|Cover Story : Recession Proof|
MIDDLE EAST REGIONAL REPORT
Saudi Arabia is increasingly looking to the East to find growing markets for its oil and petrochemicals, says John Sfakianakis, SABB’s chief economist. China has become a powerful trading partner and is the second-largest source of Saudi imports and its fifth-largest export customer. “China is an exporter of goods, and Saudi Arabia is a significant importer, while China’s growth and thirst for oil imports has been largely supplied by Saudi Arabia,” Sfakianakis says. Over the past nine years, Saudi exports to China have grown by 963%.
Abdul Rahman Al Attiyah, secretary-general of the GCC, says the world is beginning to use Islamic banking and investment principles as a result of the global financial crisis. He told a conference in Dubai last month that Islamic financing in the Americas, Europe and Australia increased by 80.6% in 2008 to more than $35 billion, out of a worldwide total of $639 billion.
As the biggest and wealthiest country in the GCC, Saudi Arabia has substantial cash reserves it can tap to sustain economic activity, says Philippe Dauba-Pantanacce, senior economist for the Middle East and North Africa at Standard Chartered. SAMA reacted decisively and appropriately to a liquidity squeeze in June 2008 and ensured that liquidity conditions soon normalized, with interbank rates falling substantially, he says.
Structurally, the country faces the problem of underemployment and is trying to address this by diversifying away from oil to more labor-intensive industries. Recently, the cabinet approved a plan to increase the industrial sector’s share of gross domestic product to 20% by 2020 from less than 10% in 2007.
Education was deemed a priority in Saudi Arabia’s fiscal 2009 budget, Dauba-Pantanacce says. “This is in line with the recent project to build the largest women’s university in the world, with a price tag of $5 billion,” he says. The Princess Noura bint Abdulrahman University, with a capacity of 40,000 students, is under construction in the eastern suburbs of Riyadh.
Saudi Arabia’s record 2009 budget will be in deficit for the first time since 2002 and includes a 36% increase in capital spending to support the government’s infrastructure program. The budget includes funds for 1,500 new schools and 86 hospitals. It also includes appropriations for roads and traffic lights, ports, airports, railroads and new postal services.
Saudi Arabia is building modern infrastructure to improve its global competitiveness. Under a program introduced by Sagia in 2005, known as the “10 by 10 program,” Saudi Arabia pledged to become one of the 10 most competitive economies in the world by 2010. The International Finance Corporation ranked the kingdom 16th out of 181 countries in its “Doing Business Report 2009,” issued last September. The ranking was based on economic reforms and the ease of doing business. Besides the IFC benchmark, Saudi Arabia tracks the World Economic Forum’s global competitiveness index and the Institute for Management Development’s world competitiveness rankings. Sagia says Saudi Arabia will be in the top 10 in at least one of these rankings by 2010.
“Saudi Arabia is on the map in a way it has never been before as an investment destination,” says Coverdale of SABB. He cited the opening last August of the country’s stock exchange, the Tadawul, to institutions and individuals from outside the GCC. These foreign participants in what is one of the biggest markets in the emerging world must channel their investments through licensed local intermediaries. In the six months since this limited access to Saudi share trading was granted, HSBC Saudi Arabia says it has purchased 100 million shares valued at more than $1 billion on behalf of 30 foreign-based investment institutions. Total purchases of Saudi shares by foreign institutions in the same period were approximately $1.6 billion, which came as something of a disappointment to local brokers, who had predicted that the opening would attract huge interest from foreign investors looking to diversify their portfolios.
“This is not what everyone expected,” says Adeeb Al Sowailim, chief executive of Falcom Financial Services, a Riyadh-based shariah-compliant investment bank. “The Saudi equity market, in terms of pricing, is one of the best,” he says. The stock market fell 56.5% in 2008, as measured by the Tadawul All Share Index. It was up 39% in 2007.
Falcom was established in January 2007 at a time of growing competition in the financial services industry. “The best steel is made when the iron is hot,” Al Sowailim says.
