EMTA SPECIAL SEMINAR ON THE MENA/GCC MARKETS (LONDON)
Wednesday, January 31, 2018
In Partnership with
International Institute for Strategic Studies
6 Temple Place
London WC2R 2PG
3:15 p.m. Registration
3:30 p.m. Keynote Address
The Dana Gas Case: An Update and Implications for the Sukuk Market
Debashis Dey Partner, White & Case
4:00 p.m. Panel Discussion
Current Prospects for the MENA/GCC Bond Markets
Alia Moubayed (International Institute for Strategic Studies)
Marcel Kfoury (Bluecrest Capital)
Tim Gill (Fidelity Investments)
Christopher Watson (Finisterre Capital)
Kaushik Rudra (Standard Chartered)
5:00 p.m. Cocktail Reception
Additional Support Provided by Standard Chartered
Registration fee is US$50 for EMTA Member
Special registration fee for Gulf Bond and Sukuk Association Members US$50
Registration for Non-Members US$695
Improving Oil Prices, Outlook for Saudi Arabia Main Focuses at EMTA MENA Seminar in London
The effects of stronger oil pricing, and the outlook for Saudi reforms, including its anti-corruption campaign, were the main focuses of EMTA’s Second Annual MENA Forum in London. The event was sponsored by MarketAxess, with the additional support of Standard Chartered. Over 100 EM market participants attended the event on January 31, 2018, which was held in partnership with the Gulf Bond and Sukuk Association (GBSA).
Debashis Dey (White and Case) kicked off the event with an overview of the litigation surrounding Dana Gas sukuk, a complex case involving multiple jurisdictions and a claim by the debtor that it would not make payments because its sukuk was determined to be to be non-sharia compliant. Dey provided a detailed overview of the case thus far, in both English and Sharjah (UAE) courts. He noted that sharia compliance was a complex and “ultimately subjective matter for investors to determine based on their own personal investment criteria,” with standards evolving over time and not uniform throughout the world. He also noted that, based on the court pleadings in both jurisdictions, the main thrust of the case had little to do with sharia compliance, but instead issues of conflict of law between English law contract and UAE contract law.
Dey noted that the question facing the English court was whether the potential breach of UAE companies’ law in relation to the English contract provisions automatically invalidated the legal enforceability of payment obligations in a sukuk issued under English law, and whether English courts would hold that, “sharia compliance and legal enforceability are distinct issues.” He added that any enforcement action of an English Court award for successful creditors would still need to occur in the UAE to be enforced against company assets in the UAE, thus underscoring the role of UAE courts in the resolution of the case.
A panel of industry experts, moderated by Alia Moubayed (IISS), followed. Kaushik Rudra (Standard Chartered) provided his firm’s global overview as background. He expected strong global growth driven by US tax cuts. Rudra was not concerned about aggressive Central Bank action in reversing accommodative policies, and believed oil in the $50s-$60s was a “good level, which didn’t prompt inflation.”
Tim Gill (Fidelity Investments) observed that the overall compliance with the OPEC production cuts had surprised many analysts, adding the possibility of an average oil price of $60-$65 in 2018 “wasn’t crazy.” Gill believed that, if need be, Saudi Arabia could act unilaterally to support oil prices, and suggested the risk of resumed high US shale production might be overstated, “…though I might be Pollyannaish.”
Gill saw low-$60 oil as having major effects on reducing GCC budget deficits, while Chris Watson (Finisterre Capital) disagreed, declaring the budget deficits to be huge. However, Watson agreed that OPEC and Russian production-cut compliance had worked well, and would support prices near-term.
Oil at a higher $70 level would preserve the Saudi social contract, according to BlueCrest Capital’s Marcel Kfoury, even though the country’s Vision 2030 program to promote the non-oil sector was, “too optimistic.” $70 oil allowed Riyadh the wiggle room to implement its austerity measures (including the new VAT and the reduction in subsidies), while ultimately the country was returning most of these budget cuts through civil servant bonuses and allowances. Ultimately, the call on Saudi Arabia was, in Kfoury’s words, “a view on oil.”
The detention without charges of Saudi princes and businessmen in the Riyadh Ritz Carlton had introduced new uncertainties in the rule of law, opined Watson. “The massive shakedown doesn’t augur well; it will affect investors’ willingness to put money on the table without a clear idea of the legal framework.” Rudra cited the high level of unemployment among Saudi youth, and stressed that the official sector was needed to promote growth.
In Gill’s assessment, Crown Prince Mohammed bin Salman’s foreign policy forays may have been prompted in part by this desire to blunt criticism by Wahhabi clerics on his social liberalization policies; he advised investors to “temper expectations, we haven’t seen the end of foreign policy cock-ups.”
Panelists discussed whether economic backtracking in Saudi Arabia would affect other GCC countries. Kfoury stated that investors could safely assume Qatar would no longer adopt the GCC-agreed VAT, and that Oman and Bahrain would delay its implementation to avoid popular discontent. “I don’t think the reforms are that serious. Oman is a pure bet on oil, Bahrain is a pure bet on Saudi, and I’m not sure how long the umbrella of the GCC will last.”
Saudi support of Bahrain was further explored. Watson admitted, “I’m increasingly uncomfortable that Saudi support for Bahrain will come in a way that is helpful to bondholders.” Kfoury believed default was unlikely, but questioned the timing of a Saudi bail-out of its neighbor, which would serve to avoid speculation on the Kingdom itself.
The economy of blockaded Qatar appeared to be improving, in the view of several speakers. Rudra noted that bank deposits had begun to increase, and new relationships with Turkey, Oman and Iran had been fostered. Gill believed Qatar had benefited from good public relations, and that both Asian inflows and support from the Qatar Investment Authority had also helped. “If the aim [of the blockade] was to promote regime change, it hasn’t worked; the support for the Emir domestically is strong, and the country is now more self-sufficient.”
Qatar was among the MENA credits panelists expected to issue new paper in 2018, with speakers noting the “game-changer” of large Asian inflows into MENA bonds. However, Watson expressed concern at the lack of differentiation by Asian investors into MENA assets.
Most panelists viewed a political upheaval in Saudi Arabia as the greatest geopolitical risk in the region. Other concerns cited were an unraveling of the Iran nuclear deal, election-related violence in Iraq, and a large increase in Iraqi oil production.
Other countries discussed included Lebanon (Gill’s optimism in contrast to the pessimism of Moubayed and Kfoury, who saw little chance of donor inflows) and Tunisia (where Watson noted the IMF program is barely intact, and Moubayed criticized the program as being poorly designed).