Capitalizing On Debt: Middle East Bonds

By almost any measure, Saudi Arabia’s bond issue on October 19, 2016 was a success. While analysts had been predicting an issu­ance of between $10bn and $15bn, the final amount was $17.5bn, setting a new record for the largest ever emerging markets sovereign bond—the previ­ous record had been set by Argentina in April 2016, when it sold $16.5bn.

UAE Real Estate: A Buyers’ Market

Published in Forbes Middle East, 23 October 2016

The real estate developers were putting a brave face on it, saying they had been remarkably busy, but there was no hiding the fact that the Dubai Property Show in London in mid-May was both small and, at least on the first day of the show on Friday afternoon, sparsely attended. Around a dozen developers including Dubap Properties, Tebyan Real Estate Development and Binghatti Developers filled part of the Olympia West exhibition hall, which was dominated by a Nakheel stand in the centre.

It was certainly a far cry from the likes of the Cityscape show in Dubai, but that’s perhaps to be expected. London is after all a long way from the U.A.E., and the gloss has come off Dubai’s real estate scene of late. Prices are down by 15% from their mid-2014 peak and confidence is low in the light of the oil price slump.

In addition, the rise of the U.A.E dirham (and other Gulf currencies pegged to the dollar) means that inward investment into the region is becoming more expensive for a lot of po­tential buyers. And while expat residents in the Gulf who are earning money in the local currency are not affected, the re­gional economic slowdown also means that some of them are losing their jobs, selling up and leaving the country.

Craig Plumb, head of research at estate agency Jones Lang LaSalle (JLL), says the rising value of the dirham has “definite­ly been a factor” for international investors in the residential market. “The volume of residential sales in Dubai over the first half of 2016 is down by around 30% compared to the same period last year,” he says.

But such trends do not mean the whole system is about to come crashing down. In broad terms, the market for cross-bor­der real estate investment continues to be fairly vibrant, even if these days the bulk of the deals involve Gulf investors putting their money in international markets, rather than overseas buyers picking up properties within the region. Plumb says Middle East investors bought almost $9.5 billion of real estate outside the region in the second quarter of this year, compared to $2.3 billion of capital flowing into the region.

“There has been a shift in the nature of [outbound] invest­ments, with private investors becoming relatively more impor­tant compared to the major sovereign wealth funds,” he adds. “But the desire to invest in real estate assets outside the region remains.”

This trend has been developing for a couple of years. According to CBRE, another real estate consultancy, a total of $14.1 billion of investment flowed from the Gulf to other parts of the world in 2014, with Qatar leading the way with $4.9 billion of purchases, followed by Saudi Arabia ($2.3 billion) and the U.A.E. ($1.6 billion). The total was down on the $16.3 billion a year before but it still made the Gulf the third largest source of capital in the world after North America ($66.5 bil­lion) and Asia ($28 billion).

While much of the outward investment has historically been done by sovereign wealth funds, in the wake of lower oil prices they have been drawing down some assets to help plug their government’s budget deficits. That leaves them with less to invest. However, that trend is being partly balanced by the fact that rich individuals are showing more inclination to in­vest overseas. CBRE predicts that while sovereign wealth fund investments in global real estate will fall from $9-11 billion a year to around $7-9 billion a year going forward, non-institu­tional investments from the Middle East will rise to an annual figure of $6-7 billion, up from an average of around $3 billion in 2010-2013.

London has long been the most enticing market for Middle East investors and it still holds the top spot, but it is not as dominant as it once was. In 2014, the U.K. capital city accounted for 32% of all outbound investment, compared to 45% in 2013. Other large Western cities followed it in popular­ity, including Paris ($2.2 billion), New York ($1.3 billion) and Washington ($481 million).

More recent events have altered the landscape, in particu­lar the vote by the U.K. in June this year to leave the European Union. That is pushing investors to re-evaluate their position. A recent survey by financial advisory firm DeVere Group found that 69% of its clients, including some in the U.A.E. and Qatar, intended to decrease their investment exposure to the U.K. following the Brexit vote.

“High net worth investors are overwhelmingly consider­ing rebalancing and diversifying their portfolios following the U.K.’s decision to leave the EU,” says Nigel Green, chief executive officer of the firm. “These investors are seeking to reduce their exposure to U.K.-based assets in the wake of the impending Brexit.”

Nonetheless, the motivation to invest in overseas markets still remains strong, whether because investors want to diver­sify their portfolios away from their home market and from dollar-denominated (or dollar-pegged) assets, or simply a de­sire to buy a residence for themselves or family members in overseas cities.

