EconomicME Issue 1 by economicme

Issue 1 - 2015 www.economicme.com

CELEBRATING

OIL THE END OF

COME ON IN: What will it take to bring the big hitters to ADX?

DREAMING BIG: Vice Chairman of ADS talks Abu Dhabi

DELISITNG: Damas CEO on what he learned

COMPETITION: Manage the EconomicME GCC equity fund

We want to see your imagination soar as much as you do

Wherever it takes you, we can help you get there. Being first begins with you, and with us listening. Which means we can match our expertise with your instincts, so that we can provide you with exactly what you need. Personal Banking Solutions - Global Wealth Management - Business Banking Transaction Banking - Financing - Advisory - Global Markets - Islamic Solutions UAE - HONG KONG - INDIA - LIBYA - QATAR - SINGAPORE - SOUTH KOREA - UNITED KINGDOM

www.fgb.ae

ISSUE ONE

Economic ME Issue 1 - 2015

EDITOR'S LETTER Damian Reilly EDITOR damian@economicme.com

We want to start a conversation…

Registered in Creative City, UAE www.economicme.com EDITORIAL Damian Reilly Managing Editor +44 (0) 7951 929 629 damian@economicme.com SALES & MARKETING Paul McGrath Managing Director +971 (0) 50 457 4425 paul@economicme.com

FOR MORE INFORMATION AND ANALYSIS GO TO ECONOMICME.COM - THE GULF’S BEST AND NEWEST BUSINESS WEBSITE.

modernity announcing itself elcome to this the through some or other form first issue of of corporate governance EconomicME Value of Saudi crisis. Over the commagazine, the region’s stock market ing issues, we will turn only business magathe spotlight on the rezine produced entirely gion’s regulators and with the needs of the examine the efficacy of investor in mind. Coninitiatives implementcerned chiefly with the ed to govern markets – region’s listed compawhere possible making nies, we are dedicated to regulators accountable. bringing you insights from We very much hope you the men and women responenjoy this first issue and welcome sible for decision making at the your feedback. Please do take the time to highest corporate levels, or whose job it is to ensure the region’s markets are equitably share your thoughts with us – I can be contacted on damian@economicme.com. After regulated and governed. These are exciting times for Gulf econ- all, all good conversations are two-way. omies as full recovery from the global ecoThank you, nomic crisis gathers pace, while other regions see their economies stutter. Inclusion for QaDamian tar and Dubai on the MSCI Emerging Markets index has seen large volumes of liquidity enter local markets, liquidity Saudi Arabia hopes in the coming months to tap by opening itself to foreign investment through its Tadawul exchange. Not a week seems to go past in the Gulf without the struggle between tradition and

$570 bILLIOn

P.48 THE END OF THE WORLD AS WE KNOW IT? MASHREQ’S JOHN IOSSIFIDES DISCUSSES REGIONAL STABILITY.

P.36 WHERE THERE’S MUCK THERE’S BRASS? THE MENA AFFORDABLE HOMES GOLDRUSH - COME ON IN.

Issue 1 - 2015 Economic ME

Contents

EXCLUSIVE

Market maker

ADX CEO Rashed Al Balooshi talks dividends, transparency and creating an investment culture.

EXCLUSIVE

Close calls

Franklin Templeton’s Bassel Khatoun says nothing beats local knowledge for investors.

19 Renewables What will it take for alternatives to replace fossils? 24 PwC’s Gus Schellekens discusses renewables investing 28 NBAD’s Nathan Weatherstone talks new financing models for alternatives 34 EY’s Phil Gandier discusses the advent of Tadawul 36 Colliers International’s John Davis says affordable housing’s the next big Gulf opportunity

Economic ME Issue 1 - 2015

38 36

COMPETITION

Win $10,000

Take part in our inaugural Fantasy Fund Manager competition and stand a chance of winning $10,000. Share your best stock picks with us over the course of the coming year and show us how easy beating the market really is. What are you waiting for?

EXCLUSIVE

Accountable SWFs?

Mumtalakat CEO Mahmood Al Khooheji says the SWFs that will flourish over the long-term are those that embrace corporate governance best practice.

42 44 48

EXCLUSIVE

Opportunities of scale

HSBCâ&#x20AC;&#x2122;s Arindam Das discusses the sheer scale of the investment story that has opened to the world now Saudi has allowed foreign players to enter the market.

EXCLUSIVE

Cautionary tales

Damas CEO Anan Fakhreddin discusses the roller-coaster ride that saw his company fined $3m for accounting irregularities by DFM regulators and eventually delisted.

EXCLUSIVE

Trouble ahead?

Mashreqâ&#x20AC;&#x2122;s Jon Iossifidis talks about the factors that will cause the GCC member states to band closer together, threats to peace and why Dubai real estate still presents value.

FINANCE

Issue 1 - 2015 Economic ME

Economic ME Issue 1 - 2015

Companies listed on ADX paid out more than AED17bn in dividends in 2014. So why aren’t the big multinational funds filling their boots? Give it time, says CEO Rashed Al Baloushi, they’ll come.

What’s not to like?

he ADX story grows by the day. Since being granted Emerging Market status, the UAE has done all it can to attract increased foreign investment, and Abu Dhabi’s stock exchange is as good a place as any for foreign investors – individual or institutional – to capitalise on the emirate’s economic vitality. That said, convincing sceptics that a culture of regulation and corporate governance best practice exists in Abu Dhabi is not the work of a moment – it remains a concern that continues to keep some investors on the sidelines. But, as ADX CEO Rashed Al Baloushi cheerfully explains, cultures are not created overnight, and neither are reputations. Abu Dhabi’s bourse is today ready to stand comparison to any of the world’s most famous exchanges, he says. And as Abu Dhabi’s listed companies continue to thrive, it is likely the world’s investors will come calling, sooner rather than later. Already, the signs are good. At its peak in the second quarter of the year, ADX saw some AED2.3bn of stocks traded daily, with real estate and banking shares consistently the most popular. (During the slower summer months, coinciding in 2014 with the holy month of Ramadan, volumes decreased sharply to

Issue 1 - 2015 Economic ME

AED250m a day). The growing enthusiasm of investors, at home and overseas, is obvious. Today, 68 companies are listed on ADX, and that number is likely to increase considerably as the benefits of listing become more apparent to the emirate’s companies, be they privately or family-owned. Al Baloushi is happy to let anyone who’ll listen know that ADX is in the process of proactively modernising, utilising the latest technologies to make the lives of buyers and sellers as simple as possible. ADX is thriving, and after spending the best part of an hour in Al Baloushi’s company, it is not hard to see why. > How was 2014 for ADX? 2014 has been very positive. Since the global crisis we have been moving very fast in terms of development and the introduction of new financial instruments. We have also introduced new regulations. 2013/14 gave us a chance to start initiating new ideas that will help us to further develop. The biggest achievement we had since the start of last year was being granted MSCI Emerging Market status. It was a project that took us several years to complete, and we had to make sure ADX met the specifications and processes required by the international investment community – which we did. During the first six months of 2014, we have replaced our trading system, from Horizon to

“Listed c o m pa n i e s i n A b u D h a b i pa i d o u t AED 1 7 . 5 b n i n cash dividends last year, and the year before t h at t h e f i g u r e w a s AED 1 6 b n . "

Economic ME Issue 1 - 2015

Extreme, which provides better security and and we add new regulations from time to This is an issue for all listed companies. Listed faster data. This was a very big project, but we time. But there is more to do. It is culture and companies sometimes believe that some information would be harmful to them if it fell into cultures take time. implemented it quickly and without fuss. the hands of their competitors, and so they try > Do you think investors still perceive > How difficult has it been to introduce a to hold on to it. corporate governance to be a problem in Abu culture of corporate governance in Abu Dhabi? It’s a thin line. But we go back to the rules: any information that affects the price must I wouldn’t say introducing corporate govern- Dhabi, and is this something that is keeping be distributed fairly to the investors, and one ance as a culture has been straightforward. them away? However, we have seen in the US and Europe What we hear from investors is they want im- party must not take advantage of it against the how much value corporate governance adds proved investor relations. Investors want to go other party. We have made big progress here. to listed companies, and we have held events further. We have contacted listed companies Today, for example, if we see a company’s valto pass that message on to private, public and and told them it is not enough to have an inves- ue going up or down and we hear rumours, family owned companies in Abu Dhabi. We tor relations officer, they must provide more in- immediately, we suspend the company from have been doing this since 2006. I wouldn’t formation – it is very important. We must per- trading. We tell that company they must desay it has been straightforward. Have we got suade our listed companies that they are owned clare or clarify these rumours, or trading will the best results? I wouldn’t say so. There is by the shareholders. So the shareholders must not resume. We have done this from the start. room for further development, but so far it have the right to protect themselves and to get > Is market manipulation a problem has been very positive. At first, we did not the information in a fair manner. for the ADX? force it upon companies, even though we Share prices normally only get manipulated wanted to. We consulted international firms > And do you think transparency is a problem when the liquidity goes down. When liquidthat adhered by international best practice, in Abu Dhabi? to learn from them. Then, we consulted the There are two types of transparency. The first ity is back, it is very hard for anyone to mopublic. ESCA (Emirates Securities and Com- type is transparency with numbers. From day nopolise the price. For example, if the daily avmodities Authority) did the same, and be- one, we have been precise in the issuing of erage volume was one billion dirhams, which tween us we designed the governance codes. numbers and financial statements based on it often is – how can you manipulate that? Listed companies were told they had to start the international accounting standard. We How much money do you want? It would be so complicated. But the danger is there when adhering to these codes - they had two years have made sure of that. The second type is not related to numbers, there is no liquidity - a company with only ten to make it mandatory, until 2010. By then, already 95 percent of them were adhering to but to information, and that is what we are trades in the day, then there is a danger. But the majority of it. Today, 99 percent of the working on with the listed companies. By the we have well trained and experienced employcompanies in Abu Dhabi are adhering to it, way, this is not an issue for GCC companies. ees to stop this happening. We have clear rules

Economic ME Issue 1 - 2015

and regulations, and we have clear penalties. We also have a system to monitor for irregularities. We will take people to the authorities or to court. It is a market, so there will always be people that will try to take advantage, but sometimes they do it out of ignorance. > Do you see the opening of Saudi Arabia’s Tadawul stock exchange to foreign investors as competition to ADX? I wouldn’t say it is competition. The Saudi market is very big. Saudi is a good opportunity for some investors. But it is worth remembering listed companies in Abu Dhabi paid out AED17.5bn in cash dividends in 2014, and the year before that the figure was AED16bn. These are very positive returns, so ADX definitely has something to offer all investors looking at the Gulf. Tadawul is not direct competition, but we could complement each other. > What efforts do you make to alert the international investment community to the opportunities available to them on the ADX? From the start of 2014, we have started looking again at doing roadshows – telling people all over the world about what is going on in Abu Dhabi, and about ADX. Our message is a strong one – we can talk about the dividends, the growth, the health of the UAE economy, Abu Dhabi in particular. There is so much in-

" I w o u l d n ’ t s ay introducing c o r p o r at e governance a s a c u lt u r e has been s t r a i g h tforward."

frastructure spending going on at the moment, so that is a particularly good opportunity, and it is something that people are definitely interested in. So we’ve decided to start doing roadshows again, to spread the word. In the first half we did one in New York and one in London. We will be going to Hong Kong, Singapore and Korea. Normally we take representatives from listed companies with us and we talk generally about the opportunities that are available in Abu Dhabi - we allow the asset managers to listen directly to the listed companies. And we listen to the investors’ suggestions and expectations – which help us to develop. > What have you got planned for next year? We are looking at making life as easy as possible for everyone concerned with ADX – to do this we are going to embrace everything digital. All the information and services you would require as an investor from the stockmarket will be available on our website. Everything anyone could need will be there. And we are also going to start doing a lot with smartphones. We also want to attract more institutional investors to ADX. At the moment we are 30 percent institutional, 70 percent individuals. And we would like to have more financial instruments available on the stock market, in addition to the listed companies.

