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Real-ity check.

Summary: Do soaring commercial and residential real estate prices, and the associated cost of living in the booming BRICs, mean that some banks have moved too slowly into what are becoming intensely competitive markets? Is booming Brazil's soaring currency pricing it out of the market?

If onerous regulations are threatening to drive top tier banks out of Wall Street and the City of London and into the arms of emerging market giants with light touch regulation, the same banks have to deal with the downside to the popularity of BRICs as lands of opportunity - the high cost of being based there.

A report by real estate services company Cushman & Wakefield (C&W) showed that South America had the strongest regional rental performance last year, recording growth of 12 per cent in stark contrast to North America where rents were at best stable. Brazil saw a rental rise of over 25 per cent and accounted for two of the three most expensive locations within the Americas region - Rio de Janeiro, with a 47 per cent annual rental increase and SEuo Paulo, with a rise of four per cent.

While Asia is still the most popular location for banks with emerging market ambitions, Latin America (Brazil in particular) is attracting more than enough attention of its own.

"In the occupational markets, Asia and Latin America still lead in terms of the pace in the recovery in activity, but Europe is also up strongly, with office take up increasing by around a third last year for example, while North America is past its lows and vacancy has largely peaked. As a result, rental trends have turned more positive but are again led by Asia, where rents rose nearly six per cent. The Americas is in the number two spot for rental growth-at 2.6 per cent-largely due to Latin America and Brazil in particular," C&W explained.

C&W's findings were echoed by a number of other companies. The party capital of Brazil rose from 57th to 25th place on a DTZ ranking of the top 50 total occupancy costs per workstation per annum. The price rose from $7130 to $10,670.

At the same time it came 10th in DTZ's list of total occupancy costs per 1000 square metres at $1,170,036. That compares with the City of London (in seventh place) at $1,335,800, Moscow (in fourth place) at $1,498,335, Mumbai (third place) at $1,630,731, the West End of London (in second place) at $2,016,07 and Hong Kong at the top of the ranking at $2,035,453.

New York was in 14th place at $977,362, one place behind Abu Dhabi (Free Zone) with an average total occupancy cost (per annum) per 1000 sq m of $1,033,334.

Other cities of note on the DTZ list include Doha (16th) at $941,841 and Dubai (Free Zone) at $677,049 in 39th place.

The prices for other locations with world renowned reputations as financial centres were thus:

DTZ reckons that London's West End will be the fastest growing market in Europe over the next five years. Recovering demand, combined with supply constraints following reduced development activity, will continue pushing up rents. Occupancy costs are forecast by the firm to increase by 5.1 per cent ($5,730) per annum, to reach $25,890 per workstation by 2015. This growth, says DTZ, will see London's West End retain its position as the second most expensive office location in the world, behind Hong Kong.

"Demand for office space in Brazil's main centres is twice the volume of units currently available and this is translating into strong rental growth, which is pushing up total occupancy costs," DTZ added, as it reviewed Latin America.

Banks which are planning to send their employees off to emerging markets also have to contend with wildly fluctuating costs, unpredictable decisions by regulators and an increased level of political risk.

'Business Friendly Bahrain' has been a victim of the political risk premium and has seen at one bank go public on its decision to move elsewhere in the region. The Financial Times reported that Robeco has decided to move its regional headquarters and dozen staff to Dubai by the end of 2011.

"The situation in Bahrain is improving but conditions for doing business have not yet returned to their strong pre-crisis conditions," Douglas Hansen-Luke, the Chief Executive of Robeco told the newspaper.

A raft of new regulations by regional central banks will also create some movement around the globe. Qatar's decision to ban Islamic windows and Oman's nearly simultaneous decision to allow Islamic finance (windows and all) is also likely to create a certain amount of relocation activity.

The Dodd-Frank act in the US and the decision by British regulators to radically overhaul the banking system there by separating retail banks from investment banks to prevent the latter from destroying the former with wild bets on toxic derivatives for instance, (even though the British banks which were bailed out were retail banks) could also seen something of a reshuffle amongst the talent pools.

The Dubai International Financial Centre (DIFC) could be one regional beneficiary from the turmoil, as could Abu Dhabi's financial centre, while Qatar might see more banks moving there as they angle for business in Saudi Arabia. Some banks chose Bahrain for just that reason, but may now feel that the combination of the 2022 World Cup in Qatar and its proximity to Saudi Arabia is worth a punt.

The DIFC was recently in Brazil where it held a series of meetings in Rio de Janeiro and SEuo Paulo as it went about drumming up business. Full disclosure: CPI Financial, which publishes Banker Middle East, is majority-owned by the DIFC.

DIFC officials met with Brazilian companies from a range of sectors including; agriculture, oil and gas, food manufacturing and processing, financial services, and insurance as well as meeting the senior management in the Brazilian Stock Exchange. It has also been meeting with existing and prospective clients in China, South Korea, Malaysia and Brunei.

