specifically around oil prices, market volatility and geopolitical tensions.
our information technology platforms, and developed our systems and operational processes to control costs and improve productivity. More broadly, we trust that the Saudi Vision 2030 and its National Transformation Plan 2020 will boost economic diversification in the Kingdom of Saudi Arabia. By taking advantage of the opportunities provided by the Saudi government’s commitment to supporting the growth of a number of non-oil sectors— including education, healthcare, and religious tourism—Alkhabeer was able to seize the moment and position itself for the future. These changes helped the company overcome challenges brought on by the changing risk characteristics of investors, due to a highly volatile global economic environment.
– Ahmed Saud Ghouth –
the year, we strengthened our efforts towards sourcing income generating investments and devoted our energies and expertise to identifying competitive and innovative investment opportunities, while responding to market developments quickly and effectively. In addition, we focused on becoming leaner and more focused in the face of economic challenges and uncertainties, while leveraging the talent we have nurtured at our firm as the core of our outstanding achievements. We also strengthened our corporate governance and risk management framework, upgraded
Alkhabeer raised record equity investments through private placement, in spite of ongoing uncertainties dominating the markets throughout 2016. How were you able to maintain the trust of your clients, and what is your strategy for developing this trust? Undoubtedly, the main factor that contributed to Alkhabeer Capital’s success in 2016 is our clients’ sustained cont. overleaf
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cont. from page 19
confidence and loyalty, as we continue to strive towards being a partner that facilitates innovative investment solutions with long-term value. Our strategy in doing business is centred on the nature of the relationship between Alkhabeer Capital and its clients. We constantly look for ways to develop this relationship by assessing client needs, understanding their priorities and preferences, and providing products commensurate with their investment aspirations and objectives. We believe this attentiveness strengthens their confidence in the Alkhabeer Capital brand, the capabilities of our team, and the excellence of our products. This is why in 2016 we saw a 10 per cent increase in client subscriptions in Alkhabeer Capital’s investment funds, and succeeded in raising record equity investments through private placement, amounting to SAR 588 million. In addition, Alkhabeer expanded its client base by 17 per cent, with a significant increase in institutional clients, including local and regional financial institutions and banks, as well as a 28 per cent increase in our discretionary portfolio management accounts.
Alkhabeer Capital was ranked by Great Place to Work as the top company in the financial sector on its list of Great Workplaces 2016—Kingdom of Saudi Arabia, and one of the best 25 workplaces in the Asia region. How did you achieve this, and why is it so important to you? Alkhabeer Capital has earned a place on the Great Place to Work Institute’s list for the seventh consecutive year, and we have been ranked the top company in the financial sector, and fourth overall, on its annual list of Great Workplaces 2016 in the Kingdom of Saudi Arabia.
Alkhabeer’s total operating income grew
16% SAR 207 million to
Net profit increased by
6
%
to
71 million
SAR
ROE increased
8%
Total AUM grew
10% SAR 4.4 billion to
ROI rose
12.6
%
Alkhabeer was also selected for the first time as one of the best 25 workplaces in the Asia region under the Best Small & Medium Workplaces category. We are also proud that Alkhabeer has recently been named to the ’Best Workplaces in Asia 2017’ list for the second consecutive year, jumping 18 spots to sixth place under the Best Small & Medium Workplaces category, and the only company from Saudi Arabia on that list. As for the reason behind our drive to nurture a positive working environment, one cannot overstate the importance of people in our achievements. To give our clients the best results and our shareholders the best returns, we need to build a team consisting of the best people, and having a workplace that motivates employees to do their best and collaborate towards shared objectives is the ultimate way to attract and retain talent, so our capabilities can truly shine.
Alkhabeer Capital is known as a leader in real estate investment, and has launched multiple real estate investment funds in local and international markets with an impressive track record in successful exits. Can you describe Alkhabeer’s real estate investment portfolio? What is Alkhabeer’s investment strategy in the real estate sector? Alkhabeer understands the importance of the types of assets we offer our clients. We conduct extensive analytical studies to source investment opportunities based on deep understanding of real estate investment fundamentals. This is in order to provide a diverse range of products in local and international markets in all major asset classes. We also manage real estate investments by adopting cont. on page 22
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strategies aimed at realising added value. This can be through sustainable returns from income-generating products, or by targeting promising sectors like religious tourism, as well as other investment strategies. We allocate our capital effectively to several market segments in order to achieve different investment objectives. We also arrange investment opportunities based on risk returns, geographic and sectoral preferences of our clients, and subsequently use our extensive experience in the sectors we invest in, along with our prudent approach, to achieve the highest levels of performance.
This year, Alkhabeer was named ‘Best Private Equity Company’ in Saudi Arabia at the Banker Middle East awards. When did you start focusing on private equity investments, and what is the secret to your success? Alkhabeer Capital is proud for the awards that we receive, and this recognition of Alkhabeer Capital as the Best Private Equity Company in the Kingdom is testament to our team’s hard work in sourcing promising investment opportunities, developing our private equity portfolio and creating added value for each of the portfolio companies. Alkhabeer Capital is considered to be a major player in the region. Our first private equity fund was launched in 2012, which invests in the industrial sector. By end of 2016, our private equity portfolio consisted of five closedended private placement funds investing in healthcare and education, in addition to our industrial portfolio companies. The company’s successful private equity strategy focuses on investing in defensive sectors, such as education and healthcare, and a cautious yet opportunistic approach
Ahmed Saud Ghouth, Chief Executive Officer, Alkhabeer Capital
to manufacturing businesses that have strong exporting activities, such as food and beverage, as well as retail. This strategy allows Alkhabeer Capital to achieve strong returns while minimising risk relative to the opportunities we invest in.
In view of ongoing changes in local and international markets, and the developments implemented by the government to support the Saudi economy and diversify sources of income, can you please briefly describe your outlook for the Company over the period to come, and your readiness to tackle these changes? Looking ahead, we expect that the coming few years will continue to be highly challenging and unpredictable, with the headwinds that rocked markets last year continuing unabated. However, based on our solid achievements, the management team believes in its ability to implement Alkhabeer’s strategy, address market challenges, and proactively seize new business opportunities. Nevertheless, it should be pointed out that continued uncertainties
in economic, geopolitical and regional market conditions could make it difficult to sustain the high growth momentum of recent years. As such, we remain cautiously optimistic about the future prospects for Alkhabeer Capital. Overall, we expect that the next few years may be even tougher than 2016/2017, with the current economic volatility continuing to negatively impact most asset classes. The key challenges remain—specifically around oil prices, market volatility and geopolitical tensions. In response, we will continue to sharpen our strategic focus, consolidate our first-mover advantage, diversify our revenue streams, develop the right products to meet investors’ needs, and be creative in investing in the right businesses. We will also further strengthen our institutional capability, maximising operational cost efficiencies and improving the productivity of our people. Looking ahead, we will exercise caution and be more conservative in selecting transactions. Meanwhile, we will analyse a number of potential opportunities to consolidate Alkhabeer’s strong position in a global environment that has a great deal of uncertainty.
