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Saudi Arabia’s Tadawul All-Share Index (TASI) has posted impressive returns YTD (up over 16%), but last week’s correction, coupled with a recent report issued by Riyadh-based Samba Bank–which warned that the recovery of oil prices to above $60/barrel and a forecasted 24% increase in government spending will not be adequate to offset a sharp slowdown in private sector activity–raises concern.

The Bank asserted that while public spending in both oil and non-oil sectors has been robust, private investment, in contrast, remained tepid, constrained by lingering tougher lending standards due at least in part to poor export prospects, especially in petrochemicals (polyethylene prices are still down roughly 50% from their mid-2008 highs) and refined products, the country’s main exports after oil and natural gas. It added that the country’s GDP would contract by 1.2% in 2009 (following 4.5% growth last year), but predicted that growth would climb to 4.4% in 2010.

Additional observations included the perceived “oversupply” in the commercial real estate market, such as the government’s pet King Abdullah Economic City north of Jeddah on the Red Sea, which the Bank projects will have trouble attracting additional-needed financing.

Differing projections emerged this week on the future fate of Kenya’s shilling, which has risen of late against the dollar thanks to heavy dollar selling from offshore accounts and healthy interest in Kenyan government bonds from foreign buyers. On Friday the shilling traded 76.85/77.15 against the dollar after several weeks mired in a monotonous 77.50-78.50 band.

According to Absa Capital, a South African investment bank, Kenya’s shilling–which has already lost nearly 20% of its value over the past year–will be under “continued pressure…due to lower receipts, including exports and remittances” in 2009. Moreover, because Kenya is a net importer, its balance of payments can thus also be expected to further decline.

However, per Kenya’s CFC Stanbic Bank, the currency “is expected to strengthen against the dollar for the rest of this half-year, lifted by the recovery of the global economy [and thus export recovery], sluggish dollar demand at home and earnings from tourism.” That said, analysts there admit that the Central Bank of Kenya (CBK) “could stem any gains if it continues soaking up foreign exchange from the market to shore up its official reserves.” Reserves are still below the four months import cover that the bank is meant to maintain. Yet the shilling “could strengthen towards 75.00 against the dollar,” if the CBK steered clear of the market, opined one trader.

According to Joel Toujas-Bernat, the International Monetary Fund’s (IMF) Tunisian mission chief, Tunisia maintains a “relatively favorable position” to address the financial crisis.  In addition to the government’s historically “cautious” monetary policy, which created a buffer zone for public finances, Toujas-Bernat cited an anticipated “good performance” in agriculture and energy as the underpinning for the country’s projected 3% growth rate this year.  Though the country’s export markets in particular have been affected by the crisis, he continued, “the political openness of the economy”, which has  realized improvements in both productivity and competitiveness, has helped made Tunisian companies “more robust” and thus better equipped to withstand the economic shock.

Some markets which I would classify as “frontier” may be even too frontier to really invest in.  Uganda, for example, has only a dozen securities listed on its exchange, and typical volume is dominated largely by one of them—Stanbic Bank Uganda, whose market cap dwarfs that of any of the other country’s firms, and which made headlines earlier this year when it slashed its prime lending rate to a record low 15%, following the central bank’s own rate cut.  The firm is also intriguing, however, because it recently expanded into Kabale, a rapidly growing district (with a growing demand for financial services) in the southwest and very near the Rwandan border.  It also has an ongoing relationship with MTN Uganda, a telecom firm, to provide a Mobile Money Transfer service, which kicked off in March.

One way to get exposure to Uganda without being constrained by its exchange’s tepid liquidity, however, would be on a more macro level.  Timber plantations, for example, offer such an opportunity.  The country is in the midst of a sawn timber (two species dominate the plantation areas established to date in Uganda – namely, Pinus caribaea var. hondurensis and Eucalyptus grandis) shortage—due to a lack of planning or planting during Idi Amin’s tenure–that forestry experts opine is likely to persist for the next two decades as demand increases and the number of hectares of plantations meant for growing (as opposed to natural, or tropical high, forests, which are preserved) has only relatively recently begun to be replenished via EU support.  While there are currently around 20,000 hectares of tree plantations, it is estimated that Uganda will need at least 60-70,000 just to meet the country’s projected timber demand by 2025.  In the meantime, the shortage has had wide-ranging effects: most notably, and on a commercial level, it handicaps the country’s growing construction industry (second only to telecoms in terms of growth rate), whose response has thus far been to import from Congo and Tanzania.  But increasing transport costs and price for wood means that said reaction may not be viable in the long-run. 

