JANUARY 2019 | ISSUE 214 MIDDLE EAST
JANUARY 2010 | ISSUE 214 A CPI Financial Publication
Philippe Ghanem, CEO and Vice-Chairman, ADSS
for business: How Kuwait is transforming itself to attract FDI 20 Open
tense, future perfect? 30 Present
inclusion and the future of fintech in the Middle East 40 Financial
the digital CFO 46 Introducing
Dubai Technology and Media Free Zone Authority
DID 2018 RE-WRITE OUR UNDERSTANDING OF TRADING Philippe Ghanem, CEO and Vice-Chairman, ADSS
DID 2018 RE-WRITE OUR UNDERSTANDING OF TRADING
AT YOUR SERVICE ACROSS AT YOUR SERVICE ACROSS THE REGION AT YOUR SERVICE ACROSS THE REGION AT SERVICE ACROSS EnjoyYOUR ABK’s simpler banking services in THE REGION Kuwait, Egypt, and the UAE. services in Enjoy ABK’s simpler banking THE REGION Kuwait, Egypt, and the UAE. services in Enjoy ABK’s simpler banking Enjoy ABK’s simpler banking Kuwait, Egypt, and the UAE. services in Kuwait, Egypt, and the UAE. Simpler Banking Simpler Banking Simpler Banking Simpler Banking
EDITOR’S NOTE
A
ll things considered, it has been a great start to the year. Financial markets in the region started 2019 with a bang. The Middle East first saw Saudi Arabia’s $7.5 billion bond issuance which was well-received by the market when it garnered $27 billion in orders. The Kingdom will pay a yield of 4.48 per cent on the debt maturing in 2029, and 5.33 per cent on the 2050 paper. Word on the grapevine is that the bonds were largely placed with investors within the region, signalling steady confidence in the Saudi Arabian economy. Next, we saw Dubai Islamic Bank come to the market with a $750 million Additional Tier 1 (AT1) Perpetual Non-Call six-year Sukuk with a profit rate of 6.25 per cent per annum. The rate is equivalent to 366.4bps over the implied six-year US Treasury yield. The transaction which was only the second AT1 Sukuk under the new Basel III capital guidelines issued by the UAE central bank, is also the first hybrid capital issuance from the GCC in 2019. The auction witnessed $3.7 billion in orders from investors, representing an oversubscription of 4.9 times. Similar to the Saudi bond, more than half of the investor base originated from the Middle East. Investor sentiments towards key GCC markets remain fairly upbeat in spite of its continuous vulnerability to oil price volatility. Emerging markets in the Middle East is seen as one of the more stable investment destinations compared to some Asian and Latin American markets. MENA economies have been sluggish since the oil crash and these effects are expected to continue in 2019. Industry players expect to see more refinancing activity across the region as both governments and the private sector
continue to manage their fiscal deficits. Economies with their currency pegged to the US dollar is viewed as more stable markets, with currency risks eliminated. On the macro front, with the US Federal Reserve, European Central Bank and the Bank of Japan adopting a wait and see approach, central bank officials have predicted two hikes this year, down from three rate raises projected earlier on. This bodes well for economic growth and global financial markets, as more predictability translates into more stable investment activity throughout the year. Across MENA, markets that are most vulnerable to macro and micro risk factors are Egypt and Turkey. Egypt’s currency risks remain apparent with high expectations of more devaluation of the Egyptian pound. In Turkey, the glaring issue is the country’s twin deficit and its high foreign currency debt. Another economy to look out for is Lebanon—the absence of a government continues to take a grave toll on its economic growth. The Middle East will always be an interesting market to watch. There is so much potential, yet there are equally as many challenges and encumbrances. And this is what we continue to shed light on to help you navigate unpredictable and converging tides within the region. In the first instalment of the year we examine various issues within the industry, providing you with market projections for 2019; and as usual, we wish you a productive read and a fruitful year.
Nabilah Annuar EDITOR, BANKER MIDDLE EAST
bankerme.net
3
CONTENTS
JANUARY 2019 | ISSUE 214
NEWS 8 Banks remain strong amid regional volatiliy 12 News highlights
THE MARKETS 16 Volatile oil prices pose challenges to GCC’s stable outlook
LEGAL PERSPECTIVE 20 Open for business: How Kuwait is transforming itself to attract FDI
COVER INTERVIEW 24 Did 2018 re-write our understanding of trading?
COUNTRY FOCUS 30 Present tense, future perfect?
DEBT CAPITAL MARKET 36 Investors should value fundamentals over the headline risks 37 Lower Sukuk volumes
24
16 4
20
JANUARY 2019 | ISSUE 214
IN DEPTH 40 Financial inclusion and the future of fintech in the Middle East 42 A new horizon
GET THE DIGITAL EDITION OF BANKER MIDDLE EAST ONLINE.
P.O. Box 502491, Dubai Media City, UAE Tel: +971 4 391 4681 Fax: +971 4 390 9576
bankerme.net
bankerme.net
TECHNOLOGY MIDDLE EAST
CHAIRMAN Saleh Al Akrabi
JANUARY 2010 | ISSUE 214
DID 2018 RE-WRITE OUR UNDERSTANDING OF TRADING Philippe Ghanem, CEO and Vice-Chairman, ADSS
46 Introducing the digital CFO 48 Open banking: putting consumers in the driver’s seat
JANUARY 2019 | ISSUE 214
CHIEF EXECUTIVE OFFICER STEVE LEE steve.lee@cpifinancial.net Tel: +971 4 391 4681
DID 2018 RE-WRITE OUR UNDERSTANDING OF TRADING A CPI Financial Publication
Philippe Ghanem, CEO and Vice-Chairman, ADSS
for business: How Kuwait transforming itself to attract FDI 20 isOpen
Present tense, perfect? 30 future
inclusion and the future fintech in the Middle East 40 ofFinancial
the digital CFO 46 Introducing
EDITOR - BANKER MIDDLE EAST NABILAH ANNUAR nabilah.annuar@cpifinancial.net Tel: +971 4 391 3726 Dubai Technology and Media Free Zone Authority
CONTENTS
EDITORS MATT AMLÔT matt@cpifinancial.net Tel: +971 4 391 3716
DECEMBER 2018 | ISSUE 213 MIDDLE EAST
DECEMBER 2018 | ISSUE 213
HARNESSING COLLABORATIVE OPPORTUNITIES OPPORTUNITIES Faisal Al Haimus, Chairman & President of Trade Bank of Iraq
36
WILLIAM MULLALLY william@cpifinancial.net Tel: +971 4 391 3718 ISLA MACFARLANE isla@cpifinancial.net Tel: +44 7875 429476 WEB EDITOR JESSICA COMBES jessica@cpifinancial.net Tel: +971 4 364 2024
HARNESSING COLLABORATIVE OPPORTUNITIES Faisal Al Haimus, Chairman & President
A CPI Financial Publication
The great experiment 18 US
What about workers? 34 the
Digitalisation of trade finance underway, geopolitical concerns 42 despite
FDI Forum 62 Sharjah
Dubai Technology and Media Free Zone Authority
Faisal Al Haimus, Chairman & President of Trade Bank of Iraq
NOVEMBER 2018 | ISSUE 212
EDITORIAL ASSISTANT KUDA MUZORIWA kuda.muzoriwa@cpifinancial.net Tel: +971 4 391 3729
BUSINESS DEVELOPMENT MANAGERS DANIEL BATEMAN daniel@cpifinancial.net Tel: +971 4 375 2526 AKASH AMBALE akash.ambale@cpifinancial.net Tel: +971 4 433 5320 NEEMA SAJNANI neema.sajnani@cpifinancial.net Tel: +971 4 391 3717 JAMIE O’LOANE jamie.o’loane@cpifinancial.net Tel: +971 4 433 5321
MIDDLE EAST
ADVERTISING sales@cpifinancial.net
CHIEF DESIGNER BUENAVENTURA R. JALUAG, JR. jun@cpifinancial.net Tel: +971 4 391 3719
SENIOR DESIGNER FLORANTE MAGSAKAY florante@cpifinancial.net Tel: +971 4 391 3724
DIGITAL MANAGER SIYAMUDHEEN PAINAYIL siya@cpifinancial.net Tel: +971 4 391 3722
EVENTS MARKETING MANAGER CRIS BALATBAT cris.balatbat@cpifinancial.net Tel: +971 4 391 3725
FINANCE & DATA EXECUTIVE KHALED TAHA khaled.taha@cpifinancial.net Tel: +971 4 433 5322
FINANCE & DATA MANAGER SHAIS MEMON, ACCA, CMA Shais.memon@cpifinancial.net Tel: +971 4 391 3727
HR & OFFICE MANAGER RIZZA INFANTE rizza@cpifinancial.net Tel: +971 4 391 4682
ADMINISTRATION & SUBSCRIPTIONS CAROL BASA carol@cpifinancial.net Tel: +971 4 391 3709
NOVEMBER 2018 | ISSUE 212
EDITORIAL editorial@cpifinancial.net
TRANSFORMING KUWAIT A CPI Financial Publication
Khaled AbdulRazzaq AlKhaled, Chief Executive Officer of Boursa Kuwait
GDPR compliance framework security technology 18 with
36 Lebanon Special Report
dominance financial intermediation 60 ofRetaining
Trade Bank of Iraq: Growth 66 Supporting
Dubai Technology and Media Free Zone Authority
TRANSFORMING KUWAIT Khaled AbdulRazzaq AlKhaled, Chief Executive Officer of Boursa Kuwait
40
enquiries@cpifinancial.net ©2019 CPI Financial. All rights reserved. No part of this publication may be reproduced or used in any form of advertising without prior permission in writing from the editor. Printed by United Printing & Publishing - Abu Dhabi, UAE
42 6
48
PUBLISHED BY CPI FINANCIAL FZ LLC REGISTERED AT DUBAI MEDIA CITY, DUBAI, U.A.E.
ANALYSIS
BANKS REMAIN STRONG AMID REGIONAL VOLATILITY GCC lenders are coming up with ways to resist geopolitical tensions and unstable oil prices through partnerships with fintechs and increasing their presence in the international market through synergies
T
he GCC, home to some of the fastest growing economies in the MENA region, is seeing a booming banking sector attracting some of the world’s heavyweights in the industry over the past few years since the recovery from the oil crisis of 2014. In its Global Banks 2019 Outlook, S&P Global has predicted that the financial profiles of GCC banks financial profiles should remain stable in 2019, absent of any unexpected geopolitical shocks. However, the volatile oil prices, existing geopolitical tensions and the slump in real estate sector threaten the financial profile of banking sectors in the region. GCC lenders are coming up with ways to resist external shocks ranging from partnerships with fintechs, increasing their presence on the international market and reduce a glut of banks in the region through synergies.
8
MERGERS AND ACQUISITIONS There has been an increase of bank synergies across the region between GCC-based lenders and international banks operating in the region. The region is heavily over-banked, and lenders are being forced to merge as they seek to stay competitive in an era of lower oil prices. Regional banks are heavily reliant on government deposits, customer spending, as well as the real estate sector, and these have been dwindling in sync with crude oil prices. According to Bloomberg, there are more than 73 listed banks in the GCC, catering to a population of around 51 million. The formation of First Abu Dhabi Bank in the UAE in 2016 triggered a wave of consolidation across the region, resulting in more than a dozen banks in the region exploring possible mergers to increase
the lenders’ capital base, improve operational efficiency and to comply with requirements of the countries from where they are operating. Abu Dhabi Commercial Bank (ADCB) and Union National Bank (UNB) are in talks with Al Hilal Bank for a possible tie-up that would create a regional powerhouse with assets of about $110 billion. The trio share the same majority owner in Mubadala Investment Company, which analysts are saying it is likely to increase the chances of a smooth consolidation. Similarly, Sharjah-based Invest Bank has secured support from the Central Bank of the UAE and the Sharjah government after it was hit by recent high levels of bad loans, partly due to its exposure to the troubled GCC real estate and construction market, which threatened its capital base. The Government of
BANK OUTLOOKS BY REGION
North America
Western Europe
0% Nov. 2018
10%
20%
30%
40%
12%
50%
60%
70%
80%
62%
90%
100% Negative
26%
Stable June 2018
5%
71%
24%
Positive
Nov. 2018
94%
6%
June 2018
94%
6%
10%
82%
8%
APAC
Nov. 2018
CEE & MEA
LATAM
June 2018
11%
82%
Nov. 2018
8%
92%
June 2018
8%
92%
Nov. 2018
June 2018
19%
73%
11%
81%
7%
The positive outlook bias in Western Europe is reducing and partly reflects the ongoing build-up of ALAC.