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country
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24
Reality is better than perception Ankara castle in Ankara, capital city of Turkey. (CREDIT: MURATART/SHUTTERSTOCK)
In spite of several turbulent years for Turkey, the republic’s fundamentals are relatively strong when viewed objectively
B
eleaguered by continuous geopolitical tensions, Turkey had to endure domestic and external shocks for numerous years. Nevertheless in spite of these blows, the country has done relatively well since 2000. Following a strong performance in 2015, growth has unfortunately waned. The Turkey Regular Economic Note (TREN) recently issued by the World Bank revised its growth forecast for 2016 to 2.1 per cent, as recovery in Q4 was weaker than envisaged earlier. In 2017, growth in Turkey is expected to recover to 2.7 per cent in 2017 thanks to improving net exports. The country’s economy shrank in Q3 amid temporary political turmoil and falling tourism revenues. Seasonally adjusted GDP plunged by
2.7 per cent q-o-q in Q3, recording the largest drop since March 2009, because the failed coup attempt and its aftermath depressed business and consumer confidence and tourism revenues declined. “We expect growth in 2017 to be driven more by public spending and net exports and less by private consumption and investment. Strengthening growth in the EU will help increase exports, while subdued private demand will constrain import growth,” said Johannes Zutt, World Bank Country Director for Turkey.
DEFICIT AND INFLATION Mehmet Şimşek, Deputy Prime Minister of Turkey, addressing the press at the International Media Forum in Antalya in May 2017.
The IMF, in its Article IV Consultation with Turkey found that growth in the country remains consumption-driven.
cont. on page 26
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25
TURKEY
in numbers TURKEY: RECENT DEVELOPMENTS
12
Real GDP Growth
(Year-on-year, per cent)
14
6
12
4
10
10
8
8
6
6
4
4
2
2
0 0 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 2016Q1
Credit growth s also slowing... 45
Banking Sector Total Credit Growth (Year-on-year, per cent)
Real GDP Contribution
(Quarter-on-quarter, per cent)
6 4
2
2
0
0
-2
-2
-4
Net exports Private investment Public demand
Private consumption Real GDP growth (y/y)
-4
-6 -6 2011Q1 2012Q1 2013Q1 2014Q1 2015Q1 2016Q1
10m
but external imbalances remain high... 45
60
60
Current Account
40
40
35
35
20
20
30
30
0
0
40
25
25
20
20
15
15
10
(12mms, billion of US dollar)
-20
-40
-40
10
-60
-60
5
5
80
0 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
0
...and the financing of the current account deficit remains titled towards portfolio and debt creating flows. Current Account and Financing
110
Current account
Excluding fuel
-80
-100 -100 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
Headline and core inflation remain well-above target. 14
14
Inflation
90
12
70
70
10
10
50
50
30
30
8
8
10
10
6
6
4
4
90
-10 -30
(12mms, billion of US dollar)
FDI Portfolio MT debt
ST debt CAD
-50 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16
-10 -30
2
-50
0 Jan-12
(Year-on-year, per cent)
Headline
Jan-13
Jan-14
Core, I
Jan-15
12
Target
Jan-16
100m
Source: Turkish Statistics Institute (January 2017)
40
-20
110
79.8 million
...and the composition has shifted to private consumption...
Growth has weakened... 14
POPULATION
2 0
Source: Bank for International Settlements (BIS); Central Bank of the Republic of Turkey (CBRT); Haver Analytics; Turkstat; and IMF staff calculations.
GDP GROWTH
2.7% Growth in Turkey is expected to recover in 2017 on the back of improving net exports Source: Turkey Regular Economic Note - February 2017, World Bank
COMPETITIVENESS
Ranked 55 out of 138 for macroeconomic competitive environment Source: The Global Competitiveness Report 2016-2017, World Economic Forum
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cont. from page 24
Investment is weak amid heightened uncertainty and a sharp deceleration of credit growth. Inflation has moderated but is still well above target. The current account deficit remains sizeable, as the decline in tourism offsets savings from low energy prices. Speaking at the International Media Forum in Antalya, Turkey, in May, Mehmet Şimşek, Deputy Prime Minister of Turkey stated that the most pressing problems facing the Turkish economy is the current deficit and inflation. “We would have been able to keep the deficit under control if it weren’t for the problems we faced in tourism last year. But I can say that the deficit will be on the decline. In the past two years Turkey has gone through a real shock. This translated into inflation. We are working towards bringing inflation down to single-digit level,” he said. Thus far 7.3 million new jobs were created after the global financial crisis and he explained that the government is finding it difficult to keep the unemployment level below 10 per cent. Şimşek pointed out that the country’s fiscal deficit is 1.6 per cent of its GDP with an expectation that this year’s deficit would be higher. Turkey’s national income had nearly doubled in the last 14 years, according to Şimşek. He affirmed that the Turkish economy was developing. Şimşek, stating that the financial markets had returned to normal after the referendum, said that this was normal as the markets were expecting the referendum result to be ‘Yes’. “Net exports, is a field which we should be focusing on. We have increased the support given to export so as to achieve economic growth based on export. We even issued special passports for exporters,” he explained.
Turkey’s fiscal deficit is
1.6% of its GDP
Over the medium-term, growth is projected reach
3.5%
Non-performing loans make up
2%
of overall loans in the country
BANKING AND FINANCE
Şimşek in his speech at the forum stressed that the banking sector in Turkey is in well-capitalised, with solid asset quality. This is in line with IMF’s finding that bank capital levels remain high, although some buffers are decreasing. Higher profits boosted capital adequacy, reflecting in part lower overnight borrowing costs and relaxation of prudential norms. Non-performing loans are increasing from a low level that partly reflects accommodating rules for loan restructuring. Credit growth slowed markedly in 2016, due to both demand and supply factors. According to the minister, non-performing loans make up two per cent of overall loans in the country. In its Article IV Consultation, the IMF welcomed that the banking
sector remains well capitalised, and encouraged continued vigilance in light of a deterioration in asset quality. It cautioned that banks face substantially higher credit risks, and called for further strengthening of supervision and bank governance. The IMF recommended that macro-prudential policy should be strengthened, focusing on foreign exchange and other systemic risks, and not be used for demand management. Normalcy is believed to have returned to financial markets postreferendum. This is reflected in the stabilisation of the Turkish lira. Renaissance Capital in a recent commentary highlighted that Turkey does better when the Euro strengthens, as they tend to import more in dollars, but they often export in euros. As a currency that trades 50/50 with the euro and the US dollar, a stronger euro means imported inflationary pressures are falling when the euro is getting stronger, while Turkish exports to Europe are getting cheaper.
