Saudi Sukuks’ Well Gusher
2012 April 24 by admin
Saudi Arabia blazed onto the Islamic debt scene with a Gulf-leading $6.5 billion in issuance in Q1, with the sudden entry of banks and utilities as Western-sourced project and syndicated finance vanished. One-quarter that amount came from a two-tranche state electric company instrument that was heavily subscribed from regional investors at a 150 basis point premium over the mid-swaps rate. The global total for the period was $45 billion, already half 2011’s overall activity, according to industry trackers. The UAE continued to be prominent despite headline rescheduling attempts by additional government-linked groups following the DW package. Family groups are tapping the market for the first time, and Abu Dhabi Oil diversified with a direct placement in Malaysia. However Dubai World’s Drydocks unit sought refuge in bankruptcy court as creditors took a hard line, and the parade of names in search of refinancing now includes the airline and its duty-free shops. Yields on the HSBC Gulf sukuk index had dropped to 4.5 percent at end-March but have since crept up as oil prices have moved in the opposite direction. Both the Saudi and UAE stock markets have jumped 20 percent, behind only Egypt, and the former may join the MSCI roster this year with a formal opening to qualified international institutions and individuals. The dual Emirates exchanges missed the last promotion chance to the core universe, but are working on infrastructure and short-selling issues that may allow admission. Smaller area bourses have lagged, with Kuwait, Oman and Qatar in negative territory while Lebanon and Tunisia were flat. Despite the carnage in next-door Syria, a Lebanese Eurobond was well bid by banks and expatriates, and Tunisia’s government has secured a US bilateral guarantee to facilitate possible near-term external debt rollover. It can back a $500 million placement following a Treasury bond operation of that size with Qatar. The Islamic-party headed administration has emphasized job creation and capital mobilization efforts and has invited outside advice and support for small business startups as untangling of the previous Ben Ali legal and illegal holdings slowly proceeds.
Egyptian stock performance has veered to the top from the bottom of the pack, although the early year 40 percent surge has faded. The central bank has laid the foundation for its own sukuk thrust as Treasury auctions fail and longer-term yields approach 17 percent. Foreign reserves are off 60 percent since Mubarak’s resignation to a critical import coverage level, and a diaspora launch of special certificates of deposit is designed to gather funds with talks over a $3 billion IMF loan at a stalemate pending the outcome of Muslim Brotherhood-military jockeying for power and scheduled May presidential elections Withholding tax may be modified to stimulate domestic debt inflows while other stimulus is off the table with promised subsidy reductions to bring the fiscal deficit under 10 percent of GDP.
The West Bank-Gaza’s Bleary Blockades
2012 April 4 by admin
Despite a blip in Palestine Stock Exchange interest mainly from Gulf investors exiting Egypt, the World Bank’s annual West Bank and Gaza donor report underscored the severity of “fiscal crisis” with a recurring $1 billion deficit only half plugged by aid and commercial bank borrowing. The double-digit growth pace from a low base will not repeat as Israel’s access and trade restrictions remain intact, and business and regulatory reforms languish especially around land registration. The Palestinian Authority’s wage bill rose 5 percent in 2011 on greater security force employment. Tax and customs revenue collection were below target, as cumulative domestic debt reached over $1 billion, “at the limit” of available supply. Capacity may be further constrained by proposals to impose capital gains and savings account levies alongside ongoing efforts to overhaul payer exemption and reporting practices. The public pension system is currently insolvent, and steps to eliminate arrears and introduce “parametric changes” were missing in recent years. The civil service takes half of regular spending, with salaries absorbing twice the MENA average as a fraction of national income. Reconciliation between the respective governing parties in the twin territories as outlined by their leaders could reduce overlap, but administrative structures are unwieldy despite data and information processing strides, the document comments. The combined West-Bank Gaza economy will increase 7 percent in 2012, with per-capita incomes around the end-1990s level. Gaza construction spurted after blockade easing with first assistance-related and then private-sector equipment let in, while the West Bank’s pillars are defense and government. Unemployment continues at 25 percent, and after the initial wave, few Israeli investment restrictions have been loosened. Border closures and limits on dual-use items with potential military application extending to telecommunications are external obstacles, but dated and inconsistent internal company and transactions laws are also market-unfriendly.
