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JULY 2018 | ISSUE 208

MIDDLE EAST DIGITISATION Ahmed Al-Faifi, Senior Vice President and Managing Director at SAP Middle East North A CPI Financial Publication


AHMED AL-FAIFI, Senior Vice President and Managing Director at SAP Middle East North Dubai Technology and Media Free Zone Authority

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nternational collaboration and diplomacy has been the name of the game for 2018. Global market conditions in the last 12 months have not been very encouraging with investors and market players alike turning to caution and becoming accustomed to reacting quickly to macroeconomic and geopolitical developments. This has resulted in a period of low volatility amidst fears of stagflation. Global issues such as the trade war between US and China, a discord in OPEC decisions, a concerning Brexit, monetary policy and regional conflicts have left nervous sentiments in the market. A large part of manoeuvring in current conditions is to adopt a broader approach to things, looking beyond and identifying pockets of opportunities to harness mutually beneficial partnerships. Bringing these things into perspective, especially for the GCC and wider MENA region, our issue this month looks at opportune areas such as technology, investment strategies, (particularly in light of the opening up of the Saudi market), corporate governance, as well as the Belt and Road Initiative.

Across the GCC, we are witnessing numerous developments in the financial sector including encouraging initiatives from governments and regulators. These are indeed signs of a maturing market, one that is willing to adopt bold measures and international best practises, in a bid to increase foreign direct investment. From my note last month on economic sustainability beyond large-scale events and projects, strong initiatives that have since been rolled out and demonstrated in Saudi Arabia, UAE and Kuwait, are fundamental in affirming investor confidence, not just on a sovereign-level but also on a regional scale. We aim to bring you an unparalleled assessment of the developments across the MENA region. As usual I wish you a productive read.




JULY 2018 | ISSUE 208

NEWS 10 A united front 12 News highlights


THE MARKETS 16 Geopolitical upheaval, oil volatility and milestone reforms: what next for the Middle East?

LEGAL PERSPECTIVE 22 A step towards securing investor trust

COVER STORY 26 Middle East digitisation

COUNTRY FOCUS 32 The price of rebellion


16 32

TRADE 40 China’s Belt and Road Initiative

INVESTMENT MANAGEMENT 44 Diversification, one success at a time 46 Saudi equities: approach with care

WHOLESALE BANKING 50 Digitalisation of wholesale banking

PRIVATE EQUITY 52 Tackling education ventures


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JULY 2018 | ISSUE 208

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46 CORPORATE GOVERNANCE 54 Investor realities

IN DEPTH 60 Adapting to a new era



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A CPI Financial Publication


MIDDLE EAST DIGITISATION Ahmed Al-Faifi, Senior Vice President and Managing Director at SAP Middle East North



EDITORS MATT AMLÔT Tel: +971 4 391 3716


WILLIAM MULLALLY Tel: +971 4 391 3718 WEB EDITOR JESSICA COMBES Tel: +971 4 364 2024

JULY 2018 | ISSUE 208

64 Financial inclusion and financial literacy initiatives






AHMED AL-FAIFI, Senior Vice President and Managing Director at SAP Middle East North Dubai Technology and Media Free Zone Authority

MAY 2018 | ISSUE 206



MAY 2018 | ISSUE 206









EMBRACING THE NEW NORMAL Middle Eastern markets are adjusting well to current realities


Global macroeconomic climate bodes well for investment

THE HOLISTIC APPROACH Tackling the changing trend in private banking

A CPI Financial Publication



Dubai Technology and Media Free Zone Authority


APRIL 2018 | ISSUE 205




For many years, Iraqi citizens have felt that the only way is up—and analysts are finally starting to agree


Where can asset allocators find ballast when both volatility and correlations are rising?

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A UNITED FRONT An overview of UAE and China’s renewed commitments


hina and the UAE have cemented their strong bilateral relationship in a series of strategic partnerships across various sectors of the economy including key fundamentals such as energy, finance, technology and trade. Following President Xi Jinping’s visit to the UAE, both countries have signed 13 agreements and MoUs building the foundation for the Belt and Road Initiative.

A report by UAE’s national news agency, WAM, revealed that the agreements and MoUs included: • Two MoUs between the UAE and the China on the construction of embassies and other buildings, as well as the establishment of cultural centres; • An MoU to advance energy cooperation between the UAE Ministry of Energy and Industry, and China’s National Energy Commission;

• Two MoUs to enhance e-commerce ties as well as greater cooperation at the China International Import Expo; • Two MoUs for cooperation between the UAE Ministry of Climate Change and Environment and the Ministry of Agriculture and Rural Affairs of China, to enhance cooperation in the agriculture sector, and the building of a wholesale market for agricultural products, livestock and fisheries;

L-R: HH Sheikh Mohamed bin Zayed Al Nahyan, Crown Prince of Abu Dhabi and Deputy Supreme Commander of the UAE Armed Forces, President Xi Jinping of China, and HH Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai.


• Two MoUs between the UAE and China concerning cooperation on the Silk Road Initiative and the 21st Century Maritime Silk Road Initiative; • A strategic cooperation agreement between Abu Dhabi National Oil Company and China National Petroleum Company to explore partnership opportunities in refinery and petrochemical operations, as well as investments in downstream projects including an aromatics plant, a mixed feed cracker and a new refinery in the UAE, as well as partnership opportunities in at least one of CNPC’s downstream assets in China; • An agreement between the UAE and China on mutual cooperation and administrative assistance in the customs issues; • A framework agreement for cooperation between the Abu Dhabi Global Market and the Chinese-UAE Pilot Zone to create a platform for financial services and innovation on industrial capacity cooperation within the framework of the Belt and Road initiatives; • A partnership and investment agreement in the world’s largest solar energy project. FINANCIAL GAINS The UAE and China entered into a strategic partnership back in 2012 and this bilateral relationship has witnessed evidential growth in numerous areas of the UAE economy as well as in trade volumes between the two countries. As a regional hub of trade, finance, logistics and tourism, and with its advantageous location and policies, the UAE now leads the Gulf region in seeking closer cooperation with China. The UAE is China’s second-largest trading partner and its largest destination of exports in West Asia and North Africa while China has been the UAE’s largest trading partner for several consecutive years. In 2017, their bilateral trade reached a value of $41 billion, a 1.06 per cent increase from the previous year. In 2016, the UAE invested over $2.1 billion in China, topping

Bilateral trade between the UAE and China reached

$41 billion

the list of Arab countries. At the end of 2015, China’s foreign direct investments in the UAE reached a value of $4.6 billion. The Chinese president’s visit also saw partnerships built across the financials centres in both Abu Dhabi and Dubai. In Abu Dhabi, the Abu Dhabi Global Market (ADGM) witnessed the establishment of the first Chinese state-owned financial services firm in its jurisdiction. The Industrial Capacity Cooperation Financial Group Limited (ICCFG) is the first of such Chinese financial services firm to be approved by the Financial Services Regulatory Authority of ADGM, to conduct the regulated activities of providing and arranging credit via the ADGM platform. This follows from the signing of the framework agreement between the ChinaUAE Industrial Capacity Cooperation Demonstration Zone (‘the Demonstration Zone’ led by the Jiangsu Provincial Government) and will play a critical role in promoting the Demonstration Zone and providing efficient lending facilities to support the investment and financial needs of Chinese enterprises established in the Zone located in the Khalifa Industrial Zone of Abu Dhabi, KIZAD. The ICCFG in ADGM aims to offer a comprehensive suite of financial services to support the Demonstration Zone, Belt-and-Road initiative, and Chinese companies expanding in the region. It seeks to serve as a platform to support the internationalisation of Renminbi for investment and financial projects in the Demonstration Zone. The ICCFG also intends to scale up its services and presence in other Belt and Road-related industrial capacity zones in the near future. Over in Dubai, the Dubai International

Financial Centre (DIFC) signed an MoU with China Everbright Group (CEG), a state-owned enterprise that operates across banking, securities, insurance, funds, asset management, futures, and investment management. The MoU allows both parties to explore collaboration opportunities relating to China’s Belt and Road initiative. The partnership will also enable CEG to benefit from the Centre’s strategic location and worldclass platform to manage its investments and access growth opportunities in the MEASA region. DIFC is already home to China’s four largest banks, which have successfully upgraded their banking licences from subsidiaries to fully-fledged branches. In addition, the regional headquarters of large Chinese corporations, including PetroChina, Shanghai Electric Investment, ZTE Corporation, New Silk Road Company and CMEC Thar Mining Investments, are currently based in the Centre. DIFC has continued to see growth from the registered Chinese financial institutions, which accounted for 22 per cent of total assets booked in the Centre as at the end of the third quarter of 2017. The total value of these assets reached $33.4 billion, a 30.5 per cent increase from $25.6 billion reported in year-end 2016. This reflects the strength of cooperation and understanding that exists between the regulators in China and the DIFC, as well as the business opportunities in MEASA that they access from the Centre. Additionally, both countries will also join hands for the third China-UAE Conference on Islamic Banking and Finance, hosted by Hamdan bin Mohammed Smart University in November. The conference will explore new horizons to further enhance financial and economic integration and to strengthen historical economic ties between the Silk Road markets, with a focus on driving investment in Islamic sectors that offer opportunities for the UAE-China economic rapprochement.



Egypt offers stakes in state-owned public listed companies In a bid to raise EGP 100 billion ($5.6 billion), Prime Minister Mostafa Madbouly’s office has recently announced that it will begin the procedures for offering stakes in five publiclisted state-owned companies: Heliopolis Housing, Alexandria Mineral Oils Co, Abou Kir Fertilizers & Chemical Industries, Alexandria Container & Cargo Handling and Eastern Tobacco; with Alexandria Container and Eastern Tobacco to undergo one-to-10 stock splits before being offered. The announcement follows through on pledges by the government to sell stakes of as many as 20 public sector companies on the Egyptian Exchange. The five companies listed above is the first batch of companies to float additional stakeholding. According to a report by Bloomberg, the second portion of the 23 companies is expected to go on offer in the first quarter of 2019, with the details on which firms or the sizes of stakes to be sold decided on at a later date. The current programme marks a first step toward attempting to strike a balance between efficiency, profitability and raising revenue for the government. The target is to improve the companies’ performance and to allow private sector participation in their boards by giving investors stakes in these companies and allowing them to have majority ownership in some of them.