INTERVIEW

ADS Vice Chairman Phillipe Ghanem is candid about his company’s appeal to global investors and the factors that are keeping multinational institutional away from GCC bourses

Issue 1 - 2015 Economic ME

Open, Ghanemstyle P

hillipe Ghanem is making a name for himself in the UAE. Young, charismatic and driven, he talks in the colourful phrases loved by journalists everywhere. He’s good copy. “The air smells of business in Abu Dhabi,” he tells EconomicME when we meet on a warm, late summer’s day in London. “Everyone comes to Abu Dhabi. Everyone. You’d be amazed.” Ghanem, apparently possessed of the ultra-confidence that renders decision making the simplest thing in the world, is only 34. But he’s second in charge at ADS Securities, a brokerage house (and so much more, to hear him tell it), with global ambition and capitalisation, he says, of some half a billion dollars. Ghanem and his team are said to be processing huge volumes of trades daily, across the full trading spectrum, making the most of a time difference that is relatively convenient for the financial community in both the Far East and Europe.

He’s vague on targets; he says he has no goals he wants to share today beyond a desire to keep breathing, which, in its own way, is refreshing in this age of corporate speak. What he will say is that listed companies in the UAE don’t often go bust, and that global institutional investors will eventually come to appreciate that businesses in the emirate, in Abu Dhabi particularly, are generally well capitalised and solid. The only problem, he says, is communication and transparency – or communicating transparency – but that it will come in time. Ghanem is likeable and interesting. He might be an imposing force in the privacy of his office - there are rumours about his attritional management style – but in the tea room of the Landsdown hotel in Knightsbridge, he is excellent company. > Why are international institutional investors still so reluctant to get involved in UAE stocks?

Economic ME Issue 1 - 2015

“I come with a big smile, my team is very important, it is not a oneman show, we explain what we do. Whoever is in front of us, he is confident we are competent and know what we are doing.”

We don’t deal with local market liquidity. We feel it is undervalued and there are too many retail investors interfering with it. But I think it is quite a solid market in terms of the companies that are listed there. We have really good companies listed there. But it needs to mature to be proven. It will take some time. But in terms of the safety of the investment, when we are talking about bankruptcies, more and more those companies are extremely well capitalised, they are extremely solid, but they have an issue with communicating that to the market. So it will take some time for it to be communicated. It is a culture that is growing. It is going to take time. > Don’t cases like last year’s performance of Arabtec’s share prices just demonstrate the market is too volatile?

> Does the UAE’s proximity to so much geopolitical tension count against it to investors, or is it seen as a safe haven?

The air smells of business in Abu Dhabi. Abu Dhabi is well managed politically, internally, in a mature way, and it is managed by a very solid family that spreads power correctly. This is exactly the stability that makes the country attractive - the way internal and external policy is managed. Now, of course, the region is in turmoil, and it has been for many years, but Abu Dhabi has always grown, during the Gulf war, during the Iraq war. It is not waiting for war to grow, it is just growing. Because it is slow, it is conservative, it takes its time. It thinks ahead. It over-capitalises itself in cash. This is what I see ADS client base in in Abu Dhabi. Abu Dhabi

35%

I agree. But Arabtec is still alive and the stock is going up. I agree, but it is a culture and it is changing. I see it as positive. It had to happen - restructuring, and more governance, of Arabtec or others. > What do you think the GCC bourses could do to attract more investment? Communication and governance and compliance. It is that simple.

> What does ADS offer that is unique? ADS is not only a brokerage house. It is an international financial services company. We have a very strong brokerage department because we thought that in the region there was the need to propose a strong brokerage house to offer services that are highly sophisticated, online and offline, in all markets. That proved right. On the other side, today ADS is a company with a lot of products. So if you are a so-

Economic ME Issue 1 - 2015

they didn’t want them to use the client’s money to grow. As a broker, you end up having a big amount of money in deposit, and some brokers have been tempted to use that to leverage themselves. So we put a statement in the market that we will never, ever use clients’ money. We were big from the start. Today, when a client comes to us to open an account, he would never open that account if we had ten million dollars. He would put in one million. But when he opens an account of thirty of forty million dollars, he sees we have a capital of half a billion and he is quite comfortable. It is not just that he knows I am not going anywhere. He knows I have the money to pay my bills.

phisticated client or a sophisticated institution, you do not wish to work only in one domain. You wish to have in front of you all the products that are being traded on all markets: fixed incomes, currencies and so on. Today, ADS is a multi-product platform, online and offline. > Geographically, where do your clients mainly come from?

“When a client comes to us to open an a c c o u n t, he would never o p e n t h at account i f w e o n ly had ten million dollars.”

> And why do people choose ADS, and not a competitor? We all pay in the same dollar, we all pay in the same euro. It’s your judgement. We are a company that is very devoted to its clients, we are well capitalised, we are quite generous. We follow and support our clients, we invest time and money in our clients. > What sort of commission do you take?

The majority is in Abu Dhabi and Asia. And now, more and more, we are winning the trust of European businessmen and European companies. ADS has proved that it is capable, not only because of the very big capitalisation we have and the people that have joined us, but also because we have sophisticated technology that allows, in my opinion, highly regulated and compliant companies in Europe to work with us. At the moment, about 35 percent of our client base is from Abu Dhabi and the UAE.

It is a fair commission. We have good clients who have committed themselves to working with us, and we make good commission. We get good money for our services. I have always said that – we are spending a lot of money to build a big and sophisticated structure. All kinds of business can use us as an intermediary or advisory, it costs money, simple as that, and so we charge what we need to pay for it, simple as that – if they want high quality, they have to pay.

When we first built ADS, the most important question for us was: how much are we going to put into capitalisation? As the economic crisis was very severe – and we are still living in it – regulators were very strict on capitalisation in Europe and Asia. In fact, the strictness didn’t just come from the regulator, it came from the clients’ requirements. They wanted to work with highly capitalised companies, because

When they look at me, in good health and smiling, they know everything is going well where I come from. I come with a big smile, my team is very important, it is not a one-man show, we explain what we do. Whoever is in front of us, he is confident we are competent and know what we are doing. I’m a walking advert for Abu Dhabi. Big time.

> When you travel and you meet people who > Why do you place so much emphasis on ADS’ have never been to this part of the world, how do you sell Abu Dhabi to them? capitalisation?

INTERVIEW

Franklin Templetonâ&#x20AC;&#x2122;s Bassel Khatoun knows nothing compares to proximity when it comes to understanding the Middle Eastâ&#x20AC;&#x2122;s investment environment

Issue 1 - 2015 Economic ME

Local knowledge is power

assel Khatoun, Franklin Templetonâ&#x20AC;&#x2122;s head of MENA equities, points out that nothing is as valuable when it comes to making smart Middle East investments as local knowledge. Where the global investment community might see the Middle East as one, homegenous, region, Khatoun understands that value lies in the often subtle regional differences, and that without knowing where to look, or how to look, that value cannot be unlocked. Khatoun says he is interested in local investment stories, where growth is not reliant on global trends, but rather on local ones. Certainly after spending the better part of an hour talking to him, it is not hard to see why.

> What sectors would you receommend to someone unfamiliar with the Gulf? There are a number of very exciting opportunities in the Gulf presently. The banking sector is very leveraged to the macro-economy, so when you see strong economic growth, that usually comes from strong lending and lower provisions on banks balance sheets, which is usually a very good environment to be in the banking space. So that is definitely an area of interest. And you have got a lot of under penetration of loans, so you have got the volume growth that is happening at banks and if we put that into a global context, where you have banks that are deleveraging or reducing their balance sheets, the Gulf is one of the few areas of the world where banks are actually expanding their lending and in quite an aggressive manner, double digit growth. The added bonus in the Gulf banking space is that they are very leveraged to a rising interest rate environment, which is something that we foresee as the Fed starts to tighten monetary policy, the deposits the banks take are non-interest bearing, which means as interest rates rise the price they charge on their loans rises, which means their margins will expand.

Economic ME Issue 1 - 2015

“As foreign investors demand better s ta n d a r d s a n d pay a p r e m i u m f o r i t, s ta n d a r d s w i l l continue to improve. C o m pa n i e s t h at aren’t up to it will just be left behind.”

So there is a great loan growth story, there is a great margin expansion story, and there is very limited bad credit formation happening in the region. So, overall, it makes banks a very attractive proposition given their listed value today. Banks represent more than 55 percent of the listed Gulf financials. > And aside from banking? There has obviously been quite a big buzz around real estate in Dubai, and we see increased economic activity and stronger tourism flows, both of which are usually supportive for real estate prices and yields. What we are finding exciting is replcating that theme and looking further afield to countries that have the same underlying dynamics but haven’t had that same appreciation. Somewhere like Saudi Arabia or Egypt, for real estate, is quite interesting. Because effectively they are benefiting from the same underlying trends but that hasn’t neccesarily been reflected in the prices of the real estate companies.

real estate prices that hasn’t been captured by the market. The real opportunity in those two countries is that you have young, growing, dynamic populations, where the median age is still close to 25, so you have a large number of the popualtion who are below 20 and disposable income is growing. In both countries there is a massive shortage of affordable and mid-income housing. What you are seeing now is private developers and government coming together to try to reconcile that hole or vacuum in the market, and that creates an interesting opportunity for real estate investment. > Do you see the same trend in Qatar? Are there lucrative opportunities aligned with government infrastructure spending?

