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International Petroleum Investment Company (IPIC), an Abu Dhabi-based investment company, announced on Monday that it has been assigned Aa2/AA/AA long term credit ratings by Moody’s, Fitch Ratings and Standard and Poor’s, with a stable outlook.  “While we have no immediate plans to raise external capital, the ratings will facilitate future engagement with the debt capital markets if IPIC wishes to pursue this,” commented its managing director, Khadem al-Qubaisi, who added that the ratings were a means of “reinforcing strong corporate governance principles and enhancing transparency.”  According to one analyst, the ratings are “a signal that [state sovereign] funds are eager to keep spending and [are] willing to borrow to increase their buying power.”

IPIC’s ratings acquisition comes on the heels of a similar move by another Abu Dhabi investment arm, Mubadala Development Corp, which issued its first annual report last week and also recently announced plans to set up a medium-term bond program.  According to news agencies, “both companies have taken on billions of dollars in debt to fuel their growth in recent years, some of which soon needs to be refinanced.  That sets them apart from the secretive and far larger Abu Dhabi Investment Authority (ADIA), which likens itself to a pension fund and is not understood to seek out external sources of funding.”

Most importantly, the move is a another step in the early maturation of Gulf fixed income, on both a state and corporate level.  In March, Abu Dhabi raised the first $3bn of a $10bn sovereign bond program to secure funds for state entities and to help develop a domestic bond market, while Qatar and Bahrain followed suit.  Pundits at the time noted that such benchmarks are vital to the emergence of local credit markets, as corporate issuers in the region can ultimately price their own debt against them.

The Gulf Cooperation Council (GCC) will realize faster growth in the Islamic bonds (sukuk) market and “tap into the massive potential that the segment hold” by adopting regulations and measures such as credit ratings, say analysts. “Sukuk is important when it comes to overall financial market. The region, with its huge capital needs, but [only] a small debt market needs to look into opportunities,” said Kamal Mian, Head of Islamic Finance, Saudi Hollandi Bank. While the GCC holds a significant share of global sukuk market (estimated at $130 billion, Dh477bn) when it comes to volume, regulations and policy guidelines are relatively sparse, especially when compared to Malaysia, according to Moinuddin Malim, Head of Corporate and Investment Banking, Badr-Al-Islami, Mashreq. Malaysia, with its proper regulatory measures and incentives, has managed to create a success story of its sukuk market and “investors from various countries such as Korea and Japan too are going there to issue sukuks”.

“Rating for sukuks in Malaysia is mandatory. Besides, they have created a platform to quote sukuks on a daily basis so people would know the fair value of the instrument,” said Dr. Mohd Daud Bakar, Managing Director, Amanie Islamic Finance Learning Centre. “The government in Malaysia has also incentivised issuances when it comes to the taxation aspect of it,” he added. “From the day of issuance to redemption, everything is clear.” Analysts also point out that credit enhancement structures in bond market can be used for sukuks as well and should be studied.

The “Invest Iraq, London 2009” conference will be held from April 30 to May 1 at the Landmark Hotel under the patronage of Iraq’s Prime Minister Nouri Al-Maliki and his British counterpart Gordon Brown, and will be an opportunity to present investment opportunities in several fields including oil, gas, industry, housing, infrastructure, banking services, tourism, communications, and agriculture.  The conference, in which more than 250 international companies will participate, will be attended by ministers of the two countries and a large number of Iraqi businessmen.  The head of Iraq’s National Investment Commission (NIC), Dr. Sami Raouf Al-Aaraji said that it has prepared investment plans for more than 500 projects.

Given the plummeting price of oil, Iraq faces a grave revenue crisis in 2010 that analysts speculate could derail most of its blue-sky projects.  Ahead of the London visit, Iraq’s finance minister, Baqir Jabr al-Zubeidi, admitted that the country faces a large budget shortfall, adding that oil revenues were already down by $4.5bn (£3bn) on projections made for the financial year and will likely fall further. “This time last year, in May 2008, the export market was 2m barrels per day and the oil price was around $130 a barrel.  Until now, we haven’t this year reached $50. The price is hovering around $42-$43 and exports are also right down. In my view, if we stay at less than $50 and less than 2m barrels per day, we will have to produce a supplementary budget well into debt.”