Egypt sets up new sovereign wealth fund The Egyptian parliament has announced that it has agreed on the is setting up of a sovereign wealth fund with a capital of EGP 200 billion, according to local newswire, MENA. The law, passed by parliament approved a EGP 5 billion start-up capital for the fund called ‘Egypt Fund’ with EGP 1 billion to be transferred immediately from the treasury. The fund is set to participate in all economic and investment activities, including setting up companies, investing in financial instruments as well as other debt instruments in Egypt and abroad. No further details were given on when the fund was predicted to reach EGP 200 billion. The law passed in parliament allowed the president to transfer ownership of any unutilised state assets to the fund or any of its subsidiaries.


Saudi Aramco considers buying PIF’s 70 per cent stake in SABIC Saudi Arabia’s Aramco is mulling over the purchase of a controlling stake in SABIC, possibly taking the entire stake owned by the Public Investment Fund (PIF). Aramco seeks a majority stake in SABIC, but if it fails to buy the entire stake, Aramco could end up with a 50 per cent stake, still making it the majority owner, reported Reuters. Last week the CEO of Aramco, Amin Nasser, said that the potential acquisition would affect the time frame of Aramco’s planned initial public offering set for later this year. SABIC has a market capitalisation of SAR 385.2 billion.

Saudi Electricity Company plans international bond issuance Saudi Electricity Company has engaged several international banks as it plans to issue international bond to refinance a $2.6 billion bridge syndicated loan it raised in January, reported Reuters. The state run company raised a bridge loan with a oneyear maturity and was provided by Citibank, MUFG, First Abu Dhabi Bank as well as HSBC, Mizuho Bank, Natixis, Sumitomo Mitsui Banking Corporation and Standard Chartered Bank. The debt sale can be deferred to September if market conditions do not show improvement.

KFH and AUB begins merger feasibility discussions Kuwait Finance House (KFH) has signed an MoU and nondisclosure agreement with Ahli United Bank, and have selected HSBC and Credit Suisse to advise on a possible merger. In a statement to Boursa Kuwait, KFH said that HSBC and Credit Suisse were selected to conduct the valuation studies and propose a fair price. If the two lenders on the share exchange ratio is reached, the next step would be the initiation of due diligence as well as submitting an official request for approval from Central Bank of Kuwait and other related tasks. The major shareholders in the two lenders are Kuwait state-owned entities. The Public Institution for Social Security owns 18.59 per cent of Bahrain’s Ahli United Bank, according to data on the Bahrain bourse. Meanwhile, Kuwait Investment Authority (KIA), is the largest shareholder in KFH. If a merger proceeds, the total assets of the two banks would be $90.57 billion, making it the sixth largest bank in the Gulf, according to Thomson Reuters data.

Noor Bank introduces wealth management proposition RAKBANK signs three-year partnership agreement with FC Barcelona The National Bank of Ras Al Khaimah (RAKBANK) and FC Barcelona has formed a strategic regional partnership where RAKBANK becomes the official bank of FC Barcelona in the UAE. The partnership is for three years, extendable by another two and entails the launch of new FC Barcelona dedicated co-branded products including credit cards. Speaking exclusively to Banker Middle East, Frederic de Melker, Managing Director of Personal Banking at RAKBANK, said, “FC Barcelona shares the same values with RAKBANK both in the stadium and outside. Their credo is to be more than a club—similar to RAKBANK’s aim to be more than just a bank.” The conversation between the two parties began in February 2018, with a deal concluded in May 2018. Melker further highlighted that the partnership is part of the bank’s refreshed strategy for its personal banking business with the relationship as a main focus of the approach. The aim of the partnership is to foster better awareness of both brands, launching specific banking products (accounts, loan products, wallet-based products, etc.) that are in line with the common goal by the Q4 of 2018. RAKBANK also plans to introduce a limited edition version the offering for high net worth individuals in Q1 of 2019.

Noor Bank has launched Noor Wealth, a Shari’ah-compliant platform offering to meet high-net-worth individuals (HNWI)’s banking, wealth management as well as investment needs. In terms of wealth offering, the bank has a Shari’ahcompliant platform that matches the offerings of conventional banks. The bank offers mutual funds among other 10 lenders in the GCC and it also offers access to fixed-income products through its Sukuk platform and Islamic structured products. Noor Bank also collaborated with Knight Frank to offer global physical real estate services Noor Wealth, Noor Wealth customers that are looking to invest in properties overseas are therefore assisted by Knight Frank on a referral basis. Noor Wealth targets customers with a minimum of AED 367,300 of assets under management or a minimum salary of AED 50,000.



EFG Hermes to acquire Nigeria’s Primera Africa   Cairo-based EFG Hermes Group, has signed a definitive sale and purchase agreement (SPA) to acquire 100 per cent of Primera Africa, a top-ranked brokerage house in Nigeria. In a statement, EFG Hermes said that upon completion of the acquisition, Primera Africa will operate under EFG Hermes’ brand name. Karim Awad, EFG Hermes Holding Group CEO, said, “Nigeria is our fourth direct entry as we continue our strategy of expanding our geographic footprint in high-potential, frontier emerging markets.” In the last 12 months, EFG Hermes has directly entered Pakistan, Kenya, and Bangladesh in addition to their recent regulatory approval from the FCA to operate in the UK.

KIA’s UK unit acquires North Sea Midstream Partners for $1.7 billion Kuwait Investment Authority’s UK-based arm, Wren House, has agreed to buy oil and gas pipeline firm NSMP for around $1.7 billion from ArcLight Capital, reported Reuters. NSMP owns a 67 per cent stake in the SIRGE pipeline and a 100 per cent interest in the FUKA pipeline which transports gas from the SIRGE pipeline and various fields in the northern and central North Sea. NSMP also owns the St. Fergus Gas Terminal, Teesside Gas Processing Plant as well as Rhum gas field, in the North Sea. The firm’s other investments in the United Kingdom include stakes in Associated British Ports, London City Airport and Thames Water.

Kuwait banks to face $1.8 billion bad debts for laid off expatriates The number of expatriate employees in state departments dropped by 70 per cent in the past six months, according to Central Statistical Bureau and Civil Service Commission. The Central Bank of Kuwait said that the total amount of bad debts for expatriates during the past four years reached $1.8 billion and part of the bad debts are for the foreigners who were laid off by the government. The central bank said that 85 per cent of those debts are owed to local banks, while the remaining 15 per cent are owed to financial facilities companies. Kuwait’s Kuwaitisation efforts has created a problem as thousands of laid off expatriates are unable to fulfil their financial obligations towards local banks. The number of expats in the public sector dropped from 340,000 to 80,000, as of the end of June, reported local daily, Kuwait Times.


Boursa Kuwait joins Federation of EuroAsian Stock Exchanges Boursa Kuwait has announced that it has joined Federation of Euro-Asian Stock Exchanges (FEAS) as a full member, reported Arab Times. The membership makes Boursa Kuwait a member of a federation that gathers exchanges from Europe, Asia and the Mediterranean and allows Boursa Kuwait to benefit from awareness sessions, access to research, analysis and data, as well as widening the network. Khaled Abdul Razzaq Al Khaled, CEO of Boursa Kuwait said that, the announcement is a step closer towards fulfilling the of Boursa Kuwait’s key objective to become a leading regional stock exchange as well as implementing the highest standards of international best practices.

GCC corporate and infrastructure Sukuk issuance to remain muted S&P Ratings has projected that GCC corporate and infrastructure Sukuk issuance volumes will remain suppressed in Q2 2018, well below 2017 levels. Although the region has a good number of Islamic banks that are frequent Sukuk issuers, the number of corporate issuers that tap into the Sukuk space remains small resulting in volatile annual volumes of issuance, said S&P. S&P also expects GCC corporates remain cautious, translating into muted investment programmes in some sectors due to a number of developments in the region ranging from introduction of the value-added tax, energy subsidy reforms as well as other government revenue-enhancing initiatives that has created pressure and uncertainty for some sectors. Internationally, investors’ appetite for GCC issuance has dropped lately due to international political and economic uncertainty these include the recent reinstatement of US sanctions on Iran, the continued animosity between Iran and some of its GCC neighbours, as well as global economy wars that are not supportive of emerging capital markets. GCC banks continue to offer credit at favourable terms to corporates as a result of the improved liquidity in 2017 and 2018 no major changes will be expected in this picture over the next 12 months because lending growth will remain muted and local liquidity strong. This is being driven by stabilisation of oil prices, large issuances by select sovereigns that injected the liquidity locally as well as muted loan growth. Fifty per cent of the $7.6 billion raised by GCC corporate and infrastructure issuers last year was driven by the activities of Saudi Aramco, which raised SAR 11.25 billion and Investment Corporation of Dubai which raised $1 billion and there are no similarsized transactions so far in 2018.


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Last CreditWatch/Outlook Update

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GEOPOLITICAL UPHEAVAL, OIL VOLATILITY AND MILESTONE REFORMS: WHAT NEXT FOR THE MIDDLE EAST? In an exclusive, Ehsan Khoman, Head of Research and Strategist for MENA at MUFG, projects market movements for the region


f one thing is certain, it is that the Middle East never fails to keep investors on their toes. The first half of 2018 has seen geopolitical tensions intensify and then retreat, nuclear pacts tear apart as well as oil price oscillations. However, underneath the surface, it’s not all strife and turmoil. 2018 has also offered—so far—some relief from the economic stresses and disappointments that have characterised the region in recent years. As the global economy strengthens, regional countries are likely to take advantage by accelerating structural reforms. There are also hopes that an easing of geopolitical conflicts will bolster the prospects for MENA oil importers.


Three developments in particular have shaped the financial and economic landscape of 2018: President Trump’s withdrawal from the Iranian nuclear agreement, Saudi Arabia’s noticeable progress with Vision 2030 and the OPEC+ meeting in June. They have all dominated the agenda over recent months and are undoubtedly set to further impact the region as we head into the second half of the year. IRANIAN NUCLEAR DEAL President Trump’s decision on 8 May to withdraw from the Joint Comprehensive Plan of Action (JCPOA) was a landmark moment. Given the state of geopolitical tensions between the two countries,

there had been whispers that Trump was leaning towards a hard US exit. Despite Trump’s announcement, markets have still not fully priced in the willingness of Iran’s crude importing countries to comply with the US restrictions. Indeed, while the reinstatement of US sanctions on Iranian crude will undoubtedly curb Iranian exports, the size and scope of the impact is still unknown. This will depend on the extent to which those countries who previously received Iranian imports adhering with the sanctions, as well as whether they will be a reinstatement of sanctions on shipping insurance which were critical in disrupting Iranian crude exports between 2012-16.

