After the turbulence of 2009, human nature expects the new year to be one of positive difference. If 2008's ending weeks were tinged with the hope that the GCC economies would survive unscathed 2009 proved them wrong, as the Al Gosaibi debt issue, the Dubai World surprise and the general battering of UAE credit ratings by rating agencies brings 2009 final days with a gloom that focuses ofcourse on the hope all will be well. Yes I have mentioned the silver linings that accrue in this over cast moment of the regions financial landscape. While we can all hope for the best, there has to be a concerted effort to put into place the elements the will change the financial topography for the region. This does imply what are the likely events or processes that will change the economic outlook.
Here is a mind map of what perhaps will happen.
1. The Dubai World Debt.
Indeed this has been and will be the prime issue that the financial and media world will focus upon. It is crucial to the well being of the economic system for the region, and most importantly, it is where the confidence of the financial community can be best restored. I believe it is important that the banks and lenders agree to the restructuring of the Dubai World debt, whether through their negotiations with the company or through some prodding from the government, both Dubai and the Federal government. Indeed, Abu Dhabi assistance is already implicitly tied to the lenders agreeing to a restructuring and thus I do feel bankers and lenders will not be so short sighted as to scuttle a settlement merely to get brownie points. I believe there might be a few hiccups but in the end the settlement will be hammered out and a restructured debt will provide the breathing space to improve the repayment capacity down the road. I believe also that a successful deal with the lenders will allow either Abu Dhabi, Dubai government or the Federal Government, or a combination of them all, to be more forthcoming about their plans in a restructured environment.
2. Oil Prices.
The current bet is that an oil price hike would slow down the recovery in the US and Europe and hence derail any recovery that we have seen thus far. My own opinion is that a better economic performance from India and China will bring in a higher demand for oil, and a gradual up tick in the US and European economy will also add to the demand side of oil. I foresee a $15 increase, on average, for the price of oil in 2010, with a possibility in the summer for even a higher spike based of inventory management and constraints in stockpiles. Added there could be tensions between Iran and the West that could well add to the upward pressure on oil prices. The political dimension to oil prices is hard to follow and while most predict Iraqi oil production improvement could well keep a lid on oil prices, my own feeling is that we are a bit complacent about oil prices and it could well be a benefit for the region adding to the reserve pools of the sovereign wealth funds.
3. Increased Government spending.
I do believe Saudi Arabia, UAE and Qatar within the GCC, and Iraq and even Iran, outside the GCC, will be investing more into infrastructure, health and education. The first two countries have already announced major plans for power, railway and roads and health care upgrades. These are massive investments which will become the base of economic recovery for the region. Though it may well be that the fruits of these spending programs may not show up immediately there is no denying that it will set the stage for the decade. UAE's announced investment into nuclear based power generation already promises to benefit the region and indeed the US and European suppliers of technology.
4. Revenue Leaders.
If property was the revenue leader for the region in the past decade it is clear that new revenue leaders will emerge. I feel the service industry and the trading sector will come back into the limelight, with tourism becoming a new major revenue earner for the region. The model of an enabling economy in the UAE, through which the service and trading sector can thrive has been a tried and tested model and all we have to see is the return to those values as the prime drivers of the economy. In addition the attention that has been put into creating tourism as a destination driver for UAE there is the promise that this could well be the new bright star for economic performance. Countries like Oman who have a very rich tourist content will also begin to play this card more effectively, resulting in a broad based attraction for the region. I also feel in some ways manufacturing will become more important as more electric power is available in the years ahead, allowing the strategic advantages of the region coming into play.
5. Financial Performance.
I do believe banks will continue to be burdened in their performance through the effects of the past two years. There is alot of clean out of these balance sheets and that may well be the focus for the years ahead. I know that banks are in better shape than our rating agencies would like us to believe, but their focus on asset management will be more crucial then trying to get run away performance numbers each year. I also believe banks will have to change the way they compensate their senior staff as some bonus schemes only implied that the more risk they took the higher their bonus. I do however feel that the stock markets will do better than they have recently and while the maturity of these stock markets is still doubtful with true depth and two way liquidity still down the road attention towards superior performance compared to other markets is on the cards.
I do feel in addition some important steps need to be taken for the year ahead. Paramount to this would be the setting up of a 'think-tank', perhaps sponsored by the banks, to bring in the mind power to frankly and openly discuss the issues that face the economy. I also believe that people within the UAE government also recognize that there are many here, both Emirati and expatriates, who may not agree with some of the ways things are handled, but their sincerity and care for the country should not be questioned. I believe a broader base of discussion is what will improve the understanding.
Yet we have to understand that there will always be the cynics, like some of my banker friends who call me to tell me how bleak things are, and there will be the over enthusiastic admirers who will pretend there was no problem. Perhaps the truth is squarely in the middle, and this is perhaps why I ask for balance, not hysteria, for understanding rather than idiocy, for patience rather than panic, and most of all, when in doubt 'ask' do not 'guess'.
My single line call for 2010: 'Will be an anxious year, with more reasons to cheer than weep."
Showing posts with label abu dhabi. Show all posts
Showing posts with label abu dhabi. Show all posts
Saturday, December 26, 2009
The Silver Lining.
Telling someone that one is based in Dubai, or the UAE, these days is tantamount to admitting that one is under the strains of a financial system that is groaning under debt and piles of newspaper analysis, which range from brilliant to pure junk. While there is not doubt that the fall out from Lehman Brothers in the US in September 2008 took a while to be understood in UAE and the Gulf, especially in terms of its possible impact. This was certainly the case of most countries in the world who felt the US economic problems were isolated and their global impact would be marginal. How wrong we all were, as it was often said when the US economy sneezes the world economy catches a cold; in this case this is not a cold, this is full blown bronchitis.
