Dubai Forum - March 10, 2010

Speakers at EMTA Forum in Dubai Discuss Dubai World Restructuring, Outlook for Gulf Economies Special Events

EMTA’s first Forum in Dubai was held on March 10, 2010. Standard Chartered hosted the event, which drew over 150 market participants.

The event included a panel discussion of sell-side analysts moderated by Marios Maratheftis (Standard Chartered). The first topic to be debated was whether any sovereign defaults were looming in the aftermath of the global recession. Royal Bank of Scotland’s Okan Akin noted his firm’s constructive outlook, specifying that a deal would eventually be reached to solve the Greek crisis, and that “federal support of Dubai is even more firm than EU support for Greece.” Igor Arsenin (Credit Suisse) noted that in Latin America, his area of expertise, the outlook was relatively benign, with only the “mostly voluntary” 2007 default of Ecuador having occurred in recent years.

Reviewing 2009’s economic data, Simon Williams of HSBC observed that “most of us underestimated how bad growth would be,” and that the year was marked by a “soundtrack of bursting bubbles across the Gulf.” Williams forecast “uninspiring” growth for the region in 2010, at 4% vs. overall EM growth of 6%. Last year’s downturn highlighted the need to reform monetary and fiscal policy in the region, and the need to develop local capital markets, he affirmed. “Until those concerns are addressed, we won’t be able to get the growth in the Gulf that we should have,” he stated. Prompted by Maratheftis on whether lower growth rates were a sign of a mature market, Williams responded that Gulf economies should be achieving 6-8% annual increases in GDP. “The potential is enormous,” he concluded.

The main driver of Gulf economies is of course oil, and unless you believe in an Asian economic collapse, reasoned Alia Moubayed (Barclays Capital), pricing for oil should be well-supported. Demand from OECD countries is bottoming out, while there are concerns about non-OPEC supply, and Barclays is forecasting an average price of $85 in 2010 and $97 in 2011 for WTI crude.

The panel’s Russia expert, Ivan Ivanchenko (VTB Capital) noted that, although last year’s oil price was relatively weak, and the Russian economy did not perform well, the appetite for Russian credits remained “unstoppable.” Current oil pricing, which he admitted was higher than his own forecasts, mitigated any potential spillover effects from recent events in Ukraine and Kazakhstan.

Would any possible slowdown in Asia harm Brazil? Arsenin noted that Brazil was the f rst LatAm country to emerge from the global recession. “The old stereotype that Brazil is a commodity play is wrong; Brazil is a closed economy with a low ratio of exports to GDP,” he stated. Thus, Arsenin continued, the recovery in Brazil was in fact domestic demand-driven rather than commodity-driven. Arsenin listed as main risks to the Brazilian economy a large drop in commodity prices (especially if Chinese demand drops) and the low rate of investment, which could hinder sustainable growth.

Panelists differed on their impressions of the ongoing Dubai World restructuring. Williams noted the “massive amount of confusion” and “lack of clarity.” He added that the standstill announcement would make it more difficult to reach a creditor-friendly restructuring, and that he was “anxious” about the future because of an on-going funding squeeze. Akin sounded a more positive tone, stating he had been hearing positive news about the restructuring process.

Discussing their recommendations for Gulf instruments in 2010, Moubayed observed that the Dubai World incident had led to greater discrimination in investment choices by fund managers. “There are strong foundations in Qatar because of the expected doubling of gas production in 2010,” she stated, pointing out the widening of Rasgas compared to the sovereign as “giving some opening.” Moubayed also favored Egypt, citing accelerating growth, an improving balance of payments and increased tourism receipts. She added that those “comfortable with the politics” should consider Lebanon, including local bonds. Moubayed also recommended the Egyptian pound, the Russian ruble and the Kazakh tenge.