That helps to explain the results of another survey released earlier this year by property consultancy Cluttons, which found that 61% of high-net-worth individuals (HNWIs) in the GCC were likely to invest in their preferred location in 2016, against 25% who said they were unlikely to (the remaining 14% said they weren’t sure). Of those, London was the preferred city for 13% of investors, followed by New York and Bangalore in India. Half of these investors were targeting residential prop­erty, while 22% favored commercial property and 28% were looking for a mixture of both.

They are not just investing in distant lands though. Just over half (53%) of HNWIs in the U.A.E. told Cluttons that Middle East locations were among their top three investment targets for the year ahead. Dubai and Abu Dhabi were, perhaps unsurprisingly, the most popular, cited by 30% and 23% of re­spondents respectively. They were followed by Sharjah (8%), Muscat, Kuwait City, Doha and Riyadh. The reasons for the U.A.E. cities’ popularity stem from the country’s role as both a trading hub for the region and also—particularly in the case of Dubai—its position as a safe haven.

That too has been one of the long-term attractions of London. And although the political uncertainty caused by Brexit has unnerved some investors and led them to postpone or cancel some deals, demand is expected to recover before long. For one thing, the rise of the U.A.E. dirham and other Gulf currencies pegged to the dollar over the past few years means that it is now far cheaper for Gulf investors to buy U.K. property than it was previously, all the more so following the slump in the value of the pound after the Brexit vote.

As a result, many real estate agents say they are expecting interest in London to recover in the second half of the year.

“One of the key things of benefit to buyers from the Gulf is the fact that the majority of them, except for Kuwait, maintain a fixed exchange rate with the U.S. dollar. That means they’re effectively purchasing in dollars, so for them London property became 12% cheaper overnight on 23 June [the date of the ref­erendum],” says Faisal Durrani, head of research at Cluttons. “Since the referendum, some of our offices in locations like Belgravia and Chelsea have reported an upturn in interest from buyers from the Gulf.”

Whether the investments follow remains to be seen but, for everyone involved, the ups and downs of recent years in Dubai and London alike is at least a useful reminder of the inherent volatility in real estate investment no matter where you are in the world.

Iran’s markets come in from the cold

Published in Euromoney, 3 October 2016

The country’s financial system is still not easy to access; money has trickled rather than flooded into its stock exchange since January’s deal with the US to lift sanctions. Nevertheless, as the country emerges from years of isolation, important changes are taking place that could herald a new era for Iran’s capital markets.

Attracting investors to the Iranian capital markets has long been a challenge. International investors have been scared off by sanctions and the reputational risk of doing business in Iran; even their domestic counterparts have found it more profitable to keep their money in banks than in the more volatile stock market. Yet the outlook is changing for both groups. Could the Tehran Stock Exchange be on the cusp of a breakthrough?

The appeal for many investors of the TSE and the junior Farabourse market is largely tied to the difference between bank deposit rates and the returns they can expect from investments in listed companies. That gap has been narrowing, most recently in June when the Central Bank of Iran cut the one-year deposit rate from 18% to 15%, still an astronomical level for most markets.

Turquoise Partners, a Tehran-based investment firm, noted hopefully in a recent market review issued “with dividend yields on the market at 12%, not far below deposit rates of 15%, things are edging ever closer to a tipping point where the stock market becomes the most attractive asset class.”

For foreign investors, the big change was the Joint Comprehensive Plan of Action (JCPOA) in January to lift most sanctions, in return for Tehran scaling back its nuclear programme. Since then, investors have been keen to unearth opportunities to justify the hype. Invariably, those coming to Iran find the puzzle that is more complex than they might like, but the pieces are gradually falling into place.

“We are seeing signs of increased activity, both in terms of FDI [foreign direct investment] and foreign portfolio investment,” Ramin Rabii, chief executive of Iran-focused Turquoise Partners, said on a call with investors in mid-June. “Having said that, the ease of doing business is far from perfect. There are a lot of challenges. The main one is the issue of the banking route and banking transfers, which has remained a main obstacle for transfer of funds back and forth.”

Just how difficult it has been to move money into the country (or indeed out again) is obvious from a story dating back to January, when the US government put $400 million worth of cash, made up of Swiss francs, euros and other currencies, onto a cargo plane and flew it to Tehran. This was part of a larger debt the US has owed Iran for decades, after a deal to sell military equipment was cancelled in the wake of the 1979 revolution. It was a rather novel way of getting around the lack of formal banking channels between the US and Iran; it also highlighted that doing business with Iran sometimes requires a flexible approach.

A number of smaller European banks are now said to be processing transactions with Iran, along with others in Malaysia and the UAE. The Iranian authorities have also been trying to forge new banking ties with other countries. For example, in August, the central bank signed a memorandum of understanding with its counterpart in Azerbaijan to set up correspondent relationships between banks in the two countries.