Dubai perhaps was in a state of denial as to the impact that was seething below the surface, with prominent officials making upbeat statements right into the face of the storm that was approaching. But enough of the dissections of the situation. I believe that this situation has caused some benefits that might well be ignored by people. I believe these are the silver linings on the clouds that need to be seen and pondered upon. I list them in no particular order of preference.
1. Governance and transparency will become the watch words of the coming decade. The UAE as a whole, and Dubai in particular, has, reading between the lines, realized that the maverick ways of doing business will not just work from here onwards. Yes they have a wonderful vision but with that vision a sense of clarity and focus are to remain paramount. A greater adherence to critical reviews and financial planning will be the result of this. I believe, at a Federal level, the UAE will want to monitor how their financial system, and more importantly the quasi government entities conduct their business will be under more closer review and oversight.
2. Dubai will need to go back to the basics. Traditionally the soul of Dubai's economy was the commerce generated by the trading houses; it is this sector that was ignored in the rush to become a metropolis of high rise buildings. It has been the trading hub that Dubai gained its reputation on and this is where the superior infrastructure in terms of ports and facilities will come into play. As demand grows in the Sub Continent, Iran and Iraq the service ability of UAE and Dubai will become of paramount importance giving the traders the traditional advantage they have held for so long.
3. Dubai's underlying story has not been shattered, it has been ofcourse seriously dented, and the repair work is going to be on the back of a restructured financial position, focusing back to the enabling economy model that allows businesses to thrive and do well here. The financial hub, the technology hub and the trading hub status will come back into focus. While pundits predict that properties will remain subdued, I anticipate from 2010 a 5% annual rise in property prices, on average, through the next 6 years. While this may seem minuscule to the dizzy levels of a couple of years ago, so be it. Some smart Germans even announced they will proceed with their development on the World Islands, perhaps aware that when in 3 years time they complete construction they will be walking into a recovery.
4. The focus of a more Federally driven economy will be the key aspect to consider. This is indeed good and this crisis has brought focus back to one nation and one economy as a model for moving forward. This cannot be bad for the economy and its future, and I do feel all these statements about political compromises are really humbug. This new economic focus on a Federally driven economy will actually benefit Dubai in more ways that one, mostly by allowing the integration of the infrastructure covering areas of public transport, power generation and perhaps eventually ports management.
5. UAE position within the GCC as the most favored place to do business from has not been compromised in this crisis. On the contrary they have not gone an blamed the excesses of foreign property developers and indeed have held their words even against their own plans. Quite simply the floor fell of the real estate market and whether this was the reason the debt implosion happened or because of a world wide financial contagion will always remain open to debate.
6. Finally the business laws and financial management of the system will become more streamlined. This will be a welcome step for the business sector. It might be a teething process but it is clear the regulation and over sight support by a sound business judicial system can only mean well for all.
Indeed there will ups and downs in the process. The first and most pressing issues will be the restructuring of the balance of the debt of Dubai World, which the bankers and lenders eagerly await into the new year. I tabulated, from the public media, maturity profile of the debt in Dubai, and the UAE and it is interesting to note that if banks were to consider around $ 12 billion to restructured from a 2 year maturity profile to a 5 year maturity profile then indeed the pressures what seem so immediate will be released. At the end of the day this breathing space is needed for the positive economic fundamentals to come into play. The service sector remains strong and indeed the tourism industry has actually performed remarkably better than expected. These are the silver linings we are missing, and while pulling out the check books and putting money into real estate may not be the first thing that comes to mind there is no doubt that not being a player in this economy is not the right thing to do.
Yes Dubai, especially, must cut back on its long term project plans and make them fit the needs that they realistically assess, and side by side phase the development from here on. They must also realize that a fair amount of the splurging of the past years was indeed wasteful and even at times questionable. This is why the return to basis is so vital at this stage to be emphasized by all and sundry.
Dubai perhaps was in a state of denial as to the impact that was seething below the surface, with prominent officials making upbeat statements right into the face of the storm that was approaching. But enough of the dissections of the situation. I believe that this situation has caused some benefits that might well be ignored by people. I believe these are the silver linings on the clouds that need to be seen and pondered upon. I list them in no particular order of preference.
1. Governance and transparency will become the watch words of the coming decade. The UAE as a whole, and Dubai in particular, has, reading between the lines, realized that the maverick ways of doing business will not just work from here onwards. Yes they have a wonderful vision but with that vision a sense of clarity and focus are to remain paramount. A greater adherence to critical reviews and financial planning will be the result of this. I believe, at a Federal level, the UAE will want to monitor how their financial system, and more importantly the quasi government entities conduct their business will be under more closer review and oversight.
2. Dubai will need to go back to the basics. Traditionally the soul of Dubai's economy was the commerce generated by the trading houses; it is this sector that was ignored in the rush to become a metropolis of high rise buildings. It has been the trading hub that Dubai gained its reputation on and this is where the superior infrastructure in terms of ports and facilities will come into play. As demand grows in the Sub Continent, Iran and Iraq the service ability of UAE and Dubai will become of paramount importance giving the traders the traditional advantage they have held for so long.
3. Dubai's underlying story has not been shattered, it has been ofcourse seriously dented, and the repair work is going to be on the back of a restructured financial position, focusing back to the enabling economy model that allows businesses to thrive and do well here. The financial hub, the technology hub and the trading hub status will come back into focus. While pundits predict that properties will remain subdued, I anticipate from 2010 a 5% annual rise in property prices, on average, through the next 6 years. While this may seem minuscule to the dizzy levels of a couple of years ago, so be it. Some smart Germans even announced they will proceed with their development on the World Islands, perhaps aware that when in 3 years time they complete construction they will be walking into a recovery.