It is no surprise that financial centres in the Gulf are eager to attract business from the BRICs as they point out their time-zone friendly locations. Dubai, for example, is GMT+4, Beijing is GMT+8, Rio/SEuo Paulo is GMT-3, Moscow is GMT+3 and Mumbai is GMT+5.30.

These days merry bands of trade delegations are flat out hawking their location as the ideal place to do business in a globalised world and (almost) no location is too small or too obscure. International news networks like CNN International, BBC World, Bloomberg, CNBC and France 24 (to name but a few) have one advertisement after another extolling the virtues of investing in Georgia, Macedonia, Dubai, Russia etc. In fact, on some channels, there are very few other ads.

Asset managers, private equity houses and investment banks which have been hoping to ride the commodities boom, as well as the surge in the Brazilian currency's value have poured into the increasingly prosperous South American state and they range from European giants like Santander and Deutsche Bank to Bank of China and even Bahrain's Arab Banking Corporation (ABC Brasil), which saw its net income rise by 20.8 per cent to $29.3 million from the same period a year earlier. ABC Brasil said it has business platforms in eight Brazilian states, with a presence in 19 cities.

Brazilian Central Bank regulations require banks to maintain total capital of no less than 11 per cent of risk- weighted assets, well ahead of the eight per cent that Basel III requires.

"For Brazil, the key issue will be transactional challenges where larger banks share risk with smaller banks. Therefore, implementing Basel III will revolve around accounting instead of whether banks will have sufficient capital coverage," Oxford Analytica explained.

Qatar Holding acquired a five per cent stake in Banco Santander Brazil for a reported $2.7 billion in October 2010, which would probably make it one of the bank's largest shareholders.

Grupo Santander said that the transaction would allow it to advance in its commitment for its Brazilian affiliate to have a free float of 25 per cent by the end of 2014. Emilio BotE[degrees]n, Chairman of Banco Santander, said, "This agreement is the first step in our relationship with Qatar Holding as a strategic partner in Brazil and the rest of Latin America," which suggested to some that the Qataris could be eyeing more business on the commodity-rich continent which is seeing incomes rising widely.

In the year to 15 May 2011, BM&FBOVESPA, Brazil's stock exchange registered more than $11.5 billion in public offerings and follow-ons. There were seven Initial Public Offerings (IPOs) in 2011. Meanwhile, Exchange Traded Funds (ETFs) reached a record BRL 942.43 billion ($590.49 billion) financial volume in April, in 28,969 trades and 14,734,230 units. The financial volume figure surpassed by 7.5 per cent the previous record of BRL 876.25 million in February 2011. The most-traded ETF in April was BOVA11, which tracks the Ibovespa index.

The bourse has invested heavily in infrastructure to build a new trading system, clearinghouse infrastructure and main data centre and they are expected to be fully implemented sometime in 2012. With this infrastructure in place, BM&FBovespa said it expects to launch new products, further develop HFT [high frequency

trading] activity and, it says, "establish one of the most advanced trading and post trading exchange platforms in the world."

A new data centre is being built in the SEuo Paulo metropolitan area to host the exchange's IT infrastructure and it said it is also thinking about offering the space for co-location and equipment hosting to brokers, investors, and independent software vendors, to provide them with "a low cost solution."

"The credibility of Argentina's national statistics institute has long since gone up in smoke."

New products and offerings include the cross-listing of derivatives between BM&FBOVESPA and the Chicago Mercantile Exchange and five new indices have been developed: the Corporate Governance Index Trade (IGCT), the Brazil Broad-Based Index (IBrA), the Dividend Index (IDIV), the Basic Materials Index (IMAT) and the Public Utilities Index (UTIL), which the bourse says will be the basis for new ETFs in the future.

Egypt managed to establish a free trade agreement with the Mercosur bloc (Brazil, Argentina, Uruguay and Paraguay) in 2010 during a trip to Brazil and Argentina by the then Minister of Trade and Industry, Rachid Mohamed Rachid. Egyptian Trade Ministry figures show that Brazilian exports to Egypt amounted to $1.53 billion in 2009, while Egyptian exports were at $87.7 million.

Argentina's economy has been given the thumbs up by Goldman Sachs, which reckons that its GDP could expand from 6.8 per cent to 7.7 per cent, although an inflation rate of around 20 per cent (perhaps closer to 30 per cent), although official estimates put it is 9.7 per cent.

"We all know that the question of inflation in Argentina is a difficult question, and as you know, the Fund has been providing technical assistance, and you also know that there are large discrepancies between the official estimates and the estimates that are prepared by private analysts. ...the monetary aggregates that are used by the central bank have gone up, and they arenowintherangeof20to30per cent or in some cases a little bit higher," Gilbert Terrier, a Deputy Director at the International Monetary Fund said.

Jude Webber, writing in the Beyond Brics blog in the Financial Times wrote, 'The credibility of Argentina's national statistics institute has long since gone up in smoke. For more than four years, the institute, known as Indec, has been reporting inflation numbers that are considered by all but the most ardent government supporters to be diverging wildly from reality."