In the Gulf, the government is quite a big actor in the economy and while there is a high degree of private sector involvement, the government is critical to stimulating these economies through budgets and fiscal policies. In Qatar we have seen the same trend, where the > What are those underlying trends? government has been involved in the developIt is a slightly different theme in terms of what ment of the country. They have come out in is driving real estate investment to Dubai. 2014 and announced a record budget. In a But the point is there is an appreciation in world talking about austerity, it is remarkable

Issue 1 - 2015 Economic ME

their budget is a record. In Qatar, the focus of that spending, given the demographics of the country, has been less focussed on housing and much more focussed on infrastructure, which has been in the form of building new airports, new bridges and new roads, and also a railway. > Are there any sectors you would counsel investors to be wary of? What we like today are the insulated domestic demand growth stories that we see in the region. Bank lending, infrastructure spending, we like those domestically driven stories. What we don’t have a particularly strong view on, or have as much visibility on, are sectors that are driven by global growth and that rely on global dynamics for their growth. So, petrochemicals would be a sector like that, and although we do have petrochemical investments, we have less visibility on how Chinese growth will play out and on how other drivers of that sector will play out, as opposed to more domestically driven stories, which we are more focussed on. Ultimately, we believe living in this region and being close to the investments enables us to really understand local investments, whereas on a global level you have to look at trends that are, for example, export driven. We want to be leveraged to the strong growth story in the region.

If that deal has legs and we see more progress we are headed in and I think we have seen it to then that will have massive ramifications for some extent in Qatar and the UAE. the entire region on a positive level. > But what about problems associated with corporate governance and transparency? > Institutions are still wary of issues they associate with the Gulf, such as political We don’t invest in a company unless we have instability or a lack of transparency. What conducted considerable due diligence. Invescan be done? tor relations has improved dramatically since Because of the risk profile of the region, a lot as recently as 2007. As foreign investors deof the institutionals have not had the incentive mand better standards and pay a premium for to cover the region in their investment uni- it, standards will continue to improve. Compa> Do you think political instability is affecting verse in recent years. What needs to change is nies that aren’t up to it will just be left behind. the value of regional equity markets? the region needs to become a part of the wideThese are interesting times, but the region has ly tracked MSCI Index, rather than the fron- > What other trends are you seeing in already had a level of instability that is implied tier. In Dubai, you see passive money that the market? in its risk premiums. I would say that at this has come in purely as a result of tracking the The IPO pipeline is something we are hearing stage the major causes of instability are the sit- MSCI index, there will always be an element of about a lot, in the UAE and elsewhere. It is a uation in Iraq, but we don’t have any invest- sticky money that just follows an index. What reflection of the very helathy macro environments in Iraq. So long as the situation is con- we have noticed, too, is that if you look at the ment we are operating in . Valuations in the tained to Iraq, we haven’t felt the impact of the level of foreign participation in the market af- market are healthy. It is a natural environment political instability in our equity markets. Not ter the UAE admission to the MSCI Index, for companies to list in. We are often asked at this stage. What often happens is an event we have seen a resurgence in appetite for UAE why there has been a dearth of IPOs in the last occurs, which leads to mass selling across the and Qatari equities. If you look at trading vol- few years, and why so many now. The answer markets, and people don’t really differentiate umes, foreign participation has been a big part is there hasn’t been a dearth, they have just all between the markets - we have advantage of of that. It would be great if the Middle East be- been listing in London. But now it has been being close to the action, and therefore able to came a subset of the Emerging Markets fund made easier for companies to list locally, the differentiate. Progress between Iran and the that was held in the same regard as South East criteria has been loosened, so they don’t need US has brought investors back into the region. Asia or Emerging Europe. That is the direction to go and find London listings.

GLOBAL

opportunity doesn’t sleep. neither do we.

GAIN FROM OUR PERSPECTIVE New investment opportunities emerge around the globe and around the clock. It’s why we have over 650 professionals in more than 25 countries, actively working to uncover smart opportunities as they emerge. To learn more, contact your investment advisor or visit www.franklinresources.com/global.

ANALYSIS

A renewable alternative

Economic ME Issue 1 - 2015

The GCC region has the opportunity to take global leadership in the development of renewable sources of energy, but doing so will involve embracing innovative investment and financing strategies. EconomicME investigates.

ith a low oil price comes an intriguing debate regarding the alternative energy sector for GCC countries. The impact of lower oil export revenues long term can undoubtedly have a substantial effect on investment in the region, however the idea that alternative energy is an expensive alternative to conventional fuels has been debunked by ACWA Power’s recent deal with Dubai Electricity and Water Authority (DEWA) for phase two of the Middle East’s largest renewable energy power plant located at Mohammed bin Rashid Al Maktoum Solar Park, Dubai, United Arab Emirates. This landmark deal set a new global benchmark by reducing the cost of solar energy by

more than 20 per cent resulting in ACWA Power receiving a levelized tariff of 5.84 US$ Cents/kWh for a 25 year power purchase agreement making it competitive with oil at US$ 10/barrel. During the recent government summit held in the United Arab Emirates His Highness Sheikh Mohammed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces had a clear vision: “In 50 years, when we might have the last barrel of oil, the question is: when it is shipped abroad, will we be sad?” he asked. “If we are investing today in the right sectors, I can tell you we will celebrate at that moment.” So this leads to only one logical conclusion, the GCC must invest in creating a source of energy for the future, but also the GCC has the capacity to create a centre of excellence within the alternative energy sector to become a glob-

Issue 1 - 2015 Economic ME

al leader in development, innovation and excellence in renewables. National Bank of Abu Dhabi (NBAD) recently produced a report in conjunction with University of Cambridge and PWC titled “Financing the Future of Energy” the purpose of which was to highlight the forecasted changes to the global energy system over the next decade. It surmised the need for a strategic approach to energy finance is driven by the pressures of growth in the region, pressures that are creating the greater demand for energy. There is a large projected gap between supply and demand for energy in the GCC, especially in the form of electricity. This is driv-

US$48

trillion Over 170 GW of investment in energy infrastructure is needed in the next 20 years, most of which is in nonOECD countries

of additional capacity will be required in the GCC by 2020

8.3% MENA energy demand expected to grow by 8.3 per cent per year between 2013-2019 and at a rate three times fasters than the global average

that transmit and distribute energy to consumers, and that improve the efficiency of energy use. All of these – especially when combined – will help to address a fundamental requirement for the region: ensuring that supply can continue to meet the growing demand for energy. At the same time, it can enable the region to move towards greater prominence as a global home of sustainable energy. While the economies of this region have been built on oil and gas production, and that will continue for the foreseeable future, the energy system of the past will not be the same as the energy system for the future. It is clear that renewables will be an established and significant part of the future energy mix,

GLOBAL

INVESTOR STRATEGY

50 %

More than of investment in new generation capacity worldwide is in renewables

INCREASING DEMAND en by growing populations and increasing per capita GDP with associated lifestyle benefits and challenges. More electricity generation is needed to serve a more energy intensive industrial base, greater use of air conditioning and an urgent scaling up of desalination capacity to meet future water demands. Energy demand in the region is expected to triple during the next 15 to 20 years. Rising to these challenges will require both substantial new generation capacity and wiser, more efficient, use of that energy. For financiers in particular the opportunities created lie in projects that generate energy,

in the region and globally. There are still many sceptics around the world when the climate debate rages however its apparent that this is no longer a discussion to be had whilst focused purely on environmental impact. As population growth continues in the GCC and industrialised economic diversification moves forward the requirement for power will rise unabated. Globally many investors have already aligned their strategy with plans to broaden the energy mix to incorporate more renewables.With the advancement of technology comes cost efficiency, solar PV has witnessed

Economic ME Issue 1 - 2015

US$ 260 billion a year has in invested in renewable energy technologies worldwide for the past five years

80 %

Green Bond issues to pay for low carbon energy projects reached US$ 36.6 billion in 2014, more than triple the previous year

solar PV modules have fallen in price over 80 per cent since 2008 Solar PV will be at grid parity in 80 per cent of countries in the next 2 years Solar PV is already cheaper than grid electricity in 42 of the 50 largest US cities

SOLAR PV a steady decline in cost which now makes it a more attractive proposition than ever before. So all this sounds absolutely fantastic. We can bask in the glory of the technological energy revolution whilst breathing cleaner air and paying less for our utility bills, and whilst we are at it, letâ&#x20AC;&#x2122;s invest in the companies delivering these gargantuan changes now and let the returns roll in. But there are a couple of stumbling blocks though: Despite the rhetoric of governments for diversification whilst having significant budgetary surplus very little has actually been done across the region to implement any change in

" T H E M I D D LE E A S T â&#x20AC;&#x2122; S ENER G Y DEMAND IS E X P E C TE D TO TRI P LE IN T H E NE X T F I F TEEN TO T W ENT Y Y E A R S . "

the energy generation space. There are noticeable exceptions in Dubai and Abu Dhabi but region-wide these examples are defiantly bucking the trend rather than being embraced. When projects are announced there is often a disconnect between the financiers and borrowers. A focus on short term maturity from banks historically does not allow the flexibility required by project developers so a change in strategy from banks to accept longer tenors of 20-25 years and an understanding that the projects backed by Power Purchase Agreements can offer a utility style bond return which does offer benefits to any investor or financier.

INTERVIEW

POWERING TOMORROW

Economic ME Issue 1 - 2015

Is investing in renewable energy now the wisest long-term bet for multinationals and the region’s high net worth individuals? EconomicME talks to Gus Schellekens, head of PwC’s Sustainability and Climate Change Team about what it will take to make the sustainables investment story more interesting. > Tell me a little about your background in relation to renewables and your current role for PWC? I lead PwC’s Middle East sustainability and renewables practice based in Abu Dhabi. This provides services to clients across the entire Gulf region focusing on two primary areas of work; providing sustainability consulting advice to companies and governments and providing consulting advice to the renewables market. I’ve been involved in Middle Eastern work since 2010, but have been interested in sustainability since my university days. My mission in the Middle East is to see what PwC as a big organisation can do to help support both the sustainability and the renewables transition that is slowly beginning to happen across the region. I think there are tremendous opportunities everywhere you look. One of the recent pieces of work that PwC have been involved with that reflects this was a Green Growth project with the federal government and individual emirates. Our brief was to look at how you sustain or increase economic growth in the UAE without increasing the environmental footprint. For me that’s hugely exciting, because the outcome will be a transformative effect across all industry sectors. There is an opportunity to reduce water, energy and oil use whilst still adding to the current rate of GDP growth in the UAE.