4. The focus of a more Federally driven economy will be the key aspect to consider. This is indeed good and this crisis has brought focus back to one nation and one economy as a model for moving forward. This cannot be bad for the economy and its future, and I do feel all these statements about political compromises are really humbug. This new economic focus on a Federally driven economy will actually benefit Dubai in more ways that one, mostly by allowing the integration of the infrastructure covering areas of public transport, power generation and perhaps eventually ports management.
5. UAE position within the GCC as the most favored place to do business from has not been compromised in this crisis. On the contrary they have not gone an blamed the excesses of foreign property developers and indeed have held their words even against their own plans. Quite simply the floor fell of the real estate market and whether this was the reason the debt implosion happened or because of a world wide financial contagion will always remain open to debate.
6. Finally the business laws and financial management of the system will become more streamlined. This will be a welcome step for the business sector. It might be a teething process but it is clear the regulation and over sight support by a sound business judicial system can only mean well for all.
Indeed there will ups and downs in the process. The first and most pressing issues will be the restructuring of the balance of the debt of Dubai World, which the bankers and lenders eagerly await into the new year. I tabulated, from the public media, maturity profile of the debt in Dubai, and the UAE and it is interesting to note that if banks were to consider around $ 12 billion to restructured from a 2 year maturity profile to a 5 year maturity profile then indeed the pressures what seem so immediate will be released. At the end of the day this breathing space is needed for the positive economic fundamentals to come into play. The service sector remains strong and indeed the tourism industry has actually performed remarkably better than expected. These are the silver linings we are missing, and while pulling out the check books and putting money into real estate may not be the first thing that comes to mind there is no doubt that not being a player in this economy is not the right thing to do.
Yes Dubai, especially, must cut back on its long term project plans and make them fit the needs that they realistically assess, and side by side phase the development from here on. They must also realize that a fair amount of the splurging of the past years was indeed wasteful and even at times questionable. This is why the return to basis is so vital at this stage to be emphasized by all and sundry.
Sunday, December 13, 2009
The Wolves need to back off.
When the crisis of credibility and debt was unfolding in Dubai and the region, I had commented that this crisis has one benefit that it will make the UAE think like a nation and not as individual city states. Irrespective of the rumors of assets deals between Dubai and Abu Dhabi, the bottom line was, in my eyes, that an adherence to a one Nation concept was all the more important to all parties. Since September of this year this has been the message of one people and one nation. It was in this light that the announcement today of Abu Dhabi's $10 billion support for Dubai has been made. Yes it leaves one wondering why all this drama if the end the Sukuk maturing today was going to be paid in the first place. I have all along said the public relations side of this episode leaves a great to be desired and I am sure all parties have learned from it.
I now have to smugly look at my friends in Moody's and other rating agencies and wonder where their argument that support from government to commercial entities is 'questionable' stands? In the parlance of the real world will they admit they jumped the gun and became over cautious, will they step forward and correct what has been done wrong in the downgrades and the review notifications? I suspect not, because rating analysts hate to admit they are wrong.
For Dubai indeed this is a bitter lesson learned, in terms of its relations with debt holders, the media and indeed the manner in which crisis is handled. However, I always say if the end has been satisfactory then all said and done it works to the better of all. Yes there will be questions over access to new credit lines, and there will be the rumor mill wanting to know the background of the 'deal' between Abu Dhabi and Dubai. Frankly, as someone who has lived here for three decades and followed all this carefully, I believe that the good of the country has been restored. Yes Dubai needs now to do a proper public relations exercise, not those glitzy statements of the past, and get some serious repair work underway. While the debt has been paid today, the damage still needs to be repaired and this is where the hard work must go.
While the credibility of UAE has been restored, there will be a number of doubters out there, and these will need to be talked to, engaged in discussions and a manner of governance brought back to the forefront that will bring confidence and support for all that is being done from hereon. I do believe that all parties who care for this country, both UAE Nationals and seasoned expatriates should now speak out and talk of measures that will be needed to restore confidence in the system. Today an important brick has been laid, more work has to be done from here on.
I now have to smugly look at my friends in Moody's and other rating agencies and wonder where their argument that support from government to commercial entities is 'questionable' stands? In the parlance of the real world will they admit they jumped the gun and became over cautious, will they step forward and correct what has been done wrong in the downgrades and the review notifications? I suspect not, because rating analysts hate to admit they are wrong.
For Dubai indeed this is a bitter lesson learned, in terms of its relations with debt holders, the media and indeed the manner in which crisis is handled. However, I always say if the end has been satisfactory then all said and done it works to the better of all. Yes there will be questions over access to new credit lines, and there will be the rumor mill wanting to know the background of the 'deal' between Abu Dhabi and Dubai. Frankly, as someone who has lived here for three decades and followed all this carefully, I believe that the good of the country has been restored. Yes Dubai needs now to do a proper public relations exercise, not those glitzy statements of the past, and get some serious repair work underway. While the debt has been paid today, the damage still needs to be repaired and this is where the hard work must go.
While the credibility of UAE has been restored, there will be a number of doubters out there, and these will need to be talked to, engaged in discussions and a manner of governance brought back to the forefront that will bring confidence and support for all that is being done from hereon. I do believe that all parties who care for this country, both UAE Nationals and seasoned expatriates should now speak out and talk of measures that will be needed to restore confidence in the system. Today an important brick has been laid, more work has to be done from here on.