In the short-term, government employees may be asked to take a 20% cut in salaries, while several ministries have already frozen employment plans, raising questions about the viability of the integration into public sector jobs of up to 90,000 former militants

“[Iraq] is still in a stage of building up private sector awareness,” said Britain’s ambassador to Iraq, Christopher Prentice.  “[It] needs a wide education campaign to re-program 30 years of thinking.  Public-private sector partnerships are still at an early phase.  Successful joint ventures and public-private enterprises will be the agents for change.”

How come?  The Economist explains:

The ironic truth is that the country’s double curse, of chaotic internal politics and being located in a nasty neighbourhood, are proving helpful for a change. For one thing, they have made Lebanese bankers unusually wary and resourceful. Four years ago, for instance, the Banque du Liban’s (central bank) stern and far-sighted head, Riad Salameh, banned any dealing in such tricky foreign instruments as mortgage-linked securities. And while banks, property developers and service vendors raked in business as private cash spilled out of the oil-enriched Gulf, competition between influence-seeking powers brought a windfall in aid for reconstruction following the ruinous 2006 war with Israel. Iran alone has injected perhaps $1 billion to rebuild the heavily bomb-damaged parts of Beirut run by its protégé militia, Hizbullah.

Lebanon’s economy gets as much as $6 billion in remittances a year from about 10 million Lebanese living abroad, or roughly 20% of GDP, per a March 24 report by Standard Chartered Bank.  And thus far, fears that the global crisis would force home thousands of expatriates have proved unfounded.  That said, forecasters predict that economic growth will probably slow to 4% this year.  But Lebanese banks may still be a sector to consider, despite a recent warning  by the IMF which warned that as the global financial crisis took its toll on the oil-rich economies of the Persian Gulf, capital inflows to Lebanon could weaken and the growth in commercial bank deposits slow.  Lebanese banks are required to hold a third of their foreign currency deposits in cash and to have a capital adequacy that is more than 11% on average.  Moreover, Lebanon central bank Governor Riad Salameh announced earlier this month a plan to cut the loan reserve requirement for banks to help push down borrowing costs.  The move could push lending rates to about 7.5% from 10%.  Finally, Moody’s upgraded Lebanon’s local and foreign currency government bond ratings from B3 to B2, while the currency ceiling for foreign currency bank deposits was upgraded from B3 to B2 and the country ceiling for foreign currency bonds from B2 to B1.

The Economist notes this week that Kuwait’s foray into Cambodian farmland (its purported compensation for $546m to finance a dam on the Stueng Sen river for irrigation and hydropower and to build a road to the Thai border) can surely be a win-win, even if historically such deals haven’t always worked out and local rice farmers are cautious, worried they will be left in the cold.

The government insists the deal would be good for the country and for economic growth. Cheam Yeap, the chairman of the parliamentary economics and finance committee, says that “somehow we have to attract investors for national development.” He argues that land conflict is the fault of farmers as well as the government and that farmers have to be realistic.

This is not merely self-serving. Cambodia’s rice yields are about half those in neighbouring Thailand and Vietnam. Many people—not just the Kuwaitis—are seeking to modernise farming, which is the largest employer in Cambodia.

International donors are hoping to improve the lot of small-scale farmers by helping them take advantage of world markets by investing in productivity, food processing and transport infrastructure. Other international businessmen, including some from Israel, are seeking to bring foreign technology and capital into Cambodia’s fledgling agri-business sector.

So the question is not whether investment by Kuwait or anyone else is in Cambodia’s long-term interest. It is whether the terms of the particular deal are beneficial. Alas, it is far from clear in this case whether Cambodia’s rulers have been influenced by economic development—or by the prospect of another quick payday.

According to Dr. Yeboah Woode, Research Scientist and Lecturer for the Department of Chemical Engineering, Kwame Nkrumah University of Science and technology (KNUST) in Kumasi, and Executive Director of Marglas Potash Industries (MPI), potassium carbonate (potash salt) produced from cocoa husks has large economic potential that should be exploited for cocoa farmers and the country.  Dr. Woode recommends that the government support individuals and organizations to produce potash salt extracted from cocoa husks in commercial quantities to boost incomes of cocoa farmers and create employment for the youth and women in cocoa growing areas.  Currently, MPI cannot meet the foreign daily demand of roughly 1,000 tons of potash salt produced from cocoa husks.  However, Dr. Woode said that management could meet the demand with government assistance to establish more factories in major cocoa growing areas throughout the country, further explaining that this would not only offer employment for the youth provide extra income to cocoa farmers but also generate about two million dollars in foreign exchange to the country. “Ghana needs to realise the full potentials of cocoa to benefit farmers and the country,” he added.  Moreover, he said, salt extracted from potash would help to reduce the importation of potassium salt into the country and also to diversify the country’s export earnings.  At present, MPI plans to establish more factories in major cocoa growing areas by 2010 and is appealing to both government and the Ghana Cocoa Board (COCOBOD) for assistance.

