Crisis questions future role of Gulf financial hubs

  • 05 Jan 2009
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Gulf financial hubs were hoping to attract Western capital and aggressively develop their financial services industry before the credit crunch. But the financial crisis is now forcing Gulf policy makers to re-think these expansion plans, writes Sid Verma.

Gulf financial hubs will emerge as global powerhouses in the next few years, out-competing structurally weakened London and New York by grabbing large pools of capital, talent and new investment products.

Gulf financial hubs will be slammed by a double whammy of capital repatriation to developed markets and lower commodity prices, decreasing the region’s financial firepower for years to come.

Two very different outcomes but which one is the most likely? As global deleveraging and collapsed market confidence challenge the very heart of the financial services sector, the Gulf’s international ambitions are now hanging in the balance. "The question is, does the international financial crisis delay or derail their ambitions," says John Nugee, head of the official institutions group at State Street Global Advisors in London.

In recent years, Gulf Cooperation Council (GCC) countries have sought an end to the boom and bust cycles typical of resource-dependent nations by aggressively diversifying the region’s economies. Investment in the region’s infrastructure, industry, real estate and tourism has gathered pace, ensuring a boom in non-oil related economic growth. In addition, the region is positioning itself to capitalise on increasing trade and capital flows between the Gulf, the broader Middle East and Asia as well as the US and Europe.

Dubai has emerged as the most aggressive economic power hub through its creation of a financial freezone — the Dubai International Financial Centre (DIFC). After establishing physical and financial market infrastructure, Dubai has expanded to embrace media, technology, tourism and industrial sectors. Meanwhile, Saudi Arabia is leading advances in manufacturing, especially in petrochemicals and metals, and in Qatar insurance and asset management. In addition, Bahrain has specialised in the lucrative world of Islamic finance and is attracting more non-Muslim issuers globally.

In response, Western financial institutions have flocked to the region. Dubai, in particular, is being groomed as a future stopping point for investment banking roadshows for those seeking to attract Gulf capital. However, in the short term, deal volumes are set to be thin and revenue-hungry Western bankers could be disappointed given the global deal drought.

But industry insiders say that since financial services growth stems from a low base, expansion should continue undeterred. "We are not seeing a marked slowdown in the number of firms who are contacting us to enquire about application for QFC licenses," says Steve Martin, director of marketing and corporate communications at the Qatar Financial Center in Doha.

But he admits this depends upon commodity price recovery and the return of global liquidity by the end of 2009. Given the swathes of job losses in developed markets, the region could be a net beneficiary from this surplus pool of talent, he says — providing the recovery comes in time.


Bees round the honey pot

However, as one Western debt capital markets banker now based in Dubai admits, a lot of financiers have settled in the region to be nearer to the vast capital surpluses held by sovereign wealth funds.

But these government-affiliated vehicles are now concentrating upon domestic markets. As a result, Western bankers may have to rethink their money-making strategies as the region’s financial hubs serve less as an intermediation point between the Gulf and outside regions. Nevertheless, the industry remains confident. "We have experience of advising governments in Europe and we will still have a lot of opportunities if more capital is invested domestically," says Per Larsson, head of the Middle East and North Africa for UBS in Dubai.

More fundamentally, as leverage becomes more stigmatised and the contribution of financial services to the global economy is reduced, traditional financial hubs may no longer be in fashion. "It is clear that the share of global GDP that financial services has taken up has been too high," says Nugee.

Nasser Al Shaali, CEO of the DIFC agrees. "The crisis has brought to light questions on the role of financial services in the international economy and we need to respond to this."

These recent events have sparked a fundamental re-thinking of the virtues of better financial integration with the West. Heavy losses in the region’s equity markets and spread widening of Gulf corporate bond issuers above credit fundamentals has highlighted how more financial integration exposes the region to exogenous shocks. Smaller domestic capital markets also help to limit systemic losses.

These factors may drive the financial hubs — at the behest of Gulf policymakers — to concentrate on sectors in the real economy to provide a more sustainable economic footing, argues Shaali. "The real economy is where real wealth will be generated and not the financial economy." He also argues that rather than just targeting Western markets, efforts to develop economic links between Asia and the Gulf region will be redoubled.

Fortunately, the Gulf’s capital surpluses and geographic reach means well regulated and diversified financial hubs could power through the global turmoil and outperform discredited Western financial centres in the long term. "If you are a long term financial services firm you have to be in the Middle East" adds Fares Noujaim, head of Middle East & North Africa for Merrill Lynch in Dubai.

  • 05 Jan 2009

All International Bonds

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1 Citi 417,761.51 1606 9.02%
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3 Bank of America Merrill Lynch 364,928.71 1322 7.88%
4 Goldman Sachs 269,252.76 932 5.82%
5 Barclays 267,252.43 1082 5.77%

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1 HSBC 45,449.36 196 6.56%
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4 JPMorgan 34,724.19 118 5.01%
5 Bank of America Merrill Lynch 33,835.53 112 4.88%

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Rank Lead Manager Amount $m No of issues Share %
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1 JPMorgan 22,475.46 105 8.65%
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3 Citi 17,812.08 111 6.86%
4 UBS 17,693.89 71 6.81%
5 Goldman Sachs 17,333.10 99 6.67%