Friday, December 11, 2009
The Night of the Rating Agencies
The rating agencies have in rapid succession changed their position of Dubai and UAE entities, almost like in famous night of the generals from World War II, where former darlings fell from grace.. Suddenly the very story they were selling so well a year ago is being shot down by them in their supposed zest for 'caution'. In what clearly seems a case of jittery nerves Moody's has down graded three UAE based banks citing the over all financial situation over the Dubai World debt to be the reason for caution. Interestingly they say this when on November 29th, 2009, yes just about 10 days back, they said that UAE Banks rating were on review and then do not explain the reasons for the downgrade other than some prosaic general statements. I know a Moody's spokesperson will say yes the result of this review is the downgrade yesterday of EmiratesNBD, Dubai Islamic Bank and Mashraq Bank.
To us who are familiar with rating processes one has to see what happened since the rating review was announced and the actual rating was downgraded. Ratings are not the whims of financial analysts, as indeed Moody's, Fitch and S&P are finding out being sued recently by CALPERS, one the largest public sector pension funds in the US. I would suggest readers see http://zerohedge.blogspot.com/2009/07/calpers-lawsuit-against-rating-agencies.html where transcripts of the actually filed complaint appear.
Frankly since the 'intention to ask' for a Standstill on Dubai World debt a number of positive things have happened and have been over looked by our friends at rating agencies and in sections of the financial press.
Before I go further let me be clear I am not suggesting that there are no issues with the $26 billion debt of Dubai World or there should not be questions asked that need answering on a number of other financial commitments in UAE. This is indeed a normal and healthy process, provided all parties engage in constructive discussions on these matters.
Here is how is see why the panic is not being seen in balance.
1. Dubai Government did not ASK for a 'standstill' it said it was its intention to discuss this with Dubai World bondholders and debt providers. Till today NO formal written request has been made asking for this 'standstill'.
2. Governments and companies all over the world use the media to convey to its bondholders such intentions for discussion especially as there are hundreds of bondholders, all the more so in a traded market. The wording of Dubai's press disclosure may not have been politically or financially soothing in the choice of words, but it has been a modus operandi for bond issuers to use the media to engage in a dialogue.
3. The recent panic two days back about DEWA bonds suddenly being due for payment due to a Moody's downgrade was resolved in 24 hours with the bankers holding the bonds, which mature in 2036, agreeing to continue with the terms of the bond as issued indicates that there are banks who are prudent enough to understand that rating agencies cannot be the ultimate arbitrators of investment decisions.
4. I find it appalling that the DEWA news of resolving the issue has not received the same front page focus in the financial press, perhaps because it does erode the sense of hysteria that has been generated. I have always asked my friends in the media to be fair and balanced.
5. The UAE Central Bank at the beginning of the crisis made it clear that it not only guarantees the deposits of the banks but also will stand by the financial system. It also arranged a special tap facility at 50 basis points over the interbank rate for all banks, domestic and foreign branches, in the UAE for any liquidity support. Perhaps my friends at the Central Bank should send a copy of this announcement to the Moody and S&P offices.
6. EmiratesNBD being downgraded is perhaps the biggest surprise to me. Its Tier one capital ratio on risk a healthy 12.1% or more. In addition its Tier 2 capital ratio is a very robust 19%. The banks balance sheet as at Sept 2009 shows its strength as a $ 80 billion bank with substantial liquidity and prudent lending policies. Dubai Islamic Bank was downgraded a punishing two notches when there is no clear reason for such a drastic move other than the analysts perception that things were still bad, ignoring that a substantial part of the problem is being addressed.
7. Putting major entities in UAE, including Abu Dhabi, on a downgrade review clearly shows how little these rating agencies know of the region.
I am not disputing an agency's right to review or downgrade, but please give me something sensible and substantial to chew on rather than the flippant words of a young man too over worked or over partied in Dubai's social scene. It was good to see my friends in Abu Dhabi not to be too perturbed by the likes of Moody's ratings, I bet many smiled and said 'business as usual'.
I have a simple question to ask? What happens to these rating agencies when the bond is paid off? Will they have the guts to say they got it wrong? Or will they then say well there are long term issues?
To us who are familiar with rating processes one has to see what happened since the rating review was announced and the actual rating was downgraded. Ratings are not the whims of financial analysts, as indeed Moody's, Fitch and S&P are finding out being sued recently by CALPERS, one the largest public sector pension funds in the US. I would suggest readers see http://zerohedge.blogspot.com/2009/07/calpers-lawsuit-against-rating-agencies.html where transcripts of the actually filed complaint appear.
Frankly since the 'intention to ask' for a Standstill on Dubai World debt a number of positive things have happened and have been over looked by our friends at rating agencies and in sections of the financial press.
Before I go further let me be clear I am not suggesting that there are no issues with the $26 billion debt of Dubai World or there should not be questions asked that need answering on a number of other financial commitments in UAE. This is indeed a normal and healthy process, provided all parties engage in constructive discussions on these matters.
Here is how is see why the panic is not being seen in balance.
1. Dubai Government did not ASK for a 'standstill' it said it was its intention to discuss this with Dubai World bondholders and debt providers. Till today NO formal written request has been made asking for this 'standstill'.
2. Governments and companies all over the world use the media to convey to its bondholders such intentions for discussion especially as there are hundreds of bondholders, all the more so in a traded market. The wording of Dubai's press disclosure may not have been politically or financially soothing in the choice of words, but it has been a modus operandi for bond issuers to use the media to engage in a dialogue.