8%
8%
Data as at Nov. 19,2018. Based on the top 200 rated banks. Source: S&P Global
Sharjah has pledged to acquire 1.59 billion shares for AED 1.12 billion or 50.07 per cent of the total issued share capital of the bank as well as to subscribe in full to the shares offered to it as part of a rights issue to be undertaken by Invest Bank in 2019 and any new shares offered to other shareholders, which remain unsubscribed. S&P Global expects profitability to stabilise with a return on assets at about 1.6 per cent and a net interest margin at three per cent in 2019, benefitting from the higher interest rates and significant non-interest-bearing deposits. The Saudi banking industry is also witnessing a number of successful tieups following the confirmation by Saudi British Bank (SABB) and Alawwal that they have entered into a binding merger agreement in October having started
PROFITABILITY IS EXPECTED TO STABILISE WITH A RETURN ON ASSETS AT ABOUT 1.6 PER CENT AND A NET INTEREST MARGIN AT THREE PER CENT IN 2019, BENEFITTING FROM THE HIGHER INTEREST RATES AND SIGNIFICANT NON-INTERESTBEARING DEPOSITS. — S&P
discussions on a potential merger in April 2017. Under the merger agreement, all of the assets and liabilities of Alawwal Bank will be transferred to SABB—the tie-up will create the Kingdom’s third-largest bank, a top-tier retail and corporate bank with SAR 271 billion in assets. Upon completion of the merger, SABB will continue to exist; Alawwal bank will cease to exist as a legal entity and its shares will be cancelled and new shares in SABB will be issued to shareholders of Alawwal Bank. There is an increase in bank mergers in Saudi Arabia, as profit margins have been squeezed by lower government and consumer spending due to recent economic transformation programmes such as the introduction of Value Added Tax (VAT) in January 2018.
bankerme.net
9
ANALYSIS
National Commercial Bank (NCB) and Riyad Bank have announced that they have begun preliminary discussions for a potential merger in December. As the Kingdom’s Public Investment Fund (PIF) and the Government are major shareholders in both banks, the consolidation is also expected to run smoothly. According to Bloomberg, the PIF owns stakes in some of the biggest lenders and is weighing which banks could be merged to increase scale and competition. Al Rajhi Bank’s subsidiary in Malaysia is exploring a potential merger with Malaysian Industrial Development Finance (MIDF), after receiving preliminary approvals from the Saudi Arabian Monetary Authority (SAMA) and Bank Negara Malaysia (Malaysian Central Bank). The second quarter of 2018 saw an increase in banks exploring potential tieups in the region as a whole. Kuwait Finance House (KFH) invited Bahrain’s Ahli United Bank to begin a due diligence process for a potential merger in July 2018. The duo announced that the scope of the agreement includes valuation studies and work to assess the feasibility of establishing a new banking entity and it would disclose any matters related to the possible merger in a sequential and timely manner. Three-quarters of the 24 GCC banks rated by S&P carry a stable outlook and the average GCC bank rating is ‘BBB+’. GEOPOLITICAL TENSIONS AT WORK News reports have indicated that the murder of a Saudi journalist, Jamal Khashoggi, in a consulate in Istanbul threatened a massive exodus by foreign investors and international lenders operating in the Kingdom. This has created a level of uncertainty due to the unknown long-term implications as the US Congress and Turkish Government continue to pursue the case. However, despite some top executives from international lenders pulling out of
10
GROWTH OF GCC BANKS LOAN PORTFOLIOS VERSUS GDP GROWTH Average Loan Growth
Average GDP Growth
12% 10% 8% 6% 4% 2% 0% 2011
2012
2013
2014
2015
2016
2017
2018*
2019F
2020F
RATED GCC BANKS PROFITABILITY INDICATORS Return on Assets
Net Interest Margin
Cost / Income (RHS) 40%
3.5% 3.0%
39%
2.5% 2.0%
38%
1.5%
37%
1.0%
36%
0.5% 0.0%
35% 2014
2015
2016
2017
2018*
Source: S&P Global
IN 2019, GEOPOLITICAL TENSIONS WILL ALSO REMAIN A KEY SOURCE OF RISK, AS WELL AS A CATALYST FOR RISING MILITARY-RELATED FISCAL SPENDING. — Moody’s Investor Service
the Future Investment Initiative (FII) Forum 2018 in Riyadh, senior investment bankers from HSBC Holdings, Societe Generale and Credit Suisse Group, amongst other banks, attended the event raising hope that the Khashoggi controversy may not undermine Saudi’s Vision 2030. Not all due diligence processes for potential mergers were successful in 2018, this is mainly due to geopolitical tension in the region. Bank Dhofar and National Bank of Oman (NBO) announced plans for a potential merger in June 2018 and according to EFG Hermes the merged bank, with a combined asset
of $20 billion (AED 74 billion) will be the second-largest financial institution in Oman after Bank Muscat. In a bourse filing, NBO said that it would consider the interests of all its shareholders in assessing the merits of a merger with Bank Dhofar following a statement by the Commercial Bank of Qatar (CBQ) discouraging the consolidation between the two lenders. CBQ is the majority shareholder in NBO, with a 34.9 per cent stake. GCC lenders reached a high tide of prudential regulation tightening with the finalisation of Basel III in December 2017, however now the risk lies in the delayed or uneven implementation of the agreed global standards across different operating environments in the region. This is threating to create tensions among sovereigns who once enjoyed a flawless and interconnected banking industry in the world owing to the GCC’s booming economies. In November, Kuwait’s prosecutors appealed to their Dubai counterparts to ensure the release of $500 million in funds belonging to a Kuwaiti private equity fund that were frozen in Noor Bank as part of a money laundering investigation. According to a report by Reuters, the frozen funds, which Kuwait says are owed in part to two of its state entities are threatening a political and diplomatic fallout which will not be favourable to the lender caught in between. BLACK GOLD S&P Global expects Brent oil price to average $55 per barrel in 2019, which is likely to increase the financing needs in the GCC given that the oil price is lower than last year. Analysts from different investment banks have projected oil price in 2019 to range from $61 to $73 per barrel. In its 2019 outlook report, the Kuwait Financial Centre stated that any possibility of an upward movement in oil prices beyond $80 per barrel remain bleak as long as the production
Oil price is projected to range from
$61 $73
to
per barrel in 2019
continues to rise elsewhere. In 2019, geopolitical tensions will also remain a key source of risk, as well as a catalyst for rising military-related fiscal spending, added Moody’s. Crude oil prices ended 2018 in free fall but reversed course on signs that the Organisation of Petroleum Exporting Countries (OPEC) and other major exporters will follow through on last month’s pledge to slash production. Progress in the US-China trade war talks also turned the economic outlook brighter, adding to oil’s momentum. In an interview with Bloomberg, Mohammed Al-Rumhi, Oman’s Oil Minister said that the agreement between OPEC and partners including Russia as well as Oman will sustain prices at $60 a barrel. Bloomberg reported that OPEC and partners led by Saudi Arabia agreed to cut oil output this year to support prices. The
group and its allies said they would start to trim 1.2 million barrels of daily production this month to stabilise the market— in December they reduced output by 600,000 barrels a day (bpd). Low oil prices are likely to impact Sukuk issuance by GCC Islamic lenders—a complex operating environment that might push some issuers to relegate Sukuk issuance to second place. According to S&P, the volume of issuances from the GCC is likely to be flat in 2019. Oil prices can be extremely volatile like last year after reaching $86 per barrel in October 2018 the price retreated to close at $60 per barrel mark two months later representing upside and downside risks to S&P’s 2019 forecast. The rating agency assumes oil prices will remain flat at $55 in 2019 and beyond. So far, the First Abu Dhabi Bank (FAB) has led Sukuk issuance in the Gulf by tapping the international market raising $850 million in Islamic bonds. Although GCC countries are diversifying their economies to reduce dependence on oil and gas exports, hydrocarbon revenues contribute greatly to their fiscal revenues and annual budget. The sharp drop in oil prices in the fourth quarter of 2018 highlights the vulnerability of GCC sovereigns’ credit profiles to future oil price declines which will inevitably impact the capital base of banks. Should prices stay near $60, Oman’s budget deficits would be materially wider and debt likely higher. The geopolitical tensions are the new way of doing business in the region, however the escalation of tension with Iran might prompt a closure of the Strait of Hormuz—which will have a sizeable impact on GCC sovereigns’ credit profiles. Expectations are high, more consolidations are expected among GCC banks. The UAE in particular, needs bigger and stronger institutions, too many small players— mostly family lenders will not be able to compete regionally and internationally as they will need to sustain their growth.
bankerme.net
11
NEWS HIGHLIGHTS
Lebanese Central Bank to reinstate subsidised housing loans Lebanon’s Central Bank will reinstate subsidised housing loans, ending an almost year-long freeze of the programme. The new housing package will be $200 million for housing loans of as much as $300 million, the agency said, citing a circular from the Association of Banks in Lebanon after its meeting with the central bank. The central bank also will offer a stimulus package for the production sector valued at $500 million for loans of up to $400 million, reported Bloomberg. The central bank froze subsidised housing loans at the beginning of last year, eroding a real estate market that was already reeling from slow demand caused by regional tensions and local political stalemate. Lebanon’s economy has slowed since the crisis in neighbouring Syria began in 2011, leading to a shut down of vital trade routes and an influx of some 1.5 million refugees. The country is also coming to a reckoning with years of fiscal overreach with public debt, estimated at over 160 per cent of gross domestic product this year, is projected to rise to near 180 per cent by 2023, according to the International Monetary Fund. The central bank has for years carried the burden of stimulating the economy by offering stimulus packages for various sectors given the lack of functioning governments.
KFH sees 90 per cent profit jump after AUB deal Kuwait Finance House’s (KFH) purchase of Bahrain’s Ahli United Bank (AUB) is expected to boost consolidated profit by more than 90 per cent from the level in 2018. The deal is the first major cross-border bank merger in the Gulf region in recent years. The duo, which have been in merger talks since mid-2018, agreed on a preliminary exchange ratio of one KFH share for every 2.326 AUB shares but they have not revealed the share prices for the exchange ratio. In a bourse filing, KFH stated that the due-diligences will be commenced after obtaining the required approvals of the relevant regulatory bodies represented Central Bank of Kuwait and Central Bank of Bahrain and other relevant regularity bodies. The consolidation will create the largest banking entity in Kuwait with assets of about $94 billion and the sixth largest bank in the Gulf region.
12
Saudi, UAE loans to help Pakistan avert financial crisis Pakistan received $1 billion from Saudi Arabia Friday, a day after the United Arab Emirates deposited the first instalment of a $3 billion financial support package aimed at helping the South Asian nation tide over a balance-ofpayment crisis, reported Bloomberg. The UAE transferred $1 billion as part of an agreement between Pakistan and the Abu Dhabi Fund for Development this month. The UAE transferred $1 billion as part of an agreement between Pakistan and the Abu Dhabi Fund for Development this month, the central bank said in a statement on Twitter. The total transfers so far from the UAE and Saudi Arabia stand at $4 billion and will boost Pakistan’s reserves that had fallen to $6.64 billion, or less than two months of import cover, in the week ended 18 January. Riyadh also has pledged to supply oil worth $3 billion on deferred payments. Pakistan has averted a balance-of-payment crisis this year and it is close to concluding an investment agreement with China, said Finance Minister Asad Umar. The Chinese aid is in addition to the support from Saudi Arabia and the UAE to help Pakistan bridge a $12 billion financing gap. The nation’s current-account deficit rose to an unprecedented $19 billion in financial year ended June.
UAE sets new conditions for VAT de-registration
Saudi Aramco chief sets out roadmap for share sale in 2021 The Chief Executive of Aramco said that the oil giant’s initial public offering (IPO) will require careful coordination over the next two years. The head of Saudi Aramco has laid out a roadmap leading to the sale of shares in the world’s biggest oil company in 2021, reported local daily, Arab News. Amin Nasser, the resident and Chief Executive of Aramco, said that there is no doubt the commitment is there and it was also further confirmed by Crown Prince Mohammed bin Salman as well as by the Minister of Energy Khalid Al-Falih.
The Federal Tax Authority (FTA) said that registrants will not be de-registered unless they have paid all due taxes and administrative penalties as well as filling all required tax returns for the period in which they were registered as stipulated under the tax legislation. The UAE’s FTA has defined the conditions for tax de-registration in accordance with Federal Decree-Law No. 8 of 2017, according to local newswire, WAM. In a statement, the FTA stated that if the value of the taxable supplies made by the registrant over a period of 12 consecutive months is less than the voluntary registration threshold of AED 188,000 and it is not expected that the total value of the registrant’s anticipated taxable supplies or expenses subject to tax in the coming 30-day period will exceed the voluntary registration threshold, then the registrant must submit a de-registration application to the authority. The FTA emphasised that the UAE tax system is based entirely on voluntary compliance by taxable persons, whether it being with regards to registration, filing tax returns or payment of due tax or de-registration, and these services are available free of charge. The de-registration application must be submitted within 20 business days of the occurrence of any of the aforementioned cases using the authority’s e-Services portal and failing to submit the de-registration application will lead to the imposition of administrative penalties, added the FTA.
