SAADIYAT: A $3.3BN OFFSHORE MARKET.
Saadiyat, a 26-square-kilometre island just off the Abu Dhabi coast, is being developed as an international financial and commodity market to access the emerging Middle Eastern and surrounding hinterland economies. The city is being built from scratch, to be a dedicated business and trading haven with an international stock exchange, a futures and options exchange, a clearing house and a commodities trading exchange.
"The creation of Saadiyat came from a real need," Ali Makki, head of marketing for the project, told The Middle East. "The hinterland region surrounding Saadiyat contains US$1 trillion in liquidity and estimated annual commodity flows of US$400 billion, so the lack of a financial hub in the region seemed to be an anomaly." By 2005 the project is expected to reap $500 million a year from property development alone.
The area surrounding Saadiyat is cash heavy but in trading terms it suffers because of the time zone gap between the Middle East and the world trade centres of Europe, Hong Kong and Singapore.
"Saadiyat is intended to become a leading financial and commodities centre, similar to Singapore," explained Makki. "Benefiting from its strategic location, the market is filling the crucial time gap of three to five hours that currently exists between the major financial markets of the East and the West. It is the final link in the world-wide financial chain, providing a 24-hour active global market, seven days a week."
The UAE government is trying to entice international financial institutions with generous spoils such as direct stock market participation, mutual funds, offshore and local banking and wealth management services, and insurance products. The Abu Dhabi Free Zone Authority (ADFZA), a separately constituted arm of the Abu Dhabi government, will regulate the market.
"An independent, business-friendly legal and regulatory framework, based on the best international practice, will govern all the activities undertaken within the Saadiyat market," said Makki.
The Emirates Global Capital Corporation (EGCC) has been entrusted with the task of building and operating Saadiyat on a 50-year concession. Like tax-efficient Hong Kong, Saadiyat has lined up an impressive list of incentives for finance companies and industries to move operations to the island. This includes tax exemptions, 100 per cent foreign ownership and management of companies, fully repatriable capital and profits, freedom from local employment quotas and business protocols, simplified company structure and so on. "There is also scope for the introduction of newer financial instruments with protection for minority shareholders," said a company official. "International accounting standards and disclosure norms will be enforced."
Foreign banks that set up shop on Saadiyat will be exempt from minimum capital requirements. They can operate fully fledged branches, and banking activities will not be hampered by geographical or functional restrictions.
The company hopes to transform Saadiyat into an international banking hub. "The excess liquidity of the UAE banks, estimated in the region of $60 billion, is what the organisers hope to divert to the island," said a Dubai-based analyst.
"Expected market participants can be classified as investment and financing companies," said an EGCC official. "This includes commercial and investment banks, leasing and investment companies, asset management firms, mutual fund providers, insurance companies and brokers."
The UAE is the financial and commodities trading centre in the Middle East, with an estimated $300 billion worth of business transacted annually. An EGCC spokesperson told The Middle East: "The new market is ideally located to service this trade. Besides the UAE's political stability, the region offers a stable social life for expatriates. Saadiyat will be developed as a city of the future, offering an unmatched working and living environment based on a sophisticated IT/telecom platform."
The island will have a series of exchanges that will form the base for the market's financial services. "The market, the focal point for regional financial and commodities trading, will contain all the elements needed for a successful financial centre," says Makki. "These are the Saadiyat International Stock Exchange (SISE), Saadiyat Futures and Option Exchange (SFOE), Saadiyat Commodities Exchange (SCE) and the Saadiyat Clearing House (SCH)."
"The market is expected to have a strong positive impact on the UAE economy," said Makki. "The spin-off benefits to the UAE are estimated to be in the order of $170 billion over the first 25 years of the project. The UAE economy is heading towards liberalisation and this development is part of an economic diversification strategy. Saadiyat will create numerous job opportunities; the island will even have its own schools, hospitals and airport. The presence of a commodities centre on Saadiyat will increase trade activities and urge traders to use the UAE seaport and airport facilities as well as the storage facilities available in most of the free trade zones." Abu Dhabi airport, to cope with the increased passenger numbers, is upgrading its infrastructural facilities.