> The report highlights the requirement for generation capacity and more efficient use of energy. Should the construction sector be mandated to develop in a more energy efficient manner or are there other ways to ensure this type of development? There are ways to encourage this type of development (a push from the government or regulators, or a pull from consumers are two examples) however it is more a question of how effective this would be in this type of market environment. In many western countries the retail individual holds huge sway and their buying decisions can significantly influence corporate and government activity. Here I think that the pull from the consumer will have less influence as we are at an earlier stage of development around sustainability awareness and recognition that something needs to be done. If the pull doesn’t come from the consumer and there isn’t the demand for something to change, what you are left with is forward looking companies that will do the right thing by themselves. > What is the downside of GCC Countries not being International Energy Agency members and is there an upside? I think there are downsides and upsides. The IEA is an interesting organisation which historically has focused on oil but more recently has spent much more time looking at

renewables. They have done a tremendous job in producing insightful reports that ensure clear and relevant information about renewable energy technologies is available to the market, and have also been more vocal at events to publicise these findings. Over the last two years I have supported efforts to bring the IEA more to the region, mainly to the World Future Energy Summit in Abu Dhabi, where we organised workshops and meetings to allow for more dialogue between senior IEA individuals and local energy and business leaders. I think on the other side, by not being part of the IEA, countries here have developed in their own way building on a legacy of oil and gas and slowly one by one have reached a point of realisation that things need to change. Although life is good, and the infrastructure in place around oil and gas works well, fluctuations in oil price, the possibility of reserves running out in some countries has made governments realise that they need to look differently at the future. > Is the development of renewable energy a political, economic or climate debate in the GCC? Energy is always political and we see that everywhere in the world. The ability of a government to ensure that its citizens get water, energy and food is at the very core of its mandate. Here, more than usual, this is the case given the food and water resource scarcity

Issue 1 - 2015 Economic ME

and the heavy reliance on oil and gas to deliver these. With renewables I think that it goes beyond the economics. As a new development in the region there is also a psychological element to it, in the sense that people are always hesitant to be the first to try something new. If no one else has done it and you are the only one doing it, is it a good idea to do? DEWA has in many ways led the way and been very bold in awarding a 200 megawatt tender and have recently issued another for 800 megawatts and this is the icebreaker moving everything in a significant way and beginning to show at scale, that renewables have a place.

resenting the bulk of that. With renewables its different in that most of the capital investment is upfront. Once you’ve committed to building it, that’s 80 percent of your investment sunk on day one of the operation but then you have very low operational costs over the life of the plant and obviously no fuel costs. So psychologically, do you want to part with most of your money upfront or spend less of it now and know that you’ve got a more expensive cost over time. Unfortunately in many cases it seems that people would prefer to spend less now.

> Local banks are likely to be the largest > Do sustainability and subsidies go source of debt finance for renewable energy together, and when do GCC countries need projects but don’t have the internal skill set to to stop subsidies and create real pressure on manage this. Who, how and from where do these consumers to save energy? banks attract the right talent base? It’s certainly an interesting challenge and we There needs to be a push and a pull and the are doing a report at the moment that looks at market needs to come out with projects that energy pricing across the region because subsi- will require banks to step up and meet that dies are part of the fabric of society here and are challenge and there are some forward looking an established and acknowledged way of sharing banks like NBAD that can begin to proactive“the state state wealth with citizens. What ly develop the skill set, prove that we are seeing here in the UAE for it works with the projects that can’t continue the foreigners is the costs are goemerge and off the back of that to subsidise ing up and this shows a recognigrow this further, whether that’s everything. one tion that the state can’t continue organically in house or through Solar PV modules camp out there to subsidise everything. acquisition or bringing expertise have fallen in says “let’s price over 80% One camp out there says “lets from other countries that have since 2008 remove all remove all the subsidies”, but gone through the cycle. let’s be practical. What the resubsidies”. Let’s > How does the constant newables sector has done is say be practical. “we have to get our costs down so we can com- pressure on financial institutions to deliver what the pete with fossil fuels including subsidies”. record growth year on year deter banks from renewables financing over longer tenors? And does this sector has said > Obviously economic diversification of the pose a substantial threat to future investment in is: “we have to GCC creates higher demands for energy, do you the sector? believe that government visions of more broad It does pose a challenge, there is tremendous get our costs based economies can be delivered with a lower pressure on all business to show short term profit down so we can oil price alongside an increased investment in growth and everybody looks at quarterly results compete with renewables? and everyone wants to show stellar performance. fossil fuels, The challenge for renewables is that if you Renewables are much more a long game, so what including look at the total cost of a renewable energy I believe is that some of the banks are now realsubsidies.” project investment versus a conventional en- ising that perhaps they need more diversification ergy project investment the conventional has and if you are all chasing the same asset classes a reasonable amount upfront but the bulk is that deliver stellar returns in the short term there over the life of the project with fuel costs rep- is a danger that they may stop delivering that at

80%

Economic ME Issue 1 - 2015

some point. So you begin to allocate part of your portfolio to renewables recognising that it’s a slow but steady rate of return with less volatility than comes with other asset classes. > What more do local projects need to do to attract international banks for finance as opposed to other global opportunities? The investment behaviour by banks and financial institutions is influenced by all the risks surrounding a project. Some of it is geography, technology, experience of contractors and stability of governments and therefore if you are comparing a project in Germany or here the project in Germany will usually win out with international financial institutions because there is more of a track record there. But this can play two ways; international banks may be hesitant about investing in the Middle East which could be good or bad. Good because there is more opportunity for local banks and, looking at Middle Eastern individuals, most of them prefer to invest in the region rather than anywhere else and there is certainly enough money in the region for this. On the other hand you may want some of that international capital to flow into these projects to provide more liquidity. To do this organisations like the World Bank have acted as anchor investors to prove the concept and they remain involved in countries like Jordan and Egypt. > It appears to me that renewable energy projects and Islamic finance are a natural fit. What role can Islamic bonds play in the sector? Islamic finance definitely can play a role and I believe it’s one of the things NBAD is looking into at the moment as it lends itself nicely to it. I think it just hasn’t at the moment, and part of that is because in the grand scheme of things there hasn’t been that much renewable activity in the region. You’ve had small individual projects but to date this haven’t been big enough to engage with Sukuk financing.

10 percent, they are going to invest in the high yield assets and the known investment opportunities. I think if that doesn’t change we won’t see much of the money going into renewables. If there is a recognition that the investments in conventional energy are not going to deliver, and I think there are signals from the government that the focus is on renewables and that is the new industry that will have long term support from the government, we all realise that government intent and support is critical and impacts any project development.

> What are the biggest risks associated with the sector for investors? One of the issues in the GCC is that in many countries you can’t be an independent power producer, the legislation is set up to favour the monopolies, the utilities that already exist they are the only ones that can produce power at this point, so those are some of the challenges. I think financially there are fewer risks in terms of the financial model, the technology works, the resources are > What needs to be done to attract regional there, if you build it to international specifications and use quality products and you’ve HNWI investors into the sector? Part of it depends on the rate of return, so got the right insurances in place you can if you can invest in an office building and get guarantee that the electricity will be produced so 16 percent and you invest in renewables and get those risks are all known.

> Can the GCC become a centre of excellence in renewables and if so what if anything threatens this potential being realised? There is no reason why it couldn’t become a global centre of excellence particularly in the solar area, perhaps even in the waste energy area. Wind and geothermal less so, but it’s obviously related to the resources available. I think what holds it back is obviously you have economies which are underway at the moment that are reliant on energy, oil and gas and are heavily based around those. And therefore there will be a fear around stopping doing what they are doing but they need to start doing something else and how do they begin to make that switch across without impacting GDP or government revenues etc. Of course they don’t want to send a shock into the system, either the financial system or the social system that results in people leaving and business collapsing or slows the rate of growth. > How do you personally live in a sustainable way? The difficulty here is I can’t put solar panels on my roof so I can’t power my apartment from renewable energy. But we are seeing a lot of progress.

Issue 1 - 2015 Economic ME

INTERVIEW

Growing together

Economic ME Issue 1 - 2015

As the Gulf’s investment landscape shifts, EconomicME talks to Nathan Weatherstone, NBAD head of project finance advisory, about the role the bank will play in Abu Dhabi’s ongoing growth story and the rise of renewables.

he National Bank of Abu Dhabi has played a key role in creating modern Abu Dhabi, working with key public and private sector agencies for decades to provide liquidity and investment expertise. The UAE capital’s first bank, today the investment landscape in which it works is transformed from that of 1968, when it was formed. Where once Abu Dhabi’s almost sole source of income was derived from the hydrocarbon sector, today the emirate is home to a thriving economy in which a diverse range of sectors compete on a global level. And, of course, the hydrocarbon sector itself has undergone considerable evolution - today renewables offer an increasingly exciting investment opportunity for the region’s energy investors.

> How much is the Abu Dhabi 2030 vision a driving force behind the bank’s strategy? Our strategy is independent, yet complementary. NBAD has played a significant role in the majority of Abu Dhabi’s major projects and is a key enabler of economic diversification in the emirate. The bank is well positioned to stand squarely behind the major projects required to deliver Abu Dhabi 2030. NBAD also operates outside the UAE. We operate across the GCC and beyond and now have a strategy to connect the trade and investment flows across a geography stretching from the west coast of Africa through MENA, the GCC, the Indian subcontinent and across South East Asia; we call this the West to East Corridor (WEC). The scale of opportunity across the WEC in the traditional and renewable energy sectors is huge.

Issue 1 - 2015 Economic ME

“i don’t see any reason why Sukuk can’t play a very fundamental role in financing renewables projects . it is my belief that capital markets, conventional and islamic, will have an important role to play.”

> The Financing the Future of Energy report surmised that local banks would need to accept longer tenors for renewable energy projects. Is NBAD prepared to accept those longer tenors and if so why? One of the key takeaways from the report is that the long term financing market is unlikely to be able to meet the scale of the opportunity in renewables. Other approaches are likely to be required, perhaps geared around the recycling of liquidity across concession terms. It’s incumbent on the financial advisory community to take a long term view on how these financing structures come together, even if liquidity in the banking market is in a good place at the moment.

the GCC – the CSP project here in Abu Dhabi being a good example. In my view, the constraint on renewables has not been a lack of banking sector expertise. However, if we ask ourselves “can the expertise be supplemented, augmented and made better?” then I would say the answer is yes. Currently, banks rely on technical due diligence advisors so where a body of expertise doesn’t reside in the region, it is certainly not difficult to import it, to get banks comfortable on a deal by deal basis. At NBAD, we are at the beginning of a journey. The sector has the highest management support within the bank and we are very keen to push forward on a cross product and sector basis. And that is about dedicating resources and developing products appropriate to the market.