STRUCTURAL REFORMS Providing a progressive strategy for the advancement of the Turkish economy, Şimşek said the government’s aim is to introduce more reforms in moving towards a high income threshold. In addition, the administration also aims to make preschool mandatory in the country by 2019. “Reforms were put into place during the Özal administration, and Turkey became a middle-income country. We had become an upper middle-income country thanks to the reforms initiated since 2003. We were just about to become a highlevel income country when the terror attempts started to happen,” he explained. cont. on page 28
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cont. from page 26
Stating that Turkey had to go through structural reforms, Şimşek added, “We prioritise the education reform. We will make reforms in order to organise competitiveness and establish a better investment environment. Structural reforms regarding research-development will be put into place, as well as reforms concerning the labour market and administrative regulations.” In global competition, Turkey ranks 55th among 138 countries. Şimşek said, “Turkey drew in $15 billion in investment until 2002. In the last 14 years this has risen to $180 billion. This means we have improved the investment environment. We will continue to do so.” With an aim to put more investment into tradables, a key challenge in increasing the country’s investment competitiveness is moving up the value chain. Additionally, increasing the efficiency of the country’s judicial system as the current process is relatively slow in comparison to international standards. The IMF encourages Turkish authorities to intensify the pace of structural reforms to promote economic rebalancing and boost productivity. They welcomed progress made to reform the voluntary pension system, and urged continued efforts to increase domestic saving. IMF also underscored the importance of improving the investment climate and labour market competitiveness. They commended the authorities for hosting a large number of refugees and for their efforts to integrate them into the labour market, while stressing the importance of continued international assistance. Commenting on Turkey’s potential, Dimitris Tsitsiragos, Vice President,
We prioritise the education reform. We will make reforms in order to organise competitiveness and establish a better investment environment. Structural reforms regarding research-development will be put into place, as well as reforms concerning the labour market and administrative regulations. – Mehmet Şimşek, Deputy Prime Minister, Turkey –
Global Client Services at the International Finance Corporation, said, “Turkey in some ways shares the same characteristics with the Middle East (ME) but it is very well integrated into Europe. Turkey also has the same opportunities as ME (healthcare, infrastructure, services sector education) these are all opportunities. Turkey is very outward looking—it is looking at ME and Europe as a market. There are many Turkish companies that operate globally. Many have a strong regional presence and they are now looking at the Middle East and also Africa.”
RELATIONSHIP WITH THE EU The government’s aim is to keep Turkey anchored to the EU. Evidently, a recovering Euro zone is good news for Turkey. “We have to look at the facts. We have to continue the EU accession process. For this we need more structural reforms. Secondly we must connect Turkey to the EU. Thirdly we need to get our message across. Then we can explain why there is a state of emergency in Turkey.
We are trying to do this. In today’s world even a single tweet can lead to misperceptions. It takes time to correct those perceptions. That is why we need more structural reforms,” said Şimşek.
OUTLOOK Growth is projected to be below potential in 2016–17. The political focus on transitioning to a presidential system; renewed questions over the future of the EU-Turkey relations; and tense security situation in the south-east and conflicts in neighbouring countries are expected to prolong the uncertainty, keeping domestic demand subdued. Fiscal stimulus and the expected completion of the gradual lifting of Russian sanctions are expected to support growth. Over the medium-term, growth is projected to firm around 3.5 per cent. Inflation is expected to stay above target and the current account deficit to remain sizeable. In spite of the critical perception of a troubled Turkish economy, the country’s fundamentals are in essence stable. The country only needs some fine tuning to align itself to global standards.
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Investing in Saudi’s consumer staples Anjali Anand, Senior Manager, Investment Research & Analytics, at Aranca Research provides an insight into the three consumer staples stocks an investor needs to tap into in Saudi Arabia
C
onsumer staples, prized for their slow but steady growth in investment portfolios, are generating higher alpha than ever before. They’ve not only been more resilient to the usual market headwinds but also have tremendous potential to grow, bolstered by technological disruptors and a growing consumer base among the world’s emerging market middle class. Legacy brands, plain vanilla business models, and not nearly as much excitement as the technology space; that pretty much sums up affairs in the consumer staples industry. The same traits, however, make consumer staples stocks a quintessential part of any portfolio manager’s collection. Higher returns, low volatility, and a less capital-intensive profile make consumer staples an especially attractive investment opportunity for the long-term. If we consider a 15-year historical trend, the MSCI world consumer staples index recorded its highest average annual returns of 7.2 per cent, almost double the MSCI world average annualised returns of 3.4 per cent. It also boasted the lowest volatility, 12 per cent vs. the MSCI
CONSUMER STAPLES ARE AT AN INTERESTING PHASE
Anjali Anand
world average of 18 per cent, which translates to far fewer fluctuations in the stocks’ pricing behaviour. Conversely, the technology hardware and equipment sector recorded the highest volatility (+27 per cent) amongst all other sector indices at an average annualised return of two per cent, turbulence due mostly to the collapse of the tech bubble.
Consumer staples are believed to be stimulating right now as its performance spread widens, while its valuation spread narrows. Since 2000, the MSCI world consumer staples index’s outperformance versus the MSCI world index is noteworthy. The barometer has widened from 1.4x (December 2007) at the beginning of our most recent period of recession to 1.9x (April 2017) right now, way ahead of the historical median (1.6x). Early 2016 was turbulent for the global equities market, driven by factors such as instability in Chinese equities markets, a slump in global oil prices, disappointing GDP numbers, and corrections in other sectors such as technology, automotive, and banking. Amid tough market conditions, consumer staples was the primary sector yielding positive returns, and investors flocked to what they’ve always considered a safe heaven. Accordingly, the spread between MSCI world consumer staples and MSCI world index, forward priceearnings ratio (P/E) peaked at 4.8x in January 2016 as investors rewarded consumer staples for its stable performance.
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The spread has further narrowed to 1.4x in April 2017, far below the historical average of 2.2x, and we believe the current 1.4x valuation spread offers a noble entry point for long-term investors, as long as they pick the right names.
CONSUMER STAPLES REMAINED RESILIENT TO SHORT-TERM HEADWINDS While the Brexit impacted short-term sales growth for global consumer staples; the overall industry is well shielded from such uncertainties. The outlook for consumer spending remains strong for the next couple of years, driven by growth from underpenetrated rural markets, premiumisation, growing health awareness, and niche brands. BMI Research forecasts 5.4 per cent annual sales growth for global food and non-alcoholic drinks in 2017 and an annualised average growth rate of 4.4 per cent until 2020. Structural trends such as population growth, burgeoning middle class, rising urbanisation, increasing disposable incomes among working couples, and above all, a growing disposition among consumers for product and supply-chain innovations and digital disruption in the marketplace (through the emergence of e-commerce) offers multi-year growth potential for consumer staples, especially in the emerging markets vis-à-vis developed economies.