Khalid Al-Falih, Saudi Arabia's Energy and Industry Minister, arrives ahead of the 174th Organization Of Petroleum Exporting Countries meeting in Vienna, on 22 June 2018.

Countries across the globe have been swift to choose their sides. European governments are working assiduously to safeguard business links with Iran. In early June, France, Germany and Britain pleaded in a public letter to the Trump administration to exempt European companies from sanctions on Iran. However, with the US viewing its new Iran strategy as both necessary and inevitable, European allies are already preparing for the US to proceed with wide-ranging sanctions irrespective of their wishes. Entities with significant operations in the US seem to be prioritising those relationships; Total, AP Moller-Maersk, MSC (world’s second biggest container shipping group), Allianz, Siemens and Maersk Tankers

THE NEXT SIX MONTHS WILL BE A CRUCIAL TEST OF INTERNATIONAL DIPLOMACY. have all warned that they would wind down business in Iran. One such example was Iranian delegates being barred from a S&P Global Platts meeting in London due to fears of breaching the US’s strict measures. Furthermore, if Europe does not deliver a credible compensation package, Iran may follow through on its threat to exit the nuclear non-proliferation treaty (NPT)—the only binding multilateral treaty aimed at achieving disarmament. This would severely degrade global security and increase the risk of war and a nuclear arms race in the region.

Europe’s next steps will have serious consequences for not only its alliance with the US, but also for security in the region and perhaps the wider world. The next six months will be a crucial test of international diplomacy. SAUDI MARKET REFORMS In the past six months, the world has watched Saudi Arabia take significant steps towards achieving economic reform. Notably, there is a sense among those close to the Kingdom that recent activity is genuinely different to previous rhetoric and that, under the leadership of Mohammad Bin Salman, the country may be moving towards a period of meaningful structural change.



This has been highlighted by the Kingdom’s mandate under Vision 2030 to reduce its reliance on the cyclical nature of hydrocarbon revenues, which has previously held the economy back. The Kingdom won classification as an emerging market by the FTSE and MSCI indices earlier this year; a huge step towards its goal of attracting more in foreign investment. The watershed announcements were a resounding endorsement for Saudi Arabia’s success so far with Vision 2030 and other market reforms aimed at transforming the nation’s economy. Investors are also looking forward to privatisation plans, which are coming to fruition in 2019. If successful, these should further propel the rise of foreign exchange reserves over the medium-term. The Crown Prince’s Vision 2030 targets are undoubtedly ambitious. It is inevitable that the Kingdom will face challenges consolidating its finances—highlighted by the widening fiscal deficit in the first quarter to $9.2 billion compared to $7 billion in Q1 2017. In reality, given the ambitiousness of the transformation programme, the pace is likely to be modest with many of the pledges taking years to achieve, but investors should not be put off by short-term challenges. On the contrary, investors should look ahead to the Kingdom’s long-term success. The authorities’ determination to support economic growth by adjusting policies in line with changing oil market dynamics, while sticking to the 2018 Budget path, have thus far provided encouraging signals. One core part of Saudi’s diversification efforts is of course, the corporatisation of Saudi Aramco and its upcoming IPO. As we approach the two-year mark since the Crown Prince’s announcement, the listing continues to draw widespread speculation, despite the recent announcement that it will be delayed to early 2019.


Ehsan Khoman

Head of Research and Strategist for MENA, MUFG

LOOKING AHEAD, THIS PRODUCTION INCREASE MARKS THE FIRST STEP AND OPENS THE DOOR TO FURTHER POTENTIAL INCREASES IF OPEC+ MEMBERS CONSIDER SUCH AN ADDITIONAL INCREASE AS NECESSARY FOR MARKET REBALANCING. A likely explanation for the prolonged delay is the complexity of the transaction and the work required to disentangle Aramco from the rest of the Saudi state. However, one must not lose hope: these challenges are surmountable. Further clarity to key disclosure guidelines in the second half of this year should go some way in assuaging any concerns. The next step for the Kingdom is to decide whether it will go ahead with an international listing. Though we know that the Saudi local Tadawul stock exchange will serve as the anchor market, investors eagerly await further guidance of additional locations. Countries across the globe are still jostling for the Kingdom’s

attention, with the UK’s financial watchdog announcing only a few weeks ago that it will overhaul its entire regime (which currently entails strict adherence to rigorous governance standards) for IPOs of sovereign-controlled companies to create a ‘premium regime’ which would accommodate listings like Aramco. If governments are prepared to reassess their own legal codes, the IPO is clearly a prize worth winning. Politically speaking, a listing on a Western stock exchange could help the Kingdom strengthen ties with the US and Europe. As long as regulatory concerns do not complicate efforts, the Kingdom could reap the benefits of strengthened Western ties. Meanwhile, an Eastern stock exchange could be less challenging from a legal and regulatory perspective but might come with less geopolitical benefits. OPEC As we enter the second half the year, developments in OPEC+ are currently the centre of attention for oil markets. Prior to the OPEC meeting on 22 June, the key concern for OPEC members was that oil prices were approaching a concerningly high level for consumers and producers alike, leading to weakening demand and a slowdown in global economy. Output had fallen far further than the group initially intended (OPEC and non-OPEC compliance rates were at 172 per cent and 80 per cent respectively in April 2018), primarily due to involuntary production cuts by Venezuela, natural decline rates in other members such as Angola, as well as heightened geopolitical tensions surrounding the re-imposition of Iranian sanctions. Whilst OPEC+ member agreed in principle to raise production by up to one million barrels per day (b/d) on a coordinated basis at the latest meeting, there still remains a lack of clarity on the allocation by country. Rather than increasing each country’s production allocations, OPEC+ will instead strive for 100 per cent compliance


CHART 1. SAMA FOREIGN EXCHANGE RESERVES (USD BN; PER CENT Y/Y) 30.0 25.0 20.0 15.0 10.0 5.0 0.0 -5.0 -10.0 -15.0 -20.0 -25.0

800 700 600 500 400 300 200 100 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18


SAMA Foreign Reserve Assets (USD bn) (LHS)

SAMA Foreign Reserve Assets (% y/y) (RHS)

Source: Bloomberg, CEIC Database, SAMA, MUFG MENA Research

with the overall production ceiling agreed in November 2016. The central takeaway is that the 100 per cent compliance target is for the group as a whole, and not for individual members. Indeed, the only approach that OPEC+ as a group can bring compliance with the deal agreed back in November 2016 to 100 per cent (as of April 2018 it was 172 per cent), is for countries with spare production capacity to raise output at the expense of others. Thus, without explicitly stating, OPEC+ members are in effect giving tacit approval for countries with spare capacity to produce over their allocation numbers. Several OPEC+ energy ministers appear to provide their own interpretation of what the output revival meant for the market. Iran saw no more than 500,000 b/d of additional output whilst Nigeria forecasted 700,000 b/d and Iraq said it could be as much as 800,000 b/d. Whilst the magnitude of the proposed oil production increase is negligible, at around one per cent of total global oil supply, it does mark a major shift in OPEC+ strategy to raise market share and away from supporting prices. They are in



effect articulating that they have won the battle to eliminate global inventories and now must move on to the next stage to demonstrate that they can manage market rebalancing in an uncertain future in which (i) global economic and demand growth are at risk; (ii) the robustness of non-OPEC production (particularly shale) could be a challenge and (iii) there remains uncertainties surrounding the production of Venezuela, Iran, Iraq, Libya and Nigeria. Looking ahead, this production increase marks the first step

and opens the door to further potential increases if OPEC+ members consider such an additional increase as necessary for market rebalancing. Whilst the consensus agreement by OPEC+ will offer a clarity on the global supply/demand balance in the near term, we view that considerable risks remain in relation to the oil price trajectory. In this regard, compliance adherence will be central to the determination of the frontend of the oil price curve, especially given the deviations in interpretations of the real production increase that is expected by OPEC+ members vis-à-vis the nominal articulation of the one million b/d revival in production. In addition, if all members are to participate in the production rampup, some countries’ capacity to meet their targets will be questionable. Prices will also be susceptible to headline risks throughout the summer, should OPEC agree to reconvene and assess market conditions in September. A critical issue surrounds the US-China trade war which is diminishing energy cooperation. The threat of retaliatory Chinese tariffs on US exports of oil—US share of oil exports to China has sharply from 3.8 per cent in mid-2017 to 8.4 per cent in Q1 2018—would increase uncertainty surrounding the energy cooperation between the two countries, with Chinese oil corporates potentially becoming reluctant to sign long-term contracts with US oil exporters going forward. This has already had an impact on oil prices, and an escalation in the trade tensions between the US and China could create further jitters. A rollercoaster region, the Middle East never fails to surprise and excite. Geopolitical activities will undoubtedly rumble on throughout 2018, with all eyes focused on how the region will react to the contentious OPEC+ meeting and Trump’s abandonment of the Iranian nuclear deal. Investors should expect a bumpy ride for the rest of 2018, but it could be one worth holding on for.




fter much anticipation, the UAE issued a new Federal Arbitration Law in May 2018. While it may still be too early to assess the exact impact on financial and business sectors, a first review of the 61 Articles contained in the new Arbitration Law confirms the enthusiasm of legal practitioners and economic actors for this latest legislative enactment. THE PREVAILING SITUATION BEFORE THE NEW ARBITRATION LAW Ever since the UAE acceded to the New York Convention on the recognition and


Mohamed Alem, Founding Partner and Mazen Ghosn, Senior Associate at the Dubai office of Alem & Associates, analyse the new Arbitration Law and its impact on the financial services sector

enforcement of foreign arbitral awards in 2006, it was anticipated that Articles 203 to 218 of the 1992 UAE Federal Civil Procedure Law (FCPL) governing arbitral proceedings in the UAE would be repealed and replaced. Indeed, it was widely believed in the arbitration community that the FCPL provisions failed to reflect international best practise and that the ambiguous and inconsistent framework of the 1992 law paved the way to so-called ‘guerrilla tactics’ employed by recalcitrant parties with the effect of significantly hampering the progress

of arbitral proceedings conducted in the UAE. In addition, the UAE Courts have interpreted the FCPL’s provisions in such a way that arbitral awards often risked annulment on unreasonable grounds. Thus, the UAE Courts annulled arbitral awards because witnesses failed to give an oath in the exact form prescribed for court hearings in the FCPL. Arbitral awards were also negated because the arbitrators did not sign each page of the award or that they were not physically present in the UAE when they signed the award.

