It was summer, it was hot and there may have been a mirage on the horizon; one that looked like Dubai debt defaults.
Nakheel, the residential property giant that amongst other high profile projects, built the famous Dubai Palm developments, had become the bellwether for credit concerns in the UAE. The company’s $3.5billion Sukuk had become the main conversation piece for investors in the region and was closely followed by many nervous market participants of which many have been concerned about a possible default. Some still claim that the great moment of truth now dates December 14 when the bond matures. From the strong upwards price-action on Nakheel, it is fair to say that the market finally seems to have gathered some perspective on the whole matter.
Here’s some detail on the overall UAE debt profile: estimates suggest UAE 2009 Eurobond and syndicated loan redemptions of around $28bn for the UAE, of which two thirds of which have already been refinanced. Dubai accounts for around $19bn of the full-year redemption, Abu Dhabi $8bn. For Dubai the peak of the redemption profile is in Q4 with USD6.8bn due, of which Dubai Inc is USD4.5bn. A second tranche of the $20bn Dubai bond program is likely to be issued in the coming months (note that the first $10bn tranche was entirely subscribed by Abu Dhabi). Debt payments outstanding for 2010 are around $20bn. Let us not forget there is such a thing as Abu Dhabi, and while the exact size of the emirate’s reserves is not public knowledge, it would be safe to estimate it to be in excess of $650billion. The total external debt stock of the UAE is estimated to be around $160bn, or approx 25% of reserves and around 72% of GDP. This may sound a bit simplistic, but in my humble opinion, this looks like quite a reasonable credit profile, especially when compared to that of most ‘developed’ economies.
It’s time to get out our debt vs. reserves chart out again.
Our view is that the recent situation not only brings focus to the UAE but will also strengthen its fiscal governance culture going forward. The establishment of the Public Debt Management Office is a formal confirmation that things are moving in the right direction.
There were a few stories playing out on Saudi Arabia’s stage. The central bank denied rumors that it would buy out the debts of the Al Gosaibi and Saad groups. Very interesting was that the GOSI (General Organization for Social Insurance), Saudi’s largest pension fund, has been increasing its stake in a number of listed firms, many of which are related to the construction industry. This clearly puts upward pressure on the market as supply is turned into long term holdings.
More ‘silk road’ connections seem to be in the making with the news that a sale of a controlling 46% stake in Zain, Kuwait’s telecom company, was agreed with a Malaysian-Indian group. Was Zain’s recent intention to sell its African division nothing more than a way set a price and lure a buyer who would be interested in Arab-African expansion? In any case, this is yet another example of India’s foreign direct investment style, while not as blatant as that of China with its infrastructure building and resources grab, India already has established a good track record of entering the region through corporate endeavors such as these.
Nigeria’s local investors remain nervous and have been putting more pressure on the market. We have to keep listening for that thud that will tell us we have reached the bottom. When it turns, it will go fast and that is why we have been building a position there. The -31.5% ytd market decline is compounded by the -13.35% drop in the currency which could well act as a turbo booster when things turn around. Note that the Nigeria currency (Niara) is out of synch with its habitual correlation with oil prices so there is a case to be made in favor of regression. Some patience may be required but we believe it is justified by the potential upside to be had in Nigeria.
Morocco came back last week. Much is attention is likely to go to the reporting season for first the half of 2009. If foreign investors like what they see, they might be investing in a thin market due to the end of Ramadan and the Eid holiday next week. In Tunisia, we had the first set of earnings reported this week to which the market reacted positively. If the Ciments de Bizerte IPO serves as a gauge for sentiment, it could be concluded that it is running rather high. Subscriptions have opened at a price equivalent to PE ratio of 100x 2009 earnings! The IPO is reserved for local investors only.
Egypt’s foreign reserves rose by approximately 4%, mainly due to increased drawing IMF rights. What caught my attention was the jump in revenues for the Suez Canal. It may be further evidence of improved global economic conditions as it serves as a minor proxy for international trade activity. It certainly contrast with the stories that were going around about commercial freight sailing at one-third speed around the Cape in order to save costs during the first half of the year. However, the Canal’s revenues, however, are still 26% below those of 2008.
More color and detail about our markets can be found about in our weekly update.
We look forward to keeping you updated!
Kind regards
Baldwin
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