CURRENT MIDDLE EAST MARKET DOWNTURN AUGURS WELL FOR CONSUMER STAPLES Over the past year and a half, Middle Eastern equity markets have corrected sharply in the wake of slow economic growth, low oil prices, and geo-political tensions. Looking at the valuations, the market is now beginning to look ‘attractive’ with
MSCI sector indices average annual returns (2001-16) 8% 7% 6% 5% 4% 3% 2% 1% 0% s s -1% y d ls ls &... ure ces i ple ria nar orl itie cia t -2%r sta dust retio W Util inan warestruc serv
e In isc um d ns er Co um s n o C
F ard fra om c y h In Tele log o hn c Te
31
MSCI sector indices volatility* (2001-16) 30% 25% 20% 15% 10% 5% 0%
. s s s s s d &.. ary vice ial trial ure tie ple orl re nc on r s W truct Utili r sta wa Fina Indu creti m se s e d a r r um ha dis leco Inf ns er gy Te Co um olo ns hn o c C Te
Source: Aranca Research
MSCI world Index vs. MSCI world consumer staples index 300 250 200 150 100 50 0
Economic Contraction
Great Recession
1.9x
1.4x
’00 n’01 n’02 n’03 n’04 n’05 n’06 n’07 n’08 n’09 n’10 n’11 n’12 n’13 n’14 n’15 n’16 n’17 Ja Jan Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Ja Source: Aranca Research
MSCI world index (MXWO)
MSCI worl/consumer staples (sector index) (MXWOOCS)
Spread between MSCI world consumer staples and MSCI world index forward P/E Jan’16: Investors saw consumer staples as a safe haven amid global stock market turmoil
5.0 4.0
4.8x Apr’17: MSCI world consumer staples forward P/E of 23.2x vs. MSCI world
3.0 2.0
1.4x
1.0 0.0 ’14 r’14 ’14 l’14 ’14 ’14 ’15 r’15 ’15 l’15 ’15 ’15 ’16 r’16 ’16 l’16 ’16 ’16 ’17 r’17 Jan Ma May Ju Sep Nov Jan Ma May Ju Sep Nov Jan Ma May Ju Sep Nov Jan Ma
Source: Aranca Research
Spread = MSCI world consumer staples PE - MSCI world PE
Average
Growth potential for consumer staples 1000000
AGR 4-year C
750000
= 4.4%
500000 250000 0
Apr-2016
Source: Aranca Research
Apr-2016
Apr-2016
Apr-2016
Global - food sales (US$ million)
Apr-2016
Apr-2016
Apr-2016
Global - non-alcoholoic drink sales (US$ million)
cont. overleaf
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cont. from page 31
– Anjali Anand, Senior Manager, Investment Research & Analytics, at Aranca Research –
(USD)
160 140 120 100 80 60 40 Apr-2007 Apr-2008 Apr-2009 Apr-2010 Apr-2011 Apr-2012 Apr-2013 Apr-2014 Apr-2015 Apr-2016 Apr-2017 Data as at month end Source: Aranca Research
FTSE all-world
FTSE Middle East & Africa
Fundamental performance metrics Top 15 consumer staples stocks in the Middle East by market capitalisation 5-year average (2011-16) EBIT margin%
20% 15%
Savola Group
-10%
-5%
Almarai
Above average growth and profitability rgion
Saudia Dairy & Foodstuff Coca-Cola Içecek Anadolu Efes Biracilik Ülker Bisküvi Sanayi Average = 7% Mezzan Holding 5% Abdullah Al-Othaim BIM Birlesik Shufersal Ltd Kent Gida Magazalar Migros Ticaret A.S. Maddeleri 0% 0% 5% 10% 15% 20% 25% CarrefourSA -5% Revenue - (2011-16) 5-year % CAGR
10% Strauss Group
Source: Aranca Research
Agthia Group
Forward PE - ROE metrics Top 15 consumer staples stocks in the Middle East by market capitalisation 12 month forward P/E - 2017E
Looking at the valuations, the market is now beginning to look ‘attractive’ with some large cap stocks trading at rock bottom. The current state of high volatility and low returns in the Middle East and Africa (MENA) region is a good spell for investors banking on stable returns in the consumer staple sector.
5-year performance - total return
Average = 8%
some large cap stocks trading at rock bottom. The current state of high volatility and low returns in the Middle East and Africa (MENA) region is a good spell for investors banking on stable returns in the consumer staple sector. As stated in the IMF 2017 outlook for the Middle East region, “subdued growth prospects will keep underlying inflation low in the GCC region. Although energy price reforms are expected to temporarily push up headline inflation to about 3.5 per cent in 2016, inflation is expected to drop back to 2.5 per cent in 2017.”
45 40 35 30 25 20 15 10 5 0
Anadolu Efes Biracilik CarrefourSA Kent Gida Maddeleri Almarai Coca-Cola Içecek BIM Birlesik Magazalar Ülker Bisküvi Sanayi Savola Group Strauss Group Favourable zone Abdullah Al-Othaim Agthia Group low P/E and high Shufersal Ltd Mezzan Holding Saudia Dairy & ROE% Foodstuff 0%
Source: Aranca Research
5%
10%
15%
20%
25%
30%
35%
40%
Return on Equity % - 2017E
As low inflation drives low consumer spending and growing price competitiveness in the GCC region’s food and beverages industry, it becomes all the more imperative to look for stocks that are fundamentally strong on growth and valuation metrics.
WHICH SAUDI COMPANIES WILL GENERATE THE MOST ALPHA? Picking the right stocks is the key to capitalising on the consumer staples theme.
Key stocks that seem to strike the right cords regarding fundamental performance metrics, with positive revenue growth trajectory and strong profitability (above peer average EBIT margin per cent), are—Almarai, Anadolu Efes Biracilik, Coca-Cola Içecek, Ülker Bisküvi Sanayi and Saudia Dairy & Foodstuff Co. They are among the top 15 consumer staples stocks in the Middle East region by market capitalisation.
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SADAFCO 3000
18%
2500
16%
2000
14%
1500
12%
1000
10%
500
8%
0
2014
2015
2016
2017E
2018E
Source: Aranca Research
2019E
2020E
Revenue - SAR million
EBIT margin%
Ülker Bisküvi Sanayi 6000
13.0%
5000
12.0%
4000
11.0%
3000
10.0%
2000
9.0%
1000 0
8.0% 2014
2015
2016
2017E
2018E
2019E EBIT margin%
Revenue - TRY million
Source: Aranca Research
Almarai 25,000
19.0%
20,000
18.0%
15,000
17.0%
10,000
16.0%
5,000
15.0% 14.0%
2014
2015
2016
Source: Aranca Research
On the valuation-return metrics, key stocks Abdullah Al-Othaim, Strauss Group, Saudia Dairy and Foodstuff Company, Shufersal Ltd. and Mezzan Holding Co. are in the favourable zone right now. Among the top 15 consumer staple stocks (in the Middle East, by market capitalisation) they’ve logged higher than peer average (18 per cent) return on equity per cent on lower than peer average (20x) 12-month forward P/E for the year ending December 2017.
