Interpreting Middle East Economic News and Analyzing Market Trends

Archive for February, 2013

UAE bank begins offering accounts in Yuan

Emirates NBD became the first bank in the UAE to offer accounts to individuals denominated in Yuan, the Chinese currency.  Here are some highlights from a story in The National (click here for the full story):

The step will also help individual investors and small businesses to hedge against the risk of the yuan’s appreciation against the US dollar.

“The enormous increase in UAE’s bilateral trade with China and the resultant fast-growing Chinese-related business and resident population in the country have turned the focus significantly on the world’s second-largest economy,” said Suvo Sarkar, the general manager of retail banking at Emirates NBD.

Emirates NBD’s move is a reflection of the tightening in commercial ties between the UAE and China in recent years.

Two-way trade has advanced fivefold over the past decade from US$3.12 billion (Dh11.46bn) in 2002 to $15.6bn last year, according to data from the Ministry of Foreign Trade.

Banks operating in Dubai including HSBC, Standard Chartered and Mashreq, have begun offering business banking services denominated in Yuan. Emirates NBD, Union National Bank and National Bank of Abu Dhabi have opened offices on the Chinese mainland.

Last March, Emirates NBD became the first bank in the Middle East to issue a bond sale denominated in Yuan.

The bank’s plans also link into a wider bid by Dubai to become an offshore trading centre for the currency.

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Saudi Arabia and the UAE handle bad debts differently, yet both come to the same wrong conclusion

Consumer finance has been on the rise in Gulf countries over the past decade.  Banks have been too eager to give out auto loans, unsecured loans, credit cards and other forms of credit.  This has been a good source of income for banks.  Since the financial crisis, banks have been refocusing on expanding their consumer finance business as they look to reduce their dependence on governments for business (see older post).

 

With interest rates so low (a typical savings account pays 0.5% per year), consumer loans are still on the high end in the Gulf.  A low annual interest rate on credit cards in the region is 24%, regardless of your credit history with the bank.  Some banks, such as Citibank offer credit cards with annual interest rates as high as 36% (is this legal in any other part of the world?).  Auto loans are on the cheaper side ranging from 4%-9% or above depending on the bank.  Interest rates on personal unsecured loans range from 6% to well above 10% depending on the borrower’s income.  It’s no wonder then that consumer loan defaults have been rising.

 

Both Saudi Arabia and the United Arab Emirates (UAE) have seen rising bad debts on bank balance sheets over the past few years.  Though their approach to handling these bad loans were different, they both arrived at the same wrong conclusion.  First, here’s a report from Arab News on Saudi Arabia:

 

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Dubai Financial Market Performance YTD … WOW!

The Dubai Financial Market (DFM) has been on fire since the beginning of this year, up 15% as of yesterday.  Its neighbor, the Abu Dhabi Exchange, is up 10% for the year.  Excellent earnings announcements coupled with a positive outlet for the rest of the year is re-energizing the markets.

Market YTD Return %
Kuwait 6.3%
Saudi Arabia 3.3%
Dubai 14.9%
Abu Dhabi 9.9%
Bahrain All Share 1.9%
Qatar 4.4%
Egypt – EGX30 5.2%
Jordan 4.4%
Lebanon* 2.4%
Morocco* -4.0%
Tunisia* 3.9%

* Traded from Monday to Friday. Returns as of market close on Feb. 4, 2013. Source: Global Investment House

It’s important to note, however, that markets in the Gulf lack the liquidity of larger emerging markets, with the exception of Kuwait and Saudi Arabia.  As such, money flowing in or out can result in huge sings up or down.  For now, investors and market watchers in the region are optimistic that the high-flying performance will the the theme for 2013.  

Kuwait wealth fund assets top $291 billion, focuses on PE not bonds, while Kuwait Petroleum joins $9 billion oil refinery venture in Vietnam

  Kuwait’s largest sovereign wealth fund, Future Generations Fund, managed by the Kuwait Investment Authority (KIA) had assets of $261 billion at the end of March last year, according to Reuters.  The report also said that 47% of the fund was invested in stocks.  In its search for returns the KIA has also been moving more aggressively into private equity.

“The Kuwait Investment Authority (KIA) is focused on private equity funds instead of bonds, Badr Al Saad, the head of Kuwait’s sovereign wealth fund, said yesterday.

Mr Al Saad said that the KIA has been investing in private equity funds where the returns are good and is shunning bonds because interest rates are so low.

“We have been investing in private equity funds lately … the returns are good,” he said in rare public comments about the KIA’s investment strategy. He named Texas Pacific Group and CBC as two of the funds the KIA has been investing in.

He said the fund wanted to invest in upcoming infrastructure projects in Europe and the United States.

“We think that these countries need to develop their infrastructure. We think that investments in infrastructure will be big in the next five years,” he said.  Read the full article from The National.

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Gulf banks go shopping in the MENA region

After four years of slow growth or no growth, banks in the Gulf are looking for ways to expand their market reach.  Banks in cash-rich Qatar can only grow so much in their tiny home market, whereas banks in the UAE have a larger customer base to work on.  However, banks in the UAE have been revering from the property bubble and per Central Bank statements, need to reduce their exposure to the government (see older post).

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