3. The recent panic two days back about DEWA bonds suddenly being due for payment due to a Moody's downgrade was resolved in 24 hours with the bankers holding the bonds, which mature in 2036, agreeing to continue with the terms of the bond as issued indicates that there are banks who are prudent enough to understand that rating agencies cannot be the ultimate arbitrators of investment decisions.
4. I find it appalling that the DEWA news of resolving the issue has not received the same front page focus in the financial press, perhaps because it does erode the sense of hysteria that has been generated. I have always asked my friends in the media to be fair and balanced.
5. The UAE Central Bank at the beginning of the crisis made it clear that it not only guarantees the deposits of the banks but also will stand by the financial system. It also arranged a special tap facility at 50 basis points over the interbank rate for all banks, domestic and foreign branches, in the UAE for any liquidity support. Perhaps my friends at the Central Bank should send a copy of this announcement to the Moody and S&P offices.
6. EmiratesNBD being downgraded is perhaps the biggest surprise to me. Its Tier one capital ratio on risk a healthy 12.1% or more. In addition its Tier 2 capital ratio is a very robust 19%. The banks balance sheet as at Sept 2009 shows its strength as a $ 80 billion bank with substantial liquidity and prudent lending policies. Dubai Islamic Bank was downgraded a punishing two notches when there is no clear reason for such a drastic move other than the analysts perception that things were still bad, ignoring that a substantial part of the problem is being addressed.
7. Putting major entities in UAE, including Abu Dhabi, on a downgrade review clearly shows how little these rating agencies know of the region.
I am not disputing an agency's right to review or downgrade, but please give me something sensible and substantial to chew on rather than the flippant words of a young man too over worked or over partied in Dubai's social scene. It was good to see my friends in Abu Dhabi not to be too perturbed by the likes of Moody's ratings, I bet many smiled and said 'business as usual'.
I have a simple question to ask? What happens to these rating agencies when the bond is paid off? Will they have the guts to say they got it wrong? Or will they then say well there are long term issues?
Wednesday, December 9, 2009
Moody's Cheap Shot.
During my banking days I often met with rating agencies and always found them to be a rather pompous lot who 'researched' alot and often were judgmental to the point of sounding like pontificating pundits. They performed an important task for the financial markets and while generally did a decent job, but once in a while they messed up in royal style. Moody's downgrade of Dubai Electricity and Water Authority (DEWA) is based on Dubai government's "recent decision to explicitly segregate its direct obligations from those of its GRIs, following which a decision was subsequently made to pursue a debt restructuring for Dubai World'.
Moody's conveniently sets aside Dubai's assertion that it was never a guarantor of the liabilities of Dubai World, this was stated and known to all Sukuk holders, while Dubai government does seem to suggest that as a shareholder it will support the restructuring of Dubai World. Admittedly, as I have said before, the public handling of this matter was far from elegant, Moody's downgrading of DEWA and then going over the top and downgrading companies lilke Mubadala, TAQA, and other GRI's of Abu Dhabi Government is perhaps clearly evidence of their lack of understanding the risks in this market. In addition the biggest surprise of all is the assertion that Etisalat, the Federally owned largest telecommunications operator, is also slated for a downgrade review.
Moody's baseline credit support for GRI's is based on whether the governments who have substantial interest in the GRI will lend it the support if it is needed. Thus these down grades imply that Moody's feels that Abu Dhabi Government may not be able to or willing to support the likes of TAQA, Mubadala, Etisalat and others. This truthfully suggests that somebody at Moody's has not done their homework, Abu Dhabi has the financial means, liquidity and will to support any of the entities that have been named in the review for downgrade of Moody's. DEWA is a large utility company and Moody's downgrade triggers a payment of $872 million and not $ 2 billion as is being reported in some sections of the financial press. It must be stressed that the particular sukuk in question was not guaranteed by Dubai government and was against the billings inflow of DEWA.
Moody's is not being entirely fair in its massive across the downgrades of all the entities it named in its recent press release. Ofcourse, one is prone to wonder what their motives were in a situation where such reviews while acceptable for say Dubai World or entities directly effected by the debt resturcturing attempt, certainly do not warrant the same of the other entities named. This does remind one of 1997 fiasco when Moody's downgraded Hanover Re (one of Europe's largest re insurers). It transpired that Moody's has issued an unsolicited rating on Hanover Re and then asked them to formally apply for a rating, which Hanover Re did not accede to. When Moody's demanded payment for the unsolicited rating and Hanover Re refused, Moody's downgraded the company causing $175 million losses to the company in the stock price. In 2005 Moody's was subpoenaed by a court in the US and only in July 2008 it sheepishly admitted that some of this officials, who they conveniently called 'independent financial advisers' had engaged in unethical practices and that it had corrected the problems for the future.
The 'issuer-pay' model for fees of Moody's is highly questionable as it asks the issuer of securities to pay for the rating that it issues and is a subject matter still under serious review by regulators. It also gives Moody's the power to not only negotiate high fees but also hold companies whose paper it rates to ransom, as was indeed was the case of Hanover Re. The Securities and Exchange Commission in the US in July 2008 issued a scathing report questioning the practices of rating agencies and pointed out Moody's in particular. When nine employees openly questioned Moody's own ethical practices in 2007 they were 'downsized' from the company and Moody refused to comment on the 'internal matter.'
I am not suggesting any conspiracy theory but rather the lack of proper analysis, or depth of knowledge on this matter.