SOVEREIGN RATINGS AS OF 1 JANUARY 2019 Issuer
Foreign Currency Rating
Last CreditWatch/Outlook Update
1 Bahrain
B+/Stable/B
01-Dec-2017
2 Central Bank of Bahrain
B+/Stable/B
02-Dec-2017
3 Egypt
B/Stable/B
12-May-2018
4 Iraq
B-/Stable/B
03-Sep-2015
5 Jordan
B+/Stable/B
20-Oct-2017
6 Kuwait
AA/Stable/A-1+
20-Jul-2011
7 Lebanon
B-/Stable/B
02-Sep-2016
8 Morocco
BBB-/Negative/A-3
06-Oct-2018
9 Oman
BB/Stable/B
11-Oct-2017
10 Qatar
AA-/Stable/A-1+
08-Dec-2018
11 Saudi Arabia
A-/Stable/A-2
17-Feb-2016
12 Abu Dhabi
AA/Stable/A-1+
02-Jul-2007
13 Ras Al Khaimah
A/Stable/A-1
05-Dec-2018
14 Sharjah
BBB+/Stable/A-2
27-Jan-2017
Copyright © 2018 S&P Global Ratings. All rights reserved.
bankerme.net
13
NEWS HIGHLIGHTS
Turkish banks face more restructuring woes as bad loans soar More Turkish companies are seeking to restructure foreign debt, adding to the woes of banks as the regulator warns bad loans could almost double this year, reported Bloomberg. Anadolu Birlik Holding has started talks with lenders to rearrange part of its $2 billion debt pile. The ratio of non-performing loans to total credit could rise to six per cent in 2019, the banking regulator has predicted. In the most recent data, the proportion already surged to 3.7 per cent as of November, signalling that rising borrowing costs and the tumbling lira are starting to take a toll on corporate balance sheets. Turkey’s largest companies have either completed or sought almost $24 billion of loan restructurings as a result. Turkey’s banking association and soccer federation announced a plan on 7 January to restructure between TRL 9.2 billion and TRL 11 billion of debt ($2 billion) accumulated by several clubs including Galatasaray, Fenerbahce and Besiktas—three major sides from Istanbul—with 15 financial institutions. Restructured debt will have a maturity of as much as 10 years. The lira’s decline is threatening to put foreign-currency debt beyond the means of many to repay. Turkey’s currency is the second-worst performer of all emergingmarket currencies over the past year, losing almost a third of its value against the dollar. The combination of a slowing economy, weakening currency and rising bad loans is hurting the banking sector. The 13-member Turkish banks index fell 27 per cent over the past 12 months, compared with a 16 per cent drop in the Borsa Istanbul 100 Index. The banking gauge has started to recover this year, though, as low valuations and the need to cover short bets give investors a reason to buy.
Saudi Arabia mulls euro-denominated bond issuance Saudi Arabia’s finance minister said that the Government is considering into issuing euro-denominated bonds. The Kingdom will also consider raising debt in other currencies such as the Chinese yuan. Mohammed al-Jadaan, the Saudi Finance Minister, said that the plan is to look into, potentially, another currency, euro is a possibility. Saudi Arabia issued $7.5 billion in international bonds this month, bringing to almost $60 billion the total amount it has raised through US dollar-denominated public debt issues since 2016, reported Reuters.
14
Fitch maintains Alawwal Bank on ratings watch positive Fitch Ratings has maintained Alawwal Bank’s long-term issuer default rating (IDR), support rating (SR), support rating floor (SRF) and viability rating (VR) on rating watch positive (RWP), ahead of the bank’s merger with SABB. Alawwal Bank and Saudi British Bank entered into a binding merger agreement on 3 October 2018. In a statement, the rating agency stated that it is also maintaining SABB’s SR and SRF on RWP. The merger of the two banks will be implemented in the form of a share swap with Alawwal shareholders receiving 0.485 SABB shares for each Alawwal share and following the issue of new shares, Alawwal’s current shareholders will own approximately 27 per cent of the combined bank and SABB’s shareholders will own 73 per cent. The merger is still subject to regulatory approval and is expected to complete in Q1 2019.
Iraqi parliament approves 2019 budget The budget projected oil exports of 3.88 million barrels per day (bpd), up from 3.8 million bpd for the previous year at a price of $56 per barrel, an increase from the $46 the 2018 budget was based on. Iraq’s parliament has approved the 2019 budget ending weeks of deadlock over allocations to different provinces and privatisation of state projects. The 2019 budget of IQD 133 trillion ($112 billion) includes payment of salaries for the Peshmerga, the military force for the semi-autonomous Kurdish region, a move that lawmakers said might help ease tension between Baghdad and Erbil. Last year the budget excluded the semi-autonomous Kurdistan Regional Government’s (KRG) share from the 17 per cent the region has traditionally received since the fall of Saddam Hussein, reported Reuters.
Dubai Islamic Bank successfully closes $750 million AT1 Perpetual Sukuk
Saudi Crown Prince to launch $425 billion infrastructure plan Saudi Arabia is seeking SAR 1.6 trillion ($425 billion) in investment by 2030 for infrastructure as well as energy, mining and other industrial projects, as part of an effort to cut its reliance on oil. According to Bloomberg, Crown Prince Mohammed bin Salman, who is behind reforms known as Vision 2030, will present details of the infrastructure plan on Monday, Energy Minister Khalid Al-Falih said Saturday in Riyadh. The Kingdom could sign about 70 deals worth more than SAR 200 billion at the same time. Saudi Arabia is among nations in the Middle East working to diversify Government income away from oil sales and build new industries. The Kingdom will focus on chemicals, power and natural gas businesses in its industry plan, Al-Falih said. The Kingdom plans to restructure its power industry by separating its generation business from transmission and distribution. As part of the plan, the country will create a separate power purchasing agency. The Kingdom is also considering building a new airport for Riyadh, and plans to refurbish and expand five airports as well as build 2,000 kilometres of railways.
Dubai Islamic Bank PJSC (DIB), rated A3 by Moody’s (stable) and A by Fitch (stable), has successfully closed a $750 million Additional Tier 1 (AT1) Perpetual Non-Call six-year Sukuk with a profit rate of 6.25 per cent per annum, which is equivalent to 366.4bps over the implied six-year US Treasury yield. This was also the first hybrid capital issuance from the GCC in 2019. The transaction, was only the second AT1 Sukuk under the new Basel III capital guidelines issued by the Central Bank of UAE in 2018. This was also the first hybrid capital issuance from the GCC in 2019. According to a statement, DIB achieved one of the largest and high quality order books from a GCC bank in over a year at $3.7 billion from 168 investors, representing a 4.9x oversubscription. The investor base was well diversified with 62 per cent of the Sukuk allocated to Middle East investors, 19 per cent to UK/ Europe, 18 per cent to Asia and one per cent to US offshore. The issuance attracted a diverse local, regional and international investor base, which helped us achieve the lowest possible pricing (6.25 per cent) of any Basel III compliant AT1 instruments issued under the new capital guidelines from the UAE.
bankerme.net
15
THE MARKETS
VOLATILE OIL PRICES POSE CHALLENGES TO GCC’S STABLE OUTLOOK GCC countries are reliant on oil which accounts for three-quarters of the six-nation bloc’s spending, however, the instability associated with crude prices pose a challenge for the GCC sovereigns in 2019
E
conomies in GCC are growing at a faster pace compared to their emerging market peers. This is largely attributed to the rise in oil prices reaching $84 per barrel. Heavily reliant on oil, it accounts for three-quarters of the six-nation bloc’s spending. The instability associated with oil prices continue to pose a challenge in 2019. The UAE, Saudi Arabia and Bahrain have begun implementing economic reforms in a bid to diversify their economies. According to International Energy Agency (IEA), the world record was set in September 2018 when both demand and supply were at 100 million barrels per day—the IEA has since revised down its forecasts for demand for this year and next, stressing that peak oil demand is nowhere in sight. Higher oil prices during most of 2018 reduced fiscal and external pressures in the short term.
16
It also weakened the impetus for GCC governments to diversify their fiscal bases and rein in expenditure, leaving their credit profiles vulnerable to phases of lower oil prices, asserted Moody’s in a recent report. Moody’s assumed a WTI oil price of $60-65 per barrel in their base scenario for this year, added Indosuez Wealth Management. Crude oil prices ended 2018 in free fall but reversed course on signs that the Organisation of Petroleum Exporting Countries (OPEC) and other major exporters will follow through on last month’s pledge to slash production. OPEC+ led by Saudi Arabia agreed to cut oil output this year to support prices. The oil cartel agreed that they would start to trim 1.2 million barrels of daily production in January to stabilise the market--in December they reduced output by 600,000 barrels per day (bpd).
THE EMIRATES The UAE has a slightly better public debt outlook compared to its allies in the region. The adoption of economic diversification measures like the implementation of VAT a year ago and the foreign direct investment (FDI) law this year as well as the country’s open market system is expected to boost non-hydro economic growth--which should alleviate the UAE’sdependency on energy prices. In its Global Outlook 2019 report, Indosuez Wealth Management stated that in terms of monetary policy there is not much divergence due to the peg of the dirham to the greenback. The US Federal Reserve (Fed) is becoming more restrictive and following interest rate hikes this year, the Central Bank of the UAE (CBUAE) has to adopt a tightening bias. The central bank has so far raised its repo rate to 2.5 per cent from one per cent at the beginning of 2017, in six steps of 25 basis points.
HIGHER OIL PRICES DURING MOST OF 2018 REDUCED FISCAL AND EXTERNAL PRESSURES IN THE SHORT TERM AND THEY ALSO WEAKEN THE IMPETUS FOR GCC GOVERNMENTS TO DIVERSIFY THEIR FISCAL BASES AND REIN IN EXPENDITURE, LEAVING THEIR CREDIT PROFILES VULNERABLE TO PHASES OF LOWER OIL PRICES. — Moody’s Investor Service
Tourism, another pillar of UAE’s nonhydrocarbon economy did not expand as expected. Dubai International Airport passenger traffic declined by 0.2 per cent between September 2017 and September 2018--extending a downward trend which started back towards the end of 2015. Additionally, inflation in the UAE increased to 4.8 per in January 2018, due primarily to the introduction of a five per cent VAT but has since begun to ease.
(PHOTO CREDIT: CALIN TATU/SHUTTERSTOCK)
The UAE is now using the open market system to lure foreign investors to compete with the local market but at the same time measures are being put in place to protect Emirati firms. The new FDI law which came into effect in January states that a retiree must either have a property investment worth at least AED 2 million ($544,500), savings of no less than AED 1 million or a monthly income of no less than AED 20,000. The government projected up to 15 per cent FDI growth this year owing to the Federal Law No. 19 of 2018 which was issued by a presidential decree. The granting of long-term visas to the country’s largely expatriate population will benefit investors and people with specialised expertise like doctors, researchers and those in the technology field. The UAE introduced support for the industrial sector by agreeing to reduce electricity fees for UAE factories. Under the plans, larger factories would receive a 29 per cent reduction in tariffs while small and medium-sized units would have fees reduced by between 10 and 22 per cent.
bankerme.net
17
THE MARKETS
Meanwhile, all of this will not change the debt outlook as assessed by various rating agencies. The current Moody’s rating applied to Abu Dhabi’s long-term debt is Aa2, which means that the Emirate’s bonds are of high quality and are subject to very low credit risk, says Indosuez Wealth Management. THE KINGDOM Although Saudi Arabia is on track to reduce its dependency on hydrocarbon revenue, oil revenue still contributes greatly to the Kingdom. Like its Gulf peers, Saudi is restructuring and opening up its once closed-up economic activities, rethinking the role of foreign direct investment as the authorities look to ease fiscal burden as well as do away with dependence on oil. The government is targeting a fiscal deficit of 7.3 per cent of GDP this year and a balanced budget by 2023. Economic analysts are saying that the plan defies ‘the laws of arithmetic, this projection may be based on a crude price as high as $80 a barrel in 2019, and it would have to climb to $95 a barrel to balance the budget. Saudi Arabia recently approved the largest budget
in the Kingdom’s history with SAR 1.11 trillion spending in 2019, approximately seven per cent higher than the projected expenditure by the end of the fiscal year 2018. The Kingdom’s oil minister also reassured investors that the OPEC+ coalition would pursue output cuts to balance the market and will do more if it needs to. The 24-member coalition of oil producers is cutting output to stabilise global markets and they agreed to collectively reduce supplies by 1.2 million barrels a day for the first half of 2019. The Kingdom’s new bankruptcy law, which was introduced in August 2018 will act as a conduit to investment growth is the latest development in a string of reforms under Crown Prince Mohammed bin Salman’s Vision 2030. Among other economic transformation measures, the bankruptcy law will encourage foreign direct investment (FDI) by structuring the business legal framework. Moreover, the bankruptcy law clarifies provisions that are related to the liquidation, settlement and financial reorganisation. The law will protect creditors’ rights, reduce the costs and timeframe of the bankruptcy procedures
and encourage SMEs to invest in the commercial market. The new law has since been put to test in the case of Ahmad Hamad Algosaibi & Bros (AHAB)-which applied to the Commercial Court in Dammam for protective settlement. In an audit report, Dallas-based DeGolyer & MacNaughton stated that the Kingdom’s vast oil reserves are at 268.5 billion barrels since it nationalised its energy industry about 40 years ago, slightly more than the 266.3 billion barrels that the Government published previously. The audit comes at a time when the Saudis are trying to generate interest in Aramco ahead of a potential initial public offering (IPO). Aramco IPO stalled last year but the Crowne Prince insisted plan to sell shares in oil giant will go ahead by 2021, sticking to his view the state-run company is worth $2 trillion or more. Similarly, the Saudi Arabia Stock Exchange (Tadawul) was upgraded to an emerging market from a frontier market by the MSCI index in June 2018—together with the bankruptcy law the move is expected to attract billions of dollars of passive funds. Earlier on in March, FTSE Russell had upgraded
STATUS OF REFORMS IN THE GCC VAT
Sin Taxes
Transport fuel
Electricity
Saudi Arabia UAE Oman Kuwait Qatar Bahrain Key: Green = fully implemented reforms/market-prices; Yellow = reforms initiated/subsidies remain; Grey = no specific reforms or not yet initiated. Note: Sin taxes are excise taxes on harmful products such as alcohol, tobacco and/or sugary drinks (typically 50-100%). Source: Moody’s Investor Services
18
Water
Natural Gas
MOST GCC SOVEREIGN RATINGS CARRY A STABLE OUTLOOK (As of 14 January 2019) Positive
Stable
Negative
OUTLOOKS
14 JANUARY 2019
Ba hr ain
Aaa
it wa Ku
A1 Baa1 Ba1 B1 Caa1
United Arab
Emirate s
C
B1
Caa1
Ba1
A1 Baa1
Aaa
Oman
C
A1 Baa1
Ba1
B1
Caa1
Sovereign Ratings
C
Aaa
C
Caa1 B1 Ba1 Baa1 A1 Aaa
Sau di A rab ia
ar Qat
Source: Moody’s Investor Services
the Saudi index to the emerging market status which was followed by launches of other ser vices essential for a modern stock market, such as a central clearing system. Saudi Arabia also started the year by announcing that construction at the Crown Prince Mohammed bin Salman’s ambitions for life after oil NEOM city, a proposed $500 billion futuristic city, will start in the first quarter of 2019. The planned megacity, which is being financed by the Kingdom’s sovereign wealth fund unveiled more than a year ago, is part of MbS’ grand plan to bolster non-oil revenue and attract FDI. According to Bloomberg reports, the area will have its own airport, 2,500 luxury hotels as well as 200 retail establishments and 700 villas.