A second sticking point has been the relatively high cost of bank transfers, but this is also set to change. Until recently, bank transfers had to be based on the official exchange rate, which in early August was running at IR30,900 to the dollar, around 14% more expensive than the market rate of IR35,344. However, in late July the central bank said it would allow banks to offer the market rate on foreign exchange transactions, which should mean that more investment will flow into the country through the banks.

“This is very significant, as it should allow large FDI to come into Iran more easily,” says Kiyan Zandiyeh, portfolio manager for London-based Sturgeon Capital, which operates an equity fund investing in listed Iranian companies.

In the medium term, the central bank has vowed to close the gap between the two rates and end the system of parallel exchange rates, either later in 2016, or at least by the end of the current Iranian year, which falls in March 2017.

The cost and complexity of bank transfers has not put off all investors. German industrial conglomerate Henkel, which has been active in Iran since the early 1970s, increased its stake in local detergent manufacturer Henkel Pakvash, which is listed on the Farabourse, from 60% to 90% in May. Wulf Klüppelholz, a spokesman for Henkel, confirmed the deal but declined to give any further details.

However, Afsaneh Orouji, director of inspection and audit at the Farabourse, said in a statement issued a few days after it was completed that the deal for €51 million was approved by the Securities and Exchange Organization and that “the amount was calculated in the currency exchange rate set by Iran’s Central Bank rather than [the] free market rate in the country”.

Exchange houses

Instead of using banks, other investors have preferred to transfer money into Iran via exchange houses – credit institutions regulated by the central bank that can facilitate cross-border money transfers.

Before the recent change in rules for banks, the exchange houses had the key advantage that their transactions were based on the cheaper market rate for the Iranian rial. Several of the international funds investing in the country’s stock market have used them, including Sturgeon Capital and Charlemagne Capital, which is also based in London. Now that banks are also able to offer the market rate, the exchange houses are likely to lose out on some or all of this business.

To date the amount of money that has come into the market has been limited, even if the number of potential investors continues to rise. According to the Central Securities Depository of Iran, stock market trading licences have been given to 636 foreign investors to date, including 25 in July alone. The investors come from 31 countries, ranging across Asia, the Middle East, Africa and Europe, as well as the US, despite some sanctions remaining in place.

Such licences are necessary to buy and sell shares. However, given the amount of money that has actually been invested, it appears that many are setting up, but not yet making meaningful investments in shares, with the bulk of the money ending up in bonds. Ali Naghavi, chairman of the Iran Financial Centre, says around $500 million has been invested in the Iranian capital market since January.

But Zandiyeh says, excluding the Henkel deal, overseas investors have put just $22 million into listed Iranian companies so far this year. On an exchange with a total market capitalization of more than $90 billion, that is a very small drop. Zandiyeh says, the numbers suggest “there’s a lot of money waiting on the sidelines”.

Sturgeon Capital launched its Cayman Island-domiciled Iran fund in December 2015 and has just under $10 million in assets under management with stakes in 20 listed companies across the TSE and Farabourse, as well as in three bond issues.

The UK’s Charlemagne Capital is running another fund in partnership with Turquoise Partners. Turquoise set up the Cyprus-domiciled fund in 2006 and Charlemagne came on board in December last year. At roughly €65 million, it is the largest active fund investing exclusively in Iranian securities, according to Dominic Bokor-Ingram, fund manager at Charlemagne.

Both Sturgeon and Charlemagne say their equity funds have made good gains so far this year. Zandiyeh says Sturgeon’s fund is up more than 14% in euro terms since it started investing in February, while Bokor-Ingram says that as of June the Charlemagne-Turquoise fund was up by 26% from the start of the year.

Another new entrant is the Griffon Iran Flagship Fund, launched by Tehran-based Griffon Capital earlier this year. The fund is also domiciled in the Cayman Islands.

Alongside these, there has also been a small but noteworthy trend for new private equity funds. Griffon already runs one such fund, while Turquoise is setting up a venture capital fund, in partnership with Swiss firm Reyl & Cie. The Iranian firm says it will focus on local consumer goods, pharmaceuticals and hospitality companies and is aiming to raise $200 million this year. It’s also looking at establishing a fixed-income fund for the Iran market.

Another, indirect route for investors wanting exposure to Iran’s stock market should emerge in the coming months, when Swedish investment house Pomegranate lists its shares on the Stockholm Stock Exchange, which it plans to do before May 2017. Pomegranate focuses on investments in unlisted consumer technology companies in Iran, such as car-sharing start-up Carvanro and online classifieds platform Sheypoor. However, it also has a 15.2% stake in Griffon Capital, which it valued at €2.8 million in its 2015 annual report.