My simple consideration now is that that these ratings that have been put on review for downgrade, i.e. Etisalat, Mubadala, TAQA and many others in the UAE, clearly do not deserve such a harsh treatment. So I wonder why Moody's would take such an nonsensical and rash step when a person familiar with UAE, and especially Abu Dhabi could easily explain that for say Abu Dhabi alone the daily revenue of oil alone is over $140 million per day, then add the investment income, and income from services, and the list goes on. I am sorry to say but the boys at Moody's you got this one wrong and it would be wise to wipe the egg of your face and get your act right. But then I better be careful they might downgrade my sukuk's, glad no one issued one in my name.
Moody's conveniently sets aside Dubai's assertion that it was never a guarantor of the liabilities of Dubai World, this was stated and known to all Sukuk holders, while Dubai government does seem to suggest that as a shareholder it will support the restructuring of Dubai World. Admittedly, as I have said before, the public handling of this matter was far from elegant, Moody's downgrading of DEWA and then going over the top and downgrading companies lilke Mubadala, TAQA, and other GRI's of Abu Dhabi Government is perhaps clearly evidence of their lack of understanding the risks in this market. In addition the biggest surprise of all is the assertion that Etisalat, the Federally owned largest telecommunications operator, is also slated for a downgrade review.
Moody's baseline credit support for GRI's is based on whether the governments who have substantial interest in the GRI will lend it the support if it is needed. Thus these down grades imply that Moody's feels that Abu Dhabi Government may not be able to or willing to support the likes of TAQA, Mubadala, Etisalat and others. This truthfully suggests that somebody at Moody's has not done their homework, Abu Dhabi has the financial means, liquidity and will to support any of the entities that have been named in the review for downgrade of Moody's. DEWA is a large utility company and Moody's downgrade triggers a payment of $872 million and not $ 2 billion as is being reported in some sections of the financial press. It must be stressed that the particular sukuk in question was not guaranteed by Dubai government and was against the billings inflow of DEWA.
Moody's is not being entirely fair in its massive across the downgrades of all the entities it named in its recent press release. Ofcourse, one is prone to wonder what their motives were in a situation where such reviews while acceptable for say Dubai World or entities directly effected by the debt resturcturing attempt, certainly do not warrant the same of the other entities named. This does remind one of 1997 fiasco when Moody's downgraded Hanover Re (one of Europe's largest re insurers). It transpired that Moody's has issued an unsolicited rating on Hanover Re and then asked them to formally apply for a rating, which Hanover Re did not accede to. When Moody's demanded payment for the unsolicited rating and Hanover Re refused, Moody's downgraded the company causing $175 million losses to the company in the stock price. In 2005 Moody's was subpoenaed by a court in the US and only in July 2008 it sheepishly admitted that some of this officials, who they conveniently called 'independent financial advisers' had engaged in unethical practices and that it had corrected the problems for the future.
The 'issuer-pay' model for fees of Moody's is highly questionable as it asks the issuer of securities to pay for the rating that it issues and is a subject matter still under serious review by regulators. It also gives Moody's the power to not only negotiate high fees but also hold companies whose paper it rates to ransom, as was indeed was the case of Hanover Re. The Securities and Exchange Commission in the US in July 2008 issued a scathing report questioning the practices of rating agencies and pointed out Moody's in particular. When nine employees openly questioned Moody's own ethical practices in 2007 they were 'downsized' from the company and Moody refused to comment on the 'internal matter.'
I am not suggesting any conspiracy theory but rather the lack of proper analysis, or depth of knowledge on this matter.
My simple consideration now is that that these ratings that have been put on review for downgrade, i.e. Etisalat, Mubadala, TAQA and many others in the UAE, clearly do not deserve such a harsh treatment. So I wonder why Moody's would take such an nonsensical and rash step when a person familiar with UAE, and especially Abu Dhabi could easily explain that for say Abu Dhabi alone the daily revenue of oil alone is over $140 million per day, then add the investment income, and income from services, and the list goes on. I am sorry to say but the boys at Moody's you got this one wrong and it would be wise to wipe the egg of your face and get your act right. But then I better be careful they might downgrade my sukuk's, glad no one issued one in my name.
Sunday, November 29, 2009
Dubai World: A spin that is hard to follow.
Dubai's debt woes have captured the world news attention, with articles written by people who are familiar with the region and the issues, and some obscure journalists who would be hard pressed to find Dubai on the world map. My three decades of experience living in UAE, and almost all of it in the financial sector, as a participant and observer, has taught me that in many cases the depth of the problems may well never be known, but in equal measure the efforts going into the solutions are always clouded in a measure of secrecy.
Yet globalization and the presence of international media has made it more difficult to not tell the extent of the problems. Some weeks ago when it was revealed that Dubai World alone had $60 billion of debts, out of possible $82 billion of total Dubai debt, I did balk at the number for two reasons. In the first place how could a company with the size of DP World have acquired such a huge debt, totally disproportionate to the overall debt of Dubai and more importantly, who were the silly bankers who had not only opened the tap of finance to that level but perhaps opened the floodgates to lending money to one entity?
It would seem that someone advising the Dubai government might well have thought that since the majority of the debt is in one entity lets isolate it from the other good parts of Dubai and hence proposed a 'standstill'. Interestingly the standstill concerns mainly the $4 billion of an Islamic bond maturing on the December 14th 2009. From what I gather is that perhaps only 15% of this bond is held by hedge funds from Europe and some from the US, or perhaps tax havens, leaving the chunk of the bond to be held by local banks, investment companies and private investors from the region. While preferential treatments of bond holders are not possible, my guess is that a two tranche payment of this bond will be a solution that might be proposed.
Alternatively, a new short term issue will be put together in the next week allowing local and regional banks to fund it, and use those funds to retire the old bond thus allowing perhaps 60% of the old lenders to roll into the new structure and thus saving face. This new bond/lending may well carry the express backing of the Government of Dubai, which unlike the chunk of the $60 billion is really not guaranteed by the Government.
