UAE faces global headwinds to emerge stronger.

DESPITE THE SCEPTICISM of many international critics, Dubai and Abu Dhabi have stood together and, in the face of the escalating global downturn, declared their intention to cooperate and provide each other with financial and economic support. For the UAE's bankers, entrepreneurs and investors, this means that efforts to consolidate to preserve the possibility of future growth are now more likely to go ahead. Other benefits of a stronger federal union include the prospect of better financial regulation to ensure greater transparency and efficiency, as well as profitability.

The scepticism has been fed by media reports that Abu Dhabi, one of the world's top five exporters of oil and gas, might be reluctant to coordinate its financial and economic policies with Dubai, the second-largest of the UAE's seven emirates. While rivalries and competition among the UAE's ruling families are nothing new, analysts say that both Abu Dhabi and Dubai, which has virtually no energy reserves and relies primarily on its geographic location as a vital port between Arabia, Asia and Africa, have far more to gain by cooperating, rather than competing.

News this year of Dubai's estimated $80bn debt that has dominated headlines in the western media, has fuelled speculation that Abu Dhabi might be reluctant to use its huge financial reserves to bolster the union's needs. But bankers and economists in the country have pointed out that Dubai's debts must be put into perspective. The emirate's phenomenal growth, and international recognition as one of the world's fastest-growing economies, stems in large part from Crown Prince Mohammed bin Rashid Al Maktoum's willingness to borrow to finance new developments. The debt, the analysts point out, is backed up by more than $200bn in assets owned by Dubai's state- or semi-state-owned corporates.

This is in addition to the vast revenues from oil and gas exports earned by the federal UAE government over the past four decades, especially during the "boom" years which saw the price of a barrel of crude oil rise to $147 in mid-2008. As a result, despite the subsequent dramatic fall in oil prices, the UAE's savings are estimated to total more than $1 trillion, including its sovereign wealth funds, central bank reserves and other state holdings. For a country that has less than five million people, this indicates a degree of potential resilience than can only be envied by cash-strapped banks, corporates and consumers in the US, Europe and Japan, as well as their governments.

In the past few weeks, the UAE authorities, in addition to providing much-needed liquidity for the country's banks, have issued a new budget that will ensure much of the planned infrastructure, development and tourism projects go ahead as planned. These, according to the IMF, amount to some 2.2 trillion dirhams ($607bn) in real estate alone over the next decade. Other sectors expected to benefit include transport, electricity and water, utilities, social housing, petrochemicals, oil and gas.

Speculation that Dubai might fail to pay its foreign loans this year, unless it turns to its oil-rich neighbour, Abu Dhabi, during this global 'credit crunch', were wide of the mark, according to analysts in the region and in Europe. Proof of that came when the UAE's central bank announced it would subscribe to half of the $20bn-dollar long-term bond programme launched by the government of Dubai at the end of February. "Now the refinancing requirements of Dubai...for this year are in place," commented Henry Azzam, CEO for the Middle East and North Africa of Germany's Deutsche Bank.

As for the economy, Sultan bin Saeed Al Mansouri, the UAE's Minister of Economy, told a forum organised in Abu Dhabi in March: "I don't think there will be recession in the UAE. There will be a slowdown because we are part of the world and we will be affected." However, the UAE's forecast budget deficit, analysts and economists say, should ensure growth continues, although at a reduced pace to that experienced in 2007 and 2008. However, they note, this slowdown should help to slow the huge rise in inflation, a development that will be welcomed by both the UAE's citizens and its large expatriate population.

"Dubai is the gateway to this part of the world," the Director General of the Dubai Chamber of Commerce and Industry, Hamad Buamim, told the local media in March. And the region, he added, included "a major economic power ... Saudi Arabia". This year, he insisted, should "be a year of stability, and 2010 a year of growth".

Foreign banks in the region have also confirmed this cautious optimism. Praising in particular the financial programmes issued by the UAE, Youssef Nasr, the chairman and CEO of HSBC Bank Middle East, noted that while "there are challenges throughout the Gulf ... so far, the policy response has been quite robust".