PHOTO CREDIT: Shutterstock/Possawat Sepa


UAE Courts also imposed the stringent conditions that tribunals render awards within six months from the ‘first arbitration session’ and that arbitration agreements be entered into by signatories who possess a special power of attorney or are named in the articles of association as the person with the authority to bind the company to arbitration. Inevitably, the rigid application of the FCPL by UAE Courts on UAE-seated arbitrations sent a signal to the business community that the UAE is not a proarbitration jurisdiction. This resulted over time in dampening the appetite of foreign

investors, particularly in public/private ventures where courts are overly protective of the Federal State’s interests. Considering the urgent need to achieve a set of arbitration rules that are consistent with internationally accepted principles, Federal Arbitration Law no.6/2018 was ultimately enacted after eleven years of waiting and two previous failed attempts in 2008 and 2014. KEY FEATURES OF THE NEW ARBITRATION LAW The new Arbitration Law is largely based on the UNCITRAL Model Law,

which is designed to assist States in reforming and modernising their laws on arbitral procedure to take into account the particular features and needs of international commercial arbitration. The new Arbitration Law also incorporates several international principles such as the doctrine of competence-competence enabling tribunals to decide on their own jurisdiction and the principle of autonomy of arbitration agreements by virtue of which these agreements are separable from other provisions contained in underlying contracts.



In addition to the abovementioned substantial changes, the new law modernises different aspects of arbitration proceedings in the UAE. For instance, the new Arbitration Law provides that witnesses and experts can be cross-examined through electronic means, therefore allowing flexibility in providing evidence. The new law also recognises the validity of arbitration agreements concluded via email as well as awards signed electronically. Mohamed Alem

Founding Partner, Alem & Associates

It is to be noted that as soon as the new Arbitration Law comes into effect (one month from the publication date in the Official Gazette), it will apply to both ongoing and future arbitration proceedings. One of the key features of the new Arbitration Law are the powers expressly conferred to UAE Courts to issue interim/ protective measures in relation to the arbitration proceedings and to intervene in the arbitration process in order, for instance, to act as appointing authority where parties fail to appoint arbitrators. As for the enforcement of arbitral awards, the new law puts in place strict time limits with the purpose of simplifying and expediting the enforcement process. As such, the authentication, approval and execution of arbitral awards are now expected to be completed within 60 days from the request for enforcement of the award, unless the UAE Court finds that a reason for annulment exists. Turning to the challenge of arbitral awards, the new law stipulates that the party that wishes to set aside an award must file the application for annulment within 30 days from the date of notification of the award. Furthermore, a challenge to the award no longer suspends enforcement as it did under the FCPL.


Mazen Ghosn

Senior Associate, Alem & Associates


IMPACT OF THE NEW ARBITRATION ON FINANCIAL AND BUSINESS SECTORS It has long been established that firms and businesses are attracted to arbitration due to the expertise and neutrality of the decision maker, the confidentiality of the proceedings, the parties’ lack of familiarity with courts and s in foreign jurisdictions, and most importantly the enforceability of the awards. Undeniably, an effective arbitration that leaves no room for unpredictability of outcomes at the time of enforcement is paramount to securing investor trust. Indeed, a strong arbitration facilitates contract enforcement, thereby leading to increased investments, and particularly relationship specific investments (i.e. investments that have far less value outside of the initial relationship) such as those in the construction sectors or those with a high intellectual property component. The adoption of the new Arbitration is clearly aimed at improving the reliability and predictability of arbitration as a mean to resolve contractual disputes in the UAE. By strengthening the legal protection of arbitration, the UAE can reasonably expect to attract foreign direct investments. This said, it remains to be seen how the UAE Courts will be interpreting and applying the new Arbitration in such manner that may generate further confidence among arbitration users.


MIDDLE EAST DIGITISATION Ahmed Al-Faifi, Senior Vice President and Managing Director at SAP Middle East North, shares his views on the threats and opportunities in technology


ow has the year been for SAP thus far? SAP is growing stronger than ever before, with double digit year-on-year growth in the Middle East and winning strategic deals with financial services industry customers across the region. SAP and our channel partners are helping the region’s financial services industry to achieve their digital transformation journey. We are fully aligned with national visions, such as Bahrain’s Economic Vision 2030, Kuwait Vision 2035’s National Development Plan, and Saudi Vision 2030, which are supporting the financing of small- and mediumenterprises to foster diversified economic growth, promote foreign direct investment, and support new levels of insurance. What are your views on the development of financial technology in the Middle East? Technology has always served as a backbone of automation, reconciliation


and settlement in the financial services industry. Technology, including digital solutions and cloud computing, is rapidly being adopted by regional financial institutions as part of their digital transformation enablement. In the financial services sector, digital transformation is the key factor to drive customer success, achieve operational excellence and sustain margins. What are your projections on the market for the rest of the year and going into 2019? As Middle East financial services firms adopt digital transformation agendas and map their visions to their digital journeys, we will continue to see an increased demand towards adoption to cloud-based solutions. Real-time data processing and increased demand towards cloud computing capabilities are enabling digital customer engagement, integration with external partners and promoting operational efficiency at financial institutions.

We perceive the Middle East’s digital market to continue to grow in 2019, especially as banks and insurance companies work with business software partners like SAP to achieve their digital transformation initiatives. What are the biggest challenges in technological progression for banks in this market? The Middle East banking and finance sector faces numerous challenges in their digital transformation journeys. These challenges include managing change as well as existing legacy technology landscape, fostering agility, reducing time to market for new products, and effectively use customer transactional data to better engage and monetise customer relationships. With a wide adoption of social media amongst the customer base in the region, financial institutions have challenges managing big data initiatives to improve customer analytics and increase campaign responsiveness.


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Where do you see opportunities? We see tremendous growth and opportunities towards the financial services industry adopting the cloud and moving towards software as a service (SaaS) platforms, which can allow their support functions to be managed by providers so the firms can focus more on their core business. We perceive significant opportunities towards helping financial services firms collaborating and integrating better with fintech companies as a key opportunity. There are also opportunities for the financial services industry to adopt blockchain and distributed ledger technology to promote operational efficiency, integrate better and quicker with partners and commercial customers and facilitate ease of settlement and reconciliation with payments and trade finance. We also see tremendous opportunities towards governance and regulatory framework adoption as regulators and central banks in the region continue to introduce and adopt newer initiatives revolving around payments, capital adequacy, operational risk and lending. In addition, we see adoption of compliance automation and simulation solutions by commercial banks to address regulatory requirements as well as monitor their risks accordingly.

Looking to the future, what would you say is the biggest threat to financial institutions? I believe that with the advent of fintech and digital currencies, financial services firms now must work hard towards sustaining their margins, enhancing their customer engagement, and retaining trust and loyalty in order to grow their market share. The focus on enhancing the customer experience is especially pronounced among the emerging digitally-savvy generation of millennial banking and finance customers. What are the company’s plans moving forward? In the Middle East, SAP has been growing significantly, with double-digit year-onyear growth over the past five years. Our customers are on our side, and our solutions are poised to help our customers to succeed and grow. Across the board, the Middle East’s banking and

finance firms, regulators and insurers are all executing digital transformation initiatives across real-time big data analytics, compliance and risk management, omni-channel customer services and customer onboarding, campaigns and loyalty management. We are working closely with the Middle East’s leading and most innovative banking and finance firms to drive co-innovation and digital transformation, including with the General Authority of Zakat and Tax, Islamic Development Bank, the Saudi Arabia Monetary Authority (SAMA) in the Kingdom of Saudi Arabia. We’re seeing strong Middle East demand for digital transformation enablers, led by line of business cloud solutions that run on our recentlylaunched Saudi Arabia public SAP cloud data centre, along with our SAP Hybris portfolio of e-commerce and marketing and customer experience solutions, predictive analytics and machine learning

Banking and finance, much like the rest of the services industries, will inevitably witness a massive emergence into other respective industries in the next five years.



on our SAP Leonardo digital innovation system, governance risk and compliance solutions and variety of core FSI industry solutions running on our SAP HANA in-memory platform and SAP S/4HANA real-time business suite. How do you envision banking and finance in the next five years? Banking and finance, much like the rest of the services industries, will inevitably witness a massive emergence into other respective industries in the next five years. With telco and financial technology companies trying to position financial products and win customer loyalty on one hand, and tech giants emerging as ‘one stop shop’ financial supermarket providers on the other side, have a major challenge ahead to either disrupt or be disrupted.

BANKING AND FINANCE, MUCH LIKE THE REST OF THE SERVICES INDUSTRIES, WILL INEVITABLY WITNESS A MASSIVE EMERGENCE INTO OTHER RESPECTIVE INDUSTRIES IN THE NEXT FIVE YEARS. While banking and finance firms are working aggressively towards investing in fintech or collaborating with fintech companies and tech giants, we believe that the and finance companies will continue to ‘manage and own’ the financial products. However, the ‘outlets and front office’ firms offering these financial products might very well be taken over by retail and fintech players while , finance and insurance companies managing the back-office and product lifecycle. We believe that regulators are expected to continue to rely on sound reporting and prudence adopted by insurance and finance companies (as opposed to fintech companies) ensuring economic equilibrium between lenders, consumers, and depositors.