Over 50% of Uganda’s timber is currently imported, and at this pace the country will be a net timber importer in the next five years.  But Uganda Tree Growers’ Association (UTGA) secretary Ms Sheila Katamara points out that Uganda is in a “strategic position” to be a regional supplier, given its vast land.  Commercial tree growing is just starting to gain a foothold, thanks to the Sawlog Production Grant Scheme (SPGS), an EU-funded initiative offering subsidies to help establish private growers.  “We already have an association of Uganda Timber Growers Association (UTGA) whose membership comprises of investors in trees and those intending to become forest lords,” said Allan Amumpe, the SPGS project manager.

Conditions for growth could hardly be more ideal.  The region is widely regarded as having better soils than most countries in Eastern and Southern Africa.  Additionally, it is a well-watered country that is richly endowed with renewable natural resources.  Finally, with a temperature range of 15-30 degrees Celsius, and an annual rainfall range of 750-2000mm, the country is highly suited for forest production. Finally, vis a vis yields (m³/ha/yr), Ugandan plantations can match, or often exceed, some of the best growth rates in the world, including those in Australia, South Africa and Tanzania.

That said, political complications arose last December that should cause investors to be cautious—namely President Yoweri Museveni’s brouhaha with the National Forest Authority (NFA), which manages 15% of Uganda’s remaining forest cover (70% is located on private land).  Museveni expressed dissatisfaction with deforestation projects that he said reeked environmental havoc.  The scuttled deals in question, however, involved an Asian sugar cane plantation company and palm oil developers, not plantation or timber production per se.

Aramex, the Dubai-listed logistics and transportation provider, launched yesterday its “Value Express” service for express shipments within the Middle East, North Africa and South Asia regions. The company has contracted with budget carrier Air Arabia to transport parcels at economical rates. The service allows customers the option to transport less urgent parcels at more economical rates, and was developed to support the region’s commercial sector in achieving greater cost efficiencies in the current downturn. According to Aramex Gulf Chief Executive Hussein Hachem, the demand for cheaper freight transport has naturally increased during the recession. Moreover, he expects that the new service will particularly benefit small- and medium-sized enterprises (SMEs)–which represent 75% of total operating companies in the Middle East and which are looking for reliable and cost-efficient solutions.

Both Aramex and Air Arabia are considered two of the stronger “defensive” plays in the UAE, a concept that could one again garner fancy assuming the World Bank’s recent dire forecast for the global economic recession is anywhere on point. Other defensive picks include telecoms Etisalat and du, and foodstuff and mineral water firm Agthia (which back in March announced 90% net profit growth).

Defensive stocks are considered to provide relatively more stability in earnings than high growth companies, and moreover do not experience high volatility quarter-over-quarter in terms of losses, write-downs or uncertainties coming from investments or provisions. That said, defensive plays are not primed for long-term growth, and thus many portfolio managers may still prefer the better risk adjusted opportunities offered by real-estate and financial firms, should markets correct.

An interesting feature in this week’s Economist (“Face Value: Godly but ambitious”) focuses on Adnan Yousif (pictured right), who in 1980 with the Bahrain-based Arab Banking Corporation was one of the first to establish an Islamic-finance practice and is now the chairman of the Union of Arab Banks and chief executive of Al Baraka Banking Group. At the time, a glut of petrodollars in the Gulf was largely invested in bonds [namely American] whose yield was verboten under sharia. Twenty years later, “there were more than 200 Islamic banks and Mr. Yousif was leading from the front.” That said, what the industry lacked, and still lacks today, Yousif argues, is a veritable, global Islamic bank. “Today $700 billion of global assets are said to comply with sharia law. Even so, traditional finance houses rather than Islamic institutions continue to handle most Gulf oil money and other Muslim wealth.”

To fill the gap Yousif wants to create “Istikhlaf” (“doing God’s work”), a sharia-compliant investment bank which will be listed on the Bahrain Stock Exchange and NASDAQ Dubai via an impending, $3.5 billion fourth-quarter IPO, following a $6.5 billion private placement that will comprise its capital base. Per analysts, such larger Islamic banks will be crucial for the industry to realize its growth potential and to compete with Islamic windows or subsidiaries of Western conventional banks that have large market shares in wholesale banking services (Deutsche Bank, HSBC and Citigroup dominate the field presently).

The piece also touches on the practical concerns surrounding the fundamental viability of the concept of Islamic banking itself. Namely: “the rules for Islamic finance are not uniform around the world. A Kuwaiti Muslim cannot buy a Malaysian sukuk (sharia-compliant bond) because of differing definitions of what constitutes usury. Indeed, a respected Islamic jurist recently denounced most sukuk as godless. Nor are banking licences granted easily in most Muslim countries. That is why big Islamic banks are so weak. Often they are little more than loose collections of subsidiaries. They also lack home-grown talent: most senior staff are poached from multinationals.”