"The central banks have been good about injecting liquidity," he insisted. "In addition, most of the countries now have introduced deposit insurance and in several of the countries they've allowed the sovereign wealth funds to take equity positions in the banks."

Plans to encourage mergers within the sectors most affected are also helping to improve the investment climate, although many advisors and analysts also caution that despite the need to consolidate given market conditions, firms should not rush into ventures that may not be suitable. "We are looking favourably to the merger of real estate and financial companies within the UAE as it would create better synergies," Mansouri said in March. Signs that this was already happening in the two sectors, he added, were creating "a positive impact in the market".

"This is the time when we should be facilitating and helping mergers and acquisitions," Dr Nasser Saidi, Chief Economist of the Dubai International Financial Centre told The Middle East in mid-February. "This is long overdue, primarily for efficiency reasons." Because the UAE is "overbanked", he added, "we need a process of consolidation in financial services to enable banks to face foreign competition. I would certainly be a strong proponent of that."

In the real estate sector, Dubai's announcement last November that two of the country's largest real estate lenders, Amlak and Tamweel, along with the government owned Real Estate Bank and Emirates Industrial Bank, would be merged under a government umbrella into a new entity, the Emirates Development Bank, set the stage for consolidation in Dubai's overvalued property sector. While that merger is now under reconsideration, the withdrawal of foreign funds from the emirate's banking sector and stock markets has exacerbated liquidity problems for both residential buyers and commercial developers. This continues to put downward pressure on prices and valuations in Dubai and in other parts of the UAE, although prices are reported to be holding steady, or still rising, in Abu Dhabi due to a shortage of apartments and villas for a continuing influx of foreign professionals.

Mergers and/or acquisitions within the sector could provide substantial benefits for both local and regional, as well as international, investors. Mohammed Dahmash, head of Ernst & Young's Real Estate Transaction and Advisory Services Group in Dubai, told The Middle East that though there are challenges facing many of the young companies, the long-term prospects of those leading the markets are positive. "The present valuations," he said, "continue to present excellent opportunities for investors to buy and benefit in the medium to long term. Many investors," Dahmash concludes, "who are on the sidelines should come back as soon as they regain their confidence."

"In the Middle East, the government-backed companies are always looking at acquiring distressed assets," observes Blair Hagkull, Managing Director in Dubai for the Middle East and North Africa at UK realtors, Jones Lang LaSalle. "We are in discussions with corporate clients," he told The Middle East, who are looking at opportunities both locally and internationally."

In the financial sector, the pace has been set by what analysts are calling the "quasi-merger" of Dubai International Capital (DIC) and the Dubai Group (DG), both owned by Sheikh Mohammed, the ruler of Dubai, who also serves as the UAE's vice-president and prime minister. The two, which have more than $12bn in assets, focus on his investments and have relied heavily on borrowings to make substantial high-profile acquisitions both at home and abroad. Other consolidations are reported to be taking place within Dubai Holding, another of Sheikh Mohammed's companies. Analysts say that business model must now be reviewed and amended in light of the global financial turmoil.

"Sheikh Mohammed promotes the growth of Dubai in everything he does, including in his private investments," explains Florence Eid, who is in charge of the Middle East and North Africa for the US hedge fund, Passport Capital. "So DIC has some of the characteristics of a sovereign wealth fund," she noted. This means mergers in banking and other financial services are now being seen as a policy that is not only obtaining official approval but also one that is being actively implemented at the highest level.

The next step, according to Kamran Butt, the head of Middle East equity research and private banking at Credit Suisse in Dubai, may be for the government to take the lead in coordinating mergers and acquisitions within the financial sector, which has 51 separate institutions regulated by the Central Bank. "This will be a way to provide the needed stability," Butt told the local media.

Politically driven mergers and acquisitions are "a possibility", Raj Madha, senior banking analyst at the regional investment house, EGT-Hermes in Dubai, confirmed to The Middle East. Of the 26 local banks, eight are middle to large in size with a market capitalisation of 6bn dirhams ($1.6bn) or more, he notes. Most of these could be considered as takeover targets, he says.