In May this year, Pomegranate raised €60 million in what it described as a pre-IPO placing. The investors were mainly from Europe. That fits in with a larger pattern of corporate investment in Iran in the months since the JCPOA came into force.

However, some investment executives say they are seeing most interest from the US. While US citizens are barred from dealing with Iran due to the continuing sanctions programme, there are efforts afoot to explore any legal loopholes that could bypass these provisions. Some doubt that such an option will be possible for some time and the Office of Foreign Assets Control (OFAC), the arm of the US Treasury that deals with sanctions, is likely to keep a close eye on anyone who tries.

Ali Nassersaeid, co-founder of the American-Iranian Business Council, says the chances of US investors being able to access the TSE are “pretty much slim to none, at least for the next couple of years. There are ways to structure an entity outside the US to conduct transactions. However, the entity cannot include a US person in a controlling capacity. The only safe way to proceed with such a plan involving a US person would be to apply to OFAC for a licence.”


For those who are willing and able to get involved, there are some decent gains to be made, although there are many risks too. The Tedpix, the TSE’s main index, has more than tripled in value over the past four years, rising from around 24,000 points in August 2012 to more than 78,000 points by August this year. In comparison, the MSCI Emerging Markets index has lost 8% of its value over that time, while the MSCI Frontier 100 Index rose by 26.5%.

Of course a stock market would not be a stock market without volatility, and there has been plenty of that too. The Tedpix was on a bull run from late 2012 until it peaked at 89,500 points on January 5, 2014. Some of those gains drifted away over the course of the next two years, but the market has rebounded strongly this year. The index shot up in January, around the time the sanctions deal was confirmed. It continued to rise in February and March. Thereafter some ground was lost, with a 9% fall in the second quarter of the year, followed by a rebound in July and August. Even with that second quarter slump, the market was up 26% since the turn of the year.

This year’s movements reflect two big (and opposing) trends: enthusiasm for companies’ prospects in a post-sanctions era, mixed with realism about the difficulty in attracting capital from overseas. For investors this means that stocks have to be chosen with care. Sentiment and rumour play a big part in the trajectory of stocks on the TSE, not least because retail investors account for around half of the trading volumes, but also because reliable information is often a scarce commodity.

“The crucial part of the process is to ensure that buy/sell decisions are based on accurate information,” says Nassersaeid. “The TSE and its regulatory branches are still working through their processes to ensure accurate, timely and transparent information is released.”

Unsurprisingly, views differ widely as to what sectors offer the best opportunity in such a market. Naghavi points to petrochemicals, insurance, power and industries related to oil and gas as attractive options. Nassersaeid suggests the two most promising sectors for the longer term are petrochemicals and raw materials firms producing copper, iron ore and the like. He is warier about other areas such as construction, banking, insurance and IT until economic conditions improve.

There is certainly the potential for the Iranian economy to grow quickly, but its short-term fortunes rely on domestic and international political issues, which are hard to predict. For one thing, the outcome of Iran’s presidential elections in May 2017 will set the template for the country’s relations with the outside world for years to come. Even so, some appear optimistic.

“Our thesis for Iran is the same as in any frontier market that’s coming out of one political or economic system and going into another,” says Bokor-Ingram. “Political reform leads to economic growth and we want to be exposed to sectors and companies that can take advantage of that economic growth. We forecast that the Iranian economy, if things progress as they should do, can grow by 6% to 8% a year for the next 10 years. There’s certainly the spare capacity in the economy for that to happen, and we want to be in companies that can take advantage of that growth.”

Others predict slower growth rates for the near term, with the IMF suggesting GDP will expand by 3.7% to 4.5% between now and 2021. However, there are a few reasons why some companies should grow quickly in the coming years, even if the economy as a whole does not match the highest hopes.

For one thing, many Iranian businesses have been operating below capacity during the sanctions years and, with the shackles now removed, they should be able to expand their output even without much investment. For companies that were more productive, expansion plans that had been put on hold can start to move forward. Turquoise predicts that listed companies will post earnings growth of around 10% on average over the year to March 2017.

The biggest boost of all could come from Iran’s inclusion in international indices, such as those run by MSCI. Zandiyeh says that, based on the size of the TSE, it “should conservatively occupy between 25% and 30% of the MSCI Frontier Index. Looking at the money which tracks the index, up to $7 billion to $10 billion would have to enter the market. That could happen in the next year or two.”