2017E
2018E
2019E
Revenue - SAR million
2020E EBIT margin%
FUTURE OUTLOOK ON THE TOP THREE CONSUMER STAPLES STOCKS Saudia Dairy and Foodstuff Company (SADAFCO) have a strong market position in milk, tomato paste and ice-cream, even though the sectors are plagued by challenges such as low consumer spending and intense price competition. Expect a FY18E full-year top-line growth of 11 per cent on a stable margin of 14 per cent. Despite a growing equity base, SADAFCO’s
33
return on total equity has been rising, while its current dividend yield of 3.4 per cent is meaningfully above the MSCI world consumer staples dividend yield of 2.6 per cent. The company’s zero leverage and healthy cash position as well is a positive sign for organic and inorganic growth. On the valuation front, the stock currently trades at a 12-month forward P/E of 14.0x, which is at a six per cent discount to its historical five-year average P/E of 15.0x. For Ülker Bisküvi Sanayi, after a subdued top-line growth of three per cent in 2016, sales growth is expected to pick up again. Expect erstwhile levels of 13 per cent on a stable EBIT margin of 11 per cent for the year ending December 2017, driven by a better price mix from its chocolate segment and below industry-average volume declines in its biscuit segment. The Street expects a 41 per cent jump in earnings per share (EPS) for the year ending December 2017 to TRY 0.95 per share after a 11 per cent dip in 2016. On the valuation front, the stock currently trades at a 12-month forward P/E of 20.9x, a modest three per cent discount to its historical five-year average P/E of 21.6x. Almarai, a SAR 58.4 billion ($15.5 billion) integrated food and beverage provider in Saudi Arabia, is looking ahead to invest SAR 2.9 billion per annum between 2017 and 2020 to fuel its capacity expansion plans. The outlook remains poised for 2017, with expected full-year EPS growth of 11 per cent, ahead of eight per cent in 2016 on strong top-line performance. In the near-term, pressure on margins may ease off a little bit as low commodity prices, improved cost management, and restored production savings will offset high fuel and energy prices. Nevertheless, in terms of valuation, the stock currently trades at a 12-month forward P/E of 25.9x which is at a 23 per cent premium to its historical five-year average P/E.
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Capitalising on the middle market Paul Isaac, Executive Director, Gulf Credit Partners at Gulf Capital discusses the appeal of structured capital investments in the present financial landscape
F
or investors looking to add alternative asset exposure in the Middle East, the selection of managers has historically been constrained to a handful of firms with limited track records and unfocused strategies. In the mid-2000s, when significant appetite for alternative investments in the Middle East first developed,
almost no fund managers existed to meet the demand. First-time teams were assembled by various sponsors. As a result, Limited Partners— almost exclusively from within the region—had no track records to evaluate and were forced to choose their investments based on name recognition, such as local banking or commercial groups.
Now however, Limited Partners can assess the performance of these managers against earlier promises. Exacerbated by the challenges that arose in the aftermath of the global financial crisis, many of these firsttime funds failed to source sufficient investment opportunities and simply withered away. Others failed to meet return expectations, either due to
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BENCHMARKING RETURNS VIS-A-VIS OTHER ASSET CLASSES Structured capital has produced truly better risk-adjusted returns as measured against other alternative asset classes. From 2002 to 2012, direct lending funds showed much lower volatility of returns than buyout funds (standard deviation of circa five per cent vs. 17 per cent for buyout funds), while median net returns (measured in IRRs) were more similar to buyout returns
Current market trends support investing in structured capital in addition to private equity and high yield. – Paul Isaac –
Figure 1: Horizon pool returns of private capital funds by asset class 20% 15% Median Return
overpaying for deals, neglecting to manage relationships with family founders or struggling to secure exits. A select few asset managers in the Middle East were able to deliver on promises of both deployment and returns, and the market has now rationalised around them. Our region has come a long way in terms of sophistication. Today, the major firms in the region embrace the concept of creating value in companies rather than relying on multiple expansion or financial engineering. At the same time, the financial markets have evolved, allowing for increased complexity in capital structures and a greater variety in financial instruments.
35
10% 5% 0% -5% -10% 1 year
3 years Private Equity Infrastructure*
Source: Gulf Capital
5 years Private Debt Natural Resurces
10 years Real Estate
* Insufficient data for 10 year infrastructure horizon
(circa 11 per cent for direct lending vs. 13 per cent for buyout). In general, investors have found that they can trade a marginal reduction in total returns for a significant increase in certainty of those returns. Figure 1 shows the horizon pool returns of private capital funds by asset class.
RISKS FACED WHEN INVESTING IN MIDDLEMARKET STRUCTURED CAPITAL There are a number of risks involved when investing in middle market structured capital. Firstly, structured capital is junior in the capital structure and typically in a first-loss position after the value of the company drops by more than the amount of its equity. Second, since structured capital is provided through privately negotiated transactions, it is far less liquid than more public securities if it needs to be sold. Thirdly, middle-market businesses often face greater risks compared to larger companies. For example, due to their smaller size, the loss of a customer or increases in the cost of goods sold
may have a larger impact on the borrower’s EBITDA than it would on a larger company. Finally, in most cases structured capital is unsecured (share pledges in some cases are the only available security) so in a bankruptcy scenario, there is no recourse to any tangible asset for recovery. Gulf Capital believes that risk management is a fundamental area of focus for structured capital-focused funds. To mitigate these risks, Gulf Capital employs a number of strategies including: assessing the value of downside protection offered by the covenant package; carefully reviewing the country-specific legal limitations that impact the deal’s security package and structure the investment around it; and the regular oversight of portfolio performance, active portfolio monitoring, identifying early signs of performance deterioration and intervening quickly and constructively. In addition to the above, consideration should also be given to the overarching risks which are faced by many in emerging markets jurisdictions, including: political risk; regulatory risk, including frameworks that are not in tune with international cont. overleaf
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Figure 2: US, Europe and emerging market returns generation Europe
US
Emerging Markets
Fund level leverage
n Zero or occasionally 1.0x
n 1.0x-2.5x on senior debt
n Zero or occasionally 1.0x
Current income
n Historically 50.0% PIK / 50.0% cash pay is standard
n Historically 100% cash pay
n Majority cash pay with some element of PIK
Original fees
n 2.5% - 4.0%
n 1.0% - 2.0%
n 2.0% - 3.0%
Original channels
n Sponsor
n Generally bank or manager
n Sponsor and advisors
Workout and bankruptcy
n Workouts tend to be consensual and amicable
n Driven by chapter 11 proceedings
n Workouts tend to be consensual and amicable
n Automatic tendency to head
straight to bankruptcy court Source: Gulf Capital
Figure 3: Cambridge Associates Private Equity & Venture Capital - Fund Index Summary: Horizon Pooled Return (10-year) 12.42% 9.89%
9.32% 7.7%
US
Developed Europe (US$)
Developed Asia (US$)
Emerging Asia (US$)
3.7%
4.51%
Emerging Europe (US$)
Africa
9.94%
9.53%
All Emerging Markets
US Mezzanine
5.61% 3.75%
Latin America
Middle East
Source: Gulf Capital
cont. from page 35
standards; currency risk; and compliance risk (corruption, politically exposed person (PEP), anti-money laundering (AML), combating the financing of terrorism (CFT)).