Following the introduction of the Capital Market Law in 2003, all commercial banks engaging in investment banking were required to create separate entities for these activities, subject to licensing and regulation by the Capital Market Authority. This encouraged foreign investment banks to enter the market at a time when oil prices were soaring and the economy was booming. The CMA has issued 104 licenses, including 30 in 2008.
Despite the recent inflow from foreign institutions, individuals still account for 94% of the trading on Tadawul, and many are first-time investors. Falcom recently upgraded its portal, which provides free information on corporate fundamentals and technical analysis. “We believe in building an empowered investor community,” Al Sowailim says.
Among at least six current investment banking assignments, Falcom is advising Jordan Internet City, a $300 million development in Amman that is seeking to attract major information technology firms from around the world. The firm is also advising on the financing of new industrial zones on 4.3 million square meters (1,000 acres) of land south of Riyadh.
In January 2009 Falcom introduced the first licensed Islamic index in the Saudi market with a pre-market feature that allows investors to get an indication of prices before the market opens. “Investing is relative, and growth in the Middle East region is stronger than anywhere else except China,” says Francis Beddington, head of research at London-based Insparo Asset Management, which has a Middle East and North Africa fund. “The region is also more transparent than China, where investors lack confidence in the data,” he says.
According to Beddington, oil prices have probably bottomed, and the Middle East could experience strong growth in 2010, following a slowdown this year. Fixed-income securities in the region are paying very attractive yields, he says. “Credit is a theme we see the most interest in for 2009,” Beddington says.
Oil prices appear to have found a short-term floor as further evidence emerges that the Organization of Petroleum Exporting Countries is making good on its output cuts, says Howard Handy, general manager and chief economist at Riyadh-based Samba Financial Group. “For now, we are maintaining our $55 a barrel average price projection for 2009,” he says. “By 2010, US consumers should begin to regain some confidence, and oil prices should rise 9%,” he predicts.
Meanwhile, there has been a surge in upstream oil and gas investments across the GCC, particularly in exploration and development projects to replenish declining reserves. There has been a 9% increase in upstream investments in the Gulf since June 2008 to a February 2009 estimate of $204 billion, according to Dubai-based Proleads, a research firm. The United Arab Emirates increased such investments by 30% from last June to $55 billion.
PRIVATE EQUITY EXPANDING ITS FOOTHOLD IN THE REGION
The Middle East’s private equity market is small relative to the size of the region’s economies. It offers growing opportunities for investors, however, as regional businesses seek new sources of funding in the credit crunch and as initial public offerings are difficult to arrange in current market conditions.
“Growing companies in the region need capital to finance their growth,” says Fadi Arbid, executive vice president and country head for Saudi Arabia at Amwal AlKhaleej, a private equity firm founded in Riyadh in 2004, which also has offices in Dubai and Cairo. “Saudi Arabia is the 800-pound gorilla in the room and cannot be ignored,” Arbid says. However, there are opportunities throughout the Middle East and North Africa, he notes.
Family-owned businesses dominate the private sector across the region. Many of these businesses are reluctant to give up control and ownership. “Business owners are becoming more willing to consider external funding because it is more difficult now to get bank loans, and because they have limited capacity to inject capital themselves in light of their declining net worth,” says Tariq Al-Sudairy, senior vice president at Amwal AlKhaleej.
Increased government spending, favorable demographics and economic reforms are driving growth in the region, Al-Sudairy says. “We are helping companies get to the next level and expand into new geographies,” he says.
Amwal AlKhaleej took a sizeable minority stake in Damas, the largest jewelry retailer in the UAE, and is partnering with the company to form Saudi Damas, which now has many branded stores in Saudi Arabia. In Egypt, the private equity firm is a founding shareholder in a textiles holding company, Al Arabia, which has made a series of acquisitions in all stages of the business, from cotton trading to spinning, weaving, dyeing, finished goods and retail.