BAHRAIN, KUWAIT AND OMAN Lower than expected oil prices would dent fiscal positions in the other small GCC economies to varying degrees. Moody’s currently assumes Brent crude to average $75 per barrel in 2019, $65 in 2020 above the $54/bbl level at which spot prices started the year. Oman and Bahrain are most exposed to persistently weak oil prices from a fiscal perspective, given their much higher initial debt burdens. Oman is the only one out of the six-nation bloc to be rated with a negative outlook. According to Moody’s, with oil at 2017 levels, Oman and Bahrain would run budget deficits of 12 and four percentage points of their GDPs, respectively. Bahrain’s bailout package from the UAE, Saudi Arabia and Kuwait in October last year reduced near-term liquidity pressures,
with oil prices at these levels, the situation implies larger borrowing needs than assumed in the arrangement, potentially raising government liquidity risks again. The Kingdom of Bahrain promised its rich-oil neighbours to implement steps to repair its strained finances which include the introduction of VAT. The country also plans to cut public expenditure, voluntary retirements for government workers and redirecting state subsidies. The planned reforms are expected to save BHD 800 million annually, as the Government looks to curb its debt after years of lower oil prices. In Oman, if the government does not take additional steps to reduce the budget deficit, funding costs would likely rise in the event of weak oil prices weighing on fiscal strength. Low oil prices pushed spreads on the Government’s 10-year bonds above 450 basis points, however in the event of low oil price the Sultanate is said to be looking for alternative financing means. Kuwait, unlike Oman and Bahrain, has vast sovereign assets under the Kuwait Investment Authority, in the event of a slump in oil prices these would act as a buffer to absorb such shocks comfortably. According to Moody’s, there are remote prospects for further removal of gasoline subsidies in Kuwait. The GCC 2019 outlook is stable in general and higher oil prices in 2018 reduced fiscal as well as external pressures for the short term. However, higher oil prices also weakened GCC governments’ motivation to diversify their fiscal bases and rein in expenditure, leaving their credit profiles exposed to phases of lower oil prices like in the case of Kuwait. Bahrain’s aid from its wealthier allies helped to reduce credit risk to the lowest level in five months on optimism following the confirmation from the tripartite agreement.There is a need for the Kingdom to fully commit to its pledge to reform the economy. The UAE and Saudi Arabia, as the strongest economies in the Gulf, are safe in the event of a decrease in oil prices this year.
bankerme.net
19
LEGAL PERSPECTIVE
OPEN FOR BUSINESS: HOW KUWAIT IS TRANSFORMING ITSELF TO ATTRACT FDI By Emile Boulos, Local Partner at BonelliErede’s Dubai office and Celine Bsaibes, Senior Associate at BonelliErede’s Beirut office 20
(PHOTO CREDIT: EYEF DEE/SHUTTERSTOCK)
L
ast year, the Kuwait Investment Forum 2018 (KIF 2018) brought together participants from more than 55 countries to highlight recent developments in Kuwait’s business environment and evolving investment trends. The event focused on new investor-friendly regulations, the overall business climate and discussed specific investment initiatives that are currently underway, building on the positive momentum gained after HH the Prime Minister Sheikh Jaber Mubarak Al-Hamad Al-Sabah’s announcement of Kuwait’s long-term national development plan, Vision 2035.
Kuwait has reported growth of
$2.5
billion in foreign direct investment over the last two years
The success of KIF 2018 marks an important milestone in Kuwait’s efforts to revamp its legal framework with the aim of transforming the nation into a leading business hub that is attractive to foreign investors. With the introduction of Law No. 116 of 2013 (Law No. 116), which concerns the Promotion of Direct Investment in Kuwait, the country took a major step forward in achieving its goal to stimulate the country’s investment landscape by attracting more foreign direct investment (FDI). The legislation brought forth a series of reforms specifically designed to diversify Kuwait’s economy while paving the way for foreign investors to penetrate the Kuwaiti market.
bankerme.net
21
LEGAL PERSPECTIVE
One of the main outcomes of Law No. 116 was the establishment of the Kuwait Direct Investment Promotion Authority (KDIPA), an independent and specialised public authority tasked with attracting and promoting FDI in the country. Centralising all decision-making at the KDIPA shall help to dispel much of the bureaucratic layers that generally hinder FDI in a business environment. Under its mandate, the KDIPA was afforded the autonomy to issue all regulations necessary for achieving its objectives, most notably Decision No. 313 of 2016, which provides a framework for evaluating investment licences under a point-based scoring mechanism whereby an applicant licence would earn points by satisfying the following criteria: transferring advanced technologies into Kuwait; providing jobs and accredited training programmes for Kuwaiti nationals; supporting small and medium business enterprises; and contributing to the overall diversification of the country’s economy. Applications receiving a score below 60 per cent per cent are automatically rejected, whereas higher scores are granted licence approval alongside certain incentives. A score of 70 per cent per cent allows for a choice of only one incentive, while a score above 80 per cent grants an investment licence and all incentives stipulated under the law, including 100 per cent per cent foreign ownership, 10-year tax exemption, as well as the ability to recruit skilled foreign labour. Although the final percentage score remains at the discretion of KDIPA officials, it offers investors better visibility into the factors that will ultimately decide whether they receive a licence or not. Further clarity is provided by Ministerial Decision No. 75 of 2015, which sets out a list of sectors that are ineligible for an investment licence, including oil and gas extraction, security and investigation activities as well as public defence.
Emile Boulos
THE INTRODUCTION OF LAW NO. 116 AND THE ENSUING KDIPA REGULATIONS ARE SOME OF MANY INDICATORS OF KUWAIT’S EFFORTS TO ATTRACT MORE FDI. — Emile Boulos, Local Partner, BonelliErede, Dubai
The introduction of Law No. 116 and the ensuing KDIPA regulations are some of many indicators of Kuwait’s efforts to attract more FDI. Several other recent legislative reforms have contributed towards the country’s goal to promote an investor-friendly business environment. For instance, Law No. 1 of 2016 on Companies Law (as amended by Law No. 15 of 2017) provides that a company’s minimum capital shall be determined by executive regulations based on the activity, thus eliminating officials’ discretion on that front and allowing equal treatment to companies with the same activity. Furthermore, Law No. 13 of 2016 regulating Commercial Agencies allows foreign principals carrying out business in Kuwait to resolve disputes with local agents via foreign arbitration under foreign governing law; this gives foreign investors the legal certainty they require in order to enter into transactions with more confidence.
22 page 20-23 legal perspective.indd 22
1/31/19 9:55 PM
Celine Bsaibes
Additionally, based on Law No. 49 of 2016 regarding Public Tenders, foreign investors can bid on public tenders without a local agent and refer to the Committee of Grievance to report any violations during the bidding process. Finally, Law No. 116 of 2014 concerning Public Private Partnerships (PPP) makes it easier for investors to acquire project financing and allows for increased foreign ownership in PPP projects. As the Government is seeking private sector partners on key initiatives, the scope of projects planned will likely fuel a number of vital sectors, such as financial services, education as well as health, information technology, communications and transportation. The energy sector in particular, is expected to witness increased activity; the Ministry of Electricity and Water is resolved to have 15 per cent per cent of the country’s power generated from renewable sources by 2030, as reported by the Kuwait News Agency.
CENTRALISING ALL DECISIONMAKING AT THE KDIPA SHALL HELP TO DISPEL MUCH OF THE BUREAUCRATIC LAYERS THAT GENERALLY HINDER FDI IN A BUSINESS ENVIRONMENT. — Celine Bsaibes, Senior Associate, BonelliErede, Beirut
This is evidenced by the large power plant construction projects in Al Zour and Al Khairan, which are currently open to tenders from foreign investors. Largescale infrastructure construction is also underway, such as the multibilliondollar development project planned for five islands off Kuwait’s northern coast. Nicknamed Silk Cit y, the area will serve as an economic free zone comprising a major port, airport, hotels, sports facilities, residences, offices and national parks. It becomes evident that international investors can expect Kuwait to offer ample opportunities for investment through ongoing projects and even more in the pipeline. With such a committed effort to execute this long-term national vision to increase foreign investment, it comes as no surprise that Kuwait has reported growth of $2.5 billion in FDI over the last two years. The reforms’ positive effects have become increasingly apparent with the World Bank moving Kuwait up six ranks in its Doing Business 2018 report. Similarly, index operator MSCI is considering promoting the country’s stock exchange, Boursa Kuwait, from frontier to emerging market status, a move which will make the country even more suited for FDI. The road towards economic liberalisation is not entirely without pitfalls, however. Although the improvement in ease of doing business score shows serious commitment to enhance the business climate, further efforts are required to ensure the economy remains diversified enough to withstand oil price fluctuations. Battling bureaucratic delays in getting projects off the ground as well as promoting private sector participation in the economy will also be key in boosting the country’s appeal to investors. As investor confidence grows in a business-friendly legal framework, it is safe to conclude that Kuwait is wellpositioned to develop into a trade and financial hub.
bankerme.net
23
COVER INTERVIEW
Philippe Ghanem, CEO and Vice-Chairman, ADSS
24
DID 2018 RE-WRITE OUR UNDERSTANDING OF TRADING? ADSS—the regional expert in trading, Wealth and Asset Management—is well positioned for another year of financial volatility
A
t the start of 2018 hedge funds were looking for increased volatility to help drive their profits, the US had a good trading relationship with China, there was a possibility of getting Brexit sorted and bitcoin was at $13,700 a coin. Twelve months later the $3 trillion hedge fund industry is licking its wounds with only 16 funds out of the 450, covered by HSBC’s alternative investment group, returning a profit. The wished-for volatility caused many funds to lose money and most were outperformed by the S&P 500. A trade war had started between the US and The People’s Republic of China, no decisions had been reached on Brexit and Bitcoin had lost almost exactly $10,000 dollars in value. So, one month into the New Year it is no surprise that investors are asking a number of questions about the future investment strategies, they should adopt.
Philippe Ghanem, CEO and ViceChairman of ADSS, a firm which in the last eight years has built itself into a highly respected trading and investment firm is very clear that the UAE is well placed to manage these potentially challenging times. The ADSS advice is to take a longterm view, reduce exposure to risk and look at the underlying fundamentals of the markets. Unlike hedge funds, forced to try and create massive returns, ADSS works with clients to maintain and build wealth for current and future generations. So where can investors find value? Many have been searching for yield as the low-interest rates in Europe and the US closed off a number of traditional investment options. The strength of the US dollar has been a benefit but the fluctuations in the price of oil remain a concern. However, when the returns from financial investments in certain
bankerme.net
25
COVER INTERVIEW
areas and markets become unfavourable the good news is that new options always open up. For Middle East investors the local GCC region is now becoming very exciting and creating interest around the world. ADSS believes the GCC countries now offer, in the medium term, excellent investment options. The GCC is seen as the new emerging market. Most of the countries in the alliance have their currencies pegged to the US dollar, so have been positively affected by the strong dollar. They import most of their goods, have large foreign currency reserves in their sovereign wealth funds, and they have among the lowest debt/GDP levels in the world. This is unlike the traditional emerging markets which exhibit high debt levels—making them far less attractive to investors. In addition, several of the GCC countries have recently been upgraded to emerging market status by both the MSCI and FTSE. This is encouraging traditional emerging market investors to allocate funds to the region. This added stimulus, to an already buoyant market, is being helped by the diversification drive away from dependency on oil, led by the UAE and Saudi Arabia, and presents a significant upside opportunity for international investors. The GCC financial markets have been regarded, by non-regional investors, as difficult to access, however, internal developments and the use of new technologies has helped to change this situation. Exchanges like the Tadawul in Saudi Arabia are actively embracing change and the markets like those in the UAE are leading the way on innovation to increase their competitiveness. For example, the Abu Dhabi Global Market (ADGM), situated close to ADSS’s head office, has created an environment which can support international and local financial and banking institutions. Feedback shows that the ADGM is recognised as being better regulated than other comparable offshore financial centres.
26
Abu Dhabi is also known for its adoption of new technology, another important change which is attracting international funds. (PHOTO CREDIT: PHILIP LANGE/SHUTTERSTOCK)
It has a legal system based on common law and offers a fast-to-market turnaround, as well as sophisticated dispute resolution, including a digital court platform which is seen as a game changer in the region. ADSS has always been an advocate of firm but fair regulation which provides a level playing field for all market participants. Under the leadership of Ghanem it is investing in fintech innovation, which includes the automated on-boarding and KYC (Know Your Client) of traders, which is just one part of the high-quality compliance ADSS offers.