STRUCTURED CAPITAL VARIANCES BY REGION There are a number of main differences in structured capital investment activities across the United States (US), Europe and emerging markets. While the size of the emerging markets is smaller than the US and Europe, the returns available for investors can be significantly higher than the developed markets. Premiums of at least 300 to 500bps above developed market peers are seen in emerging markets, while typical transactions entail
much less leverage risk (exampled by 3.0-3.5x in the Middle East and North Africa (MENA) vs. 5.5x in developed markets). The higher premiums are driven by: reduced competition of funds able to negotiate with borrowers on a bilateral and proprietary basis; lack of robust intermediation; and typical emerging markets-perceived risks including FX, regulatory and liquidity. Figure 2 outlines the differences between regions in how structured capital fund managers generate returns and Figure 3 shows returns across regions.
CONCLUSION In summary, Gulf Capital believes that middle market structured capital is a flexible financing tool for companies and an attractive
asset class for investors to consider when looking to diversify their portfolio. Compared to private equity, structured capital typically has a higher risk-adjusted return and predictable cash flows, and relative to high yield bonds, structured capital has a significantly higher yield, shorter duration and greater investment control. Current market trends support investing in structured capital in addition to private equity and high yield. Historical performance show the attractive returns of the asset class, but more importantly, we believe that current market conditions, especially in the emerging markets, suggest middle market structured capital is well positioned to outperform in the coming decade.
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A new avenue of opportunity Philip Hoffman, Founder and CEO of The Fine Art Group, sheds light on the rise of investments in fine art in the Middle East
T
he art market has evened out in recent years. The European Fine Art Fair (TEFAF) has reported a growth of $1 billion between 2015 and 2016, with the Middle East demonstrating strong growth.
WHY ART? Art is a good investment for two reasons; it is a diversification of assets and it can offer strong returns. Some of our clients have turned to art, either the funds or advisory, as a method of diversifying their investment portfolio. Funds are popular here especially when the client has little interest in art or do not want to approach their own collections from an investment angle. Investing in art is a good method of diversifying your assets because unlike property and finance art doesn’t correlate with global politics. We also have clients coming to us because they have found that a huge amount of their wealth is tied up in their art collections and they want to protect this, they want to add value to their collections and need guidance. For companies, it can be a slightly different angle, a good art collection can help with a company’s brand and positioning, look at the way Deutsche Bank has built a corporate collection
Philip Hoffman
cont. on page 40
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Excellence through innovation Rewarding pioneers in Islamic finance
Islamic Business & Finance AWARDS 2017
12th DECEMBER 2017 Emirates Towers Hotel, Dubai
Voting commences Mid-October through end of November
For more information please contact CPI Financial’s events team Tel: +971 4 391 4682 or Email: events@cpifinancial.net BA bleed guide.indd bleed guide.indd 1 1
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cont. from page 38
and positioned themselves into the art market by sponsoring Frieze Art Fair. Bank Audi in Lebanon is an example of a strong corporate collection in the Middle East.
AFFINITY IN THE REGION We consider the UAE a very dynamic emerging market that welcomes innovative ideas. As a firm we allocate time, resources and expertise to the region in order to raise our profile as well as awareness. With time we identified our target audience and were able to create relationships with them via our local office. The key is having a presence in the region to nurture and maintain client relationships as well establish strong brand recognition. This market has been very receptive to the idea of investing in art. Our target audience are both seasoned and young collectors, and both benefit greatly from working with an advisor.
A good art collection can help with a company’s brand and positioning. Look at the way Deutsche Bank has built a corporate collection and positioned themselves into the art market by sponsoring Frieze Art Fair. Bank Audi in Lebanon is an example of a strong corporate collection in the Middle East. – Philip Hoffman, Founder and CEO of The Fine Art Group –
Middle East take up of the fine art industry • TEFAF: Total global market growth between 2015 ($44 billion) and 2016 ($45 billion) and 1.7 per cent is from the Middle East, showing strong growth. • Art Tactic Global Art Market Outlook 2017: Modern and contemporary Market auction trend 2015 to 2016—Middle East has seen an increase of 40.7 per cent. • UBS: Middle East auction buyers account for two per cent of sales; it has a six per cent share of global wealth, with a rise in number of top 200 collectors in Middle East.
POTENTIAL The art market has demonstrated its strength in recent years, there seemed to be a brief downturn in 2016 but this proved to be the market evening out after a boom. We are seeing a huge increase in HNW individuals and families becoming major players in the market with the support of their advisors. There is a demand for art advice and guidance as more collectors release the potential value of their collections, we are finding that more financial institutions are coming to us for guidance. Naturally we have seen the impact of this in the Middle East. The Middle East has great potential for growth, there are some very sophisticated collectors in the region who are focusing their efforts on local artists.
Source: The Fine Art Group
About The Fine Art Group The Fine Art Group was founded by Philip Hoffman in 2001 as a new endeavour to help clients approach the art market with a view to investing as well as collecting. We have grown from operating one long-term investment fund to advising eight subsequent funds, offering to private collector’s expert art advice, collection management and art financing. Source: The Fine Art Group
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Monday 27th November 2017 Godolphin Ballroom Jumeirah Emirates Towers
Wealth House Ad 2017.indd 6
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42
Renewables: realising the potential Diego Biasi, ‎Co-Founder & CEO, Quercus Investment Partners discusses the potential of renewables and green energy for the MENA region
D
escribe the development of the renewable energy sector globally. How does this compare with efforts from MENA countries?
The renewable energy sector has been evolving and expanding globally over the past decade, driven to a large extent by the growing interest and attention from governments and investors around the world. This momentum, which originally started in Europe, will no doubt continue globally with strong growth for the next 10 to 15 years, driven by the increasing attention to environmental issues from governmental bodies and their common aspiration to reform the sector towards greater levels of sustainability.