Tunisia is one of the leading call centers and outsourcing destinations in Africa and in the Arab world, according to Hadj Gley, its Minister of communication technologies.  Gley noted at a conference this past week that he hopes to realize the development of the sector’s legislative framework by offering tax free returns and other incentives to foreign investors keen to set up projects in the country. The minister also mentioned the procedures adopted by the government to strengthen investment in call centers and remote support centers, through the activation of the network structure of the Internet Protocol (MPLS) at the national level in addition to the extension of the El Ghazala technological pole which specializes in ICT activities and research. Served by a modern infrastructure and a qualified workforce, the country is increasingly attracting major international outsourcing companies such as “SR Teleperformance,” which employs over as thousand workers who provide services to French clients. Partnerships with Indian outsourcing companies are also underway, Gley said.

A recent report issued by Fitch Ratings concludes that the more challenging operating environment has negatively affected prospects for retail banking in the Gulf Cooperation Council (GCC, consisting of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE), although the degree of severity will vary.  Fitch views the potential risks from retail lending as high in the UAE (particularly Dubai) and Oman, moderate in Bahrain, Kuwait and Qatar, and low in Saudi Arabia.

The report notes further that the most negative impact could be realized in the UAE, particularly in Dubai, because the UAE retail sector is the largest in size and UAE retail loans grew the quickest in the GCC.  Dubai’s economy has been hit especially hard by the global recession, as the UAE has an exceptionally high proportion of expatriates, at more than 80% of the population (90% in Dubai).  Expatriate residence visas are nearly always linked to employment in the GCC; rising redundancies are therefore likely to result in higher defaults as expatriates leave, Fitch notes.  Furthermore, the regulation of retail loans is not as tight in the UAE compared with certain other GCC markets.

Risks is also high for Omani banks as their relative exposure to retail lending is the highest in the GCC, at 38.5% of end-2008 banking system loans.  In addition, Fitch views the levels of leverage available to retail customers as among the highest in the GCC, and regulation of the retail sector as not as tight compared with certain other GCC states.  Finally, the negative impact from retail lending will be least severe in Saudi Arabia, where the market is relatively strictly regulated; demand is sustained by a large, growing young indigenous population rather than expatriates; and the local economy has been more insulated from the impact of the global recession than many other GCC states, though declining energy prices are of concern.

Debt markets in the Gulf received a further boost when it was announced that Dolphin Energy, whose majority shareholder is the Abu Dhabi-owned Mubadala Development Co., raised $2.59 billion from 23 banks, including the United Arab Emirates National Bank of Abu Dhabi and Abu Dhabi Commercial Bank, Saudi Arabias Samba Financial Group, and global banks BNP Paribas and Standard Chartered.

The 10-year loans have a margin of 275 basis points over the London interbank offered rate (Libor) for the first three years, 300 basis points up to year six, and 350 basis points for the rest of the term.  Dolphin Energy is purportedly also seeking an Islamic loan deal that it hopes to finalize by the end of April – and has issued a request for proposals to prequalified banks to underwrite a bond of between $500 million and $1 billion in mid-April.  Dolphin may then alter the amount it borrows from the commercial banks in June once it knows how much money it has raised from the bond and Islamic facility.

The Ho Chi Minh Exchange, which lost two-thirds of its value in 2008 and hit a low this past February, has risen 2% overall since the beginning of the year and 36.6% since late February.  Thus, while the market has underperformed Malaysia, which is up 5.3%, it outperformed Thailand, down 2.8%.  The government forecasts 5-5.5% growth in GDP, while the Asian Development Bank expects 4.5% growth, among the highest in south-east Asia.  Moreover, inflation is now in the single digits for the first time in 19 months.  Per the Financial Times:

Vietnam’s economy is starting to respond to an aggressive government stimulus program, which the IMF forecasts will cost a total of $3.8bn, or 4% of GDP. It includes some direct cash transfers but most of the money is designed to keep industry, including the vital export sector, running through the downturn.  The government has subsidized loans, improved access to export credit guarantees and significantly reduced income tax.

JGW

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