The project was first mooted in 1992 and despite the high-profile backers (the Abu Dhabi government is determined to put Saadiyat on the world map) and their lofty intentions, there are detractors who question the viability of the scheme. The high risk associated with the project cannot be ignored, according to a local analyst in Abu Dhabi. The timing of the project is also a cause for concern, as offshore markets and tax havens are under a cloud. "Is the EGCC confident of harnessing the required funds? In spite of the $1 million paid-up capital of the company, additional funds are still needed," said another economist.
Plans for an Initial Public Offering (IPO) have been languishing in the pipeline, but the company has put its own spin on the situation. The EGCC spokesperson told The Middle East: "Once the first phase of development of the island is over in 2003-2004, the management will decide on an IPO floatation. For the moment we don't need any funds from outside, the government of Abu Dhabi invested $400 million." Company officials confirm that capital is not a worry. High-profile supporters include the National Bank of Abu Dhabi as well as the Abu Dhabi government, which is prepared to invest more if necessary. Salah Al Shamsi, EGCC chairman said: `A mixture of government finance invited shareholders from regional and international institutions and the IPO will carry us through."
Is there a need for an alternative to Hong Kong and Singapore? The company feels "there is a lack of an appropriate international financial market in the region". But what about regional competition? How will it take on regional competitors like the well-established free trade zones, as well as other established GCC economies? Most of the blue chip institutions already have established Gulf bases and chances of them uprooting seem remote.
But the company argues that competition is not on its agenda; it seeks to complement the other centres. Argues Makki: "The Saadiyat market will function as a complement and a natural extension to the existing free zones in the region. The financial centre will support the growth and success of industrial free zones in the Gulf by financing the high volume of trade passing through these countries. In addition, the Saadiyat market will use storage facilities in the industrial free zones as approved storage and delivery points for physical commodities." This will stimulate economic growth in the region, says a marketing manager in Dubai.
While few doubt the ability of the promoters to make this a viable proposition, a commentator opines that "the financial market will have to piggyback on the commodities market -- the commodities trading functions of the market is the only component that can evolve into a world player". A listed company in Hong Kong or London will not look to a listing in a new and as yet unproven market. But the EGCC dismisses this critique. "This is the first international stock exchange in the region and will not compete with other regional exchanges which cater to local markets."
"The level of interest in the project is high. Overseas investors are showing a great interest in many fields -- island development, setting up regional headquarters, operating companies on the build-own-transfer basis, IT, telecom and infrastructure development," the spokesperson told The Middle East. It is said that Credit Agricole of France and a handful of strong local banks like the Union National Bank have applied for licences and discussions with other prospective institutions are under way.
The company does not expect any problems from international bodies like the OECD on Saadiyat's status as a tax haven. Al Shamsi is reported to have said: "Significant changes have been made to existing UAE laws to ensure the market acts as a free market, so we do not anticipate any changes to the tax status. The tax incentives are a good reason to feel international companies will be tempted in".
After eight years on the drawing board, the project seems finally to be taking off. EGCC was inaugurated in July 1999 and is reported to be the first firm to be floated on the Saadiyat International Stock Exchange.
The authorities are sparing no effort to attract dynamic companies. The general manager of Abu Dhabi Free Zone Authority, HE Mohammed Ali Al Hosani said: "To be successful, Saadiyat needs to be recognised internationally. Major international financial and commodities centres have expressed their interest in its development."
The commitment of Saadiyat's big backers is obvious, as is the fact they will ensure its commercial success. Whether it will develop into the big financial focal point they envisage, only time will tell.
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|Publication:||The Middle East|
|Article Type:||Brief Article|
|Date:||Feb 1, 2001|
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