For a Gulf investor looking at LatAm assets, Arsenin acknowledged that in many cases (notably Brazil, Mexico and Chile), tight spreads meant “meager” total returns. As for higher-yielding credits, he suggested looking at Venezuela, likely to muddle through for the foreseeable future but for which an eventual default could not be ruled out. Argentina is a “better economic story”—albeit with political risk-- but 2011 elections offered potential improvements. Brazilian local instruments were also worth consideration, with more potential reward than the country’s external debt, he concluded.

Akin recommended Ukraine local markets and Russian bank debt, while Egypt’s local currency market was of interest to Williams. Ivanchencko favored Promsvyazbank and Alliance Oil external debt and RUB-denominated issues from Evraz, Mechel and Detsky Mir.

Finally moderator Maratheftis called attention to his firm’s bullish stance on Asia. “Nothing is going on politically in Indonesia, which is great for any EM,” and he praised the country’s “prudent” economic management. He also spoke positively on India and Taiwan.

 The investor panel was moderated by Abdul Kadir Hussain of Mashreq Capital. Hussain invited speakers to comment on the current state of the markets. Mohammed Hanif of Insparo Asset Management responded, “When I look at EM pricing, I am frightened…I really don’t understand why we are here. We have priced in the best-case scenario although the markets seem to be skittish and waiting for a sovereign default.”

Algebra Capital’s Dino Kronfol then discussed the outlook for new issues. He noted that issuance of local currency bonds have been on an upward trajectory while it would take some time before Eurobond new issue volumes returned to pre-Lehman crisis levels.

Discussing transparency, Hanif stressed “such concerns are not new” and not unique to the region (“transparency is also lacking in Africa and –dare I say it—was the case at Lehman as well.”) Investors need to “do the work and really understand instruments before they purchase them,” he underscored, adding “do people really think that sukuks are an insured obligation?”

How should investors handle limited disclosure? Nish Popat (ING Investment Management) agreed that “you have to do the homework, you have to go and see the companies and ask the questions they don’t like.” He voiced optimism that transparency will improve over time.

Kronfol praised ratings agencies for doing a “very difficult job in the Middle East,” and having to address “opaqueness” as well as implicit guarantees. He urged that issuers take a more proactive and constructive approach to working with ratings agencies in the future.

Panelists also addressed the lack of fresh money to prop up local economies. Would the Emirates Investment Authority consider investing in special situations? Its representative Paul Oliver noted that there are institutions that are set up for this. “Is there a TARP-like institution in the UAE or GCC? I don’t know” he mused.

Panelists agreed that there probably wasn’t sufficient interest to launch a GCC –specific distressed fund. “A lot of foreign investors fled after Nakheel and they won’t be back for a while,” commented Hanif. Kronfol added that judicial and legal issues would make such a fund difficult to market abroad.

There was much criticism of the handling of the Dubai World restructuring announcement. Hanif commented that “the speed and extent of the real estate bubble bursting was a surprise, though not the bursting itself.” He voiced strong disapproval of the strategy in addressing investors, specifcally the lack of engaging with creditors immediately after the standstill announcement. “Investors hate the lack of transparency,” he underscored. The current lack of communication has also resulted in a fertile ground for rumors and contradictory messages he added. Popat concurred, adding that the six month timeframe for the restructuring was “silly.” He seconded Hanif’s assertion that there needs to be a clear channel of communication.

The panel discussed the local real estate sector. Kronfol described the short term outlook as uncertain, because of “the lack of decision making and leadership in resolving some of the debt problems.” However, opportunities remain for wise investors.

Turning to recommendations, Hanif spoke positively on Qatari banks as well as opportunities in Ghana and Zambia. “There is value around but you have to be careful,” he warned. Popat also recommended Qatari issues, as well as Egyptian paper and also indicated interest in the limited opportunities in Saudi Arabia. Oliver saw value in regional bonds. He noted that the EIA would like to see more local currency bonds available, as well as inflows of global capital returning to the Gulf region.

Following the panels, attendees were invited to a networking reception where speakers made themselves available to answer additional questions.