SAP drive co-innovation and digital transformation, including with the General Authority of Zakat and Tax, Islamic Development Bank, the Saudi Arabia Monetary Authority (SAMA) in the Kingdom of Saudi Arabia. PHOTO CREDIT: Bloomberg



THE PRICE OF REBELLION The IMF insists that the pain of short-term austerity will be worth it for long-term prosperity—Egyptians may not agree


osni Mubarak left Egypt a complicated legacy. While he is credited with reforms that spurred economic growth to highs of eight per cent, by keeping the spoils to himself he sparked a costly revolution and left financial carnage in his wake. Following his ousting, annual growth declined to 3.1 per cent in 2011-16 from an average of 6.2 per cent in 2005-10. In late 2016, waning foreign aid and diminishing reserves saw Egypt run cap in hand to the International Monetary Fund (IMF). The result was a three-year, $12 billion loan programme that came with stringent conditions. To secure the deal, Egypt was forced to float its currency, introduce new taxes and slash energy subsidies—all of which sent inflation galloping above 30 per


cent for most of 2017, a high that had not been seen in a generation. Egypt’s people have borne the cost of austerity, enduring endless price rises and punishing tax increases. However, the IMF says that while it may be a bitter pill to swallow, the tough economic reforms are for the greater good. IT CAN ONLY GET BETTER Almost half way through the term of the loan, the reforms have started to pay off for Egypt’s long-suffering population. Since the currency float, foreign investment in Egypt’s high interest treasury bills has rocketed, plugging holes in the Central Bank’s reserves. Growth now stands at the highest rate since 2008, inflation has been beaten back, foreign exchange reserves are at

Inflation is expected to gradually decline to an average of

15% in 2018-2019

Source: Bloomberg


record levels, exports are growing, and unemployment has declined. Fitch Ratings and S&P both upgraded their outlooks on Egypt to Stable earlier this year, and the country has been enjoying some positive press. Heritage Foundation’s 2018 Index of Economic Freedom advertised the fact that Egypt’s economic freedom has increased, and Harvard University’s Centre for International Development ranked Egypt as the third-fastest growing economy in the world. “Egypt has begun to reap the benefits of its ambitious and politically difficult economic reform programme,” said Subir Lall, Assistant Director in the European Department of the IMF. “While the process has required sacrifices in the short-term, the reforms were critical to stabilise the economy and lay the foundation for strong and sustained growth that will improve living standards for all Egyptians.” While the end result sounds promising, rehabilitating Egypt’s economy will be far from easy.The IMF’s plan to modernise the economy includes steps to support exports and reduce non-tariff barriers; support small and medium enterprises; strengthen public procurement; improve transparency and accountability of state-owned enterprises; and tackle corruption. The reforms have been designed to attract vital private investment. High rates and the reform programme have already attracted a surge of foreign participation in the local debt market, according to Fitch Ratings.

MATE’S RATES Egypt’s improved macro stability coaxed the Central Bank into cutting rates for the first time since the 2011 revolution. In February, the Central Bank of Egypt (CBE) cut its overnight deposit and lending rates by 100 basis points (bps) to 17.75 per cent and 18.75 per cent, respectively. Its main operation and discount rates were also cut by 100 bps, to 18.25 per cent. The CBE had increased rates by 700 bps since devaluing the Egyptian pound in November 2016. Interest rates on domestic government debt started to fall before February’s rate cut, with the 91-day T bill rate 450 bps lower than its July peak and the one-year T bill rate close to its predevaluation rate of around 16.5 per cent. “With rates falling, we think the CBE will be mindful of the risk of some outflows, even though its stock of FX reserves has risen to $38 billion and it has other reserve assets linked to its portfolio repatriation scheme,” the rating agency said.   Much to the relief of Egypt’s population, annual headline inflation dropped to 13 per cent in April, down from its July peak of 33 per cent. Food price inflation declined sharply from more than 40 per cent to 16.6 per cent, according to data from Fitch Ratings. “The CBE remains committed to reducing inflation to single digits over the medium term, with monetary policy underpinned by a flexible exchange rate regime that is critical for maintaining competitiveness and adjusting to external shocks,” Lall said. Inflation is expected to gradually decline to an average of 15 per cent in 2018/19—within the Central Bank’s 10-16 per cent target range, according to Bloomberg. This is due to the expected drop-out of exchange rate depreciations and the introduction of value-added tax from year-on-year calculations in 2018/19.


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The Central Bank of Egypt is committed to reducing inflation to single digits over the medium term. PHOTO CREDIT: Bloomberg

As inflation moderates, the Central Bank should unwind some of its monetary tightening. Bloomberg Economics forecasts rates will be reduced by 400500 bps over the course of 2018. This should boost further growth and tease out more investment. “We think inflation will fall further this year but remain in double digits, averaging around 13 per cent,” said Fitch in a statement. “This assumes that further subsidy reform in July leads to energy price increases, especially given higher oil prices. Even so, we expect the CBE to cut rates further this year—another 200300bps—even as global rates rise, while maintaining positive real interest rates.


Since exchange rate reform, the CBE has set out to control inflation expectations. In delivering the rate cut, it said that it would “not hesitate to adjust its stance to achieve its mandate of price stability over the medium term.” The IMF seems impressed with the Egyptian Government’s progress, as reserves have risen, and the current account deficit has started to narrow. It cheerfully noted that Egypt is on track to achieve a primary budget surplus excluding interest payments in 2017/18, with government debt as a share of GDP expected to decline for the first time in a decade. The budget for 2018/19 targets a primary surplus of two per cent of GDP,



which would keep public debt on a firmly downward path. Exchange rate reform has proved a turning point for Egypt’s external finances and the economy, with a growth of around five per cent in the first half of the current fiscal year, notwithstanding the tight monetary and fiscal stance. “Egypt’s growth has continued to accelerate during 2017/18, rising to 5.2 per cent in the first half of the year from 4.2 per cent in 2016/17,” said Lall. “The current account deficit has also declined sharply, reflecting the recovery in and strong growth in remittances, while improved investor confidence has continued to support portfolio inflows,” said Lall. “In addition, gross international reserves rose to $44 billion by end-April, equal to seven months of imports.” WISH YOU WERE HERE Reviving is vital to Egypt’s recovery. At its peak in 2010, the sector employed about 12 per cent of Egypt’s workforce and raked in revenues of nearly $12.5 billion, as well as contributing more than 11 per cent of GDP and 14.4 per cent of foreign currency revenues, according to Reuters data. Thankfully, tourists are edging back to Egypt’s ancient charm. The numbers climbed to nearly 780,000 per month in the first four months of the current fiscal year from about 550,000 per month in 2016/17, according to figures from Bloomberg. Tourists also appear to be staying longer—the average number of nights almost doubled to 12 in July-October 2017 compared with the same period a year earlier. This is aided by an improved security set-up which has prompted many countries to resume flights to Egypt or announce intentions to do so.  Egypt is also stepping up domestic gas production, which should benefit its current account even further. Egypt has begun production from Zohr, a supergiant gas field. Production is expected to reach 1.7 billion cubic feet per day in June 2018 before rising to 2.7 billion cubic feet per day


by the end of 2019, Bloomberg reported. This could make Egypt self-sufficient in gas and may even help the country export it in the future. The government also remains committed to continuing energy subsidy reforms to achieve cost-recovery prices for most fuel products by 2019. Together with raising revenues through tax policy reforms, this will help create fiscal space for important infrastructure projects, targeted social protection measures and essential spending on health and education.

Reforming subsidies and bringing down the government debt ratio is a multiyear process, warned Fitch. However, the reforms have not prompted a visible social backlash, and the authorities have minimised the potential for opposition figures to build political momentum ahead of the presidential elections. “Strengthening the social safety net remains a top priority for the Egyptian authorities and is strongly supported by the IMF,” said Lall. “The school meals programme for children as well as expansion of child care centres also aim

“The banks are funded by stable and low-cost domestic deposits, mainly from households, a credit strength, said Melina Skouridou, Assistant Vice President and Analyst at Moody’s. “We expect increasing banking penetration and increased remittances to spur deposit growth. Though governmentowned banks have significantly increased their market funding over the last two years, this funding is mainly from regional banks and multilateral development banks, where refinancing risks are lower,” Skouridou added. In fact, Egyptian banks have stood up remarkably well. While corporate profits declined, their debt repayment capacity has been supported by relatively low overall levels of debt, as well as government initiatives to help tourist companies and importers. It helps that retail loans are confined to wealthier households. However, banks’ continued success relies on a continued economic recovery. Moody’s warns that delinquency rates could increase as new loans mature, particularly if interest rates rise or economic growth falters. The banks’ high exposure to low-rated government Tourism is improving in Egypt with numbers reaching 780,000 per month in the first four months of the current fiscal year from about 550,000 per month in 2016/17. PHOTO CREDIT: Bloomberg

to increase women’s participation in the labour force, which will be essential to sustaining strong and inclusive growth over the medium term.” LAUGHING ALL THE WAY TO THE BANK If these positive predictions play out, Egypt’s banking sector will reap the rewards. The IMF noted that Egypt’s banking sector remains liquid, profitable and well-capitalised. Moody’s has also given its nod of approval, issuing a stable outlook for the sector last year.


securities—accounting for 33 per cent of their assets—will continue to be a key concentration risk and links banks’ credit profile to that of the government. While capital buffers for Egyptian banks are weaker than those of their rated regional peers, Moody’s expects them to improve over the coming two years as banks retain more of their profits. RISKY RECOVERY While the green shoots of recovery can be seen in Egypt, root problems remain. Relatively weak governance, security and political risks continue to weigh on Egypt’s recovery. “The story of Egypt is positive in the short term,” said Ziad Daoud, Chief Economist at Bloomberg. “However, most of the factors behind the expected recovery are temporary, and as these fade or reach their limit, Egypt will need to find new drivers for growth.” The absence of a level-playing field— especially in sectors where there are state-led activities—might stifle the private sector and job creation, the World Bank warned in a report. Additionally, regional and domestic security risks threaten the recovery of foreign investments and . Fiscal reforms slippage or unfavourable external conditions, for example in the form of sustained increases in global oil prices, pose risks that may negatively impact the consolidation trajectory, said the World Bank. Social conditions remain difficult with double-digit unemployment rate and the absence of a notable acceleration in employment. Egypt will need to make a sustained effort to implement a range of business reforms, including selling the idea of privatisation to a public which associates the very word with corruption, price rises and unemployment. Egypt has been enjoying a fair economic wind, but it needs to harness that while it can. If Egypt’s people do not see any reward for their sacrifice, they may decide that reform comes at too high a cost.










Source: Worldometers; United Nations estimates (June 2018)

Source: Worldometers (June 2018)


4.1% 4.3% 4.4%


(2017 est.)