Set against all that, there are some reasons for caution, not least the risk of ending up with a stake in a company run by the Islamic Revolutionary Guards Corp (IRGC), which remains a firm target of US sanctions. IRGC’s principle holding in a publicly listed company is in Telecommunication Company of Iran (TCI), the monopoly fixed-line telecoms provider. The IRGC owns 50% of TCI via its Etemad-e Mobin affiliate. TCI in turn owns 90% of Iran’s largest mobile operator, Mobile Telecommunication Company of Iran (MCI), which has its own stock market listing. Both TCI and MCI are among the top five companies on the Iranian bourse, with market values of $4.2 billion and $4.1 billion respectively at the end of June.

There have been suggestions that the IRGC could sell its stakes in these firms. The IRGC did offload its interest in carmaker Bahman Group in June, with local media reporting that Visman Motor has become the majority shareholder.

“The removal of sanctions has opened up the available pool of companies that Sturgeon Capital can invest in,” says Zandiyeh. “Of the 600 or so stocks across the TSE and the Farabourse, all but 50 were off-limits while sanctions were in place. Now the investment universe has expanded to include almost the entire stock market, with the only exceptions being companies controlled by the Revolutionary Guards.”

Further concerns

Beyond the problems of scarce banking links, parallel exchange rates and IRGC involvement, there are further concerns for investors, as a consequence of the relatively immature nature of the market and because it has been separated from the international mainstream for so many years.

Local regulations stipulate that stocks cannot be held by a global custodian, but instead must be held by the Central Securities Depository of Iran (CSDI). That will be a stumbling block for those leading institutional investors that prefer to use custodians. The authorities have tried to address this problem, with Mohammad Sajjad Siahkarzadeh, international affairs director at the CSDI, telling the Securities & Exchange News Agency in August that there are numerous other ways to invest in the market without using a global custodian.

“There are at least six ways for foreign investors to get into the Iranian market,” he said, although the report then somewhat confusingly included the option of using global custodians to help with investment as one of the six.

Furthermore, there are no credit ratings agencies working in Iran, nor a culture of analyst reports and coverage. Financial reports and other data are often only available in Farsi, and global accounting norms, such as international financial accounting standards are only starting to be introduced. All this makes it harder to evaluate companies for investment. Instead, investors will have to rely on the forward guidance that companies issue and their own research into a company’s performance and prospects.

Some of these concerns are being addressed and there have been signs that the market is moving to become more professional, with a wider range of tools on offer to investors. For example, Pouya Finance, a subsidiary of Mofid Securities, the largest broker in Iran, recently launched BourseView, an online tool providing real-time and historic information about TSE and Farabourse stocks. One investor describes this as “the Bloomberg of Iran”. In addition, the Securities and Exchange Organization (SEO) has invited credit ratings agencies to apply for licences.

The regulatory structure is also undergoing change, with Shapour Mohammadi appointed as the new chairman of the SEO in July, taking over from Mohammad Fetanat, who resigned and has been appointed as an adviser to Ali Tayebnia, minister of economic affairs and finance. Mohammadi subsequently outlined some of his priorities in a speech, including a promise to push for the introduction of derivatives trading, short-selling and buying stocks on credit.

Macroeconomic trends in Iran ought to drive more investors towards the market too, helping improve liquidity levels, which are another concern, particularly for many of the smaller stocks.

As well as bank interest rates dropping from 18% to 15%, interest rates on loans came down from 22% to 18% in June and the inflation rate has also been steadily falling since president Hassan Rouhani came to power in August 2013. Three years ago, inflation was running at close to 40%, by this summer it had dropped below 10%.

Bonds are underwritten by the banks in Iran, carry high fixed interest rates for multiple years and can always be redeemed for at least their par value. That means investors can lock in high double-digit returns for several years.

Clemente Cappello, chief investment officer of Sturgeon Capital, says: “Nearly $10 trillion in global bonds trade at negative yields, whereas in Iran the yields are 18% to 20%. GDP is rising, and the population is young – 60% are under the age of 30 – while it is ageing in the west. It makes for an interesting situation for investment.”

The question is how quickly will international investors be willing, able or brave enough to take advantage of those trends.

Outbound travel takes off in the UAE

Published in Gulf News, 20 April 2016

Whether it’s Riyadh or Rome, UAE residents are spending more when they’re abroad and this opens up opportunities for banks catering to their wanderlust.

When economic conditions worsen it’s natural for people to cut back on spending, and travel is often among the areas first affected. That doesn’t seem to be the case in the UAE though. The nature of the country’s population, with its overwhelming majority of expatriates, means it doesn’t react like most markets. These days, demand for travel is still on the rise.

Nikola Kosutic, Research Manager at Euromonitor International, says the number of outbound trips from the UAE increased by 5 per cent to 3.5 million last year, with those travellers spending Dh71 billion, up 10 per cent on 2014. “UAE residents travelled for longer and spent more in 2015.” 