Interestingly Abu Dhabi had, over the weekend, said it was there to help and support Dubai and will 'pick and choose' its support, thereby indicating that there is a dialogue of substance going on between the two neighbors. It was also a neat way of telling bankers that their follies of the past cannot be bailed out at will by simply creating crisis. We have to also remember that Abu Dhabi has always been very sensitive to the issue of defaults and has, more than Dubai, seen things in a Federal light rather than just about their own Emirate. I would therefore say that through the Central Bank and Abu Dhabi based banks there will be support coming in, even of in bits and pieces. The difficultly will be to know exactly what amounts and when they will be available.
As for Dubai World, it has perhaps learned a harsh lesson in public relations. One government official told me privately that it was hoped the announcement that actually caused all the nervousness would have been seen positively that now the Government of Dubai was going to reorganize DP World and all that was being asked for was time to do this. While that may well have been the intent of the move, the only thing that stuck in the minds of the banks and the financial press is that an obligation was 'not going to be paid' on time.
Dubai World, while a combination of real estate, capital markets and venture capital assets, has borne the brunt of the real estate meltdown, still has assets that could, in a recovery, be worth a substantial amount of money. Its largest and most publicized acquisition was of P&O for about $7 billion, and its port management operations are in the top three in the world. The impairment of the real estate portfolio and the lack of cash flow from it may well be where the bulk of the problems lie. However, with revenues of over $3 billion and a net profit of $ 800 million, bankers will have to see how this revenue can pay off the huge debts in the future. Yet it would seem that a selective sell off, rather than a fire sale, can bring in the cash to deal with a major chunk of the obligations.
However, the problem has been that most of the debt has been short term and it has been supporting long term assets and it is this mismatch that has caught DP World off balance, especially as the financial crisis of last year dried up not only liquidity but appetite of bankers to lend. Indeed a stable real estate market will help matters but so too will the scaling back of some of the real estate projects this company wanted to do. It will need to go back to the basics of its logistic and port management business, at which the company has proved itself to be very good. As for the huge pile of debt, this will need to be restructured and not by announcing standstills but by engaging in hard negotiations with the bond holders and debt holders for a restructuring that is realistic and well backed into the realm of a five year plus debt.
As a PR exercise DP World or the right people in the government should come out and admit that the way the matter was handled last week was not elegant. At the same time the current discussions in resolving this matter of the standstill should be revealed more openly and a degree of engagement and transparency brought to the table. I am personally confident that a solution is on hand, and it may well be a combination of Federal, Abu Dhabi and Dubai initiatives backed by the banks who have been at the forefront of resolving this matter. I also suspect that the financial markets also realize that the international impact of this embarrassing episode do not warrant the hype that has been created. Importantly the next two days are important we then the country goes into the National Day holidays, perhaps an opportune time for Abu Dhabi to emphasize that the country's unity and financial strength is more important and perhaps the act of this might well be a solution to the current issue.
Yet globalization and the presence of international media has made it more difficult to not tell the extent of the problems. Some weeks ago when it was revealed that Dubai World alone had $60 billion of debts, out of possible $82 billion of total Dubai debt, I did balk at the number for two reasons. In the first place how could a company with the size of DP World have acquired such a huge debt, totally disproportionate to the overall debt of Dubai and more importantly, who were the silly bankers who had not only opened the tap of finance to that level but perhaps opened the floodgates to lending money to one entity?
It would seem that someone advising the Dubai government might well have thought that since the majority of the debt is in one entity lets isolate it from the other good parts of Dubai and hence proposed a 'standstill'. Interestingly the standstill concerns mainly the $4 billion of an Islamic bond maturing on the December 14th 2009. From what I gather is that perhaps only 15% of this bond is held by hedge funds from Europe and some from the US, or perhaps tax havens, leaving the chunk of the bond to be held by local banks, investment companies and private investors from the region. While preferential treatments of bond holders are not possible, my guess is that a two tranche payment of this bond will be a solution that might be proposed.
Alternatively, a new short term issue will be put together in the next week allowing local and regional banks to fund it, and use those funds to retire the old bond thus allowing perhaps 60% of the old lenders to roll into the new structure and thus saving face. This new bond/lending may well carry the express backing of the Government of Dubai, which unlike the chunk of the $60 billion is really not guaranteed by the Government.
Interestingly Abu Dhabi had, over the weekend, said it was there to help and support Dubai and will 'pick and choose' its support, thereby indicating that there is a dialogue of substance going on between the two neighbors. It was also a neat way of telling bankers that their follies of the past cannot be bailed out at will by simply creating crisis. We have to also remember that Abu Dhabi has always been very sensitive to the issue of defaults and has, more than Dubai, seen things in a Federal light rather than just about their own Emirate. I would therefore say that through the Central Bank and Abu Dhabi based banks there will be support coming in, even of in bits and pieces. The difficultly will be to know exactly what amounts and when they will be available.
As for Dubai World, it has perhaps learned a harsh lesson in public relations. One government official told me privately that it was hoped the announcement that actually caused all the nervousness would have been seen positively that now the Government of Dubai was going to reorganize DP World and all that was being asked for was time to do this. While that may well have been the intent of the move, the only thing that stuck in the minds of the banks and the financial press is that an obligation was 'not going to be paid' on time.