(2016 est.)


(2015 est.)


Source: CIA World Factbook

11.9% 33.1% 55.7%

(2017 est.)

Source: CIA World Factbook






$10.9 $15.99

billion billion

Source: CIA World Factbook

Egypt’s GDP is expected to grow 5.2% in 2018 Source: IMF


$13,000 $12,800 $12,400 Source: CIA World Factbook



of GDP (2017 est.)

Source: CIA World Factbook


(2017 est.) (2016 est.) (2015 est.)

104.4% 111.2%

of GDP (2017 est.) of GDP (2016 est.)

Source: CIA World Factbook



CHINA’S BELT AND ROAD INITIATIVE The BRI is a hugely ambitious plan that will take decades to realise. If successful, it will fundamentally alter the geopolitical map of Eurasia, writes Paul Gruenwald, Managing Director, Chief Economist, S&P Global Ratings


onceived in 2013, China’s Belt and Road Initiative (BRI) aims at nothing less than connecting—or under some interpretations, reconnecting—the Eurasian supercontinent. This is to be done by land and sea “Silk Roads”, using infrastructure and industry, led at least initially by Chinese official financing. Many of the specifics of the BRI remain fluid, but it will be a decades-long effort involving dozens of countries, with a cost running into trillions of dollars. An undertaking of this magnitude has potentially large payoffs, as well as potentially large risks. Success will ultimately rest on whether BRI projects can win local hearts and minds in the recipient countries, and whether China’s initial “seed money” in the BRI will create credit-worthy projects that attract private sector investment. Seen in this way, the BRI is arguably the world’s largest venture capital (VC) project.


CONCEPT FLUIDITY Chinese President Xi Jinping introduced the Silk Road Economic Belt concept in a speech in Kazakhstan in September 2013. This initial strategic vision was developed further in the ensuing years, converging around regional connectivity and economic integration through the movement of goods, services and information. This culminated with a report by the National Development and Reform Commission entitled “Vision and Actions on Jointly Building the Silk Road Economic Belt and 21st Century Maritime Silk Road.” Given its somewhat fluid definition there is some debate as to whether the BRI is a new initiative as opposed to a platform on which to group a collection of existing initiatives. Whatever the correct interpretation, the ambition and scale are massive. GEOGRAPHY AND GEOPOLITICS China is bordered by no fewer than 17 countries. Of particular interest to Beijing are the western borders, which abut

Central Asian countries once part of the former Soviet Union. These nations tend to be Islamic and less politically and economically stable than China. They are seen as potential sources of risk, particularly in Xinjiang province in China’s northwest. Engaging these countries economically and connecting them to western China through the BRI serves several purposes: It improves economic outcomes in these countries and lowers the risk of tensions spilling over national borders, in effect creating a buffer zone. It increases China’s sphere of influence. This means achieving better political alignment with neighbouring countries, in tandem or as a result of infrastructure and investment projects under the BRI. It potentially creates a network of countries that use the Chinese currency, Chinese engineering standards, and where China plays a dominant role amongst competing regional and global powers.

ENERGY SECURITY A second driver of the BRI calculus is energy security. China’s image as a structural trade surplus economy does not apply to energy, where it runs persistent trade deficits. Although China had an overall 2017 current account surplus of two per cent of GDP, the energy trade balance showed a modest deficit. Over time, the energy trade balance deteriorates or improves as global energy prices rise or fall, respectively. But the fact remains that China is an “energy short” country, since the energy trade deficit has averaged three per cent of GDP over the past decade. Moreover, China’s continued projected fast growth means energy demand is expected to continue outstripping supply. The vulnerabilities of this recurring deficit factor prominently in the BRI.


In physical security terms, there is potential choke point at the Straits of Malacca, roughly where Singapore sits. Around 85 per cent of China’s oil imports pass through the Straits of Malacca, as well as about 50 per cent of its gas imports. Several of the early BRI projects directly address the vulnerability represented by the Strait of Malacca chokepoint: The China-Pakistan Economic Corridor is one of the more advanced, and reportedly the biggest, BRI project to date. The corridor involves extensive energy and transport infrastructure projects that will link western China to the port city of Gwadar on the Arabian Sea. Chinese firms are converting Gwadar into a multipurpose, deepwater port. Recently built oil and gas pipelines from the Bay of Bengal traverse Myanmar


Silk Road Maritime Silk Road China-Pakistan economic corridor Source of Silk Road information: Xinhua



and terminate in the western Chinese city of Kunming in Yunnan province, where considerable refining capacity is reportedly being built. Kunming is also the terminus of an extensive rail network for Southeast Asia, parts of which are currently in various states of construction. In Central Asia, the BRI envisages upgrading and extending an earlier gas pipeline system built by the Soviet Union. The goal is to tap further Turkmenistan’s sizeable gas reserves, as well as Kazakhstan’s large oil reserves. The newest pipeline will pass through Khorgos, along the Kazakh border, where China is currently constructing the world’s largest dry port. In addition to supply diversification, another strategy would be to lessen China’s reliance on imported fossil fuels. China is moving aggressively in the areas of improving energy efficiency and adopting renewables—in some cases spearheading the technology to do so—but demand for fossil fuels is still expected to rise strongly out to 2050. VENTURE CAPITAL SCHEME The BRI can be viewed as a VC fund with a twist. Getting infrastructure financed and built has been a chronic problem for Asia Pacific. This is particularly true in Southeast and South Asia. The Asian Development Bank (ADB) now estimates that the infrastructure needs of Asia will exceed $22.6 trillion through 2030, in order to maintain sufficient growth momentum. Over half of this will be for power generation and about one-third will be for transport. More importantly, the ADB sees an infrastructure funding gap—the difference between investment needs and investment levels—of five per cent of GDP in the group of countries excluding China. China’s gap is 1.2 per cent of GDP. The funding gap is not an issue of supply and demand. There is no shortage of infrastructure demand in the region,


Paul Gruenwald

Managing Director, Chief Economist, S&P Global Ratings


and the potential supply of longer term investors, both regional and global, is also ample. Pension funds, insurance funds and sovereign wealth funds all seek long-term assets to match their long-term liabilities. Multilateral development banks including the ADB and World Bank have deep pockets and broad mandates to fund spending on public goods such as infrastructure. The sticking point has been the riskreturn trade-off. Construction risks, political risks (both policies and expropriation), exchange rate risks, commodity price risks and environmental risks have made creditors hesitant to commit longer-term funds. As a result, infrastructure demand threatens to remain unmet, and investment and growth will correspondingly suffer. However, there are a number of factors which suggest a better risk-return tradeoff for China than for other creditors: Trade benefits: BRI projects will likely make the recipient countries more likely to trade with China (and use the renminbi), bringing economic benefits beyond the project itself. The size of markets for Chinese exports would also increase. Energy security: BRI projects will result in improved energy security for China as sources are diversified, bringing benefits beyond the narrowly defined output of the project. The energy build out will also help develop and raise incomes in China’s poorer, western provinces. Network benefits: China’s sphere of influence across the region will increase as a result of BRI projects as both economic and non-economic ties increase. This will provide in-network benefits as well as a buffer zone against outside influences. INVESTMENT RETURNS The Chinese government develops infrastructure under a build-operatetransfer (BOT) model. Once an agreement (concession) is granted by the host

government, the projects are built and financed mainly with Chinese materials and labour. A Chinese firm then operates the facility, usually for a period of 20 to 30 years, splitting the proceeds with the local counterpart or government. Finally, at the end of the operating lease period, the project is transferred to the host government or entity. The idea is that the costs of the project, including a target rate of return, can be amortised by payments during the lease period. This is the intent, but it is not assured. There are a number of risks being taken by the Chinese project companies, including political risk (including change, or change of view, of the government), technical or construction risk, market risk (inputs prices, interest and exchange rates) and income risk. Ideally, the outcome is that the cost of the project is amortised and the Chinese project company is able to exit. In a bad outcome, the project company may be holding an illiquid asset in a foreign country. The Chinese government is investing seed money to fund infrastructure and industry projects in the target countries. These target countries are the equivalent of early-stage or emerging firms in VC parlance. The objective is to reap returns from these investments, cash out and exit. However, in a pure VC model the financer would simply cash out and move on to the next emerging firm. In the BRI model, the Chinese project company would also cash out, but there is a clear expectation of an ongoing relationship between the Chinese government and the recipient country. SUCCESS MEASURES Success can be measured in terms of soft power and financial sustainability. Soft power boils down to winning the hearts and minds of the recipient countries. The objective here is to build a network of commercial and political alliances that will


serve China’s broader geopolitical aims— regional influence and security. Measuring this part of the success equation will be difficult since much of it will be behavioural. Building ports, road, bridges and pipelines will be necessary but not sufficient. Local populations will need at least to feel that they have some say in the Eurasian integration project and that their national identity is being both respected and preserved. In short, via the BRI, they will need to buy into the notion of a Chinese-led, but not Chinese-dominated, Eurasian block. Financial success can again be defined along the lines of a venture fund. As projects get up and running, Chinese firms will attempt to amortise their investment under the BOT model. Ultimately, the locals will take control. The key here is whether the project (and its spinoffs) will have long-lasting value to the recipient country or will just be seen as an extractive exercise. The composition of funding in the latter stages of projects will be important as well. Private sector participation will signal that the BRI has created value in the initial stages, and that the risk-return trade-off has improved to the point of being able to attract private capital. Success will also be determined by how the BRI accommodates or challenges the existing regional powers on the Eurasian supercontinent, as well as the current global superpower, the United States. Managing these relationships will be a challenge, and this dimension of the BRI challenge should not be underestimated. The cost of tensions is this area could overwhelm gains generated elsewhere. Yet, if successful, the BRI will alter the geopolitical map of Eurasia, as well as China’s economic and political relations with its neighbours near and far, for decades to come. Written in conjunction with S&P Global’s China Senior Analyst Group.



DIVERSIFICATION, ONE SUCCESS AT A TIME Ahmed Kilani, Chief Executive Officer of Tabarak Investment, shares the company’s strategy in investments


Ahmed Kilani


t Tabarak Investment, every success story, each underperforming company turned into an economic powerhouse— creates jobs, enhances GDP and reinforces long-term economic diversification. As an Emirati-led private equity firm, we go to work every day to do more than deliver high returns to our investors. We understand that each company we transform, each job we secure, every community we contribute to, plays a role supporting the economy and long-term wellbeing of our nation. By helping a broad range of companies become stable and productive, we are proud to contribute to an increasingly vibrant private sector.