When considering that the global installed capacity for renewable energy is set to increase 70 per cent by 2030, this represents significant development in the sector worldwide. While MENA governments are interested in boosting the renewable energy sector, for both environmental and economic reasons, it is my opinion that they are currently at the beginning of a steep learning process. However, it is great to see many MENA countries, namely the UAE, making committed progress towards understanding how to manage the changing energy market, how to create the right environment for investors and how to develop the renewable energy market in the most efficient way.
Diego Biasi
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In terms of the growth of the renewable energy sector in the MENA region, I believe we are currently watching the same movie that we were watching in Europe 10 years ago, especially given that the MENA market is currently following the same development trends of more mature markets. This means the Middle Eastern and North African region is set to undergo an exponential growth period of approximately seven to eight years, followed by steady growth, as it progresses towards the European market in its current state.
In your opinion, how lucrative are investments in the renewable energy sector? The UAE is a strategic choice for investors seeking to take advantage of
the renewable energy sector, especially as the GCC plans to invest $100 billion in renewable energy in the next 20 years. This sector is therefore becoming more and more attractive for investors for a number of reasons. First of all, the low risk nature of investments in the industry and the boost driven by incentives makes it a far more profitable investment compared to those in the traditional energy sector. Additionally, the renewable energy sector is generally de-correlated from the rest of the financial market, so there is a huge investment opportunity for longterm investors, and a higher level of potential returns could be generated. Secondly, the renewable energy sector is much easier to forecast compared to other infrastructure investments due to the simple nature of the technology applied and the way investments are structured. Renewable energy projects are also less dependent on market fluctuations, incentives and swings, driven by different macroeconomic factors, or any subjective relationships, due largely to their readily available sources of clean energy. Consequently, it is easier to build and manage investments to generate bigger returns, with lower risk for investors, especially when compared to other infrastructure or financial sectors.
In what ways can an investor tap into renewables? How do these structures work? I always tend to compare this sector to the automotive sector—if you want a car, you can either build it yourself or you can buy one. The difference here is that if you build your own car, it will be of a far lower quality than if you buy from a car manufacturer. The scenario with renewable energy infrastructure is similar: you can
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build your own assets or you can have someone build them for you. In the renewable energy sector, I believe the best decision would be to let the specialists do their job. Generally, there are two scenarios for tapping into renewables— individuals can invest directly as firsttime investors—which we frankly all are because the market is so new, or they seek the services of a specialist, who will build the investment portfolio for them. The second route—seeking a specialist—for sure will increase your chances to build assets of a much higher quality and will be more profitable over the long-term. Considering how young this sector is, and given that all investments in renewables can in some sense be seen as bespoke, these investments are far more sophisticated than they may at first seem. As far as the practical realities are concerned, sourcing high quality investments, and completing and managing them efficiently is of importance, because at the end of the day it will reflect an investor’s profit and loss statement. Ultimately, this is the main difference between a self-made investment and a well-managed process.
How do you view green bonds and what is your expectation of the uptake in MENA? Green bonds are relatively new to the MENA market, but I believe they have vast potential to become an efficient tool for more structured investors. Quercus has issued the largest green bond in Italy in December last year, worth EUR 125 million, which was oversubscribed three times over by international institutional investors. As for our expectations relating to the MENA region, green bonds are still waiting in the wings. It is definitely something that will take
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place, but we are at a relatively early stage of an exciting industry, just as it did in Europe. While it may take three to five years for the market to flourish, now is the time to invest, and the green bond route is certainly an attractive source of financing compared to the more traditional methods. We are witnessing a big appetite for this type of asset within the renewables sector, especially for long-term investors with more sophisticated investment styles, like insurance companies.
What challenges do you anticipate in pushing this market segment forward? The biggest challenge facing the MENA region is that local players have to import know-how and experience from more advanced markets, where equipment and access to financial services are easier to source. It is important to highlight that the MENA region still has much to learn from the growing bank of knowledge more advanced markets have developed in the renewable energy sector. While this experience is certainly something that Europe is ready to share, it adds weight to the argument that investors in the MENA region should seek the services of a specialist, who will build and manage investments on their behalf. Ultimately the MENA investor is in a very good position, as following the advice and guidance of an experienced specialist will prevent them making some of the same mistakes that were made in Europe.
What are the untapped opportunities in this area? It helps that the MENA market is in its infancy, as there is great potential for strong and sustainable developments. This potential is
The UAE is a strategic choice for investors seeking to take advantage of the renewable energy sector, especially as the GCC plans to invest $100 billion in renewable energy in the next 20 years. The low risk nature of investments in the industry and the boost driven by incentives makes it a far more profitable investment compared to those in the traditional energy sector. – Diego Biasi, ‎Co-Founder & CEO, Quercus Investment Partners – underpinned by regional government driven initiatives, such as Dubai Electricity and Water Authority (DEWA) making a commitment to solar power with its Mohammed Bin Rashid Al Maktoum Solar Park development, currently the largest single-site solar project in the world. Regarding untapped opportunities, there is rising interest in this region, especially on the part of the Global Climate Committee, to reallocate capital which is less invested in the traditional forms of energy, like oil and gas, and more into renewable sources. This will lead to a strong renewable energy infrastructure and ultimately a strong investment environment. We see growing opportunities to provide clients with our services based on our solid experience in the renewables sector. We see opportunities in due-diligence, in consulting on building or acquiring assets and helping clients manage assets after construction projects or acquisition transactions. This is why we have decided to open our Dubai-based office, to serve the MENA region.
What is your outlook on this for the short term? An energy revolution has started in the last few years, which represents a transition away from oil and gas towards renewable sources. This is happening now, and evidence can been seen in recent governmental milestones, such as the recent announcement that 200 electric car-charging stations will be installed across Dubai, double the present number, under the second phase of the Green Charger initiative. The same initiative has targeted at least two per cent of government vehicles must be hybrid or electric by 2020, increasing to 10 per cent by 2030. This indicates the beginnings of a vast investment opportunity that is set to grow for decades as more counties adopt renewable energy advancements. The MENA renewable energy environment is becoming more attractive to foreign investors, and we are witnessing a growing flow of investments into the region. We are confident that these investments will generate positive returns as long as they are managed correctly and with assistance of experienced specialists in the field.
