Speakers Discuss Middle East Turmoil and Impacts on MENA at EMTA Dubai Forum
EMTA’s Dubai Forum, held last year after the collapse of Dubai World, proved timely once again as uprisings in several MENA countries continued as the event took place. Standard Chartered Bank sponsored the event, which drew 175 registered attendees.
Moderator Marios Maratheftis (Standard Chartered) began by polling speakers for their economic assessments of MENA countries. Alia Moubayed (Barclays Capital) noted that Egyptians were hoarding cash during the on-going turmoil, which would result in lower-than-forecast growth, “probably not to exceed 2 or 3%,” she believed. “The bigger risk though is on the fiscal side, as officials are raising subsidies and wages,” she reasoned, in an attempt to meet protestor demands. Moubayed wasn’t sure that Egyptian debt prices had correctly factored in all risks.
Farouk Soussa (Citi) spoke more positively about Jordan. The Hashemite Kingdom “has been the star of fiscal consolidation,” he declared, praising Amman for its clever removal of oil subsidies-- executed in tandem with raising wages for the poor, and thereby avoiding street protests. He viewed the continued appointment of Finance Minister Mohammad Abu Hammour during the recent cabinet shuffle as a positive sign. According to Soussa, King Abdullah II has reacted well to recent unrest, and Jordan was likely to carry out reforms that would surpass Tunisia and Egypt.
Simon Williams of HSBC was less optimistic on Bahrain. The problems that have suddenly been highlighted in Bahrain were not in fact unknown to MENA experts. “Foreign investors have often seen Bahrain as just another GCC state…but it has a history of weak finances and a troubled political situation,” he stressed. Despite this, however, the political situation is “resolvable” although Williams agreed that Jordan’s fiscal issues were less of a concern than those in Bahrain.
Panelists eventually discussed the “elephant in the room,” Saudi Arabia. Soussa highlighted the importance of high oil prices for Kingdom growth. “But growth in Saudi Arabia means almost nothing, its just turning on another spigot…more importantly, is growth delivering jobs for Saudis?” Soussa noted that there are two positions per Saudi citizen in the Kingdom, but education has been largely in religious studies and not the vocational or professional skills training needed to fill available jobs.
Soussa and Williams debated on whether the recent surge in oil pricing was warranted. Soussa argued that the oil markets are over-reacting, and pricing in the worst possible political outcome as “no leader of any major oil producer could possibly cut off oil supplies without destroying the local economy.” Williams countered that, on the contrary, the markets were correctly pricing in the possibility that there could indeed be major and sudden disruptions to oil supplies. “When we have been so blindsided--not having expected the events of the past few months-- it is not impossible that the unforeseeable could also happen elsewhere,” he commented, adding that oil prices reflect only “the beginning of fear, not a major fear.”
Speakers called Abu Dhabi “relatively boring” in the current climate. Not much growth in private sector jobs was likely, predicted Moubayed, although the country does not face the demographic challenge of a country such as Egypt.
RBS’ Okan Akin noted that local buyers have provided much of the support for UAE and Qatari issues, and suggested investors might wish to consider Qatar deals (especially on panic selling). Refinancing for quasi-sovereign issues in the region was manageable, Akin judged. Dubai would likely generate more FDI in the future, he predicted, and investors are being paid for the risk in Dubai issues.
The panel’s CIS expert Mikhail Galkin (VTB Capital) pointed at an FX regime shift – from a peg to a semi-float – as a major policy improvement in Russia, which anchored local Russian interest rates, allowed better control over inflation and provided stability of exporters’ earnings. Galkin believed that Russian companies learned a few lessons from the crisis, which include better FX risk management, more concise M&A policy and more conservative approach to leverage. He conceded the Russian ruble was unlikely to perform in 2011, and was currently close to his year-end forecast of 29.3 per USD.
Looking to 2011, Akin described three main themes for the year (US growth, oil price fears and Ems going from growth-mode to inflation-fighting cycles), and stressed each would produce winners and losers. He liked the MXP as a stable oil exporter “with a kicker on US growth.”
Galkin saw most CIS debt at or approaching fair value. However Belarus was a contrarian suggestion with an almost double-digit yield on the recently placed 7-year paper. Williams suggested foreign investors be prepared to consider paper that has been panic-sold but has not been picked up by locals.
Soussa saw the recent clerical condemnation of protests in Saudi Arabia as a major development, pointing to stability in the Kingdom, although he acknowledged Saudi exposure was not easy to find. Egypt, however, was undersold. Moubayed would also avoid Egypt and Cote d’Ivoire in favor of Russian/CIS oil exporters.
Abdul Kadir Hussain of Mashreq Capital led the event’s investor session of both locally-based and foreign investors. How did the portfolio managers assess the region and how was if affecting their selection process? Dino Kronfol of Algebra Capital has been encouraged that local investors were not selling the region’s debt. “However, if both foreigners and locals sell, you pretty much have to go to cash.” He argued that opportunities to make money would continue even though fundamentals were in many cases deteriorating.
Other panelists largely concurred. Tony Hchaime (DE Shaw) noted that there was “a lot of money on the sidelines, waiting for good opportunities,” which may offset any refinancing risks due to regional developments. Ashmore’s Robin Forrest also continued to see value in MENA assets. The Emirates Investment Authority’s (EIA) Paul Oliver suggested one becomes more conservative in their investment view.
Panel speakers also discussed the sukuk market. Kronfol noted that portfolios are clearly going to be diversifying out of the Middle East, into issues such as Malaysian sukuks. Oliver noted the EIA considers such bonds exclusively on an economic basis.
Contrasting the developed markets (DM) to EM, Forrest noted the accepted wisdom accepted a scenario of US growth, a troubled euro and resurgent EM inflation. He challenged all three assumptions and specified that 22 EM banks have already begun tightening measures. “Inflation might even have peaked,” he ventured. The 2008 crisis should demonstrate for all that the vast amount of wealth invested in DMs is risky, and that EM assets should have increased allocations in a balanced portfolio.
As for distressed debt, Kronfol argued that it investing in such assets was often rewarding despite legal and other issues. Moderator Hussain suggested that a lot of the portfolio manager’s job in this case would be to knowing the policy-maker, and recognizing that MENA rules are different from those in other markets.
Kronfol noted that defaults were minimal in the MENA region. He did praise policy markers for an improved handling of default situations while acknowledging an occasional mishandling still occurred. He added “the Dubai situation was handled relatively well…but it was not communicated well, and there wasn’t a road map for what would happen next time.”
Transparency in sovereign wealth funds is improving, several speakers suggested. “It is an evolving process, but will be accelerated as they use the capital markets to find private partners to achieve their economic goals,” stated Oliver.
As for investment recommendations, Kronfol liked high yielders from the UAE and Saudi Arabia (“some compelling stories out there with BB and higher ratings with 9% yields”). Tunisia and Egypt were not sovereign buys yet, but would be later this year.
Forrest saw the best opportunities in mobile phone companies and government-supported home builders, as well as protein producers (ranging from Brazilian beef to Ukrainian chickens) but would avoid 2nd tier Chinese real estate. Hchaime looked for oversold sectors. He suggested that oversold and liquid consumer and retail equities might be of interest to investors. Hussain agreed with earlier comments on Egypt, and thought such issues had more downside risk.