To-date, thousands of jobs have been created or enhanced, across sectors such as real estate, infrastructure, construction, education, logistics, manufacturing, insurance and services— with assets ranging from Al Ain University of Science & Technology and Al Falah University; to Wahat Al Zaweya, a leading real estate development company; to Gulf Navigation Holding, operating petrochemical tankers, and the only maritime and shipping company listed on the Dubai Financial Market (GULFNAV). One day, we may be delving in on issues of maritime trade, helping Gulf Navigation streamline their operations across eight chemical tankers, and a fully integrated ship management division. Another day may bring us closer to our education assets like Al Ain University, which has tripled its enrolment since establishment in 2004, with expanded campuses in Al Ain and Abu Dhabi offering a broad range of accredited degrees, providing distinguished and capable talents to the job market. Across our portfolio, our philosophy is unwavering: bring a focused mindset, to serve a transformative role and be disciplined in our risk. At Tabarak, we are highly focused on identifying businesses with unique sets of challenges and promising potential. Our deep value investment approach means that we invest in companies that are at an inflexion point and in need for patient, smart capital. Our hands-on approach is our driver for uncovering value within businesses, as we turn underperformers to rising, competitive players in the economy. Our most recent example is Drake & Scull. The first Drake & Scull office (DFM: DSI) in the Middle East was established in Abu Dhabi in 1966, nearly 90 years after being originally founded in the United Kingdom. Currently, the company’s


operations extend throughout the region and across the globe with offices in Dubai, Abu Dhabi, Saudi Arabia, Kuwait, Qatar, Oman, Egypt, Jordan, Algeria and India, in addition to managing projects in Europe and other parts of North Africa. While acquisitions like Drake & Scull and Takaful Emarat are always capital-intensive—success needs more than just capital and being a major shareholder. We play a fundamental role in helping our companies succeed and grow. We collaborate with our companies to enhance their performance by injecting capital; streamlining and expanding business operations; enhancing governance practises; scaling market reach and employing strong management teams. Our financial experts rigorously analyse the external and internal factors of potential investments to determine risk tolerance. Every opportunity must be in line with Tabarak’s investment philosophy and strategy. We do not restrict our investment choices and are always on board to explore different sectors. Our deal-making is governed by our solid ethical compass of integrity, honesty and transparency. Furthermore, we cooperate with third-party financial and legal advisors to identify the fair price range of opportunities, optimal capital structure, financing means, negotiations and most importantly, identifying catalyst factors to maximise shareholder value. At Tabarak, we are honoured to have this core philosophy recognised with the Private Equity Firm of the Year award at the Banker Middle East Industry Awards. Seven years of work by a group of Emirati entrepreneurs with the ambition to play a meaningful role powering the UAE economy—helping companies become more productive and stable, thus, supporting a more efficient private sector.





Amidst the excitement over Saudi Arabia’s rapid reform agenda, Ross Teverson, Head of Strategy, Emerging Markets at Jupiter Asset Management, provides a reminder and some pointers in dealing with this market


audi Arabia has attracted international attention for the reform agenda being driven by Crown Prince Mohammad bin Salman, and the social and economic opportunities that are being created. Change in the Kingdom is having a direct and tangible impact on its equity market. With Saudi Arabia’s recent inclusion on MSCI’s Emerging Market Index, the country is an exciting prospect for global investors.


RAPID, DRAMATIC AND POSITIVE CHANGE Observing Saudi Arabia from afar, as well as from within, reforms are real, widereaching and taking place at remarkable speed. There has been a crackdown on corruption; the ultra-conservative elements in society have been sidelined; an entertainment sector is being allowed to develop; and women’s rights have been brought to the front of the agenda—supported by growing female participation in the workforce.

Ambitious reform agendas require financing, and Saudi Arabia has been highly active in the international debt market. Bolstered by the sovereign’s $12.4 billion international Islamic bond offer in September, Middle East debt issuance reached a record $103.7 billion in 2017, 33 per cent more than the previous year. Saudi Arabia was the region’s most active issuer, accounting for 33 per cent of activity by value. In the domestic market, equities are set to play an important role in supporting growth, as well as Vision 2030’s privatisation programme. The tabled listing of the state oil company, Saudi Aramco, in 2019, will make it the most valuable listed company in the world. Earlier this year, the Kingdom was upgraded to emerging market status by FTSE Russell, a development which is expected to pump billions of dollars of foreign investment into the region’s biggest stock exchange, Tadawul, which has a market capitalisation of $500 billion. That alone is expected to attract up to $5 billion of fund inflows from global investors. The inclusion of Saudi Arabia on MSCI’s Emerging Markets Index—the most widely followed of all indices—at a weighting of 2.6 per cent, effective in 2019, will

Tadawul, which has a market capitalisation of

$500 billion $5 billion is expected to attract up to


of fund inflows from global investors following the FTSE Russel upgrade.


place it even more on the radar of passive and active investors, and is expected to attract foreign inflows of as much as $45 billion. IS IT REALLY ‘THE CHINA OF THE MIDDLE EAST?’ With this rapid progress of social and economic reform, Saudi Arabia has been referred to on more than one occasion as the “China of the Middle East”. There are many important and fundamental differences between these two markets—not least that one is a monarchy and the other a communist state—but similarities can undeniably be drawn. Saudi Arabia will host the G20 summit in 2020, at the King Abdullah Financial District—an important opportunity for the Kingdom to position itself as a key player on the global economic stage, while highlighting the progress of its diversification agenda. The venue, here, is important. When visiting the King Abdullah Financial District—which is still mostly under construction—one is quickly reminded of similarly enormous developments in Beijing and Shanghai, where it was political will and ambition that drove the rapid completion of projects. Much the same can now be said of the Kingdom.



Another similarity is that Saudi Arabia appears to be taking cues from China’s fixed asset investment model, by investing in infrastructure projects to remove bottlenecks to economic growth. In the region, the appetite for investment in infrastructure assets has increased, and Saudi Arabia is creating further opportunities for investment with the construction of large-scale projects such as Riyadh’s metro system and high-speed airport rail link. INVESTORS MUST BE SELECTIVE While the Saudi equities market presents considerable opportunity to global investors, they will need to both allocate and manage their capital wisely. Passive money will blindly buy into the largest MSCI EM Index constituents, one of which is now Saudi Arabia, and so active investors must be selective to realise the market’s true potential. One sector that shows particular promise is healthcare, where we believe there to be several under-researched, well-run businesses that are set to benefit from rapid pace of change. Healthcare spending in Saudi Arabia is set to rise, as medical insurance moves from the state to the private sector. In 2017, the budget for healthcare and social development increased by nearly $5 billion to reach a total of $32 billion. While public spending dominated at 79 per cent, the private sector is catching up, in part thanks to the National Transformation Programme (NTP), which seeks to increase the

Healthcare sector

Ross Teverson

Head of Strategy, Emerging Markets, Jupiter Asset Management








Physicians (incl. dentists) per 10,000 people



Nurses per 10,000 people



Private sector hospitals Beds in private sector hospitals

Source: Ministry of Health, Kingdom of Saudi Arabia, 2009 & 2018


contribution of the sector to the national economy. In 2015, the Kingdom’s healthcare sector contributed $20.8 billion to Saudi GDP, and is projected to grow by 13.7 per cent by 2025. Improved availability of high-end services and a raft of initiatives being rolled out by the Ministry of Health means that where many patients had in the past chosen to travel overseas for treatment, more are now likely to spend money on healthcare at home. Furthermore, a high incidence of chronic conditions such as diabetes and rising demand for long-term care for elderly patients also suggest structural growth in healthcare spending. Meanwhile, in the short-term and at macro-level, a number of much needed economic reforms may initially inhibit economic growth—for example, the removal of fuel subsidies, the introduction of VAT and levies on expat workers who may consequently choose to exit the labour market. WHAT NEXT? As it stands, foreign investor participation in the Saudi stock market is low, but that situation is changing, and changing fast. Overseas investors bought $1.18 billion in MENA equities in March 2018, of which a large proportion were traded on the Saudi exchange, in anticipation of the index announcements. With the inclusion of Saudi Arabia in the MSCI Emerging Markets Index now confirmed, the Kingdom is set to become an increasingly important player in the EM landscape. But investors should approach with care. Blindly following the indices isn’t the way to go, whatever weighting Saudi may be given. Instead, stocks and sectors should be selected based on in-depth qualitative and quantitative research, and investment strategies must be actively managed. That is what will deliver the potential that the market offers, and that is how genuinely attractive returns will be achieved.


DIGITALISATION OF WHOLESALE BANKING By Amol Bahuguna, Head of Payments & Cash Management, Commercial Bank of Dubai