The monetary authority which is assuming central bank functions is moving to impose Basel II standards, and non-performing loans are under 5 percent of the total. The formal payments network is unable to transfer Israeli shekels into Hamas-controlled Gaza which “strengthens unregulated money changers,” in the paper’s view. Electricity, water and sanitation are critical unmet infrastructure needs demanding $500 million in funding. Energy disruption has begun to affect Israel as well with the damage to Egypt’s gas pipeline contributing to $4 billion in economic losses, according to the Finance Ministry. Bond yields have risen on tensions with Iran as foreigners have dumped short-term Makam holdings now subject to tax. With 2 percent inflation, benchmark rates have stayed the course with the shekel flat against the dollar. Projected GDP growth is 3 percent, but the OECD recently criticized high public debt and poverty ratios which restrict industrial and labor maneuver.
Israel’s Stretched Strike Capability
2012 February 27 by admin
As speculation again mounted that Israel was preparing a military operation against Iran’s nuclear facilities after comprehensive international sanctions, banks and the stock exchange were shuttered by a labor federation strike over contract workers, as the Netanyahu administration struggles to slim state employment to tackle the 3 percent of GDP budget deficit. Municipal civil servants had previously walked out on proposed higher utility taxes to raise revenue as housing costs continue to spark national debate despite evidence of modest correction as bank lending standards are reviewed. Interest rates went down 25 basis points to 2.5 percent in January but many households are unable to get mortgages while 90 percent financing has overextended other borrowers. Property developers tied to a handful of family-run conglomerates that have readily accessed cash have drawn widespread official and popular criticism, and reducing their economic dominance has become a coalition priority as it also engages in contingency planning from Arab spring revolts. Delek Real Estate became overleveraged and recently completed a debt restructuring which sparked outcry from the central bank over favorable owner terms. Foreign investors after a run-up last year have shunned local corporate as well as government bonds, which lost their former tax exemption. The sovereign returned to external markets with a $1 billion US issue which was well-received as the first placement in three years after a ratings upgrade. Venture capital-raising likewise hit a decade peak of $2 billion in 2011 with one-quarter of the total going to internet start-ups, but the industry association predicts less activity ahead with the lackluster IPO climate both on the Tel Aviv and New York stock exchanges.
In the US, listed multinational companies have long been under scrutiny for relation with Iran, and the oil and financial embargoes have been stiffened in a new round to include European and Asian partners and the central bank and SWIFT payments network. Tehran has threatened retaliation with oil supply suspension and Strait of Hormuz closure as the currency has fallen 50 percent against the dollar with pressure intensification, forcing the central bank to intervene heavily and hike benchmark rates which remain indicative for no-interest Islamic lending. Restrictions have been tightened on foreign transfers as inflation already at 20 percent further spikes. The fiscal deficit was again worsening prior to the confrontation as the Ahmadi-Nejad administration moved to restore subsidies and spending ahead of March parliamentary elections. The stock exchange too could be caught in the boycott net as privatizations slowly unfold inviting foreign participation. Geopolitics may be deterrent enough despite the Israeli Defense Minister’s assurance of “no imminent decision” on an attack as Tehran transactions indefinitely lodge in their bunkers.