The trend appears to be continuing this year. Industry executives say bookings can dip because of events such as the recent terrorist attacks in Brussels but the pipeline remains healthy. “We did see a small drop in bookings over Easter, primarily linked to the terrorism incidents in Belgium, but we are seeing a lot of leisure enquiries and bookings,” explains Premjit Bangara, General Manager for Travel at Dubai-based Sharaf Travel Services.

Key markets

Indeed, the World Travel and Tourism Council forecasts that outbound travel spending will continue to growing in the coming years, reaching Dh157 billion by 2025.

The most important market for UAE travellers is Saudi Arabia, which accounts for 39 per cent of all trips, says Kosutic. After that comes the UK with 7 per cent. Other key markets include Asian destinations such as Thailand, Malaysia and India, European countries including France, Germany and Switzerland, as well as the US and Australia. 

The tastes of UAE residents are broadening, however, not least because of the growing range of destinations served by Emirates, Etihad and Fly Dubai. Bangara says his firm has seen a rise in interest in European destinations such as Croatia and Georgia, and South American countries such as Argentina and Peru.

However, there are some contradictory trends at play. Low oil prices and weak economic growth are denting confidence locally, but the strong US dollar — to which the UAE dirham is pegged — means some destinations are now less expensive than they were in the past.

“There have been a series of macroeconomic events over the past few years that impacted the UAE travel sector, but the overall effect has been positive, mainly due to the strong dollar,” says Kosutic. “We saw a 19 per cent increase in outbound trips to Europe in 2013-15.”

However, some of those same trends are hurting inbound tourism. In 2015, the UAE received 20 million international visitors, with 14 million of them going to Dubai. Together they spent Dh54 million, with Saudi Arabia, India and the UK the three leading source markets, according to Euromonitor.

Some markets are having a tough time, though. Russia has been hit by international sanctions, low oil prices and a weakening of the rouble. That has led to a decline in its tourists coming to the UAE. Other European countries have been struggling with anaemic economic growth, although heavy promotion of the UAE as a holiday destination and the expansion of visa-on-arrival services to more nationalities means arrival numbers have remained robust.

Hit the right targets

At a time when the UAE is trying hard to diversify its economy, it’s important that it identifies what countries represent the best prospects. “We continue to see year-on-year growth in passenger numbers,” says Ahmad Al Haddabi, Chief Operations Officer at Abu Dhabi Airports, referring to traffic during February. “Traffic between India, the UK, Thailand, Australia, the US and a number of others all witnessed increased passenger figures.”

When people are travelling, one increasingly popular option is to take prepaid travel cards with them. Money can be placed onto these in advance and then used to pay for goods and services when abroad, or to withdraw cash from ATMs, much like a regular bank card. A single card can hold several currencies.

One advantage is it removes any concern about shifting exchange rates, as the rate is locked in at the point when the money is loaded onto the card. Usage charges are also fixed and, as the cards are based on chip-and-PIN technology, it is safer than carrying cash.

These cards are issued by banks and many currency exchange houses. It is still relatively early days though. There were 190,000 prepaid travel cards in circulation in the UAE last year, according to Euromonitor. That means only a small fraction of travellers used them.

“This certainly is a growing trend as the world moves to cashless transactions,” says Bangara. “With more aggressive marketing from companies we will see stronger adoption rates in the coming months.”

It’s not the only option that banks offer to travelling customers. Some also offer credit cards that are tailored to appeal to those going abroad. For example, Abu Dhabi Islamic Bank has its Rotana Rewards card, which offers discounts for hotel and restaurant bookings and access to airport lounges and it has a card linked to Etihad’s loyalty programme. Emirates NBD has something similar with Emirates. 

Such cards can help banks generate more fee income: something that is much needed in the current economic environment. The continued growth of the travel market means it ought to be a reliable area of growth for years to come — whether or not the wider economy rebounds quickly.

Brussels shows that terrorism can dent an economy but rarely destroy it

Published in Quartz, 1 April 2016

The aftermath of terrorist attacks has become a depressingly familiar scene in Europe. Sirens from emergency vehicles pierce the air. Police cordon off roads that run through the city center, and soldiers man the checkpoints.

After the sirens have fallen silent and the television crews have moved on, the effects of these attacks linger. Along with the toll of the dead and injured, the local economy frequently takes a hit. Flights are cancelled, meetings postponed, and holidays put off. In the aftermath of the terrorist attacks that claimed 32 victims in Brussels on Mar. 22, many in the Belgian capital are wondering how long it will take for life to return to normal.

If the other European cities to face terrorist attacks in recent years are any indication, Brussels’ chances of recovery are good.