2019 2018
appears to be following the trends of
with volatility controlling the way the markets are trading. The investment in fintech is not limited to regulatory systems. ADSS has become a leader in developing a range of business systems which improve the service traders receive. These included data-mining, machine learning as well as artificial intelligence (AI). The management of the firm believes that that we are on the edge of a revolution which will change all areas of financial services. From institutional clients through to individual traders, technology is present in all areas of their lives. No-one stands at the side of the road and waits for a taxi, or goes into town to shop, or rushes home so they do not miss their favourite TV programme. They call an Uber, shop online and watch Netflix. Technology has changed our lives so it would be naive to assume it will not change the way that we access and trade a range of asset classes.
bankerme.net
27
COVER INTERVIEW
Ghanem is at the forefront of using cryptographic ledger systems and smart contracts to decentralise trading, revolutionise clearing and settlement, decrease risk and reduce trading costs.
28
From its formation ADSS has been investing in algorithm based platforms, mobile technology and AI and knows that this is the way forward. The next generation fintech can provide four interlinked deliverables—security, access, transparency and advantage. The technology has to be informed, fast and personalised to the people who use it and, because this is a very competitive market, it has to be able to reward loyalty. As a leading investment firm, which has offices in Asia and Europe, ADSS understands the importance of being customer-centric, which can only be delivered through technology which learns from its clients. We are living in a digital age which has led to the democratisation of trading. More than ever, clients expect to be using platforms, systems and apps which can provide instant access to appropriate sets of data and then apply sophisticated analytics to obtain the trading insights which will guide their investments. The new generation of clients understand how and where their data is being used, and expect to be selectively and accurately targeted, as to offer them value. They want the trading options and offers they are interested in sent directly to them. They also have a different view on accessing markets. The digitalisation of assets, including cryptocurrencies, has changed perceptions of investing. Digital assets are available through decentralised networks which they can access directly. There is no need for an intermediate broker, traders are going direct to the market, and want the same access, control and visibility applied to traditional markets. The notion of being tied to your desk or sitting waiting for your broker to call you back is long gone. Trading is now informed, fast and direct. This means that technology has to change the products and services they are buying.
THE GCC IS SEEN AS THE ‘NEW EMERGING MARKET’. MOST OF THE COUNTRIES IN THE ALLIANCE HAVE THEIR CURRENCIES PEGGED TO THE US DOLLAR, SO HAVE BEEN POSITIVELY AFFECTED BY THE STRONG DOLLAR. — Philippe Ghanem
ADSS prides itself on developing world class services which help clients’ decision making. Trading will always be very personal but the new breed of investors demand easy access to quality streamed information, mobile applications and products tailored to their requirements. Social marketing and information is 24/7 and firms need to provide services which meet the demands of these new clients who understand how to make technology part of their decision-making process. 2019 appears to be following the trends of 2018 with volatility controlling the way the markets are trading. This is another reason for investors to look at working with locally based investment firms, not just because of the regional investment knowledge, but because of the financial strength, these firms offer. On-going volatility puts substantial pressures on the bottom line of trading firms. The 2018 losses of some very wellrespected hedged funds, demonstrates the risk associated with trading. Dramatic switches between risk-on and risk-off trading require very well capitalised firms with skilled individuals who have the experience to design and implement the systems which manage modern trading.
Many assets are bought and sold based on sophisticated AI systems. Trades are placed in milliseconds, quick enough to avoid losses or create profit. However, it requires in-depth knowledge to build the AI systems and the firm has to have deep liquidity to allow investors to access and trade at a good price. The capitalisation of firms like ADSS, the investment in new tech and the local market knowledge gives them a headstart on international competitors. They can provide sophisticated access to the markets investors are looking for. So, how should investors approach 2019. It is not possible to predict whether the US and China will end their trade war, or what will happen in Europe with Brexit—or even, at this stage, be able to say whether any of the outcomes will be positive or negative.
This means we will most likely see ongoing volatility with the US dollar, the euro and the British pound, but in other assets and markets, there will still be genuine value. The most important piece of advice Ghanem gives is to have a very good understanding of risk. It is vital that you do not over-leverage and are not be driven by the market. To be able to do this you must always invest in yourself—through education and training. The good news is that from emerging markets through to distributed ledger technology there will be opportunities to maintain and grow value. If investors pick the right partner, secure and forward thinking, they will be able to make the most of the volatility and create the returns they are looking for.
Philippe Ghanem Philippe Ghanem, is seen as an innovator and visionary in global financial markets. As an investor, and an expert in trading a range of asset classes, he has developed a reputation for insight and understanding of market making, trading systems, and how these are driven by changes in market conditions, regulation and technology. His entrepreneurial approach has led to the development of low latency multi-asset trading platforms, the use of Artificial Intelligence (AI) systems to increase returns and, most recently, blockchain technology as a way of developing new trading models. He is at the forefront of using cryptographic ledger systems and smart contracts to decentralise trading, revolutionise clearing and settlement, decrease risk and reduce trading costs. Over a period of 17 years, Ghanem has built and managed a number of businesses including Dublin based Squared Financial Services Limited. Ghanem was instrumental in setting up ADSS LLC. He identified a gap in the global financial highway which created high levels of risk in the daily movement of trading flows from the east to the west. Drawing on his wealth of experience in both creating and running successful financial services vehicles, he established a company which could offer liquidity between the closing of Asia and the opening of Europe. In seven years he has taken the ADSS from a start-up to trading billions of dollars daily, with capital in excess of $600 million. He has considerable personal experience in trading a variety of financial instruments covering both banking and financial products such as bonds, equities, mutual funds, commodities, derivatives, cash and treasury. He is recognised for his skill in asset and fund management and is seen as one of a select group of people who can translate this knowledge into the development of innovative new trading technology. Ghanem is regularly sought out as an international commentator on the GCC region, global trading markets and the role of technology in developing new investment opportunities. Ghanem obtained his Bachelor of Science (BSc) in Business Administration from the International University of Geneva (Switzerland) in 2002. He is fluent in English, French and Arabic.
bankerme.net
29
COUNTRY FOCUS
PRESENT TENSE, FUTURE PERFECT? A few years of low oil prices may have proved bitter medicine, but the UAE’s economy is now fighting fit 30
(PHOTO CREDIT: BOULE/SHUTTERSTOCK)
W
hen fireworks spurted from the Burj Khalifa on 1 January 2019, the UAE greeted a very uncertain world. A crescendo of populist policies, trade tensions and jittery markets have left investors’ nerves in shreds. Political chaos endured in the US while political paralysis continued in the UK. China, whose economic growth has defied critics for years, is nursing a sharp downturn. Brexit, trade tensions and higher interest rates may be conspiring to end 10 years of steady, albeit modest global growth.
Fortunately, the UAE is facing whatever 2019 may bring from a position of strength. S&P recently surmised that the Abu Dhabi Government’s substantial net asset position will shield it against almost all possible external shocks, and the UAE’s capital will be generous towards the other emirates should they need support. The rating agency predicts that economic growth will steadily recover and that the country’s fiscal position will remain strong over the next two years. “The exceptional strength of the Government’s net asset position
provides a buffer to counteract the effect of oil price swings on economic growth, government revenues, the external account, and increasing geopolitical uncertainty in the Gulf region,” the rating agency said. It seems lower oil prices from 2014 were a blessing in disguise. While the economy spent a few years in the doldrums, UAE governments stepped up their diversification efforts and began weaning the country off hydrocarbons. Now prices are rising again, the UAE can underscore its investment in broadening the economy.
bankerme.net
31
COUNTRY FOCUS
A happy combination of rising oil production, government infrastructure spending in Dubai, as well as Abu Dhabi’s fiscal stimulus package should all help its cause. Moody’s has forecast a GDP growth of 2.2 per cent in 2018 and 2.9 per cent in 2019, following a slowdown to 0.8 per cent in 2017. Plans to loosen its purse strings and moderately increase spending will help support the UAE’s economic revival. In early June 2018, the Abu Dhabi Government announced a stimulus package of AED 50 billion over the next three years to encourage foreign investment and improve the business operating environment. GOLDEN RULES The country has also etched a number of new laws which will open new revenue streams and nurture businesses. In 2018, the UAE introduced a new foreign investment law that will allow 100 per cent foreign ownership in certain sectors, which could support a rise in investment. There are also plans to introduce long-term visas for professionals, and ease licensing requirements and business fees. The International Monetary Fund (IMF) agrees that, compared to 2017, growth will strengthen over the next few years. Overall growth is projected to strengthen to 3.7 per cent this year from 2.9 per cent last year. The introduction of VAT in 2018 was a historic milestone; and, while it might encourage consumers to fasten their wallets in the short-term, it is expected to substantially strengthen and diversify government revenues in the coming years. “The UAE economy has been adapting well to a prolonged decline in oil prices since 2014. A gradual recovery in nonoil activity is under way,” said Natalia Tamirisa, Assistant to the Director of the Research Department at the International Monetary Fund. “Inflation is projected at 3.5 per cent this year owing to the
32
Moody’s forecasts GDP growth of
2.2% 2018 2.9 % 2019 in
and
in
introduction of the value-added tax and should ease afterwards. The fiscal deficit is expected to remain stable at about 1.6 per cent of GDP this year and turn to a surplus next year. The current account surplus will exceed seven per cent of GDP this year.” Abu Dhabi’s authorities also plan to issue domestic bonds in 2019 for the first time. In October last year, the UAE federal government issued a law permitting the issuance of sovereign debt. This legal framework could pave the way for other emirates to issue their own domestic bonds. “Given large fiscal buffers, ample spare capacity, and rising investment needs for Expo 2020, the Government has appropriately switched to providing stimulus to the economy,” said Tamirisa. “Front-loading stimulus measures and focusing them on productive spending, consistent with the Vision 2021 goals of diversifying the economy and raising productivity, would augment their impact on growth. “Over the medium term, as the economic recovery gains momentum, a return to the path of gradual fiscal consolidation would help save an adequate portion of the exhaustible oil income for future generations.” EMERGING OPPORTUNITIES Looking further ahead, the Dubai Chamber of Commerce and Industry is optimistic that things will stay on the up. In a recent analysis, it forecast that the UAE will achieve an average real GDP growth rate of 3.8 per cent between 2019 and 2023, supported by an increased investment and higher consumer spending. The outlook for the non-oil sector is also brighter than in recent years; the analysis predicted that it will grow by an average of 4.1 per cent between 2019-2023, compared to the 2.8 per cent per cent accounted for in the 2014-2018 period.
The chamber thinks that the UAE’s GDP growth over the next five years will be driven by the country’s transport and communication sector, which is set to record GDP growth of 7.9 per cent, followed by construction (4.2 per cent), and real estate and business services (3.8 per cent). Recent measures to reduce the cost of doing business in the UAE are also expected to cultivate more small businesses. While the global economy may have peaked, the pockets of the world intrinsic to the UAE’s export market are forecast to fire on all cylinders. Emerging markets are expected to see average real GDP growth of 4.8 per cent between 2019 and 2023, outperforming advanced economies and the global average, which the IMF puts at 3.7 per cent. Emerging markets in Asia, Sub-Sahara Africa, and the Commonwealth of Independent States (CIS) are expected to outperform the rest of the world over the next five years, with real GDP growth projections of 6.1 per cent, 4.1 per cent, and 4.1 per cent, respectively. Latin America’s economic recovery is set to continue in the medium term, with the region’s real GDP growth forecast to reach 2.9 per cent over the same period, supported an improving outlook for Brazil and Argentina. Happily for the UAE, the Middle East and North Africa accounts for the largest share of Dubai’s exports (41 per cent), followed by ‘Emerging Asia’ with 26 per cent, Sub-Sahara Africa (18 per cent), CIS (one per cent) and Latin America (0.8 per cent), trade data for the first nine months of 2018 revealed. Chemicals and allied products was the top-performing product category for Dubai’s exports to Asia, which includes perfumes and cosmetics, and fluorides of aluminium. Within Sub-Sahara Africa and Latin America, wood pulp and paperboard was the top category for Dubai exports, while vegetable oils dominated the emirate’s exports to the CIS region.