The UAE’s Island Retreat Reflections
2012 February 27 by admin
UAE shares rose through mid February after MSCI’s upgrade postponement as Abu Dhabi committed to proceed with showcase projects including an artificial island with delays after extending another $5 billion lifeline to ailing property developer Aldar in which wealth fund Mubadala has a large stake. Debt restructurings have swept that emirate as well as Dubai, with a halt in construction hitting family-run groups and private capital providers. Both local and foreign banks are exposed as in neighboring Dubai, with entire country claims two-thirds from Europe coming to $150 billion by the latest BIS data. Emirates NDB has one-quarter of its loan book with Dubai’s government-related corporate complex as total debt is $100 billion or 125 percent of GDP, according to Moody’s. $15 billion must be repaid this year as serial reschedulings following the DW deal are under negotiation and may involve bondholder haircuts for the first time. The international financial center and Jebel Ali free trade zone each have large redemptions upcoming that officials intend to refinance without seeking Abu Dhabi’s aid. Real estate values are at half the 2008 peak and economic growth is put at 3 percent even with the benefit of Arab spring diverted financial services, property and tourism flows. The twin stock exchanges are still attempting consolidation on lackluster volume that brought a wave of broker closures in past months. Their size ranks behind other GCC members, with Qatar at over $100 billion capitalization only kept at frontier status by festering foreign ownership limits.
In Lebanon stocks are flat on a 10-15 percent luxury real estate correction as growth was just over 1 percent in 2011 on slow formation of a government coalition and the fallout from Syrian conflict next door. Commercial bank lines at risk there through a half-dozen subsidiaries amount to $7.5 billion and Middle East-North Africa financial and current account links otherwise account for 40 percent of the total, according to the annual IMF Article IV report. Headline inflation was 5 percent last year and may stay up on wage and VAT hikes as a history of primary budget surpluses fades. Electricity and infrastructure spending represent big outlays and with public debt at 135 percent of GDP covering the overall deficit has invited “difficulties” with banks reluctant to take short-term paper. A $1.5 billion Eurobond operation combining a swap and new issuance several months ago was “appropriate” in the Fund’s view, but local interest rates should rise to ensure pound liquidity. The exchange rate peg has provided stability but lifts the bar for unrealized business and labor competitive changes reflecting another mass of regional drift, the analysis comments.
Egypt’s Ponderous Pound Pounding
2012 February 15 by admin
Egyptian shares retraced half their 2011 index drop as parliamentary elections entered consecutive phases with predicted Muslim Brotherhood dominance and talks resumed with the IMF on a $3 billion loan which may come with lighter conditions but no longer the no-strings package dangled in the immediate aftermath of Mubarak’s overthrow. Since then foreign reserves have more than halved to $16 billion on capital outflow, poor trade and tourism earnings, and central bank currency defense to keep the pound in the 6 to the dollar “stability” band. With only enough on hand to cover several months’ imports, non-essential goods buying will be limited. The fiscal deficit is running at double-digits as a fraction of GDP as the government turns to the World Bank, other development lenders and GCC sovereigns for support. The last group has put money into domestic Treasury bills but auctions continue to be undersubscribed as yields long ago breached 15 percent, and buyers insisted on a switch to dollar-denominated issuance. Local banks have increased their exposure 50 percent over the past year as deposits barely rose. Public sector borrowing has sent overall debt to 80 percent of GDP as officials contemplate new versions including diaspora and sukuk bonds to meet rollover requirements. Recent Fund analyses have highlighted exchange rate and institutional investor rigidities that may presage policy shifts and reprogramming on these fronts as the basic economic model is in flux with the gradual military handover. Although the army has chipped in with a $1 billion contribution from its assets to the reserve position, property and other deals completed under the previous regime have been annulled by courts as prominent business executives, including the head of lead privatization adviser EFG-Hermes, have been barred from leaving the country pending investigation.
Tunisia too is scrambling to maintain its longtime dinar peg as it faces a $650 million Eurobond redemption coming off recession and a 7 percent of GDP balance of payments gap. Unemployment is near 20 percent and 200 foreign-owned companies closed last year, according to the chamber of commerce. To mobilize funds a $500 million T-bill placement is set with Qatar as a $20 billion infrastructure and social spending plan presented at the Deauville G-8 summit still awaits pledges. Like its North African neighbor flotation of Islamic paper at home and abroad is actively under consideration. However the IMF in its latest review of pioneer Malaysia, which managed a record $2 billion external sukuk in 2011, noted that the segment was “unlikely to be spared global shocks.” International banks have not pulled back from there to the same extent as in the MENA zone hanging from slender pegs.