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29 November 2017 Kuala Lumpur, Malaysia
For more information please contact CPI Financial’s events team Tel: +971 4 391 4682 or Email: events@cpifinancial.net
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Data analytics: is this the future of audit? The possibilities for data analytics technology to change audit are enormous. Whether it’s identifying fraud, financial or business operational risks, big data and analytics could help auditors perform tasks efficiently. Is it therefore, time to introduce fintech studies in the audit curriculum? Saad Maniar asks
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resently, in the finance sphere, the big debate is how data analytics has enormous potential to transform the audit profession and broader assurance services. While the technology to integrate big data and audits is still unfurling, how should the profession prepare? Recently, I wrote about how fintech is helping companies overcome today’s challenges such as systems security, regulatory compliance, fraud, antimoney laundering, protection of consumer information, operational and third-party risk, among others. The development and deployment of technology is presenting exciting opportunities for the audit and accountancy profession, but at the same time, it is also a huge challenge for tuition providers, mid-tier and smaller firms.
Saad Maniar, Senior Partner at Crowe Horwath, UAE
The principal among these is the available skills, cost of training and preparing staff, students and developing technology, which is considerable and beyond the resources of many organisations. Presently, there is limited knowledge of data analytics and there is a huge opportunity here for stakeholders to see how data analytics could have applicability to the work of auditors. How are auditors dealing with data analytics at the moment? The profession is still not doing very much with big data, yet. However, it’s an undisputed universal law that if you do not move with the times, the times move against you. Bigger accountancy and audit firms are already using new technology to offer more cost-effective auditing and assurance services. Small and midtier firms should also get involved in data analytics otherwise they risk facing extinction. The main challenge of course is to understand audit requirements from data analytics, as there is no one-size-fits-all solution, and how the technology could fit into existing audit methodologies. Today, more than ever, businesses have larger assurance needs in the areas of data quality, security, compliance, fraud prevention and detection, and internal controls. The extra value and insights that data analytics offers to our firm’s clients is enormous. But we are not there yet. We aim to deploy technology that achieves real-time auditing to deal with risk management and fraud detection. The first step in the progression of data analytics should be to reach a common platform with a common way of viewing data. This would lead to consistency in benchmarking which would be followed by real-time reporting and real-time auditing. Also, through the firm’s use of new audit tools, cont. on page 48
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such as the Caseware audit template, technologies and methodologies we have been able to provide continuous high quality assurance that has resulted in more timely and relevant audit reporting. According to the latest findings from a review carried out by the Financial Reporting Council (FRC), audit firms can do more to help develop and support the roll-out of leading-edge data analytic techniques with the potential to improve audit quality. The report titled Audit Quality Thematic Review: The Use of Data Analytics in the Audit of Financial Statements identified that the use of data analytic techniques is not yet widespread and gives examples of good practise identified during the course of FRC audit inspections. These include: enabling audit staff to build experience and confidence in using a specific audit data analytics tool through a structured roll-out programme and using data analytics for the first time at an interim audit date to improve the prospect of obtaining robust audit evidence at the financial year end, particularly in a first-year audit. Other examples are; improving the effectiveness and efficiency of the extraction of entity data into audit data analytics tools by using dedicated specialist staff and/or dedicated software, and using data analytic techniques to improve oversight and consistency of multiple auditors contributing to group audits where organisations have global accounting systems. Significant changes in audit approach are needed to take advantage of the new technological advances. To prepare students for these workplace changes, we need to start at the colleges and universities level, where existing accounting and audit curricula, standards that are
The power of data analytics could make it possible for auditors to improve audits by providing audit evidence through comprehensive analysis of organisations’ general ledger systems. This risk assessment through identification of anomalies and trends could perhaps even point auditors toward items they need to investigate further. – Saad Maniar – the framework for audit procedures need to be revamped and modified to incorporate the concepts of data analytics and encourage students to utilise new technologies that will make it easier for them at the workplace. The right training is needed for students at the college and university level and for auditors within accounting firms in areas such as information technology, statistics, modelling, and machine learning methods. In addition, exams given by respective professional bodies such as ACCA, ICAEW, ICAI and CPA, should test these areas. Universities and colleges should create new majors that are offering courses in these areas and the existing audit and accounting curricula must be changed to accommodate additional coursework. Today, the profession is making much better use of the technological advances that we’ve seen over the last decade. Many auditors are finding ways to gain deeper understanding of their clients’ organisations than ever, thanks to advances in data analytics and software. Combined with traditional auditing techniques, data analytics
could help auditors gain deep insight and provide a better understanding of their clients. The power of data analytics could make it possible for auditors to improve audits by providing audit evidence through comprehensive analysis of organisations’ general ledger systems. This risk assessment through identification of anomalies and trends could perhaps even point auditors toward items they need to investigate further. Changes in audit practise will continue to occur as corporate processes change, but make no mistake, this does not herald the replacement of auditors by robots. Audit data analytics software will not produce the desired results if the data entering the system are not reliable and appropriately precise. So, there will always be need for human auditors to apply their judgement skills.
Saad Maniar is the Vice Chairman of the ACCA Members’ Advisory Board in the UAE. He is also a Senior Partner at Crowe Horwath, UAE.
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Q U E S T
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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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Michael P. Grifferty President, the Gulf Bond and Sukuk Association (GBSA)
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started my career helping state and local governments in the US access capital markets, kind of a link between Main Street and Wall Street. That was all about building infrastructure like airports, water systems and schools, and so it was great to see how an effective functioning market delivers practical results for communities. Next year will make 30 years, but I like to think that it’s still early days. My biggest achievement would probably be setting up a regional government debt market for the eight countries of the West African Economic and Monetary Union (WAEMU), a set of francophone countries whose common currency is linked to the Euro, previously the French franc. It’s become an important part of the financial landscape for countries like Senegal and Cote d’Ivoire. The GCC has much different characteristics but the experience with another regional union was helpful. There is little routine in our work… it may start with digesting global and regional news impacting our market and communicating it to our network. Then we might have a conference call with one of our topical committees or meet with a regulator in one of the states. I try to have a meal or coffee each day with a member to share market insights and make sure that GBSA is helping their business. Then I might spend time with the staff and other members planning an event which might be about a new product in the market. I try to be home at a reasonable time to spend quality time with family.
No question the reward about my job is working with the incredibly talented and positive individuals who choose to take part in the Association. They share a desire to be part of building the region and its markets, rather than just pursuing the next transaction. They find that by doing good they can do very well. I also enjoy that the projects we work on are practical ones that matter a lot for the region at a really important time in its evolution. We have a lot of initiatives going at any given time because they move ahead at different times and at different tempos. One thing we are working on is cooperating with the states to help build local currency markets to complement their access to global markets. The biggest weakness in GCC’s financial sector is the relative shallowness of the local institutional investor base. Sure, we need to attract more international capital to our markets but it can be fickle and its best if complemented by local investors that take a long view and are demanding in terms of disclosure and governance. Fortunately, this is moving in a positive direction. The financial sector is far more resilient than in the past due to careful oversight by the authorities. We are still small on a global scale and too fragmented. The GCC is equipped with harmonised, deep and liquid fixed income markets that support the economic transition and offer reliable financing options to companies and governments.
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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.
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