There have been worries that Argentineans continue to lack faith in the peso and have been piling into the US dollar amid fears that the Central Bank might drop the dollar peg, which is at 4.085 to $1. The fact that the Central Bank has had to go public about such fears (which it attempted to brush off) ahead of October's presidential election has been aggravated by rumours that the Government's business outlook could

swing to the left, reducing the chances of further privatisation initiatives.

"This is a phenomena that is typical before elections. It's related to portfolio shifts," Central Bank of Argentina President Mercedes Marco del Pont told journalists.

Meanwhile, UNASUR (the Union of South American Nations) has decided to postpone its plans to create an

Several countries have attempted to integrate their bourses, but it is early days. 1 June 2011 saw the launch of MILA (Mercado Integrado Latinoamericano), the Integrated Latin American Market. The new bourse brings together the combined exchange muscle of Chile, Colombia and Peru and is an attempt to level the playing field which is dominated by Brazil and Mexico.

EU-like single currency bloc. The group blamed the current crisis in Europe for its decision.

"When we launched UNASUR we were thinking of a Central Bank and a common currency, but the European experience made us decide to shelve the proposal," Rafael Fallonier, Argentina's UNASUR representative said. "In the EU, the euro has become a corset, so no member can abandon the union."

A report by MercoPress said that Chileans will be able to buy stocks from Peru and Colombia through local brokers who will have counterparts in those countries. "MILA will be the first market of the region with potentially 565 companies and the second market in stock exchange capitalisation after Brazil with more than $691 billion. Until now, 20 Colombian and 14 Peruvian shares ohave registered in Chile, representing next to 80 per cent of the deals in these countries," it said.

The value of the triumvirate of exchanges sits somewhere between Mexico's $453.5 billion stock market capitalisation and Brazil's huge $1.5 trillion.

"We've already been in a testing phase with MILA and will, in reality, continue to be for some time," an unnamed trader in Santiago told Marketwatch. "True integration will only come when we've leveled tax, regulatory, reporting and other issues." The plan to merge Colombia and Peru's exchanges was postponed

production company. The terms of the financing also entitle Standard Bank to a contingent interest participation.

Chile, which alongside Brazil, is seen as one of the more outgoing South American economies has been attempting to maintain what has been seen as reasonably robust growth, although, like Brazil and Argentina, with the worry of inflation.

In June, the Central Bank of Chile decided to raise the monetary policy interest rate by 25 basis points to 5.25 per cent and it believes that contrary to what analysts think, that rate rises will continue, though probably at a slower pace.

around three per cent while measures of core inflation remain bounded. Private inflation expectations show a decline, although some of them remain above the target,' it warned.

The country has been working diligently to recover from the damage it suffered as a result of an earthquake and tsunami in February 2010. "Output expanded 5.2 per cent in 2010, but with a significant baseline statistical effect due to the immediate impact of the earthquake, and it is forecast that growth will be between 5.5 and 6.5 per cent in 2011," Jose De Gregorio, the President of the Central Bank said at a meeting of the IMF's International Monetary and Financial Committee.

For Brazil, the key issue will be transactional challenges where larger banks share risk with smaller banks.

"Earlier this year, as the real exchange rate appreciated beyond what was deemed its long term fundamentals and global risk remained relevant, the Central Bank implemented a reserve accumulation programme to last for the course of 2011. This programme aims at boosting the external liquidity after Lima's stock exchange decided to wait and see what the outcome of the new Government's opinion would be on the decision to merge.

However, the uncertainty has not scared off Industrial and Commercial Bank of China, which if reports are to be believed, is planning to buy Standard Bank's Argentine arm for around $700 to $800 million.

Next door in Brazil, the South African bank, working in partnership with Houston-based Pareto Commodities, provided a $37.5-million financing package to Central Brazil CoE[micro]peratief, an oil and gas exploration and

'The Board estimates that, in the most likely scenario, additional increases in the monetary policy rate will be necessary, the timing of which will depend on the unfolding of domestic and external macroeconomic conditions. Accordingly, it will continue to use its policies with flexibility so that projected inflation stands at three per cent over the policy horizon,' the Central Bank said in a statement on its website.

'Domestically, output, demand and labour market figures reflect the dynamism of the economy. Annual CPI inflation indicators have hovered of the Chilean economy and to ease its adjustment to the current global monetary tensions. The implementation is through sterilised daily fixed purchases of foreign exchange and does not target a specific level for the real exchange rate. Currently, the authorities assess that the real exchange rate level is coherent with long term trends," he said.

The confidence in the Chilean economy has seen something of a spike in attempts to list on the Santiago Stock Exchange. Three local companies listed in the first quarter and more are expected. nBME

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Publication:Banker Middle East
Geographic Code:3BRAZ
Date:Aug 17, 2011
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