“If you look at the experiences of other countries, after the London or Madrid attacks, you see the impact on the overall economy in the longer term is very limited,” says Bart Van Craeynest, chief economist at Belgian consultancy Econopolis. “The only examples where it can really destroy your economy is if it becomes a long-term campaign where you have several attacks following each other.”

Brussels has dealt with terrorism before. In May 2014, four people died after an attack on the Jewish Museum of Belgium. And last November, the city was put under a three-day lockdown as the authorities searched for people linked to the Paris attacks. But it’s still nowhere close to the position of, say, Northern Ireland in the 1970s, when paramilitary activity was at its height.

Brussels authorities’ reactions to the terrorist attacks seem to be evolving. In November, restaurants, cinemas, art galleries and schools all closed their doors. Soldiers patrolled the main shopping areas and military vehicles watched over prominent junctions, guns poking out of their roofs.

This time, after bombings at the Brussels airport and the Maelbeek metro station, businesses in the city did not shut down completely. Brussels’ metro, tram and bus networks all shut down, and its main art gallery, the Bozar, closed its doors. But bistros and bars kept on serving. In the European Quarter, the location of the Maelbeek metro attack, people were asked to stay inside during the day. But by the evening, an everyday atmosphere had begun to return, with rush-hour traffic backing up at junctions as usual. The next day, more people worked from home, but regular events like the weekly food market in Place du Châtelain operated as normal.

“It’s been remarkable. In terms of people getting on with their day-to-day lives it has been rather quick,” says Fabian Zuleeg, chief economist at the European Policy Centre, a Brussels think-tank.

The soldiers remain a high-profile presence, however, with far tighter security at key sites like the Gare du Midi train station, where high-speed trains shuttle travelers to and from London, Paris and Cologne. A heavy security presence may unnerve some visitors. But the economic case for Brussels as a site for business travel remains in place.

“The situation of Brussels as the de facto capital of the European Union but also as a logistics center in the middle of Europe means it is still attractive to companies,” adds Zuleeg. “I’m not expecting this to change.”

Data on business confidence and overall economic activity for the fourth quarter of last year from the National Bank of Belgium, the country’s central bank, suggests his predictions will be proven right. There was no noticeable impact on Brussels as a result of the November lockdown, and there is little reason to suppose the events of March 22 will prove much different.

There will be a short-term drop in visitor numbers, however, not least because the city’s main airport remains closed. Market research firm Euromonitor says visitor numbers could fall by 20% in the short term, but almost everyone expects a recovery before long. “Most of the activity has just been postponed and you will get it back later on,” says Van Craeynest.

In the meantime, the Brussels stock market offers an indication of how the city’s citizens and its economy are coping. The old Bourse building quickly became the centre of public commemoration, with messages remembering the victims chalked on the sidewalk outside. The site was briefly raided by right-wing hooligans on March 27, before police reasserted control with water cannon. The stock market itself dropped sharply on the morning of March 22, but recovered all its lost ground within an hour.

On the same day as the attacks, a long-scheduled seminar on jihadi radicalization happened to be underway at the EPC, on the edge of the European Quarter. Just before the seminar began, this reporter overheard a short conversation between two of the participants. “Were you afraid?” one woman asked a colleague, referring to the news of the bombings. “Me? No, I’m from Bamako,” he replied.

The exchange puts the attacks in perspective. While the events were a shock to Brussels, many other cities and countries suffer with far greater frequency. The Institute for Economics & Peace notes that just 2.6% of all terrorist deaths since 2000 have been in the West.

Indeed, just five days after the Brussels blasts, 69 people were killed by a Taliban attack in the Pakistani city of Lahore. But that didn’t stop the Asian Development Bank from releasing a report on Pakistan’s economy on March 30 forecasting an acceleration in economic growth this year. Terrorists may wield some power. But they inevitably lose in the face of cities’ resilience.

Doha's deficit planning

Published in MEED, 15 March 2016

Low oil prices have pushed Qatar’s budget into the red, forcing the government to re-evaluate its economic model

The numbers speak plainly enough. The budget announced by Qatar’s Finance Minister Ali Shareef al-Emadi in December included a QR70bn ($19.1bn) fall in projected revenues for this year compared with the last – a decline of 31 per cent.

That would test the mettle of most governments, but the Qatari authorities appear to be holding their nerve.

The fall in oil revenues is leading to an overhaul of government activities, cuts in subsidies and other spending, and a push to expand the private sector and make the public sector less wasteful. But there is no sense of panic, not least because the economy is still growing at a healthy rate.

Emir Sheikh Tamim bin Hamad al-Thani had set out the government’s thinking in November, in a speech to inaugurate the new session of the Advisory Council. He said of the low oil price that “it requires caution and alertness, but not fear”.