> Is there a target level of exposure to renewable energy projects for NBAD? Measuring our performance in the sector is something that we’re still working on and ulti- > Do you believe there is a real appetite mately yes, we will be able to quantify our re- for investment in and development of the newables business. renewables sector outside of the UAE and across the GCC? > Is there a knowledge gap within the banking Let’s break it down. Firstly what is a renewsector about renewables and does NBAD have a able project? In terms of PV renewables genplan to develop this skill set internally? eration schemes based on IPP structures, you I wouldn’t necessarily agree with the prem- are considering mature technologies, governise that the banking sector is lacking skills in ment offtakes which provide stable cash flows the renewables sector. Deals have been suc- and experienced operators combined with a cessfully financed with local liquidity across banking sector which is able to understand the

Economic ME Issue 1 - 2015

IPP risk allocation and how the deals are put together. If you combine those characteristics, is that an attractive proposition to deploy capital? Yes, subject to the usual screening and credit evaluations. Utility scale generation, though, is only one aspect of renewables. There are opportunities right across the banking spectrum; large, medium and small opportunities, or in banking parlance, Wholesale, Commercial and Retail schemes. If you look at some of the developments in Dubai and view these in the context of the new laws for offset utility tariffs and solar cladding in industrial, commercial and even residential installations, there are other opportunities that we want to evaluate and assess how we can embrace for the benefit of our clients. And energy improvement offers a whole competitively priced liquidity. The fact that new profile of opportunities linked to the re- Sukuk hasn’t yet played a significant role in renewables is partly explained in the small newables sector. number of projects that have come to mar> Can NBAD play a role in creating a centre ket, and partly explained by the present level of banking liquidity which is currently offerof excellence within renewables in the UAE by following local companies that expand globally? ing exceptionally competitive terms. WhethI’d like to think that we could and view er this remains the case in the future or on the larger renewables projects this as an obtainable objective. remains to be seen. There are some examples here I don’t see any reason why in Abu Dhabi of world class Sukuk can’t play a very fundarenewables institutions, with mental part in financing these Masdar being the highest proMENA’s renewable projects and when looking at file of these. As their expansion energy capacity is this from a macro level, and in and development strategies are expected to increase sixtyfold by 2030 the context of the scale of the redeployed across different geogquired financing across the secraphies, the bank will consider tor, all pools of liquidity will how it can support that. need to be mobilised. It is my However, we also have a core client list which is international in nature and belief that the capital markets, conventionincorporates the global energy, utility and al and Islamic, will have an important role to renewable corporates. So it’s not just about play. supporting Abu Dhabi based institutions although this will of course be close to our heart. > What would you say to your peers that are renewable sceptics and reluctant to participate > What scale does a project need to reach in the sector? The panel which presented at our recent to merit Sukuk funding and are you actively Global Financial Markets Forum really aninterested in Islamic finance as a option for swers this question for me. When asked about financing energy projects? As a financial advisor with a duty of care to the importance of renewables, the CEO of my clients, I’m interested in finding pools of Kuwait Petroleum Company - which I would

suggest is a very traditional energy company - confirmed that renewables are a significant part of the future energy mix. Are bankers convinced? Perhaps there is an opportunity for further education and that is something we want to act on. From what we have seen in the region, the renewables projects coming to market are acceptable to a banks’ structural / risk perspective, assuming robust due diligence. If you break down the risk profile into detail and present this to a project financier, we find that the schemes have generally ticked the fight boxes. But although pipeline is great, the number of executed projects remains rather low and so increasing awareness of renewables in the wider banking market is still a case in progress. What I would say is the response to the recent DEWA-sponsored renewables project in Dubai was very positive and the reported terms from the banking market were exceptionally strong. > What do you believe are the potential obstacles for renewables in the region? Historically, there just hasn’t been the quantum of renewables projects. Why is that the case? Perhaps perceived cost competitiveness, perhaps a historic lack of government drivers to encourage and balance the energy mix in our hydrocarbon rich economies.

Issue 1 - 2015 Economic ME

> Does a low oil price favour investment in renewable energy projects? The prevailing view is that a low oil price doesn’t make a significant difference to the economics of renewables as we now move towards a much broader energy mix. If oil bottomed out at US$ 10 a barrel for the next 25 years this might pose a problem for renewables in the GCC but I haven’t met many people who believe this to be the case. There is also the opportunity cost of using hydrocarbons for domestic consumption. With the current low oil price, I wonder the degree to which governments are seeking to maximise oil revenues through maximising exports volumes.

"an end to subsidies has to be the eventual aim. incentivising g r e at e r e n e r g y efficiency would be a f i r s t s t e p. "

> A recent statistic from MSCI indices suggested that globally divesting away What the report, as well as the recent Dubai from conventional energy production had a DEWA project, illustrates is that renewables positive impact on institutional investors’ can be cost competitive with oil at $10 a barrel. portfolio even before the drop in oil price. How do you feel that may affect Solar, in particular, has alignregional investors? ment with the power demand Most of the regional energy curve in the region and with the generators are part-owned by cost of renewables continuing the state, or are wholly owned to fall, all the indicators point entities, in monopoly positions to renewables assuming a much Forecasted annual global investment in with captive markets. If I was more prominent position in the energy storage to review these as an investor, region’s energy mix. We have by 2020 I would expect to see long term an abundance of nil cost enerstable cash flows with simigy here: the sun. I would be surlar dividend profiles, making prised if governments aren’t tapan attractive value proposition. As renewaping into that in the foreseeable future. bles form a greater part of the energy mix, this > Do you think the pressures of consumption should diversify risk away from a reliance on hydrocarbon feedstock and the associated vulwith a growing population through the west nerability to price volatility. east corridor has encouraged more debate around renewables? Four years ago the price of Solar PV and wind > Do you believe there is a time when subsidies was not competitive; the report and recent trans- will and should end? An end to subsidies has to be the eventual actions tell us that is no longer the case. The statistics presented in the report show that more aim. Incentivising and enabling greater enerthan half the global investment in energy pro- gy efficiency would be a suitable first step and duction is in renewables. So I don’t believe that schemes like the offset tariff arrangements in the debate around the value proposition of re- Dubai are a welcome development. Financial newables is happening elsewhere, it has already institutions have a role to play through makhappened. The issue for the region is now how to ing appropriate financing available to customharness this. Increasing consumption will only ers and clients. I hope very much that the bank can be part of the solution. add to the debate.

$5BN

Beginnings are good The best Home Loan solutions for the home you’ve always wanted

Whether you are looking for a larger family home or investing in one for your family’s ﬁnancial future, we have made your decision easier.

To ﬁnd out more, call 800 4949.

sc.com/ae Terms and conditions apply.

EXPERT

Issue 1 - 2015 Economic ME

Tadawul: it’s built, now will they come? Phil Gandier Ernst & Young

Phil Gandier, head of Ernst & Young’s MENA Transaction Asvisory Services, says the opening of Tadawul to foreign investors is about gaining Emerging Market status. If it works, the financial benefits will be huge.

KSA’s recent announcement to open its stock market to direct investment by foreign financial institutions is likely to raise the profile of the KSA stock exchange on the international scene and it will help KSA become a more mainstream destination in the GCC for international investors. The KSA stock exchange is the most liquid exchange in the GCC and also has a higher level of liquidity than some international exchanges. This, together with the underlying strength of the KSA economy, is one of the most important and attractive characteristics to foreign institutional investors wanting access to GCC and Middle East investments, and therefore we would expect an increased flow of foreign capital into KSA as a result. Furthermore, the move will provide additional liquidity for KSA entities currently listed on the KSA stock exchange. The move is potentially a step towards inclusion of KSA in MSCI’s emerging markets index which would follow the recent inclusion of UAE and Qatar into the MSCI index. Inclusion in the MSCI index would almost automatically draw in funds from investors who track the index boosting liquidity levels further. The move should allow KSA companies better access to capital and more choices too. The ability to list and access to a broader range of funding sources should allow for a more dynamic corporate sector in KSA. It will simplify the process of investing in KSA securities and significantly reduce the

Economic ME Issue 1 - 2015

alternative indirect methods currently used by sophisticated foreign investors such as swaps, exchange traded funds, mutual funds and participatory notes which are considered to be a relatively expensive and inconvenient option. The move will ultimately reduce dealing costs. The KSA stock exchange is well regulated by the CMA, which is another important factor for foreign investors and will help the announced move further. As the new announcement comes into effect and further consultations take place, investors and companies will be able to get a better understanding of how the process and regulations will apply. Given that the CMAâ&#x20AC;&#x2122;s policy is to attract long-term investors rather than short-term speculators, it is likely that

the CMA will link eligibility of the foreign financial institutions to be able to invest in securities listed on the KSA stock exchange to factors such as the value of assets under its management, the value of its investment in the market and the number of years they have been in business. It is also likely that there will be ceilings for foreign ownership of KSA companies. The move should have a positive impact on corporate governance. It is possible that companies listed on the KSA stock exchange will benefit by receiving management, accounting or legal guidance in keeping with the best practices adopted by foreign shareholders enabling companies to adopt beneficial corporate governance practices.

EXPERT

Issue 1 - 2015 Economic ME

Affordable’s the new unaffordable john davis colliers international

The drive to create affordable housing quickly across the GCC, particularly in the UAE, presents a wonderful opportunity for investors with an eye for the lower end of the market, says Colliers International boss John Davis

Given that a significant proportion of the world’s most luxurious residential addresses are located in Dubai, the emergence of the affordable housing sector as an untapped and underdeveloped segment has captured the attention of investors from both within and outside the UAE. In order to better understand this emerging trend, it is important that in the first instance we define it. Unlike other global cities where the term ‘affordable’ often refers to government housing, in the UAE market we are referring to what is affordable for the majority of white collar expatriate workers. According to research by Colliers International, 30 percent of Dubai’s households earn between AED9,000 and AED15,000 per month. According to accepted global guidelines, average household spending on rent should not exceed more than 30% of total

household income. With this in mind, the average affordable rent in Dubai is between AED32,500 and AED54,000 per annum. If we look at the developments in Dubai that are considered to be affordable or mid-market, for example Discovery Gardens where the average rent for a one bedroom flat is AED65,000 per annum, then a family earning AED12,000 per month is spending 15 percent more than what is recommended. We have seen an increasing interest in affordable housing from investors who recognise the opportunities that the segment presents. If we look at yields for example, the average rental yield gained from investing in Dubai Silicon Oasis (affordable) is eight percent, while the average rental yield gained in Downtown Dubai (high end) is five percent. We are seeing a similar story in the residential sales market where our research indicates there has been a decrease in sales prices for villas and townhouses in more established areas, whereas we have seen growth at the lower-end of the market. For example, apartment sale prices in Jumeirah Lake Towers witnessed a 43 percent year-on year growth (2013 vs. 2014), reaching AED1,392 per sqm compared to AED972 per sqm in Q2, 2013. With the creation of affordable homes, further opportunities exist for developers to build communities that will cater to the lower end of the market. Community malls, neighbourhood retail, schools, healthcare services and leisure facilities serving this income brack-

Economic ME Issue 1 - 2015

et are currently undersupplied. Apart from the social questions this raises, it is important to also consider that housing is an economic asset and homeownership promotes wealth accumulation in an economy. Given the shortage of homes in this sector, private developers have increasingly been playing a role in reducing this lack of supply. The UAE witnessed the largest supply of affordable housing in the GCC countries during 2013 with a total of 20,000 units added to the market, but the country is still facing a huge housing shortage within the sector, with over 36 percent of forthcoming housing supply being positioned at the high end of the market. With growing populations, an increasing expatriate workforce and access to affordable land, we anticipate that the trend for affordable homes will continue to grow in the UAE and wider GCC region.

"30% of Dubai households e a r n AE D 9 k 15k. Household spending on rent should not exceed 30% of household income"

COMPETITION

You pick ‘em.... Win $10,000 by taking part in our inaugural Fantasy Fund Manager competition. There’s more than just office bragging rights at stakes...