THE INTRODUCTION OF VAT IN 2018 WAS A HISTORIC MILESTONE; AND, WHILE IT MIGHT ENCOURAGE CONSUMERS TO FASTEN THEIR WALLETS IN THE SHORT-TERM, IT IS EXPECTED TO SUBSTANTIALLY STRENGTHEN AND DIVERSIFY GOVERNMENT REVENUES IN THE COMING YEARS. — IMF
BOLSTERING BANKS The UAE’s banks are also in a strong position for 2019, with the recovering economy expected to nourish their balance sheets. In S&P’s view, liquidity in the banking sector has improved, banks are adequately capitalised and enjoy strong profitability. “The banks’ financial situation should allow them to absorb the recent uptick in nonperforming loans in the small and midsize enterprise and retail sectors,” the rating agency said. Moody’s has kept its outlook on the UAE banking system at stable, which the rating agency says reflects the banks’ strong capital, resilient profitability and solid funding. “Loan performance will progressively stabilise, as the recovering economy and the resilience of large borrowers will offset ongoing problem loan formation among small and mid-sized businesses and individual borrowers,” said Mik Kabeya, Assistant Vice President at Moody’s. Strong capital levels provide a large, loss-absorbing buffer for the UAE’s banks. Moody’s expects strengthening profitability to support capital levels, with sector-wide tangible common equity at 14 per cent to 15 per cent of risk-weighted assets over the next 12 to 18 months. Profitability will improve slightly as rising interest rates support net interest margins, the rating agency said. As banks raise their lending rates, their higher loan yields will moderately outweigh the higher rates they will need to pay on deposits. In addition operating expenses will remain broadly stable, and loan-loss provisioning will gradually stabilise as the economy recovers. Higher oil prices will continue to support solid funding and liquidity. “UAE banks will remain primarily depositfunded, with only a moderate need to turn to confidence-sensitive capital markets,” said Kabeya. “UAE banks have sufficient liquidity headroom to accommodate a pick-up in credit growth.”
bankerme.net
33
COUNTRY FOCUS
The UAE’s Islamic banks are also showing healthy growth. Assets of Islamic banks operating in the UAE amounted to AED 565 billion at the end of H1 2018, a 6.7 per cent growth from a year earlier, according to CBUAE figures. UAE Islamic banking assets accounted for 20.55 per cent of total bank assets in the country valued at AED 2.749 trillion, at the end of June 2018. This is an encouraging sign in a country aiming to derive 10 per cent of its GDP from the Islamic economy by 2021. It isn’t far off. In 2018, the Islamic economy accounted for 8.3 per cent of Dubai’s GDP and the Halal industry accounted for 5.8 per cent of the total trade volume in Dubai, according to the Dubai Statistics Centre. WORLDLY WOES However, in the absence of a fair wind blowing from the global market, the UAE will be navigating some fairly choppy waters in 2019. Dubai is very much a global city, and manufacturing, trade, transport and tourism dynamics will continue to be influenced by global and regional developments, which remain subject to uncertainty. According to the World Bank, coping with these developments requires a combination of flexible markets, policies and fiscal buffers. Outbreaks of trade protectionism, headwinds to banking sector activities and regional instability all threaten to weaken trade and asset prices. These risks are particularly relevant for Dubai given its role as a major trade, financial, and logistics centre. A faster rise in US interest rates or higher financial market volatility could increase borrowing costs for banks and Government Related Entities (GREs), while the Expo 2020 risks overcapacity, inflated property prices and debt, the World Bank warned. Large investment projects, if not implemented prudently, may create additional macro-financial risks for GREs and banks, most of which are government-owned.
34
In 2018, the Islamic economy accounted for
8.3% of Dubai’s GDP
However, according to the World Bank, the main economic challenge confronting the UAE relates to the country’s ability to adapt its successful diversification model to increasing competition among services hubs. The UAE’s private sector is still dominated by expats, despite exhaustive Emiratisation programmes. Education and labour market reforms have only just scratched the surface, and there is still much work to be done. “Improving medium-term growth and job prospects and advancing to a competitive knowledge-based economy require deepening and broadening structural reforms aimed at increasing the role of the private sector and fostering talent and innovation,” agreed Tamirisa.
“Other reform priorities include promoting competition, privatising nonstrategic government-related enterprises (GREs), and improving the ecosystem for SME development and access to finance. “In particular, developing domestic government debt markets would catalyse financial market development and expand sources of financing for SMEs. Enhancing the quality of education and healthcare and promoting gender equality would cultivate talent.” While higher oil prices have given the UAE’s economy some breathing room, it can’t afford to be complacent. The IMF has warned that tightening financial conditions and increased global and regional uncertainty call for continued vigilance in monitoring financial sector risks, including those from a downturn in real estate and concentrated loan portfolios. “Continued improvement of economic policy frameworks and coordination, and enhancing statistics would help align policies with the Vision 2021 goals for non-oil growth and further diversification of the economy,” said Tamirisa. “Stronger fiscal anchors would help mitigate the impact of adverse shocks on the economy while ensuring long-term growth, debt sustainability and saving for future generations. “Better monitoring and analysis of contingent fiscal liabilities stemming from GRE borrowing, delays in payments, and public-private partnerships, would help mitigate risks. Further improvements in the frequency and quality of economic statistics would support policy-making and inform business decisions.” When the books were closed on 2018 it looked like a pretty good year for the global economy; however, the fault lines have been drawn and opinion is divided on when and where the cracks will show. What is known is that the UAE has the economic armoury needed to meet a new financial year, and all the risks that accompany it, with confidence.
UAE in numbers POPULATION
9.6 million
1m
10m
GDP NOMINAL GDP
$258 billion (2018) Source: Standard & Poor’s
REAL GDP GROWTH
REVENUE/GDP
GDP PER CAPITA GROWTH
2.6% (2016) -0.5% (2017) 1.5% (2018) 2.0% (2019 – projected)
3.89% (2016) 9.1% (2017) 9.6% (2018) 8.2% (2019 – projected)
Source: Standard & Poor’s
Source: Standard & Poor’s
FISCAL INDICATORS
OIL
CURRENT ACCOUNT BALANCE
EXPORTS OF OIL
3% (2016) 0.8% (2017) 2.9% (2018) 3.7% (2019 – projected)
$13.2 billion (2016) $26.5 billion (2017) $30.5 billion (2018) $35.9 billion (2019 – projected)
$46.5 billion $58.1 billion $75.4 billion $84.9 billion
Source: IMF
Source: IMF
Source: IMF
GDP PER CAPITA (000s)
DEBT/GDP
AVERAGE CRUDE OIL EXPORT PRICE
71.2 (2016) 74.6 (2017) 81.7 (2018) 78.5 (2019)
0.4% (2016) 0.5% (2017) 0.8% (2018) 0.9% (2019 – projected)
$44 billion (2016) $54.4 billion (2017) $71.9 billion (2018) $72.3 billion (2019 – projected)
Source: Standard & Poor’s
Source: Standard & Poor’s
Source: IMF
REAL NONOIL GDP (as percentage of GDP)
CRUDE OIL PRODUCTION (in millions of barrels per day)
3.2% (2016) 2.9% (2018) 2.5% (2017) 3.9% (2019 – projected)
3.0 (2016) 3.0 (2018) 2.9 (2017) 3.1 (2019 – projected)
Source: IMF
Source: IMF
bankerme.net
35
DEBT CAPITAL MARKET
INVESTORS SHOULD VALUE FUNDAMENTALS OVER HEADLINE RISKS A commentary by Mohammed Khnifer, a debt capital markets professional at a supranational banking institution, following Saudi Arabia’s $7.5 billion bond issuance
S
ukuk and conventional financing share the same features that could make them vulnerable to global factors. One thing to note is that international investors should consider economic fundamentals over the headline risks that spur from the Middle East. In our region, active portfolio managers, who are on the ground, would tend to benefit more than the passive one (this is due to the fact most new investors to our region can easily be moved by negative sentiments and geopolitical risk). And when that happens, we can see “smart money” coming in and picking up certain GCC bonds or Sukuk at great value. Such “great values” can also been seen in the primary market too. In January 2019, Saudi Arabia surprised emerging markets with a bond sale of over $7 billion (with premium of 20 to 30 bps over the 10 years tranche). Despite the negative media coverage in the early hours of the issuance and the pressure that was put on investors, Saudi Arabia lured in a whopping $27.5 billion in orders.
36
Mohammed Khnifer
Foreign investors bought almost 97 per cent of the issuance. Indeed, the sheer number of foreign investors speaks volumes about the strong economic fundamentals of the issuer who closed the trade in less than seven hours—a potential market record for emerging markets. Geographical distribution for Tranche 1 (bond due in 2029): US – 40 per cent; UK – 26 per cent; Asia – 18 per cent; Europe – 13 per cent; and Middle East three per cent. Geographical distribution for Tranche 2 (note due in 2050): US – 45 per cent; UK – 23 per cent; Asia – 17 per cent; Europe – 13 per cent; and Middle East – two per cent. 2018 OVERVIEW Bond and Sukuk issuance in the GCC totalled at $77 billion as of 10 December 2018, down from $85 billion in the prioryear, according to data from Emirates NBD. Some GCC securities (worth nearly $340 billion) would benefit from the gradual inclusion by end of January 2019 to JP Morgan Emerging Market Bond Index. The Middle East’s share of global emerging markets issuance climbed from 12.5 per cent to 14.8 per cent by end of 2018.
IN OUR REGION, ACTIVE PORTFOLIO MANAGERS, WHO ARE ON THE GROUND, WOULD TEND TO BENEFIT MORE THAN THE PASSIVE ONE (THIS IS DUE TO THE FACT MOST NEW INVESTORS TO OUR REGION CAN EASILY BE MOVED BY NEGATIVE SENTIMENTS AND GEOPOLITICAL RISK). AND WHEN THAT HAPPENS, WE CAN SEE “SMART MONEY” COMING IN AND PICKING UP CERTAIN GCC BONDS OR SUKUK AT GREAT VALUE.
LOWER SUKUK VOLUMES If the oil price falls, and stays below $55 for a sustained period, higher Sukuk issuances are expected from GCC sovereigns, says S&P
S
ukuk issuances in 2018 totalled at approximately $114.8 billion, with $91.4 billion in new issuances. This was a slight decline from $120.6 billion recorded in 2017. A recent report from S&P highlighted that this decrease was more visible in foreign currency Sukuk issuances (drop of 15.1 per cent), primarily in US dollars. The marked drop in issuance in Saudi Arabia and Qatar were partly offset by issuances from the Central Bank of Kuwait and a hike in private-sector issuances in the United Arab Emirates (UAE). Activity in Malaysia and to a lesser extent Indonesia continued to support the market, contributing collectively to around 52 per cent of new issuance in 2018. Issuers in Turkey also stepped up their issuances to diversify their investor bases amid substantial reliance on external debt and reduced access to global capital markets in the second half of the year. Tightening liquidity conditions worldwide, high geopolitical risks in the Middle East, and challenges inherent to Sukuk issuance will likely dampen Sukuk market performance in 2019. S&P anticipates total issuance of $105 billion-$115 billion ($28 billion-$32 billion for foreign currency issuances and $85 billion-$95 billion excluding reopening of instruments) this year. Nevertheless, we expect higher demand for funding in most GCC countries, given our reduced oil price assumptions.
FACTORS INFLUENCING MARKET DEVELOPMENTS Sukuk issuances from Kuwait, the UAE, and Turkey helped the market avoid a steeper decline last year. For example, Kuwait’s central bank started to offer Sukuk as liquidity management instruments for domestic Islamic banks. And, in the UAE, private-sector issuers frontloaded some of their issuances to face upcoming maturities, in anticipation of less supportive market conditions. There are however, several reasons why S&P expects overall issuance volume to be subdued this year.
Global liquidit y tightening will continue, and the economic cycle could turn downward European and US-based investors generally account for around one-quarter to one-third of Sukuk holders. S&P expects major central banks to continue to close the liquidity tap this year, albeit gradually, leaving investors with less funding to invest in Sukuk. Issuers’ cost of funding will keep rising, and liquidity from developed markets channelled to the Sukuk market will continue to reduce and become more expensive. Investors are also concerned about the economic cycle after a long period of expansion. At some point, the cycle will turn and investors will become more risk averse. Moreover, liquidity conditions in the GCC improved in 2018, but appear uncertain in 2019. The research and ratings agency assume oil prices will remain flat at $55 in 2019 and beyond.
SUKUK MARKETS DIPPED IN 2018
Reopening
Issuance (excl. reopening)
Source: S&P Global Ratings, Elkon Copyright © 2019 by Standard & Poor's Financial Services LLC. All rights reserved.
bankerme.net
37
DEBT CAPITAL MARKET
We base our Sukuk issuance forecasts on these assumptions. However, oil prices can be extremely volatile and represent upside and downside risks to our forecast. The trend of reopening Sukuk supports their base-case forecasts. These are issuances under unlimited local currency programmes, which were reserved to a few Asian countries in the past. From 2018, Saudi Arabia not only joined this category of issuers but also raised $11.3 billion under this scheme. HIGH GEOPOLITICAL RISK IS THE NEW NORMAL Heightening geopolitical tensions in the region came back on investors’ radar over the past 18 months. It started with the boycott of Qatar in early June 2017 by a group of Arab states, which, in S&P’s view, has reduced the cohesiveness of the GCC countries and complicated policy predictability. Developments in Saudi Arabia have also attracted investors’ attention. Additionally, the reinstatement of US sanctions on Iran and continued animosity between Iran and some of its GCC neighbours are not helping investors’ perception of risks. The potential de-escalation of hostilities in some countries in the region could help reduce concerns over the next 12 months. OIL PRICES WILL CONTINUE TO DRIVE MUCH OF THE GCC’S FINANCING NEEDS S&P expects the Brent oil price to average $55 per barrel in 2019. Financing needs in the GCC are likely to increase this year, given that the oil price is lower than last year. However, many private-sector issuers in the GCC issued Sukuk in 2018 to refinance upcoming maturities and prepare for more stressed capital market environments. The complexity related to Sukuk issuance might push some issuers to relegate Sukuk issuance to second place. Overall, the volume of issuances from the GCC is likely to be flat.
38
FOREIGN CURRENCY SUKUK ISSUANCE SHOWED A STEEPER DECLINE
U.S. dollar sukuk issuance Source: S&P Global Ratings, Eikon Copyright © 2019 by Standard & Poor's Financial Services LLC. All rights reserved.