Dubai World, while a combination of real estate, capital markets and venture capital assets, has borne the brunt of the real estate meltdown, still has assets that could, in a recovery, be worth a substantial amount of money. Its largest and most publicized acquisition was of P&O for about $7 billion, and its port management operations are in the top three in the world. The impairment of the real estate portfolio and the lack of cash flow from it may well be where the bulk of the problems lie. However, with revenues of over $3 billion and a net profit of $ 800 million, bankers will have to see how this revenue can pay off the huge debts in the future. Yet it would seem that a selective sell off, rather than a fire sale, can bring in the cash to deal with a major chunk of the obligations.
However, the problem has been that most of the debt has been short term and it has been supporting long term assets and it is this mismatch that has caught DP World off balance, especially as the financial crisis of last year dried up not only liquidity but appetite of bankers to lend. Indeed a stable real estate market will help matters but so too will the scaling back of some of the real estate projects this company wanted to do. It will need to go back to the basics of its logistic and port management business, at which the company has proved itself to be very good. As for the huge pile of debt, this will need to be restructured and not by announcing standstills but by engaging in hard negotiations with the bond holders and debt holders for a restructuring that is realistic and well backed into the realm of a five year plus debt.
As a PR exercise DP World or the right people in the government should come out and admit that the way the matter was handled last week was not elegant. At the same time the current discussions in resolving this matter of the standstill should be revealed more openly and a degree of engagement and transparency brought to the table. I am personally confident that a solution is on hand, and it may well be a combination of Federal, Abu Dhabi and Dubai initiatives backed by the banks who have been at the forefront of resolving this matter. I also suspect that the financial markets also realize that the international impact of this embarrassing episode do not warrant the hype that has been created. Importantly the next two days are important we then the country goes into the National Day holidays, perhaps an opportune time for Abu Dhabi to emphasize that the country's unity and financial strength is more important and perhaps the act of this might well be a solution to the current issue.
Sunday, October 7, 2007
Sher Value: Good Business or Bad Business?
Living in an ever shrinking world we are no longer isolated from the events that happens miles away. The famines of Africa, the effects of the Tsunami, the plight of children around the world, are all now in our face, and thanks to some TV channels, 24 hours a day. This is truly the ‘nano-second’ age and in such and age there are two options; either do something, or simply turn off the TV.
Over a decade ago, as a young CEO of a bank I was asked as to the reasons the bank supported causes like the WWF, the Arabian Leopard Trust, MSF and many others, and I recall saying if business cannot accept a social agenda for the betterment of people and earth then its not good business. I recall it was around 1992 when I had said that and most other CEO’s called to tell me I was losing the plot of running a bank. Perhaps plots are meant to be lost, perhaps we need a vision to make a difference.
Both Dubai and Abu Dhabi have launched high profile drives to raise money, and more importantly, awareness, to causes that concern the human condition. While Dubai had started a program of care towards education around the world, Abu Dhabi has taken up the challenge of a broader format, and in both cases the response from the public has been over whelming. I read somewhere that the US government spends over US$ 1 billion at the Pentagon a DAY! Now factor that into health and education around the world and instead of swords we create pens and clinics, I have no doubt the world will not only be a better place but a safer place.
So then why is the message of ‘good business’ so hard to get, because simply put it is putting your profits into social good which in turn brings you more expansion as the market place becomes better and vibrant. Perhaps because the near term gain is more important, cutting down forests for a profit seems better to some then perhaps creating forests that will replace what we mow down.
Indeed man has wrecked more havoc on man himself than nature and in it bad business, has never played a glorious role other than to further its own cause. The resulting impact has been that only now the big business companies are beginning to become ‘energy companies’ rather than simply ‘oil companies’ and with oil at $80 a barrel alternate energy and clean energy becomes an item on their agenda.
Then there is the bad business of governments, where conscious is abandoned for gain, where India’s oil minister signs three oil explorations contracts with the Burmese military junta the same day the streets are filled with Buddhist monks being shot at, where the issues of climate change are pushed aside into the rubbish pile where other agendas of social change lay buried. Good business and good government are getting together to make a difference and that’s the good news.
Over a decade ago, as a young CEO of a bank I was asked as to the reasons the bank supported causes like the WWF, the Arabian Leopard Trust, MSF and many others, and I recall saying if business cannot accept a social agenda for the betterment of people and earth then its not good business. I recall it was around 1992 when I had said that and most other CEO’s called to tell me I was losing the plot of running a bank. Perhaps plots are meant to be lost, perhaps we need a vision to make a difference.
Both Dubai and Abu Dhabi have launched high profile drives to raise money, and more importantly, awareness, to causes that concern the human condition. While Dubai had started a program of care towards education around the world, Abu Dhabi has taken up the challenge of a broader format, and in both cases the response from the public has been over whelming. I read somewhere that the US government spends over US$ 1 billion at the Pentagon a DAY! Now factor that into health and education around the world and instead of swords we create pens and clinics, I have no doubt the world will not only be a better place but a safer place.
So then why is the message of ‘good business’ so hard to get, because simply put it is putting your profits into social good which in turn brings you more expansion as the market place becomes better and vibrant. Perhaps because the near term gain is more important, cutting down forests for a profit seems better to some then perhaps creating forests that will replace what we mow down.
Indeed man has wrecked more havoc on man himself than nature and in it bad business, has never played a glorious role other than to further its own cause. The resulting impact has been that only now the big business companies are beginning to become ‘energy companies’ rather than simply ‘oil companies’ and with oil at $80 a barrel alternate energy and clean energy becomes an item on their agenda.
Then there is the bad business of governments, where conscious is abandoned for gain, where India’s oil minister signs three oil explorations contracts with the Burmese military junta the same day the streets are filled with Buddhist monks being shot at, where the issues of climate change are pushed aside into the rubbish pile where other agendas of social change lay buried. Good business and good government are getting together to make a difference and that’s the good news.
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