Issue 1 - 2015 Economic ME

Fantasy Fund Manager 2015/16

vest in stocks listed on GCC equity markets. (A small disclaimer here; we don’t actually have US$10 million, so this is a fictitious portfolio.) But what we want to know is can our readers outperform the professional investment managers? Year to date, GCC equity funds have seen some impressive results with the best performer reaching 28 percent return as of May 18th 2015. Most people would happily take this return over four months, so this is a tough challenge. The rules are exceptionally simple. Our Will continued low oil price drag stocks lower? fund will be split into 10 separate investments of US$1 million. Each issue we/you will buy Can banks continue to grow? and sell our entire portfolio meaning that over the course of the next 6 issues of EconomicME Is there a real estate bubble? we need 60 stock picks from you, our readers. From our October issue onwards we will Will inflows of foreign investment feature our 10 investments and the people that impact markets? recommended these stocks. This will be followed up with a review of the portfolio perWhich sector will outperform all others? formance and see how well we/you have performed versus the markets, the professionals Which country has real investor confidence? and the indices. Is there a maverick company that will stun After a full year of managing the Ecomonus all and deliver exceptional results? icME GCC Equity Fund (domiciled in our offices in Dubai and under no financial reguAcross the next twelve months we/you will be lation whatsoever whilst completely forgetting managing the EconomicME GCC Equity Fund. about governance or best practice) we will We have raised US$ 10 million and plan to in- rank our stock pickers based on the percents markets rise and fall we are all bombarded with advice from the “experts” including economists, fund managers, private bankers, wealth managers, CEOs, friends and family. We’ve even been offered investment opportunities from a taxi driver. Everyone claims to have the answer when it comes to bucking a downward trend or reaching the pinnacle of an upswing. So with that in mind EconomicME is asking for your advice:

Economic ME Issue 1 - 2015

age increase in the value of the stock they have selected whilst held by the fund. Don’t forget our entire portfolio will be bought and sold every issue/two months. To ensure everyone is on a level playing field the stock pickers will be selected on a first come, first served basis so to become one of our first 10 stock pickers/fund managers/ equity investors/market oracles all you need to do is email editorial@economicme.com with the following: • Your name • Contact number • Job title • Location • Nominated company name • A brief explanation as to why you are recommending this stock Obviously any company you nominate must be listed on any of the markets in the GCC and should we have already received the same company nomination from another stock picker for the period the second nomination would be ignored as we have to invest in 10 different stocks every issue. The only other rule is you must be a resident of the GCC to participate. The EconomicME GCC Equity Fund will be

W h at h av e y o u g o t t o l o s e ? t e l l u s y o u r best stock picks every issue between now a n d SEPTE M BER 2 0 1 6 a n d s ta n d a c h a n c e o f w i n n i n g $ 1 0 , 0 0 0 . t h i n k y o u u n d r s ta n d g u l f markets? well, here’s your chance to prove i t: E c o n o m i c m e ’ s i n a u g u r a l fa n ta s y f u n d

liquidated on September 30, 2016, at this point our “Market Oracle” will be crowned and for their efforts will be awarded withUS$10,000. The fund will begin investing on September 30, 2015, and deadline for submission of our first 10 stock picks is August 31st. We will notify you if you are one of our fund managers by email and will send you a copy of the September edition with your buy recommendations featured. Obviously this is supposed to be fun but

there is a serious point to it. As investors, financiers and business leaders we should have solid grasp of the potential risks and opportunities facing the GCC economies and be able to make sensible recommendations to take not only our own businesses forward but also assist in the development of the GCC. The gauntlet has been thrown down and I am intrigued to see how we all perform and look forward to receiving your stock picks at editorial@economicme.com.

EXPERT

Issue 1 - 2015 Economic ME

SWF governance: it can be done Mahmood Hashim Al Kooheji CEO Mumtalakat

Mumtalakat CEO Mahmood Hashim Al Kooheji calls on the region’s opaque SWFs to follow Bahrain’s lead – transparency, it turns out, does not have to be the enemy of dynamism and commerical viability.

When it comes to SWFs in the region, BahCorporate governance and transparency have long been part of the business lexicon, but fol- rain Mumtalakat Holding Company (“Mumtalowing the global financial crisis - and height- lakat”), prides itself on leading the way in ened public cynicism regarding both corpo- terms of regional best practice. Launched in rates and governments’ ability to act in the 2006, Mumtalakat aims to run state-owned best interests of society - both terms have enterprises with the same discipline as the come in for scrutiny like never before to en- private sector, and to grow the wealth of Bahrain through well-governed institutions and a sure economic and commercial success. From a government perspective, greater strong corporate values system. Mumtalakat is one of the transparency and corporate govvery few SWFs to regularernance build trust in economies, ly disclose its financial results attract business and improve inon a full year basis, alongside flows of foreign direct investits annual report, which is furment, and GCC governments are ther evidence of our aim to go now taking steps to introduce regNumber of years beyond the requirements of a ulatory reforms to drive improveMumtalakat has been wholly government-owned enments in these areas. in operation tity when it comes to transparIn 2006, the Hawkamah Instiency. Mumtalakat, is now contute for Corporate Governance was established to bridge the corporate gap in the region. Hawkamah research shows that fourteen MENA countries have now issued corporate governance codes, over a third of which are mandatory, signalling that compliance is now strictly necessary, not simply optional. In collaboration with Standard and Poor’s and the IFC, Hawkamah has established the first ever Environmental Social Governance Index (ESG) tracking the transparency and disclosure activity of regional listed companies, with an aim of highlighting to SWFs the impact of good corporate governance on bottom line.

Economic ME Issue 1 - 2015

sidered one of the most transparent Sovereign Wealth Funds in the world. In an effort to open a two way dialogue between Mumtalakat and external audiences, we launched our â&#x20AC;&#x2DC;Lunch and Learnâ&#x20AC;&#x2122; seminars bringing together directors of our portfolio companies with key business leaders and stakeholders in Bahrain. Additionally, we recently launched our Directors Handbook, clearly outlining the expected conduct of Directors across our portfolio companies. Most recently, we established a partnership with the Pearl Initiative, a private sector-led not-for-profit organisation commit-

ted to improving transparency, accountability and business practices in the Gulf region. This partnership has led to a sharing of knowledge, experience and global best practice with our peers and experts in the field, in a bid to spread awareness of the principles of transparency and corporate governance. Additionally, Mumtalakat has worked with the leading international business school INSEAD to deliver a unique training programme for the directors sitting on the boards of portfolio companies, with the aim of raising the standards of corporate governance in Bahrain and the region. Mumtalakat recognises the strong business case for transparency and corporate governance best practice in improving decision-making processes, combatting corruption and ensuring sustainable operations. As a sovereign wealth fund, Mumtalakat is committed to the future economic prosperity of Bahrain and, in that respect, corporate governance is critical to our organisation as it improves reputation and trust amongst key stakeholders. Although thereâ&#x20AC;&#x2122;s clear evidence of progress in the region, there is always room for improvement. For state-owned enterprises, the priority is to create more clarity around the roles and responsibilities of these entities and the existing

shareholding and reporting structures. Governments must continue to introduce strategic reforms and initiatives, as well as new policies and regulations, to ensure both the private and public sectors are operating within set financial and operational disciplines, and adhering to the highest standards of transparency and corporate governance.

" t r a n s pa r e n c y and governance build trust in economies, at t r a c t i n g business and inflows of fdi. reform drives i m p r o v e m e n t. "

INTERVIEW

Issue 1 - 2015 Economic ME

All to play for It is the range of sectors open to investment that makes the opening of the Saudi market so exciting, says HSBC’s Arindam Das.

rindam Das, HSBC head of Securities for MENA has been in the region long enough to understand the scale of opportunity the opening of the Saudi market to foreign investors presents. It is not just the enormity of the market capitalisations or the potential trading volumes that are generating so much excitement in the international investment community, he says, but it is also the range of sectors available for investment – a range that cannot be found on any other Gulf bourse. For those with the appetite and acumen to invest wisely, the returns – given the sector range – could be excellent, he points out, on a market that looks (at the outset, at least) to be less volatile than the other Gulf exchanges.

“Saudi Arabia is about half of the t o ta l M i d d l e E a s t m a r k e t c a p, a n d i t is about two thirds o f t o ta l M i d d l e E a s t trading volumes. It a b s o l u t e ly d w a r v e s the other countries i n t e r ms o f s c a l e . ”

That said, Das suggests, we will not know how the market will really play out until Saudi is included on the MSCI Emerging Markets Index, something he believes will not happen for at least two to three years. > Why should we be so excited about Saudi Arabia opening to foreign investors? Saudi Arabia marks a departure from some of the other Middle Eastern countries because the other countries don’t have a huge number of sectors to choose from, they are very dominated by banking and finance and real estate. But Saudi has something like seventeen sectors, all of which are interesting. One of the challenges that the Middle East poses to all investors, international or local is that sometimes the sectors that drive the country’s economy are not accurately reflected on the stock markets. Therefore you may not be able to see the stock markets as reflecting the true worth of the economy. In that way, I think Saudi will offer a significant opportunity to modern investors. > And just how big an investment opportunity do you think Saudi represents? It is huge, but let me explain what I mean by huge. Saudi Arabia’s economy is currently in decline because of the oil price, but there is still almost $600bn of market cap. So, to put it in terms of trading values, there is a daily turnover of about two billion dollars. The low is about one billion and the high about four

Economic ME Issue 1 - 2015

billion. To put that in context, Saudi Arabia is “ W h e n S a u d i i s i n c l u d e d i n t h e M S CI Em e r g i n g about half of the total Middle East market cap, M a r k e t s I n d e x – a n d t h at w o n ’ t h a p p e n u n t i l and it is about two thirds of total Middle East trading volumes. So it absolutely dwarves the 2 0 1 6 o r 2 0 1 7 at t h e e a r l i e s t – a n a ly s t s other countries in terms of scale and size. It is e x p e c t n e t i n f l o w s i n t o t h e m a r k e t t o hard to estimate how much money will come in b e a n y w h e r e b e t w e e n 3 5 t o f o r t y b i l l i o n when the market opens up because it is not curd o l l a r s . T h at i s v e r y s i g n i f i c a n t ” rently in any of the indices. When Saudi is included in the MSCI Emerging Markets Index – and that won’t happen until 2016 or 2017 at the earliest – analysts expect a weighting of about two percent, which would mean net inflows into the market to be anywhere between 35 to forty billion dollars. That is very significant. IPOs in the UAE – Marka and Emaar Malls – for different reasons, all triggered by the crisis. have generated a huge amount of interest. Du- And then there was the Dubai standstill and > Do you expect liquidity inflows to be bai Malls was particularly interesting because the Arab Spring. In the last couple of years, proportional to those seen by Qatar and the UAE it was the first IPO in the region that was built this has changed significantly, so 2013 was a after inclusion on the MSCI index? on a book-based method, so it wasn’t a fixed great year for the UAE.. A combination of this and The money that came in (to the UAE and Qa- price. That was a first of its kind some flexibility on the local tar) far exceeded expectations, because the ex- in the Middle East. The price was markets regarding listing repectations from analysts were about one and a built on investor demand. I think quirements has increased enhalf billion dollars, but that has been exceeded subsequent large IPOs may want thusiasm for the local markets. by a large margin while the market hasn’t re- to follow that route, because it is Value to Saudi Arabia And we have even heard of ally gone up in value, so it is all new money. It clearly a more efficient method of MSCI Emerging some companies that went for was far more than expected. of price discovery. Markets inclusion the London listing coming back > Do you expect to see similar levels of > Why did we see Gulf to the UAE. volatility on the Saudi bourse to those seen on companies listing in London other regional bourses? in recent years, and do you expect more > How big an issue for foreign investors do you perceive a lack of transparency and corporate Obviously different investor classes behave dif- companies to list in the Gulf? ferently – there are investors who like volatil- Since the global financial crisis, the regional governance in the Gulf countries to be?