The Maghreb’s Simmering Pot Straddle
2012 February 6 by admin
In North Africa as Morocco and Tunisia attempt Islamic-party led nonviolent economic comebacks, attention has also focused on Algeria where the powers in control for decades have fought an ingrained insurgency often compared with the current battle in Syria. There the international community has withdrawn energy, tourism and banking ties as an Arab League mission seeks a phased Assad regime transition as in Yemen’s case in order to avoid full-scale bloodshed as erupted in Libya. The exchange rate was officially devalued as the central bank spent billions of dollars in initial defense. Non-essential import curbs have been introduced, and personal currency access restrictions remain in place. Private banks dominated by Lebanese-owned units are now authorized to offer pound transfer, but speculative trading is outlawed. Prominent business executives allied with the government have been subject to asset and travel freezes abroad as the stock exchange lies dormant and GDP may be shrinking at a double-digit pace. Monetary officials claim to be prepared for a “long crisis” and “painful sanctions,” but will not disclose their reserve position despite previous reporting.
Algeria’s holdings in contrast have ballooned to $175 billion or 3 years of import coverage on a 30 percent oil and gas revenue windfall in 2011. However setbacks in the public investment program dragged GDP growth to 2.5 percent on 5 percent food-driven inflation. Banking system liquidity also contributed, on “very expansionary” fiscal policy, according to the IMF’s annual review. Post Arab-Spring spending was up 50 percent on civil service wage awards, small enterprise assistance and capital outlays which lag the original infrastructure blueprint. The budget deficit was 4 percent of GDP, but hydrocarbon stabilization fund savings will keep public debt low. The dinar depreciated slightly but broadly reflects fundamentals, the analysis asserts. The central bank continues to absorb excess liquidity through two facilities, but should as well consider hiking benchmark rates to buttress the managed float currency regime, it suggests. Medium term official finances could worsen on commodity correction as deficits would be met exclusively through government borrowing as the current account balance turns negative. Better tax administration and targeting of social transfers can aid the budget, and after this year’s minimum salary increase labor policy should focus on redressing 20 percent youth unemployment. Subsidies and debt rescheduling for designated small and midsize enterprises should not be permanent budget features, the Fund recommends. State-owned banks still account for 90 percent of the sector which lacks a central credit registry. Only a half-dozen stocks are listed on the tiny exchange, which may benefit from connections under discussion with Francophone West Africa’s regional counterpart. A distressed asset management company in formation to take long non-performing loans may also help with modernization as the main post-independence party otherwise clings to old methods.
Saudi Arabia’s Recalcitrant Remittance Reliance
2012 February 2 by admin
As Saudi Arabia, the region’s largest stock market, prepared the ground for further non-GCC access after lukewarm embrace of the five-year old indirect swap scheme, new Labor Ministry policy to curb migrant worker remittance outflows offset enthusiasm with its downbeat implications at home and abroad. The past year has witnessed a renewed “Saudization” push, especially for high-skilled and management jobs in response to Arab Spring-emphasized youth unemployment as the public sector minimum wage was boosted and additional training benefits granted. Asian and MENA expatriates are 7.5 million according to the World Bank, and in 2010 sent $25 billion back to source countries. The unspecified ceiling is designed not as much to protect the balance of payments, which generates a 15 percent of GDP surplus on oil proceeds, as to deter executive influx to free positions for locals. Economists also cite the forced transfer to domestic consumption which can ease the burden on infrastructure spending which at the programmed pace will produce budget deficits by mid-decade. The government is also trying to lure poorer citizens who reportedly could be recruited by terror groups into lower-salary construction slots needed to fulfill the 2011 pledge for 500,0000 more houses. Lack of inventory has been a major inflation cause and real estate transactions will be further aided by the passage of a long-debated mortgage law. The transfer crackdown coincides with the senior royal transition to the next King and increased friction with OPEC and strategic adversary Iran which has again threatened to shut the Strait of Hormuz in response to international trade and financial sanctions. Tehran had previously been accused of attempting to assassinate the Saudi Ambassador to the US, and the combination of diplomatic and commercial tensions dragged the non-oil PMI to the mid-50s level.