The new sense of realism has continued this year. On 11 January, Prime Minister Sheikh Abdullah bin Nasser bin Khalifa al-Thani announced three new ministerial groups to coordinate economic policy, with the first of them having the task of reviewing the cost of major projects.

As it stands, the total cost of government projects under way is QR261bn, excluding the oil and gas sector, according to Al-Emadi. That includes QR87bn for transport schemes, QR30bn for water and electricity projects and QR24bn for sports schemes. There are also QR17bn-worth of education projects and QR7bn in the health sector. The budget set out spending of QR91bn on major projects this year alone.

What the low oil price has emphasised is that far more needs to be done to diversify the economy.

Doha has encouraged investment in a range of sectors over the past decade, including finance, tourism and education. Sheikh Tamim has now told his government “to hammer out an industrial strategy to increase the contribution of the manufacturing industry to GDP”. He also wants Qatar to produce more of the food it consumes.

Even so, the economy will continue to rely on gas revenues for some time to come. “Our pursuit for economic diversification and reducing the dependence on oil and gas does not mean that we will not pay adequate attention to maintain and develop this sector… it will remain for a long time a major component of the GDP,” said Sheikh Tamim in November.

The government does at least have room for manoeuvre, not least because it can tolerate lower energy prices than most of its peers due to low production costs.

In addition, while the oil and gas sector may be slowing, the rest of the economy is continuing to post healthy growth rates, helped by ongoing infrastructure spending.

Qatar National Bank (QNB) says the economy grew by 3.8 per cent year-on-year in the third quarter of 2015; London-based Capital Economics describes Qatar as “the best-performing economy in the GCC”.

Still, the financial situation does put the country under something of a cloud. On 4 March, US ratings agency Moody’s Investors Service placed Qatar on review for a possible downgrade, while it assesses the government’s fiscal reforms. It noted that continued large investments for the 2022 football World Cup are taking a toll on the government’s fiscal position, even though it “retains very significant financial buffers”.

The size of that financial cushion remains a matter of speculation, but Moody’s thinks the Qatar Investment Authority (QIA) holds assets of $329bn, equivalent to 183 per cent of GDP. The government says it would rather issue debt than use up those assets or its reserves at the Central Bank of Qatar (QCB).

“Qatar will maintain these reserves and investments,” said Al-Emadi in December. “The 2016 budget does not include any income from the reserves at QCB or investments of QIA, as this is being reinvested to boost the country’s reserves and investments.”

If the government can navigate its way through the current economic climate without drawing down its savings, it could provide a stronger base for the country’s future.

However, the longer-term sustainability of the economy will rely on success with its diversification efforts more than with the current quasi-austerity. The government may find it trickier to hold its nerve and maintain its momentum in that regard if and when oil prices start to rise again.

Iran to get sovereign rating within months

Published in MEED, 10 March 2016

A rating will help Tehran access international capital markets

Iran could have a sovereign rating within the next few months according to industry figures, marking an important point in its return to the international mainstream.

The authorities in Tehran are understood to be in discussions with the three main ratings agencies and industry executives expect one or two of them to be given the go-ahead in the near future to prepare a rating.

The move would allow the Iranian government to access international capital markets and, more importantly, provide a benchmark for other corporate issuers in Iran. At the moment, in the absence of any ratings agencies, local banks in Iran provide guarantees for corporate bonds, but formal ratings would allow companies to access the debt market in a more straightforward fashion.

Iran has not had a sovereign credit rating from any of the big three agencies for at least eight years. Fitch Ratings withdrew its rating in 2008. At the time it gave the country a long-term foreign currency rating of B+. Moody’s Investors Service rated Iran at B2 from 1999 to 2002. Standard & Poor’s (S&P) has never rated Iran.

A Fitch executive confirmed that his company is in discussions with the Iranian authorities and that its team of sovereign analysts was “ready to go”.

If a deal is agreed, the task would be carried out by Fitch staff in London and possibly Hong Kong and it is likely to take six to eight weeks to do the necessary work, meaning the rating would be issued “hopefully by the summer” he said.

Fitch says it will be careful not to involve any US staff in the work, given the ongoing US sanctions which bar American citizens from involvement with Iran’s financial sector.

S&P and Moody’s both declined to comment on whether they were in talks with the Iranian authorities.

Any move to provide a new rating will be welcomed by the financial community within Iran. “Before sanctions, the government was rated [and] some of the Iranian companies – automakers, industrial companies – were rated. We hope to see that soon,” said Majid Zamani, chief executive of Kardan Investment Bank, speaking at the FT Iran Summit in London on 9 March.