$40bn

ity and there are others who don’t. I think the markets languished a bit. 2009 to 2011 were volatility is liked by day traders. But I think not great years for the regional stock markets, Saudi is looking more for the longer term investors – certainly the foreign investor regulations suggest this is the case – they are looking for fund managers managing funds of more than $5bn, with a track record of more than five years. They want liquidity, not volatility. > We are seeing quite a few IPOs at the moment. What do you think the reason for that is? We had a barren few years after the global financial crisis, especially in the UAE, from an IPO perspective. And it was sorely missed. Because IPOs bring new liquidity into the market, they bring new depth and they bring fresh stocks for investors to look at. So the recent

So I think one shouldn’t have a stereotype that holds for the whole of the Middle East, because within the Middle East there are some countries with better standards of corporate governance than some others. It is improving - but these things do not happen overnight. In Saudi, corporate governance compares quite well to some peer markets. Saudi has a regulatory framework where corporate governance is taken very seriously. In the UAE this year a rule has been passed that requires every listed company to have an investor relations department. Also we have had local stock exchanges going on road shows to Europe and the US, with their top ten companies. That shows corporate governance is serious – they are prepared to meet with investors and be transparent about numbers and strategy.

FEATURE

Issue 1 - 2015 Economic ME

What I learned: by delisting Damas CEO Anan Fakhreddin

here was a time, not so long ago, when being the CEO of Damas was the hardest corporate job in the Gulf. In June, 2008, when then-owners the Abdullah brothers listed 28 percent of the jewellery company, raising $270.6m, many wondered how the formerly family-run business would adjust to the strictures of proper corporate governance. Not well, was the short answer. Just fifteen

“ At t h at t i m e , t h e m a i n focus was to keep the business going, to keep the lenders c o n f i d e n t t h at w e c o u l d r e pay, a n d at the same time keep t h e c o m pa n y i n ta c t a n d r e ta i n o u r ta l e n t, m a i n ta i n o u r s h o p s and our brands.”

months later, CEO Tawhid Abdullah, a member of the founding family, was forced to resign following a series of unauthorised transactions totalling $165m. It transpired the Abdullah brothers, without thinking to trouble shareholders, had withdrawn $96.6m in cash and close to two tonnes of gold, valued at $68m, from company coffers. As the market discovered what had been going on, Damas’ shareprice plummetted to $0.11, down by around 90 percent. The case was widely seen as a test for Dubai Financial Markets (DFM) regulator the DFSA. Would it show its teeth, meaningfully punishing a company that had so blatantly flouted the rules of public ownership, or would it roll over, making a special allowance for a company claiming ignorance, a company, moreover, with a history in the region stretching back more than a century? In the end, a three million dollar fine was issued – for “failure to exercise appropriate corporate governance” – it was ordered the missing $165m would be repaid, and the Abdullah brothers were banned from sitting on the board of any DIFC-listed company for a decade. It was at this time that Anan Fakhreddin was parachuted in to become Damas’ new

45 “The main objective behind delisting was just to allow us not to worry too much about the markets and to focus only on our core business – the manufacturing and retailing of jewellery”

CEO. As corporate clean up jobs go, this was the messiest in the short history of the DFM. That it was largely successfully executed is a credit to Fakhreddin and to the team he has put in place. In April, 2012, a controlling 75 percent stake in Damas was purchased for $445m by a conglomerate comprising Qatar-based Mannai Corp and private equity group EFG Hermes, effectively delisting the company. In March this year, Mannai Corp achieved full ownership. Since delisting, Fakhreddin says, the company’s fortunes have gone from strength to strength: 2013 was apparently the best year in Damas’ history in terms of profitability, and 2014 is set to surpass it. However, it is instructive today for anyone thinking of investing in a previously family-owned business to hear Fakhreddin talk of the events that threatened to bring Damas to its knees, and their aftermath. While much has been done by bourses and regulators throughout the Gulf to make corporate governance best practice standard procedure, still the story of Damas’ downfall encapsulates for many wary investors their worst fears about investing in Gulf stocks. Namely, that transparency doesn’t exist.

Issue 1 - 2015 Economic ME

Damas will list again, one day, Fakhreddin says – the company has learned its lesson. The question is, have the Gulf ’s other famous listed, once family-owned, companies? > How hard has your job been since you became CEO of Damas?

we fixed it as much as possible, to get the business back on its feet. This was all crowned by the acquisiton in April, 2012. The confidence of the new investors, their financial position, their ability to facilitate for Damas the refinancing of its old debt, and access to money markets, all of that was tremendous.

I must say it wasn’t an easy job. I > Are the debts all gone now? came during the peak of the criThat is all history. Obviously, the sis, so obviously the priorities first thing that happened after shifted. At that time, the main the acquisition was to refinance focus was to keep the business Fine DFM imposed the debt. We used to have a list going, to keep the lenders confion Damas of 32 banks, we currently only dent that we could repay, and at have four or five. Obviously, we the same time keep the compahave the normal borrowing that ny intact and retain our talent, maintain our shops and our brands. We were is a standard procedure for almost every busivery focussed on the restructuring of the debt. ness, but it is on totally different terms and you Once that had happened, we started focussing can’t even compare it to what we had before. more on the core business, to make sure that The company in reality has a very healthy fi-

$3m

nancial position and we are more or less in control of the situation, unlike what the picture was four or five years ago. > Do you prefer Damas being delisted? It was a decision of the new management, allowing the company to focus only on itself, and to really restructure the business, so we could achieve the financial objectives the new investors were looking at. I am confident that at one point in time, Damas will go back to the capital markets – I am not sure when – but I am sure it will eventually happen, once we decide the time is right and we have the right expansion plans and the requirments for the capital. But the main objective behind delisting was just to allow us not to worry too much about the markets and to focus only on our core business – the manufacturing and retailing of jewellery, which I think was the right decision. It has

Economic ME Issue 1 - 2015

“ A c o m pa n y l i k e Da m a s , b e i n g managed for a hundred years as a fa m i ly b u s i n e s s , I t h i n k t h at m ay b e Da m a s m a n a g e m e n t at t h at t i m e u n d e r e s t i m at e d t h e c u lt u r a l c h a n g e requirements to r e a l ly b e c o m e a successful listed c o m pa n y. ”

you have not so clear boundaries between the ownership and the management, it is always difficult to set the rules and to make the people think differently – you have an obligation to the market, you have an obligation to shareholders. It is not entirely your business. I think this was a major contributing factor to the issues that Damas and some other family businesses faced when they converted to listed companies, and this also gives us a lot more confidence now to go back to the markets, because we now have a professional, multi-national management team, that is basically best of standard in terms of the calibre of the people we have hired in the last two years. And now the ownership is totally separated from the management structure. > If you listed again, what would you do differently? It is not a hot subject right now, so in reality we don’t really have a plan, but I think when the time is right we will look at our options and we will decide what is the most appropriate structure in terms of which market and how to do it. > Do the Abdullah brothers still play any role in Damas?

proved to have been correct. I am sure at Having said that, I wouldn’t say our lives are some point in easier now, because in terms of corporate govtime damas ernance, in terms of how we manage and operwill go back ate the business, we still maintain the highest standards, and we still operate very much as if to the capital we were still a listed company. We are not slowmarkets - I am not sure when - ing down on issues like corporate governance or transparency. On the contrary, we still adbut i am sure it here to very strict rules that we have developed, will eventually so that we are in a position to go back to the happen, once market at any given point.

we decide the time is right.

No, because they are no longer owners. They sold their entire shareholding and they are no longer part of the Damas organisation. > Was there ever a point when you thought Damas would go bust? Not at any point. I have always known what the brand stands for and I knew the loyalty. The issues that Damas went through were all behind the scenes, on the corporate governance level, but nothing to do with the brand and it’s ability to deliver the right goods to consumers in the shops.

> Do you think being listed was a hindrance to solving Damas’ problems?

> Would you change anything as a result of what happened before?

Talking generally - not just about Damas - in the GCC we have seen some cases where family businesses find it really difficult to operate as listed companies. The critical thing was the mindset of the management, especially when

A company like Damas, being managed for a hundred years as a family business, I think that maybe Damas management at that time underestimated the cultural change requirements to really become a listed company.

Issue 1 - 2015 Economic ME

INTERVIEW

Letâ&#x20AC;&#x2122;s stay together

Economic ME Issue 1 - 2015

Mashreq Bank’s head of international banking John Iossifidis says the most pressing threats to GCC growth today are external - if regional governments can navigate geopolitical challenges, the prospects are excellent

ohn Iossifidis, Mashreq Bank’s head of international banking is a man with a keen sense of perspective. He’s not concerned about another property bubble in the UAE, nor is he worried about the sustainability of the Gulf countries’ long-term infrastructure spending plans. What bothers, him, at least on the morning he spoke to EconomicME, is the threat posed to the region’s economic stability by geopolitical tensions in general, and ISIS in particular. For the Gulf countries, there is considerable value in stability and security. In recent years, so much has been done by the GCC states - the UAE in particular - to capitalise on safe haven status, attracting vast investment from wealthy individuals and institutions alike. In total, the GCC saw investment of some $24bn last year from overseas. ISIS, then, and the disruption it threatens, is a considerable worry. “ISIS scares everyone in the region,” Iossifidis says, adding he believes recent rumours of Qatar breaking away for the Gulf Cooperation Council are wide of the mark, particularly now. “I don’t see it happening. I don’t see it as a realistic activity. You are seeing a lot of the GCC countries trying to bring everyone back in, diplomatically. I think with the geopolitical tensions around the region, you will see the GCC tighten, not loosen and break away. If it happened, I don’t think it would be good for the region. “The biggest issue [the Gulf faces] is the geopolitical tensions. They are all concerned about that – the UAE has made a very strong statement on ISIS. It is a concern, not just to the rest of the world, but also to the GCC, because it is very destabilising.”