Last autumn, two of Dubai's largest state-backed financial institutions merged to create Emirates National Bank of Dubai (ENBD), whose market capitalisation is about 19bn dirhams ($5.2bn). Since then there has been speculation that the National Bank of Abu Dhabi (NBAD), the largest financial institution in the emirate, might follow suit by linking up with the Abu Dhabi Commercial Bank, both of which are controlled by one of the sovereign wealth fund, the Abu Dhabi Investment Council. This would outstrip ENBD to create the largest bank in the UAE with a market capitalisation of about 30bn dirhams ($8.1bn).

In the meantime, NBAD is going ahead with its overseas expansion plan, according to Michael Tomalin, its chief executive. "Our expansion is part of our medium- to long-term strategy and we won't be affected by short-term pressures because there is vibrant growth in the UAE," he told the local media in mid-February. "We plan to open half a dozen new branches in Egypt, add two branches in Sudan and two in Oman." The bank is also setting up other offices in Jordan and in Hong Kong this year, he added.

Another possible combination centres on the Dubai Islamic Bank and Dubai Bank. Both would make a good fit, provided measures to ensure procedural integrity and transparency are taken, asserts Wadah Al Taha, an independent banking and market analyst in Dubai. Other banks on analysts' radar screens include Union National Bank and the Commercial Bank of Dubai.

Elsewhere, mergers are being discussed within the insurance sector, which counts 27 local companies and 24 foreign-owned entities. "Despite the positive indicators of profits made by the national companies it is necessary that national firms head towards mergers just like global insurance companies and banks that are now involved in hundreds of billions [of dollars] of mergers," insists Fareed Lutfi, Secretary General of the Emirates Insurance Association.

The country's largest national insurance company had a capital of less than 70m dirhams ($19m), he pointed out, which is insignificant when compared with the big international players. If most local firms merged into one big company, he told local media, "we would see a fundamental change in the insurance market. Undoubtedly, it would be a positive change". The fact that the UAE has vast real estate and infrastructure projects on its drawing boards which are worth "trillions of dollars", makes it even more imperative to have national insurance companies that are adequately capitalised to accommodate this market potential, he added.

The need to overcome the withdrawal of international banking funds and the shortfall in local bank lending is also having a dramatic impact on the UAE's construction sector. Projects are having to be built in shorter time periods and payment delays are reported to be increasing. Some buyers, both residential and commercial, are said to be unable, or unwilling, to meet their commitments to developers at all.

Dubai-based Arabtec, which is building the world's tallest tower, the Burj Dubai, and which employs more than 52,000 people, is said to be one takeover target. Chief Financial Officer, Ziad Makhzoumi. has noted that "the high rate of growth of the mega projects will be reduced in the short and medium term." However, he said, "We expect most of the projects that have started will be completed within the expected time frame." The sector in the UAE would see "more prudence in design, value engineering and commercial feasibility studies" undertaken before projects are finalised. "One will witness more consolidation ... be it in mergers or acquisitions," he added. Other consolidations are expected in the country's small to medium-sized firms, analysts say.

Government efforts to improve the regulatory climate are also expected to encourage the consolidation process, bankers and analysts note. The Emirates Securities and Commodities Authority said in January that it would require that companies in the country disclose full details on all types of their exposure to property as well as their financial allocations and cash and bank deposits held abroad, as well as in the UAE. The move is being welcomed by private and institutional shareholders, as a sign that the government is eager to help provide accurate asset valuations.

In the medium to longer term, a wave of mergers and acquisitions in the Emirates could help put the UAE and the GCC in a leading international position once the global financial and economic downturn stabilises, indicates Saidi. The banking and financial sectors in both the US and the UK will take at least two to three years to restructure and recapitalise, he feels, and this will create "opportunities for emerging markets such as China and the GCC to grow their banking sectors". The UAE and other Gulf states could learn from the mistakes [of the US and the UK] and emerge with "stronger capital markets and banking sectors" that would enable them to take advantage of the new global financial infrastructure. "The financial map of the world is changing, and is moving east."

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Author:	Smith, Pamela Ann
Publication:	The Middle East
Geographic Code:	7UNIT
Date:	Apr 1, 2009
Words:	2432
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