THE DANA GAS CASE ACTED AS A WAKE-UP CALL FOR INVESTORS AND PUT THE STANDARDISATION DEBATE BACK AT THE TOP OF THE AGENDA FOR STANDARD SETTERS AND POLICYMAKERS. — S&P
A COMPLEX BARRIER Sukuk standard-setting bodies agreed in the last quarter of 2018 to work together to devise a smoother issuance process. While this is a significant development, realising this goal is still far off. Ideally, the process for Sukuk issuance should be as easy as that for issuing a conventional bond. Standard legal documents and standard Shari’ah rulings, allowing the issuer to plug in an underlying asset and tap the market, should become the norm, in our view.
Today, and for the foreseeable future, the Sukuk issuance process remains more complex than for conventional bonds, where issuers need to go through several additional steps such as identifying an underlying asset, choosing the best suitable structure, and putting together lengthy legal documents. The Dana Gas case acted as a wake-up call for investors and put the standardisation debate back at the top of the agenda for standard setters and policymakers. Dana Gas reportedly defaulted on its Sukuk, alleging a lack of Shari’ah compliance, which triggered lawsuits in the UK (the court rulings were in favour of Sukuk holders) and in Sharjah. In the end, holders of Dana Gas’ Sukuk decided to settle with Dana Gas rather than try to enforce the UK judgement in Sharjah. Among other things, the Dana Gas case illustrates the potential issues that arise when trying to enforce foreign judgments in local jurisdictions, especially when Shari’ah is the ultimate source of the law. We think the standard setters will keep that in mind as they strive toward greater standardisation.
THE GEOGRAPHIC DISTRIBUTION REMAINED FAIRLY STABLE
Other countries
Other Asia
Malaysia
GCC countries
— S&P
Source: S&P Global Ratings, Eikon Copyright © 2019 by Standard & Poor's Financial Services LLC. All rights reserved.
For instance, the Accounting and Auditing organisation for Islamic Financial Institutions (AAOIFI) published an exposure draft on Sukuk governance in December 2018 that included provisions to protect investors in case a Sukuk is terminated. STANDARDISATION Standardised Shari’ah requirements could prevent potential uncertainty on compliance after a transaction closes and is therefore crucial in helping investors better understand the risks involved. Similarly, standard legal documentation provide clarity for investors on the recourse options available in the event of a default of a conventional bond. This is still lacking in Islamic finance. The Islamic finance market has achieved a certain level of standardisation for the most common structures, while a few new instruments still need some refinements. Investors are particularly asking for additional clarity on the risks attached to the Murabahah-Mudarabah structure that is widely used in some jurisdictions.
S&P anticipates total Sukuk issuance of
$105 $115
TIGHTENING LIQUIDITY CONDITIONS WORLDWIDE, HIGH GEOPOLITICAL RISKS IN THE MIDDLE EAST, AND CHALLENGES INHERENT TO SUKUK ISSUANCE WILL LIKELY DAMPEN SUKUK MARKET PERFORMANCE IN 2019.
billion
to
billion
this year
In our view, standardisation for crossborder Sukuk issuance is not only achievable but will also boost issuance volumes. It will restore the attractiveness of the instrument to issuers through a smoother, faster issuance process and increased clarity on the underlying risks for investors. The use of fintech could also support this agenda. Blockchain and smart contracts could improve the traceability of cash flows and assets. Smart contracts could facilitate outof-court resolution in a pre-agreed way from the onset of the transaction.
DEEPENING LOCAL CAPITAL MARKETS The absence of broad and deep capital markets in the GCC is a weakness, and some authorities have started to tackle it. The UAE is an example where the authorities have brought together capital market participants to come up with a plan to develop a broad local-currency Sukuk market. S&P asserts that the recipe for success consists of greater standardisation for Shari’ah interpretation and legal documents (possibly endorsed by a regulator) that offers incentives to Sukuk issuers. In Malaysia, for example, issuers benefit from tax relief if they choose the Sukuk route. In the absence of corporate income tax in UAE, the authorities could envisage other types of incentives, such as requiring Islamic financing for specific government projects or waiving other government levies if the financing instrument is Sukuk. Authorities have also started to address the challenge of standardisation requiring the adoption of AAOIFI’s Shari’ah standards and establishing a high Shari’ah authority. Coming up with a set of capitalmarket-authority preapproved legal documents could be the next step.
bankerme.net
39
IN DEPTH
FINANCIAL INCLUSION AND THE FUTURE OF FINTECH IN THE MIDDLE EAST By Sael Al Warry, Deputy Group CEO of Bank ABC and Chairman of Arab Financial Services
B
anking is about trust. I often think back to the global financial crash in 2008. Not simply in terms of the shock to the markets, a big rise in national debt, and an estimated lost growth of over $10 trillion (between 15-20 per cent of global GDP in 2008), but the long-term impacts to the banking industry, our clients and our societies. Trust in the banking sector has worsened over time. Rather than complain about the challenges, we must imagine our future, and innovate. In the Middle East, Bahrain is well placed to achieve this with fintech. The Central Bank of Bahrain h a s ch a m p i o n e d o p e n b a n k i n g as well as promoting a cashless economy through digital wallets. Working together, we want to support those who may have been left behind. Strategically it makes sense to build sustainable economic development. And commercially, it is smart too, as it will increase revenue potential in our emerging markets.
40
Sael Al Warry
Bahrain’s existing fintech ecosystem benefits from various accelerators and bespoke government support for start-ups. For example, take the Central Bank of Bahrain (CBB), which boasts a purpose-built fintech regulation and innovation unit, including a regulatory sandbox, which provides a testbed
for fintech start-ups, and has enabled an enhanced banking experience for customers throughout the Kingdom through open banking initiatives. Bahrain Fintech Bay (BFB), the largest dedicated fintech hub in the region (Bank ABC is one of its 30 backers) is propelling the development of Bahrain as the fintech gateway to the region and quickly surpassing many other global challenger s. Bahrain’s ambitious digital strategy, evidenced by bold, progressive moves such as the rollout of a ‘cloud first’ policy cements this position. It means we operate in a savvy market that is receptive to new technologies. Inclusion through innovation is at the heart of our strategy. We must constantly challenge ourselves to continue evolving and innovating. Can we use biometric technology to ensure that online banking services are made available to the unbanked? Can we leverage the increasing internet penetration and wide proliferation of mobile phones in even the
Bahrain’s ambitious digital strategy, evidenced by bold, progressive moves such as the rollout of a ‘cloud first’ policy cements its position. (CREDIT: DEEPAKT SUDHAKARAN/SHUTTERSTOCK)
THE CENTRAL BANK OF BAHRAIN (CBB), WHICH BOASTS A PURPOSEBUILT FINTECH REGULATION AND INNOVATION UNIT, INCLUDING A REGULATORY SANDBOX, WHICH PROVIDES A TESTBED FOR FINTECH START-UPS, AND HAS ENABLED AN ENHANCED BANKING EXPERIENCE FOR CUSTOMERS THROUGH KINGDOM THROUGH OPEN BANKING INITIATIVES. — Sael Al Warry
most rural of areas to introduce mobile money wallets? And can we increase international cooperation and informationsharing, so that we can provide no-frills bank accounts and credit to all? Regionally we have a generation of young entrepreneurs in the Middle East and North Africa who dream of success. Innovation in banking can help this generation realise their dreams. How can we innovate our approach to data sharing so that the API economy can empower these entrepreneurs? As big banks, can we be agile enough to drive innovation, focus on customers, and facilitate the next fintech unicorn?
Globally more than
1.7
billion adults remain unbanked, and many more are underserved by their banks
In corporate banking, fintech innovations such as faster interbank capital transfers, more access and sharing of financial data, and committing to global standards for interbank payments-related communications such as ISO 20022, will help rebuild trust in the banking sector, regenerate economies, and reassert the region as a leader in banking globally. Our 3rd Middle East and Africa FinTech Forum takes place in Bahrain on 21st February 2019, and financial inclusion is a central theme. For me, this the is pillar on which the future of our industry will be built, and the means by which it is already changing beyond recognition. We will have regulators from across the Middle East and Africa, industry leaders and some of the most innovative thinkers from around the world. Together we will imagine how fintech innovations can improve financial inclusion at all of these levels, and integrate regional and global solutions for all.
On inclusion, we have achieved a great deal but there is so much more to achieve. Globally, more than 1.7 billion adults remain unbanked, and many more are underserved by their banks. Yet we see the advances in artificial intelligence disrupting banking. The rise of open banking frameworks means that financial data can be shared and used in ways never seen before. Individuals and businesses will have new means of controlling their finances that are better integrated with other aspects of their existence. At our 3rd FinTech Forum in February, Financial inclusion is at the heart of our Fintech approach. To succeed in this journey, as leaders, we need imagination. What will the communities and cities of the future look like? How will we, as an industry, harness technology to meet the changing needs of the people and businesses of tomorrow? And how will the young think of institutions like ours? We have the power, today, to change the story of the future.
bankerme.net
41
IN DEPTH
A NEW HORIZON An exclusive with Dr. Simon Galpin, Managing Director of the Bahrain Economic Development Board (EDB), on the Kingdom’s initiatives for a sustainable future
B
ahrain has endured quite a challenging couple of years. How would you describe the economic development of the Kingdom this year? 2017 has clearly been a year of transition for the Bahrain economy, but we are now on a firmer footing with a clear plan for the future. The ongoing reforms will enable robust and sustainable growth, with investments from the private sector being a key driver of such growth. This is why it is so pleasing that 2017 was a record year for the Bahrain Economic Development Board (EDB) as we attracted $733 million of Foreign Direct Investment (FDI). In the first nine months of 2018, FDI inflows increased by 138 per cent with $810 million, when compared to the same period of last year. Additionally, in only the first nine months, the EDB has already attracted a total of 76 companies, breaking the 2017 record of 71 companies.
42
Dr. Simon Galpin
Investments in 2018 are expected to generate more than 4,200 jobs over the coming three years, of which more than 1,100 will be high quality jobs (defined as providing a basic monthly salary of more than $1,850). The FDI attracted in the first nine months of 2018 was more than five times of the total attracted in 2015. This strong growth
has come despite a challenging global environment for FDI, with global FDI flows falling 23 per cent in 2017. The investments cover all sectors, but with particular focuses on manufacturing and logistics which account for the majority of investment with 31 companies including Ariston Thermo and Mueller. In addition, a total of 15 companies were attracted in tourism, real estate, education & healthcare, ICT and financial services. Some of which include Al Sahel Resort, Flat6labs, Nest, Bank of Jordan, NFT Ventures, and Thales. For example, in a continued effort to promote investment opportunities from across the world, the EDB led a high-level delegation focusing on trade and investment to India this month. We signed a Memorandum of Understanding (MoU) with the Maharashtra Government during the visit. This MoU is in line with the EDB’s
(CREDIT: DEEPAKT SUDHAKARAN/SHUTTERSTOCK)
WE HAVE SEEN A VERY STRONG PERIOD OF GROWTH IN FDI IN BAHRAIN OVER THE PAST FEW YEARS AND THE BROADER PROGRAMME OF REGULATORY DEVELOPMENT HAS BEEN AN ESSENTIAL ENABLER OF THAT. — Dr. Simon Galpin
aims of exploring greater synergies between India and Bahrain in the financial technology space and will last for an initial period of three years. This strategic partnership will introduce innovations that will further strengthen the landscape of the fintech industry in Bahrain, which is widely regarded as the financial sector’s future. Bahrain used to be one of the main financial services centres in the region. What are the government’s initiatives in raising Bahrain’s profile again as the financial centre of choice for investment? Bahrain is still the largest financial centre in the GCC and it continues to expand with increased levels of employment and investment. Perhaps most importantly, we are a country defined by ambitious digital transformation. Transformation that includes the disruption of traditional financial services.