As one of the largest and most diversified Middle East economies, it is hugely important for the region that Egypt performs strongly, acting as a reliable trade partner and lending stability to the region. The ructions of the Arab Spring may have lessened over the last twelve months, but still there is much work to be done in Egypt to satisfy the international investment community, and external factors threatening more disruption are far from helpful. He says: “In Egypt, you are seeing positive steps to ignite investment within the economy. Our view would be that Egypt has been through the worst of it, since the first revolution in 2011, the economy has deteriorated substantially, well into 2013, and stabilised at that sort of level. Now it is marginally improving. And they are doing everything they can in terms of igniting investment. No one wants a destabilised Egypt in the market.” Given the tensions in the region, Iossifidis repeats we are more likely to see the member coun-

“I think you will see the GCC get stronger, banding together stronger i n t h e fa c e o f a l a c k of global leadership f r o m t h e US . T h e y w i l l l i k e ly r e a c h out to the likes of Pa k i s ta n ”

tries of the GCC position themselves more closely to one another, appealing to nearby countries as trade partners, than we are to see them drift apart. “I think you will see the GCC get stronger, banding together stronger in the face of a lack of global leadership from the US. They will likely reach out to the likes of Pakistan,” he says. Geopolitical concerns aside, however, Iossifidis, who has more than 30 years of Gulf expertise, says he considers the GCC economies are currently domestically well positioned. He says: “Saudi seems to be doing quite well. The three [most strongly performing economies] continue to be the UAE, Qatar and Saudi Arabia – if you are looking at non-oil GDP, then it would typically be the UAE. But overall GDP growth, Qatar and Saudi are doing very well. “In that context, I don’t think you see huge differences between them. They were all expected to grow at 3.5 to four percent, but the IMF has recently revised that to the 4.5 percent range, surprisingly. Surprising because of what is happening in the rest of the world. The US may be doing very well, but Europe is spluttering along on the bottom, I guess the UK is doing very well, and you see China doing everything it can to maintain that 7.5 percent growth rate. “We are seeing recovery happening overall, on a broad base, and that will drive what happens in the Gulf. The biggest energy consumer from the Gulf at the moment is China, China’s growth is continuing. India, another big energy consumer, seems to have the fastest growth that it has had in a couple of years. So that is pushing along energy prices, but energy prices are lower than they have been. “The Gulf economies continue to

50 grow, and then there is the continued investment we are seeing in their own economies – infrastructure in Saudi and the UAE, Qatar, and we are starting to see it in Kuwait, too, although it is slower there due to political processes.” Attracting FDI remains the holy grail for most the Gulf states, a way to achieve very rapid economic growth while simultaneously creating jobs and opportunities for the populace. Over the last decade, the UAE and Saudi Arabia have stolen the headlines as FDI destinations, and it has been remarkable over the last twelve months to see the UAE move ahead of Saudi as a recipient of FDI, despite its smaller size, both geographically and economically. Iossifidis says: “If you look at the recent stats, the UAE has beaten Saudi to become the top FDI recipient in the GCC. FDI inflow rose nine percent in the UAE to $10.5bn last year, the fourth annual increase. The UAE is a much more open economy than Saudi. It was recently voted the nineteenth easiest country in the world to do business in. Saudi is a $560bn economy, the UAE is about $360bn. The energy companies will always put money into Saudi. But despite being so much smaller, the region’s financial hub remains the UAE, and Dubai specifically.” Which begs the question, will Dubai remain the region’s financial hub for the long-term, despite the level of competition it faces? There are people who would have you believe that Saudi Arabia’s recent announcement of the opening of its Tadawul stock exchange to foreign investors will be a game-changer, shifting the spotlight onto that country, to Dubai’s cost. Iossifidis says: “I think it [the opening of Tadawul] is a reaction to the UAE and Qatar being in the emerging markets index, and they want to be a part of that, and feel the benefits of that in the longer run. Do I see substantial change? People still need to be comfortable doing business in the region as a whole. It will take time. If you don’t understand the market you will be very reticent to invest. If you have a look at how much foreign capital is in the share markets in the GCC it is very small. Even with the portfolio approach, people do not allocate that much into the GCC. It will take

Issue 1 - 2015 Economic ME

“Cluttons released a s t u d y s h o w i n g w h at a million dollars will by you in Dubai. It was a 136sqm of r e a l e s tat e . C o m pa r e t h at w i t h H o n g K o n g , where it will buy you 20sqm, or London where you get 25sqm. You get more for your money in t h e UAE m a r k e t ”

time. There is also an element of opaqueness and what they perceive to be a lack of transparency.” In the last year, there has been much talk of the UAE’s real estate market being on the brink of another implosion. But despite the concern, values have continued to rise rapidly. Iossifidis believes the market is running on much more than just sentiment. He says: “If you had asked me eight months ago, a bubble would have been on peoples’ minds. But since April, our own index indicates that the market has been flat, ticking along. We had a 25 percent increase in 2012 and a 25 percent increase in 2013. The first quarter of 2014 showed a seven percent increase. That looked concerning. “But the regulators and the developers have put in place measures to slow that down. Those measures are things like mortgages that require a greater deposit: nationals have to put in 20 percent, expats have to put in thirty percent. Second mortgages go to thirty and forty percent. That is a big chunk of change. Stamp duty costs are up substantially. That automatically reduces speculation. “Developers are being more responsible, saying no selling or flipping can take place until a property is 70 percent paid. That frustrates speculators. So we are seeing a more fundamentals-driven real estate market, being supported

by people that want to live in the homes. Mortgage buyers are still the minority in this market, but it operates as a second home market in many ways, it is a safe haven market. It benefits from being a safe haven in a very turbulent region.” Even with prices high in the UAE, Iossifidis suggests there is still plenty of room for value growth – especially when you compare what is available in the UAE to what is available in other cities around the world. “There is still relative value to be had. Cluttons released a study showing what a million dollars will by you in Dubai. It was a 136sqm of real estate. Compare that with Hong Kong, where it will buy you 20sqm, or London where you get 25sqm. You get more for your money in the UAE market. You get more in Dubai or Abu Dhabi for a million dollars than you would in Los Angeles, even, by more than 100sqm.” EconomicME suggests to Iossifidis, as our time together draws to a close, that these are terrifying times we are living in – that opening and reading a newspaper is a considerable act of courage, let alone investing in a market. All over the world, conflict and tensions seem on the brink of boiling over, threatening global stability. His response is considered and interesting – revealing the phlegmatic nature, prepared to see the bigger picture, that no doubt makes him so good at his job. He says: “I wouldn’t use those words. It is just that we are so much more plugged into the world today than we used to be, so we are aware of it. These issues have always been there. The contagion effect makes them global. That’s all.” Let’s see.

52 LIFESTYLE

Issue 1 - 2015 Economic ME

Leave your heart in Venice

Travel to Europeâ&#x20AC;&#x2122;s finest destination for romance this summer and rejoice in the wonder of civilisation, says Jason Wilkinson

Economic ME Issue 1 - 2015

here better this summer to escape the Gulf heat than Venice – the world’s most beautiful city? Leave the sand and the humidity behind you – in only six hours you could be strolling through St Mark’s Square, or sitting in any number of world-class restaurants, eating unimaginably fine food and drinking in some of the planet’s greatest views. There is nowhere in Europe more romantic than Venice, with its famous waterways and gondolas, magnificent architecture and gener-

al air of gilded luxury. But that does not mean Venice is suitable only for lovers – far from it, Venice is a place everyone should see at least once in their life, even those steadfastly opposed to romance. Three days or more in this miracle of civilisation is enriching not only for the outlook, but for the soul. Although during the summer it can feel as if tourists outnumber actual Venetians by a ratio of 2:1, Venice still retains its ability to enchant. This exquisite city seems to have been built on nothing more than water and thus has a considerable global pull – it is the reason for the crowds – but it is important to remember that even in its most crowded places, you are never far from a secluded square or shady avenue. There is no reason to let the crowds get the better of you. As summer draws on, the crowds in Venice thin – travellers are perhaps put off by the prospect of the heat, but they needn’t be. Venice is a magical place 365 days of the year, and a little heat haze only makes it seem all the more like an Impressionist painting. The summer Art Biennale is a showcase for some of the world’s most important contemporary artists, and provides an exciting counterpoint to the gothic majesty of the Byzantine art that adorns the city’s churches and civic buildings.

It is not an exaggeration to say that Venice in all its glory is an overwhelming experience. Take the speedboat from the airport to your hotel – it is the best hundred Euros you will ever spend. Stroll the streets or hire a gondola – and do not be too rigid with a plan for the day. Go with the flow – allow the city to wash over you. Stop in any of the myriad cafes that can be found without too much looking down quiet sidestreets and enjoy the food and the drink without guilt. Venice is a gastronome’s delight – there is no point coming here with concerns for your waistline. Worry about that on your return. If your budget stretches to it, make sure you eat at the Cipriani, which is an unforgettable experience, combining true luxury and style with incredible cooking. Taking a pre-prandial drink at the world famous Harry’s Bar is also a valuable life experience. See the Rialto bridge at first light, perhaps on a morning jog (there is no better way to see the city, while the crowds still slumber), and make time in your day to see the Venice Guggenheim, which is both manageable in size and wonderful in collection. Nobody ever went to Venice and regretted it. Go while you are young enough to explore it and to enjoy it.

54 WEBSITE

Issue 1 - 2015 Economic ME

Introducing EconomicME.com Your number one site for Middle East business news

"EconomicME.com gives you the latest headlines and takes you direct to the source of the news."

We’re proud to announce the launch of EconomicME.com – the Middle East’s best source of online business news. Like its print counterpart, EconomicME. com is designed specifically to address the needs of investors, business leaders and financiers. Where EconomicME aims to bring you features and commentary from the leading minds shaping regional economies, EconomicME. com is a news platform and will help our readers prepare for business on a minute-by-minute basis. We will aggregate the most important of the region’s market-moving news and present it to you in an easy to use format. Clear and simple to use, easy to navigate and updated in real time, EconomicME.com gives you the latest headlines and takes you direct to the source of the news providing unparalleled coverage without bias from hundreds of sources. You will also be able to access and share the excellent content featured in our magazine from our team of contributors on all devices giving you a chance to catch up on our in

depth features and analysis anytime. This new service will undoubtedly give users a full perspective on the days’ events without having to search through hundreds of news providers, saving you time to get on with the real work of building a better business and securing financial objectives. You don’t even need to visit EconomicME. com. Simply subscribe to our newsletter and we will deliver regular updates direct to your email giving you instant access to critical content. Our commitment to newsletter subscribers means all you receive will be news. You will not receive a promotional email from a third party or become part of a marketing database. We understand our readers want information and that is what they come to us for. Therefore this is what we will give you. We welcome feedback and suggestions and will happily add news providers suggested by our readers. If you’d like to get in touch with us you can do so by emailing editorial@economicme.com or by visiting the contact us page on EconomicME.com

Giant trees grow from tiny grains L.A.T Cleveson is a proprietary investment firm with a clear focus on Africa We recognize that successful ventures are often a result of the convergence of complementary elements, due diligence and local know-how. With our extensive network of relationships and contacts within the continent and beyond, we are equipped to identify solid investment opportunities across key sectors. Through our Offices in U.K., West Africa and U.A.E. we look to leverage on our local knowledge and strong history in investing in key African markets. We offer the opportunity to advise, and where fitting co-invest with multinational corporations, and both private and government institutions.

Learn more at www.latcleveson.com