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Dubai Forum - March 27, 2012

Speakers at EMTA’s Dubai Forum Discuss Middle Eastern Economic Outlook

EMTA’s Third Annual Dubai Forum took place on March 27, 2012 at the Ritz Carlton Hotel.  Standard Chartered hosted the event.  The Forum featured two panels on Emerging Markets issues, and was followed by a reception.

Marios Maratheftis of Standard Chartered moderated the event’s sell-side panel, which also included speakers Farouk Soussa (Citi), Ghassan Chehayeb (Exotix), Simon Williams (HSBC) and Marcel Kfoury (Nomura).

Maratheftis opened the first panel by observing that the term Emerging Markets has become obsolete.  He then discussed the oil windfall’s effects on the region and noted that the debate among financial markets professionals was whether oil income would be used for investment instead of boosting savings.  Williams expressed concern that the Gulf was the biggest beneficiary of strong oil pricing, “yet we feel like a middle-tier story.”  He added that, “I’m not desperately worried about the region….but neither am I hugely excited.”

The panel discussed prospects for individual markets in the region.  Soussa stated that Jordan and Lebanon have been hurting badly as a result of higher oil prices, despite IMF arguments that remittances traditionally offset higher oil prices for non-producing Lebanon.  Kfoury acknowledged that he was most concerned by Syria, where a civil war is possible and could affect Iraq, Jordan and Lebanon.

Chehayeb was asked about the $14 billion of Dubai debt approaching maturity, and whether he was concerned about refinancing prospects.  He voiced confidence in debt repayment, despite weak bank growth and a Dubai real estate recovery that has yet to occur, and concluded that, ultimately, Abu Dhabi would never allow Dubai to go bankrupt.

Williams discussed Qatar, and its generally favorable economic conditions, while admitting that his “big worry is that everyone loves it.”  He commented Qatar has been a market darling for years, and could be found even in the portfolios of Middle East-shunning investors.  He expressed concern that the consensus trade on Qatari issues might be making spreads too tight to be attractive.  Soussa concurred, while adding that Qatar risk is small because the government is standing behind even “vanity projects”, such as The Pearl.

Soussa ventured that 2012 could be a good year for Saudi Arabia.  Local hiring has been increasing, even if the process has been inefficient, with non-oil growth of nearly 8%.  Soussa emphasized that Riyadh’s priority should be increasing local employment levels and avoiding political unrest, as it is unclear if economic growth will match demographic growth.

Chehayeb expected volatility in Gulf markets, and preferred short-term debt.  “Don’t get greedy, take profits when debt reaches fair value,” he recommended.  As for Kuwait, the situation was one of “a small population vs. such enormous wealth, so not much can go wrong…but I’m not expecting much good either,” he cautioned.

Regarding Iraq, Soussa conceded that the Iraq 2028 bond was the only option at present for getting Iraqi exposure, while observing t that post-war Iraq could go from extremely poverty to GCC-level wealth.  “This is a massive reward/massive risk trade,” he stated.

The panel also discussed the local bond markets, with Kfoury stressing the importance of local demand for ME debt.

Soussa’s top picks included buying insurance for Dubai and selling protection for Saudi Arabia.  Chehayeb would buy Dubai Holdings ’14 and ’17 for an equity-like return, and recommended Tamweel sukuk for investment grade debt backed by a strong parent.  Williams liked buying high grade GCC sovereigns and Jordan.

A buy-side panel followed, and was moderated by Abdul Kadir Hussain of Mashreq Capital and featured Dino Kronfol (Franklin Templeton Investments), Matt Epstein (ICE Canyon), and Biswajit Dasgupta (InvestAD).

Hussein asked speakers how they were positioning themselves for the remainder of 2012.  Kronfol observed that Middle East debt had had a decent run even in recent months, though it had generally underperformed other asset-classes.  The region has become expensive so Kronfol was adopting a more defensive posture.  Dasgupta agreed in expecting to maintain a defensive stance for the immediate future.  “We are probably at a point where we need to justify value,” he stated.

Epstein thought that, notwithstanding the “risk on” period  the market experienced early 2011, there would be upcoming bouts of risk aversion.  Long-term, he still believed that EM growth would outperform developed market growth.

The panel discussed the development of local markets.  Kronfol believed that Saudi Arabia has been trying to open up their markets, noting the equity market is “quite advanced.”  He expected future progress.  He cautioned that an open market might overshoot fair value, but would eventually settle to fair value.

Speakers noted the delays in developing local bond markets, and stressed that sovereigns need to pass legislation to create pensions, for example, and must be more aggressive in issuing paper and creating supply.  Kronfol noted that this could, however, be done quickly, stating that “Egypt was able to do it in less than a year.”

Concluding with panelists’ top trades, Epstein expressed confidence in EM corporates.  Dasgupta favored Dubai banks and LatAm corporates, while Kronfol preferred cash and Dubai debt with Abu Dhabi support.

Citi, Exotix, HSBC and Nomura provided additional support for the event.