In the first
9 2018 138% $810 months of
FDI inflows increased by
with
million compared to the same period last year
For example, the development of Bahrain’s fintech ecosystem has been a top priority and this builds upon Bahrain’s position as a leading and established financial services hub. Bahrain has been committed to introduce and improve both the regulatory framework and supportive environment needed by startups and existing companies to grow and succeed. Earlier this year, we saw the launch of the Al Waha $100 million Fund of Funds by Bahrain Development Bank. Also, Bahrain FinTech Bay, the region’s largest and first fintech accelerator was launched earlier this year and a perfect example of what we call our ‘Team Bahrain’ approach—a successful economic model of publicprivate sector collaboration. The collaborative approach between the Government and private sector as illustrated by Bahrain FinTech Bay, has been instrumental to the advancement of the fintech activities in Bahrain.
bankerme.net
43
IN DEPTH
Last year, the Central Bank of Bahrain established a fintech unit that has shaped a pro-innovation regulatory framework and the region’s only onshore Regulatory Sandbox. The Sandbox is a virtual space where start-ups or larger businesses can test their innovations before going into the market. The Central Bank of Bahrain (CBB) has also issued for consultation the draft rules on ‘open banking’, which is a positive step towards growing and upgrading the financial services sector in Bahrain. Just this week, the CBB announced their first graduate from the Sandbox, Tarabut Gateway, which will allow customers to access all their bank accounts across different banks on a single platform. Tarabut is in accordance with the open banking regulations and it is worth noting that such platforms are amongst the latest fintech trends. Currently, financial services accounts for around 17 per cent of Bahrain’s GDP and we are confident that the Kingdom will continue to strengthen its position as a financial services leader, regionally and globally while preparing for a future in which technology is going to make a bigger impact. What initiatives are in place to improve the business environment and encourage foreign direct investment into the country? We have seen a very strong period of growth in FDI in Bahrain over the past few years and the broader programme of regulatory development has been an essential enabler of that. However, we know that to maintain that growth, we need to continue to innovate. The Kingdom’s recent introduction of multiple regulatory reforms will ensure that we remain competitive and business friendly. These reforms will address a range of issues and will have a particularly strong impact on the Kingdom’s economy and its growing start-up ecosystem. The laws come as part of a wider development effort, designed to create new opportunities for investors looking to
44
OUR FLEXIBLE ECONOMY, AGILE GOVERNMENT AND HIGHLY EDUCATED WORKFORCE ARE KEY FOUNDATIONS FOR EMBRACING ECONOMIC OPPORTUNITIES AND WILL ALSO HELP ENSURE THAT BAHRAIN OVERCOMES ANY CHALLENGES TO ITS ECONOMY IN THE FUTURE. — Dr. Simon Galpin, Managing Director of the Bahrain Economic Development Board access the Bahraini market. Government initiatives implemented in recent years have helped spur strong growth in FDI. The four laws recently implemented are: • Personal Data Protection Law – Bahrain has introduced a nationwide data protection law, supporting the development of the Kingdom’s digital economy. • Competition Law – facilit ates innovation as well as increasing productivit y and efficiency by introducing legislation to prevent the formation of monopolies or the practise of anti-competitive behaviour. • B a n k r u p t c y L a w – e n a b l e s experimentation and innovation by businesses and improves the outcomes of the bankruptcy process for all parties. • Health Insurance Law – promotes an integrated health system for Bahrain, based on a sustainable financing system that supports and attracts investment in both the health care and insurance industries. Bahrain has a long track record as a regional pioneer, and these new laws underline how important it is for us to maintain that culture of innovation. Looking at 2019, what challenges do you foresee for Bahrain’s economic and financial sector? The global financial sector continues to face a number of challenges, including rising compliance costs, heightened regulatory scrutiny and disruptive technologies dramatically increasing competition. Bahrain’s financial sector faces the same challenges, but we are well positioned to meet them. Our flexible economy, agile
government and highly educated workforce are key foundations for embracing economic opportunities and will also help ensure that Bahrain overcomes any challenges to its economy in the future. What are your projections for the year and where do you see opportunities? We are very excited to see the impact of recent economic and regulatory reforms, which will help improve the operating environment for existing industries as well as open-up new opportunities. The Kingdom’s future prosperity depends on growth driven by higher productivity and on embracing the new industries that are growing stronger every day. Among the most prominent developments during 2018 has been the development of the fintech ecosystem, with the launch of Bahrain FinTech Bay and the CBB’s regulatory sandbox where we are seeing growing interest in both from around the world, as well as the $100 million Fund of Funds to help fund startups across the Middle East. Therefore, we see huge growth potential for fintech in the coming year along with events around Blockchain solutions, regtech and insurtech. The Kingdom also saw several major investment announcements earlier this year during the Gateway Gulf Investor Forum, which brought together over 850 global investors and business leaders to explore ways of unlocking the opportunities being created by the economic transformation in the GCC. We expect even more investment to be secured thanks to Bahrain’s position as an entry-point to the wider GCC, especially as we provide an ideal testbed for new technologies.
Register for our daily newsletter
The business of banking www.bankerme.net
TECHNOLOGY
Data is today’s fuel for tomorrow’s insights. (CREDIT: SDECORET/SHUTTERSTOCK)
INTRODUCING THE DIGITAL CFO Rekha Talluri, Finance Director at Microsoft Middle East and Africa, talks about the shift from data crunching to strategic decision making
I
Rekha Talluri
46
t would be a mistake to think of industrial revolutions as fads. They are not. Neither are they passing fancies, flashes in the pan or any other short-term phenomena. No, industrial revolutions, including our very own Fourth Industrial Revolution (4IR), are nothing less than pages in history—massive upheavals in which the fundamentals of life are transformed forever, only to be transformed again by the next revolution. Daily routines change; priorities change; roles change. In the Fourth Industrial Revolution—as post-crunch enterprises, including those in the Middle East, have tried doing more with less—the role of the chief financial officer has morphed from accounting overseer to business-development
innovator. Of course, discovering new revenue streams and reducing costs were always in the CFO’s domain. But emerging from the 4IR fire is a new focus: that of a strategist in charge of technology procurement and how it can enable improved financial analysis and reporting, strategy and forecasting, business process automation and risk management. ROLE OVER Some 39 per cent of IT organisations now report to the CFO, so finance executives must get to grips with technology and assume responsibility for the protection of data and networks. In the Middle East, we see this every day. CFOs search for ways to gain control of IT costs and look to digital transformation to engage customers, empower employees, optimise operations and reinvent business models. This is exactly the kind of innovation now expected of these former accountants or financial analysts. The cloud plays a huge part in their journey, allowing them to plan and structure technology costs and provide high standards of encryption and perimeter defence. Expansion of line-of-business capabilities through cloud-based applications is more predictable and less fraught with risk. The building of staging environments to test new tools prior to deployment; subscription models that convert capital expenditures to operational models; advanced analytics and pattern detection that police networks looking for malicious behaviour; and many other cost-saving measures stemming directly from the cloud applications themselves—these are the benefits that the digital CFO seeks. Let’s look at some specifics. ACTIONABLE INTELLIGENCE Data is today’s fuel for tomorrow’s insights. Digital natives, new device
technology can anticipate business needs, and stay ahead of costly maintenance and business downtime, turning finance professionals from monitors into stewards.
THE MAMMOTH SCALE OF THE DATA LAKES REQUIRES THAT THESE ANALYTICS TOOLS BE HIGHLY SCALABLE, AND THE DIGITAL CFO NEEDS TO BE AWARE OF THAT. — Rekha Talluri
categories and IoT sensors create it; warehouses consolidate and homogenise it; and advanced, cloudbased analytics applications use it, to monitor, predict, advise and optimise. Visually rich dashboards are now standard tools for today’s CFOs, who are orders of magnitude better informed than their digitally bereft predecessors. This leads to real-time, intelligent decision-making, streaming from the intelligent cloud. The mammoth scale of the data lakes requires that these analytics tools be highly scalable, and the digital CFO needs to be aware of that. They also need to demand intuitive interfaces and the highest standard of security from applications. The latest generation of business
RISK MANAGEMENT Single, integrated views into their organisations allow digital CFOs to identify, assess and remedy potential issues, rather than wait for disruption. As any firefighter or doctor will tell you, prevention beats cure. For today’s CFO, the corporate equivalent of an earthquake or flood is a cyberattack. By now, everyone is familiar with the spinetingling tales of infrastructure collapse or suspension of business operations caused by DDoS, ransomware, APTs and the like. The digital CFO’s predecessors were like sheriffs in a lawless land, facing an onslaught that seemed unstoppable without huge capital outlays. Not so under the cloud paradigm, where cloud providers invest billions each year in cutting-edge cybersecurity (Microsoft alone invests $1 billion annually), to ensure that CFOs do not have to face the thorny trade-offs of yesteryear. Security is stitched into every layer of architecture and, as with everything else that resides in the cloud, costs drop because of operational models. OPPORTUNITY KNOCKS Today’s sales teams can be mobile, work from anywhere and generate leads, without concern that sensitive info will be compromised with the help of cloud based advanced security controls. The information generated through this activity can then be fed into applications that merge ERP and CRM, unifying global financials and operations. This empowers finance executives to elevate performance and increase profitability, while enabling sales teams to turn leads into customers and nurture relationships through actionable intelligence.
bankerme.net
47
TECHNOLOGY
OPEN BANKING: PUTTING CONSUMERS IN THE DRIVER’S SEAT By Moath Ismail, Digital Banking Director for CISMEA region at Gemalto 48
In the next
5 88%
years more than
of UAE banks plan to have fingerprint scanning,
67%
face recognition, and voice recognition is to be used by
64%
T
he UAE is well on its way to cementing itself as a leading technology hub in the region as the drive towards diversifying the economy through technology and innovation continues. Benefitting from a young, tech savvy and entrepreneurial population, Dubai and Abu Dhabi remain the destination of choice for Fintech firms. Technology-based companies have been identified as key drivers of growth, supported by an advanced technological infrastructure and governmental support, firmly positioning the UAE as a fastemerging regional hub for start-ups within the financial sector. In a bid to become part of a connected nation, customers in the UAE are becoming increasingly receptive to alternative payment methods from established technology firms such as
Apple Pay, Samsung Pay, Amazon, and Google. There are already a growing number of young people who bypass the traditional financial institutions in favour of transacting exclusively via disruptive mechanisms such as PayPal and bitcoin. This rapidly advancing technology has taught consumers to demand everyday information instantaneously and with little effort—and now consumers want more control over their money. that is where open banking comes in. As open banking increases in popularity, it is imperative that endusers are safeguarded from identity theft and data breaches. Essentially, open banking is the sharing of financial information from banks to third parties. With consent from the consumer, these third parties can
access reams of financial data, such as transaction history and spending behaviour, which was, until now, held solely by the banks. Technologies such as biometric software, government ID document readers, and identity and access management (IAM) solutions all support the secure transition from traditional to open banking interactions. Users can look forward to a secure environment, delivering identity verification, user authentication, transaction verification, and fraud prevention to create a seamless user experience, regardless of device. Machine learning, and artificial intelligence routines can be used to develop personalised authentication profiles for individuals, creating personalised authentication scenarios.
bankerme.net
49
TECHNOLOGY
Ultimately, machine learning creates a personalised risk assessment for each individual, with each authentication need. For example, if there are no suspicious activities for a given user when conducting a transaction, the individual will receive less authentication requests. The process allows a person to be identified and authenticated based on a set of recognisable and verifiable data, which are unique and specific to them, creating a more seamless and secure user experience. The provision of a secure environment is not simply a response to user requirements but is also a regulatory obligation. We have seen a sharp rise in cyberattacks and breaches, and the financial services sector is a particularly hot target given the assets it holds. And when Gemalto conducted a survey of 11,000 digital and mobile banking consumers across 14 markets, we found that, 49 per cent of UAE customers would switch their bank if their current bank had experienced a security breach and 52 per cent would switch to a provider with more rigorous measures. So, regulation calling for greater security and control is, in general, a sensible move in line with what the market is doing anyway. Biometrics remain a key part of the multi-factor authentication mix. Biometric technology as a means of authenticating identity is on the rise and form an integral part of a broader multi-factor set of authentication credentials. By this we mean that it can play the role of “something you are”, and then you need “something you know”—a passphrase, for example—and something you have, like a physical token. For many relatively low-value transactions, it may well be that a simple biometric reading alone would be sufficient, but if you hit certain thresholds you might trigger a second. In the near future, a majority of UAE banks plan to offer more biometric solutions to their customers. Within the next five years more than 88 per cent plan
50
Moath Ismail
OPEN BANKING PROVIDES AN OPPORTUNITY FOR INNOVATION IN A FAST-EVOLVING SECTOR… FINTECH START-UPS ARE ALREADY TRYING IN THIS VEIN, USING REALTIME TRANSACTION DATA TO BUILD UP A CAREFUL PROFILE OF EACH CUSTOMER AND OFFERING OTHER, SECURE, TRANSACTION OPTIONS TO CUSTOMERS. — Moath Ismail, Digital Banking Director for CISMEA region at Gemalto
to have fingerprint scanning, 67 per cent face recognition and voice recognition is to be used by 64 per cent. Iris recognition remains the most intricate method, but still an impressive 65 per cent of banks have plans to implement this. Customers are becoming increasingly demanding with increasing expectations from technology. To be truly satisfactory, the digital banking experience needs to go far beyond user friendliness and responsiveness. The expectation is not only to access core services such as bill payment and transfers but to tap into associated products and services such as loans, saving plans and investment. Open banking provides an opportunity for innovation in a fast-evolving sector. Banks are adopting an agile approach and are focused on utilising mechanisms to create a new set of customer experiences delivering no only security but convenience. Fintech start-ups are already trying in this vein, using real-time transaction data to build up a careful profile of each customer and offering other, secure, transaction options to customers. Open banking appears to offer many positives, however, regulators must be careful, as it is not without its risks. The second Payment Services Directive (PSD2) was recently implemented in Europe and is responsible for ensuring that banks adhere to rules and regulations around open banking. This was a significant move for the payments industry as access to this information will help new entrants create innovative new products and services and ultimately better serve the consumer. Here in the UAE, the Central Bank brought in similar regulations to address payment service providers (PSPs) and the adoption of digital payments across the emirates. With the transformation underway, strong authentication standards are needed to deliver the promises of open banking and a careful balance between fighting fraud and keeping consumers happy must be struck.
Temenos Infinity Customer-led solution for your digital banking transformation Our solution enables banks to innovate and accelerate delivering value to their customers throughout their lives. A cloud native, cloud agnostic seamless and personalized customer experience from acquisition through to servicing and retention.
The World’s No1 Banking Software temenos.com
NBF Trade Finance Ad_Banker ME Magazine_Eng_21x27cm.pdf
1
1/14/19
2:58 PM
Expertise to extend your reach across the globe Global trade is one of the economic lifelines of the United Arab Emirates. As the country’s best business partner of choice over 30 years and the Best Trade Finance Bank in the region, National bank of Fujairah has
developed an award-winning trade services team that provides tailored solutions to suit each client’s individual requirements.
With locations covering key strategic trade links, we facilitate cross border flows between the UAE and the rest of the world. No matter where you see your business going, we will be there with you, enhancing your competitiveness and maximizing your growth.
TRADE FINANCE CORPORATE AND INSTITUTIONAL BANKING
Call 8008NBF(623) to start our partnership nbf.ae