Reports surfaced this past week that Kuwait’s Mobile Telecommunications Co. (Zain)–the leading African and Middle Eastern mobile operator–is close to rescheduling a $2.5 billion two-year “murabaha” loan agreement on behalf of its subsidiary, Zain Saudi Arabia, that it signed in 2007 in order to finance the development of its infrastructure and the expansion of its subscribers’ base.  Commitments will likely come from Saudi Arabia’s Al-Rajhi Bank and Banque Saudi Fransi, as well as France’s Calyon.

Under murabaha, a intermediary financier buys a property or commodity and sells it to the buyer at a higher price (retaining free and clear title/ownership until the loan is paid in full), thus complying with Islam’s ban on interest.  The theory under murabaha is that the transaction is not an interest-bearing loan, which is considered “riba” (excess).  To prevent riba, the intermediary cannot be compensated above the agreed upon terms of the contract–even through late penalties should one party default.  Murabaha is therefore a permitted method form credit extension under Sharia (Islamic religious) law, since the fee earned is not interest per se, but rather a holding-related charge.

Back in May Zain lowered its net profit growth targets for 2009 from 30% to 20% due to the global recession, and also announced that it would seek a credit rating in order to tap longer term debt markets by 2010-end.  It also unveiled a plan to slash its expenditure targets by half, and to focus on “synergies among its various units,” per Ibrahim Adel, its Chief Communications Officer.

An interesting piece from this week’s Economist (“It may make life easier and cheaper”) details a spending splurge in East Africa, which comes in the form of a “regional communications revolution [that] belatedly got under way when Kenya’s president, Mwai Kibaki, plugged in the first of three fibre-optic submarine cables due to make landfall in Kenya in the next few months.” The government is also getting rid of the sales tax on computers as well as new mobile phones, and also allows firms to write off bandwidth purchases. Per the report:

“With a mass of young English-speakers only an hour or two ahead of Europe’s time zones, east Africa should, with luck, be well-placed to compete with India and Sri Lanka for back-office work for Western companies. Broadband, say its promoters, will transform the lives of millions in countries such as Kenya and Sudan, almost as dramatically as mobile telephones have done—all the more so because of the parlous state of east Africa’s more old-fashioned infrastructure, especially roads and railways.”

As one commentator duly noted, undersea cable in East Africa was long overdue and signals a “shift in economic and political power to younger, tech-savvy Kenyans.” Kenyan transnationals (Kenya Airways, Bidco, KCB Bank, CMC Group, Nation Media, etc.) in particular will benefit from seamless communications networks that allow enterprise resource planning (ERP)–a company-wide computer software system used to manage and coordinate all the resources, information, and functions of a business from shared data stores–to lower costs & enhance decision-making. Furthermore, argues one observer, “internet access costs are slated to drop 50-60% over next twelve months and will help Kenya achieve higher economic growth. Just as India’s ‘youth’ benefitted from the internet explosion in the 1990s, Kenyan cadres of ICT professionals are salivating at opportunities available through broadband access.”

The commencement in Saudi Arabia earlier this week of both a regulated bond and sukuk (Islamic bond) market is “a very sensible approach” to the problems facing many Saudi banks–namely the fact their loan-to-deposit ratios already exceed the central bank’s imposed ceilings–and will help to create “deeper and wider” financial markets, according to Rajiv Shukla, regional head of debt markets at HSBC Saudi Arabia. “No market should depend on one pool of liquidity,” he added.

The Saudi Capital Market Authority hopes to give potential issuers enough forms of finance to ease pressure on banks and add another layer to the nation’s capital markets. In April, for instance, it announced it was considering the introduction of options, short-selling and futures onto its exchange (Tadawul) in addition to ETFs. It also underscored the need for holders of more than 5% of a company to disclose ownership in order to improve transparency and ensure compliance with corporate governance rules.

The recent resurgence of Dubai’s Financial Market’s (DFM) general index (it has fallen 61% since last summer, but is up 42% since March and roughly 28% YTD)–coupled with tighter lending standards–will likely cause more firms to publicly float their shares, surmised Essa Kazim, executive chairman of Borse Dubai.  Firms are historically reticent to utilize capital markets, especially under distressed conditions.  Yet because it may be the only source of long-term financing, their hands will be forced.  Moreover, Kazim told Reuters that “a priority would be to attract listings to diversify the DFM away from the dominant and closely-connected banking and real estate sectors.”

JGW

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