Egypt, which has resumed negotiations on IMF help with the loss of half its international reserves to $18 billion since President Mubarak’s ouster, accounts for the largest remittance contingent at over $5 billion which has been vital to countering the chronic trade deficit and facilitating domestic demand. The infusion has also supported the pound around the 6 to the dollar mark as the interim political structure strives to maintain the peg amid debt and inflation woes and election results pointing to Muslim Brotherhood victory. Tourism at one-tenth of GDP has disappeared and strikes and ambiguity over property rights continue to stifle FDI. Jordan too, where 2011’s stock market drop was not as severe, provides a huge workforce and without remittances the current account gap would be close to 20 percent of GDP. Saudi Arabia is also a leading aid contributor to cover the worsening budget deficit as King Abdullah’s reshuffled arrangements remit subsidy responsibilities to parliament.
The Gulf’s Drill-Down Disappointments
2011 December 29 by admin
As Gulf OPEC members gathered for their Vienna plenary with oil prices tipping below $100/barrel, serial setbacks convulsed the region still trying to grapple with Arab Spring aftershocks. Two years after skirting with default, Dubai was the subject of speculation that 2012’s estimated $10 billion debt load would be restructured under harsher terms than the DW work-out, potentially entailing bondholder haircuts. Government-linked companies remaining in trouble since Abu Dhabi’s $20 billion support injection, including various units of royal family-controlled Dubai Holding, have yet to reach definitive deals, and the recently-completed exchange of Nakheel obligations saw wholesale dumping of new instruments as creditors feared another write-down request. The government admitted upcoming payments would be “challenging,” but claimed it was preparing backup local bank credit lines and structured sukuks among other refinancing options. To instill confidence an internationally-modeled bankruptcy law is due to go into effect soon, as doubts surface that the neighboring emirate would again offer help as it cuts back and delays its own project pipeline, most notably the Saadiyat island cultural center and Guggenheim museum branch. Sheikh al-Nayan has doubled public sector salaries and unveiled a slew of housing and infrastructure programs that may call heavily on annual $100 billion petroleum revenue and sovereign wealth fund holdings. Earlier this year it issued a $3 billion Islamic sovereign bond to lay a foundation for near-term additional corporate borrowing. The UAE was again rejected for an MSCI bump to the core stock market rung on reservations about the delivery-versus-payment system but low volume was an implicit concern. Qatar too failed to make the grade on foreign investor restrictions despite natural gas-led GDP growth above 15 percent, with syndicated loan access and pricing suffering with the withdrawal of traditionally active European banks. Economic expansion is forecast to halve in 2012 with further resort to large-scale external debt issuance.
Saudi Arabia experienced an unaccustomed cabinet switch as the central bank governor moved to Economy Minister, while his successor was recruited from an investment banking and stock exchange background, which may presage additional opening. Both budget and current account surpluses are due to narrow, and a $150 billion stimulus package must be managed at home as well as $20 billion in aid to Bahrain and Oman under the provisions of a recent GCC summit. 5 percent inflation could beat GDP growth next year as the delicate transition to a new monarch unfolds. The regime continues to face terrorist incidents which may mount with the civil war on the border with Yemen. It also seeks to avoid the popular resentment spectacle of neighboring Kuwait, where the prime minister was dismissed after protesters crashed the parliament decrying corruption. Food costs there have risen 10 percent as the Gulf’s falling stock markets continue to cause indigestion.
