Welcome to the third annual Reuters International Financial Review (IFR) and Project Finance International (PFI) report on the Middle East capital markets. We publish the report at a time of unprecedented turbulence in the global markets. For much of this year the Middle East has shown a degree of isolation from the global problems, but the latest shocks to the system will have an impact even in this region.
The story thus far this year in this growing market has been positive. Capital markets activity in the first half of 2008 topped US$100bn for the first time. The details are contained in the league tables on the next page. Financial newspapers have been full of stories of banks and their bankers moving to the region to take advantage of the growing market. And banks, of course, are not the only ones. In 2007, for example, leading US company Halliburton moved its headquarters to Dubai – attracted by its location between east and west.
But there have been growing pains. Inflation has been rising. Local banks have been caught out by the falling dollar and earlier this year it was widely expected that local currencies would be revalued against the dollar peg. This did not happen, to the relief of the US government. But the decision not to revalue led to local currency tranches being added to deals to attract banks that did not have dollars. And the scandal surrounding various transactions in the Dubai property market did not help. Although the decision to act was taken at the very top of government, the issue of capital markets governance in the region once again hit the headlines.
These problems have been exacerbated since the summer holidays ended. Liquidity in the banking system around the world has dried up following the Lehman Brothers collapse and no-one is unaffected. By mid-September, the UAE Central Bank was pumping liquidity into the bank market for the first time. However, one plus was that the weakening of the dollar that followed the Lehman debacle led to a steadying and then increase in oil prices.
The region remains well placed on a number of fronts. Its banks are well funded and regional economic management is sound. Resource prices remain historically very high and plans to move industrial production downstream, to take advantage of cheap feedstock prices, are pressing ahead. The region has adequate capital to invest at home, and abroad. There are concerns over the property boom, particularly in Dubai. Dubai Inc has borrowed about US$70bn in the past two years. How these concerns are managed will be the most important test for the UAE and for the region in the short term.
Saudi Arabia is the key regional economic powerhouse. Its capital markets are now opening. Its local banks are very liquid and its IPOs still attract healthy oversubscriptions. While its neighbours attract all the attention, how this market develops its capital-recycling techniques, ie, capital markets, will be the important long-term test – for both conventional and Islamic forms of finance.