Iran’s Serial Sanctions Stubbornness
2011 December 7 by admin
The Tehran Stock exchange lost ground in October as the threat of new international commercial and financial punishment exacerbated currency and inflation fears, amid a big industrial group scandal involving allies of President Ahmadi-Nejad in the run-up to municipal elections next March. He and religious leader Khamenei have been in a power struggle since his disputed second term victory, and the split has played out in government in-fighting and embassy seizures where each camp jockeys for superiority. An updated International Atomic Energy Agency assessment suggests continued nuclear bomb preparations, and the UN will soon debate the prospect of stiffer sanctions. In the meantime the US publically hinted at including the central bank in its legal boycott, while the UK vowed to retaliate against attacks on diplomatic premises. The monetary authority has already been reeling from 20 percent-plus inflation and fragmentation of the exchange control regime, which has tried to limit formal depreciation against the dollar to 10 percent. The informal market premium is 30 percent, and to relieve pressure banks were given wider scope to sell foreign currency. The price rises have come from subsidy removal as officials were forced to backtrack on original cutbacks after poor and middle-class protests. The Economy Minister survived a no-confidence vote in parliament on these questions and the failure to detect earlier $3 billion in alleged fraudulent letters of credit by a prominent business executive who used them for company and privatization bid funding. State-run Bank Saderat, which has been on the overseas blacklist, issued the paper and financials fell broadly on the bourse as the p/e ratio touched 7. In contrast with the main floor, a successful housing firm IPO took place on the OTC tier as that sector is viewed as a defensive play. Most other industries have been hit by global shunning and Euro-crisis pressures including power where a major listing wrote off $2 billion in debt. Some money has moved into bonds as the benchmark 4-year rate was lifted to 17 percent and progress toward exchange-rate unification could accelerate to reverse sentiment by the end of the fiscal year, according to analysts.
The possibility of an Israeli military strike against suspect facilities has again factored into the calculus following the IAEA report and statements by the Netanyahu administration after resumed skirmishes with Iran’s ally Hamas. With GDP growth slowing and exports forecast to be flat in 2012 the central bank has cut interest rates. With popular outrage and a crackdown on large financial-industrial conglomerates housing prices have started to come down, although a steep fall could batter bank balance sheets whose shares have been spurned on that exchange as well.
Egypt’s Fading Square Peg Fit
2011 December 1 by admin
Egyptian shares stayed at the bottom of the core universe heap as Tahrir Square again erupted in mass demonstrations and violence ahead of military-run parliamentary elections, following lapsed local bond auctions and 6 to the dollar pound breach as international reserves of over $20 billion are off 40 percent this year. Democracy activists have urged a poll boycott and insisted that prominent civilians enter the government prior to 2012’s scheduled presidential contest, while the Muslim Brotherhood expected to be a dominant force will compete in the process despite flaws. The cabinet has been reshuffled by the army council in response to criticism, and the Finance Ministry has reopened talks on an IMF loan while the central bank head’s term was extended. The reserve position covers less than 4 months of imports, and under conservative estimates the current account deficit will be at 2 percent of GDP, while the fiscal one is at 10 percent. Suez Canal receipts, which fell 20 percent in 2009, could soften further with a repeat global trade tumble, and European tourism and investment have suffered from dual tensions. Remittances from the Gulf may hold up, but pledges of large aid and T-bill allocation by sovereign wealth arms have barely materialized. Foreigners, who once accounted for one-fifth of the latter market, have cut holdings to a fraction as benchmark yields hover at 13 percent on headline inflation that has dropped to half that figure. Public debt/GDP is already at 75 percent, and while fiscal policy remains loose the monetary authority has just raised interest rates while regularly intervening to keep annual pound depreciation to 5 percent. The Fund previously proposed a $3 billion package with few strings, but with the deterioration since Mubarak’s January departure and the subsequent claims of the Euro-crisis a new offer may not meet the interim administration’s size and stringency desires.
In Tunisia the main Islamic party won handily in the initial political transition phase, and a counterpart was biggest vote-getter in Morocco’s monarchy-sanctioned exercise for a parliament with greater power. The Libya conflict will seal Tunisia’s recession as its rating is maintained on negative outlook and a large Eurobond comes due in 2013. At the opposite end of the troubled state output scale in the region Iraq on restored oil production is up 6 percent, but Baghdad has recently challenged Kurdistan over license awards to multinationals in a perennial politically-sensitive issue. From a security standpoint, the bulk of US troops are slated to leave soon but the stock exchange rally has sputtered on fears Iran incursions could join enduring inter-ethnic enmity as sand in the gears.