Amol Bahuguna


s digitalisation of the banking sector gathers momentum across the globe, many technological buzzwords like ICO, blockchain, cryptocurrency, machine learning, artificial intelligence, etc., have become popular in the Middle East as well, with UAE banks taking the lead in adopting and implementing worldclass digital solutions. The UAE is ranked amongst the top countries in terms of mobile penetration and easy access to internet, which further enhances the country’s potential for embracing digital banking services. However, whenever we hear about digital banks or challenger banks, it is typically synonymous with retail or

personal banking offerings, be it the capability to onboard the customers digitally or offering customised services in areas like wealth management, personal loans, cards, etc. Investments in technology seem to have been focused mostly on the retail banking front, while on the other hand, Wholesale banking has seen less investments in technology, leading to continued reliance on manual processes and paper-based transactions. It is quite surprising that such a large banking segment has still not been able to come to terms with the value that digital transformation could offer commercial customers in addition to corporate bankers who end up spending over 50 per cent of their time on non-core, repetitive and administrative activities, the majority of which could be replaced with digitalisation. A recent study by Boston Consulting Group (BCG),  also predicts a paradigm shift in digital disruption, with new competition from digitally nimble fintechs offering standalone commercial solutions such as low-cost cross border wire transfers or supply chain financing solutions. This is expected to fuel an accelerated wave of digital innovation in the remittance space, blockchain and trade finance transactions, as products and services get enhanced in response to commercial customers’ changing expectations. The financial stakes are high for commercial banks. In the medium term, viz in the next five years, these new digital platforms and channels are expected to attract 30 per cent of traditional corporate banking revenue. Commercial banks must undertake comprehensive end-to-end digital transformations to keep pace with customer requirements or run the risk of becoming extinct. Banks may still exist in the future, but high margins and fees will not. Markets are dynamic and so are customer’s expectations, and hence there is no place for slow or lazy banks. The technology is available like never before


and to the advantage of commercial banks, which can help them jump start their digital transformation journey. The BCG recommends a roadmap for digitisation built around four pillars: reinventing the customer journey, discovering the power of data, redefining the operating model and building a digitally driven organisation. Here are my recommendations on the top four areas where commercial banks must invest to remain in the race: 1. CRM and Mobility A robust CRM platform supported with bespoke analytic tools is essential for RMs to make informed decisions while managing customer portfolios as the CRM system gets accessed by different stakeholders within the bank including Treasury, Trade Finance and Cash Management. Through the CRM platform, customer information can be fed on a real time basis, presenting enriched information on the customer such as current share of wallet, benchmarking with competition, credit approvals, latest call reports, pitch books, pipeline, mandates, product utilisation, exceptions, etc. All of this, on the go, on mobile. 2. Billing and Pricing While new ideas such as mobility make the headlines, customercentricity also covers the aspect on how customers are being charged and billed for services. Billing and Pricing is an exceptionally critical

customer touch point, and most of the commercial banks have not invested in this area using technology, thereby making this activity complex, rigid and prone to errors and thus, prone to revenue loss. It’s time that every bank looks to implement a tech-based billing and pricing engine, which can help position it for future growth and stability, with robust analytics to optimise every opportunity. The right investment can turn this system into a powerful tool to increase revenue and adequately control risk. 3. Credit and Documentation The entire credit process starting from sourcing information, underwriting, internal reviews, approval, documentation, disbursement, et al is still a paper-based and manual process. This can be digitalised, by banks opening APIs to its customers and counter parties to directly feed the information on their performance, documentation and requests, making the entire process streamlined and more efficient. As a start, banks could conduct a proof of concept for SMEs to pilot this idea. 4. Transaction Banking Undoubtedly, transaction banking is one of the areas where technology gets discussed more often than any other place in the bank. This is because of the agile nature of the business, intense pace due to the rise of digital disruption, and of course, due to customer’s growing expectations. Continued investment is warranted, as commercial banks cannot survive on their old laurels. Research also suggests that banks have largely focused on catering to their existing customers, to protect the current share of wallet, without investing in innovation which would help them maintain the incumbent advantage or acquire new customers.



TACKLING EDUCATION VENTURES Maya El Hachem, Principal at The Boston Consulting Group Middle East, points out the pockets of opportunities in GCC’s private education sector


ow do you view the potential in this market? The GCC education sector is riddled with untapped opportunities for investors. Across the region, the education market is expected to double from $13 billion to $26 billion over the next five years. Despite the fact that strong growth has been predicted across the region, investors must fine-tune their strategies to account for the shifting circumstances before committing to an investment opportunity. Having said that, each market has unique opportunities that are becoming increasingly prominent in the sector. In the UAE, for example, the $4.4 billion market in 2017 is forecast to grow to $7.1 billion by 2023. The biggest opportunities lie in two areas—the increasing need for highquality schools, with fees in the lower range such as Indian curriculum schools


Maya El Hachem

for example, and with fees in the mid-level range for International Baccalaureate (IB) schools. Additionally, there is also a need for high-quality schools, with a rating of ‘good’ or better, that cater specifically to local Emirati preferences by offering gender segregation and adequate provision of Arabic and religious studies. Saudi Arabia is the biggest education market in the GCC and we foresee significant opportunities despite recent economic pressure. Opportunities in Saudi Arabia arise from the education and privatisation reforms of the country. These are pushing for high quality and diverse offering, professionalisation of the sector, attraction and incentivizes to private sector and foreign investment, and encouragement of public private partnerships. There are also opportunities arising out of recent megaprojects such as NEOM. What kind of challenges entail such investments? We have identified five primary challenges for investing in education across GCC markets, these are: Market fragmentation: The educational landscape is still quite fragmented in the GCC region (except for parts of the UAE), with no dominant players, which makes it attractive for large-scale operators—but it can be difficult for new entrants to break in. A shifting regulatory environment: The regulatory environment in the region can be restrictive and unpredictable, particularly when it comes to tuition fee increases and nationalisation requirements. Access to resources: In the GCC, it can be difficult to secure suitable land and obtain permits for construction since land is typically owned, controlled and assigned by governments. GCC banking practises can also make it challenging for private-school investors to access capital for financing. Attracting talent: The number of qualified teachers are limited, teacher turnover is high, and competition for expatriate teachers is fierce. As UAE is often viewed as the most attractive market

Across the region, the education market is expected to double from $13 billion to $26 billion over the next five years.

for teachers in the GCC, it is more difficult for other markets to attract teachers. Data availability: Until recently, only limited data was made available to the public on school quality and types of schools needed, which made it hard to instil competition in the market and meet the demand of unfulfilled segments. There is a recent push, however, in many GCC countries to publish comparative school performance data and investor promotion information. What key aspects should investors be aware of when evaluating these prospects? While the private K-12 education market is large, its potential for growth varies significantly from country to country in the GCC market; hence, it is important for investors to understand the dynamics and size of each market and its potential for growth in the coming years and finetune their strategies accordingly.

SAUDI ARABIA IS THE BIGGEST EDUCATION MARKET IN THE GCC AND WE FORESEE SIGNIFICANT OPPORTUNITIES DESPITE RECENT ECONOMIC PRESSURE. OPPORTUNITIES IN SAUDI ARABIA ARISE FROM THE EDUCATION AND PRIVATISATION REFORMS OF THE COUNTRY. In fact, the private education market has become increasingly complex and competitive in recent years, particularly in mature markets, such as the UAE. The market is shifting from being dominated by family-owned and individual schools to include financial investors and large-scale operators. Moving forward, we expect investor challenges to continue being addressed by GCC governments, who are increasingly offering incentives to attract private and foreign investment.

What is your outlook on this sector as an investment class? Despite some current economic slowdown, there are a number of positive factors that are significant for a good investment opportunity. The market is expected to expand, driven by the population growth of the youth, increased enrolment (specifically in early school years) and some shifts from public to private schools. In addition to this, the fact that GCC governments continue to give precedence to initiatives aimed at strengthening investor relations, while expanding the role of the private sector in education, as well as the highly fragmented education market giving an opportunity to consolidate schools into networks and scale up over time, all pose a good investment opportunity in the short term. And as governments continue to address investment challenges, the market will become even more attractive in the long term.



INVESTOR REALITIES Ted Stephenson, CFA, Executive Director of CFA Society Emirates, provides an insight into corporate governance-related challenges and opportunities facing banks, financial institutions and the end investor in the GCC

PHOTO CREDIT: Shutterstock/



Basel Committee on Banking Supervision report published in 2015 entitled Corporate Governance Principles for Banks, stated that “effective corporate governance is critical to the proper functioning of the banking sector and the economy. Banks perform a crucial role in the economy by intermediating funds from savers and depositors to activities that support enterprise and help drive economic growth. Governance weaknesses at banks that play a significant role in the financial system can result in the transmission of problems across the banking sector and the economy.�

Regulators intervened substantially after the global financial crisis in 2008 to improve corporate governance by introducing various laws and regulations. An Institute of International Finance (IIF) and Hawakamah report states that: “The willingness of banks to adopt better corporate governance practises to comply with regulations shows that companies can change practises if required to do so by regulators.” A key element in drawing foreign institutional investment to the region is confidence. Confidence can be gained by building strong governance systems and an internationally accepted

AVERAGE GCC GDP AND LOAN GROWTH 12% 10% 8% 6% 4% 2% 0% 2011




Average Loan Growth






Average GDP Growth

Source: S&P Global Ratings, GCC central banks, average loan growth is for all GCC banks at the system level



regulatory environment, transparent practises and accounting regimes. Just as stock markets in the region migrate from ‘frontier’ to ‘emerging’ to ‘developed’, regulations continue to transition with regard to corporate governance frameworks. The Capital Market Authority in Saudi Arabia issued its resolution in 2017 approving new Corporate Governance Regulations. It states: “These provisions emphasise the principle of active participation in decision making within the Board of Directors as they deal with the issues of conflicts of interest between board members and the company, and adopt honesty, truthfulness and care as a foundation and methodology for these boards.” In June 2017, MSCI added Saudi stocks to a watch-list for future inclusion in its MSCI’s Emerging Market Index and that has attracted capital into the market. As of 6 June, the Tadawul all share index is up 19.3 per cent in the last six months versus the S&P 500 return of 4.55 per cent. The UAE and Qatar were reclassified from Frontier to Emerging in 2014.

Ted Stephenson

CFA, Executive Director of CFA Society Emirates

RATED GCC BANKS Rated GCC Banks - Rating Distribution No. of Banks 14 12 10 8 6 4 2 0


Source: S&P Global Ratings



A 09/2016


BBB+ 04/2018





A case can be made that companies should proactively embrace good governance practises. In an Environment, Social, and Governance (ESG) presentation by Principles for Responsible Investment (PRI) and CFA Institute, research showed that: “…the correlation between ESG rating and risk-adjusted return turned significantly positive in the recent years and this positive correlation strengthens further by excluding the lowest ESG stocks. Stocks with worst ESG exposures have total and stock-specific volatility that is up to 10-15 per cent higher, and betas up to three per cent higher, than stocks with the best ESG exposures.” Seventy eight per cent of asset managers surveyed in the research report indicate that ESG analysis is integrated into equity analysis and that 59 per cent responded that Governance issues affect share prices always or often. As actively managed equity investment capital continues to flow into the region, banks should pass through any type of exclusionary (negative) screening. Inclusionary (positive) screening and bestin-class screening which actively includes companies that meet an ESG standard may reduce the investable bank universe. Regulators across the region are actively trying to foster a culture of innovation by introducing regulatory sandboxes and laboratories. These initiatives and others in the region are designed to promote the development of a knowledge-based economy in what is commonly referred to as the ‘post-oil’ era. A challenge for banks in the GCC is the commitment to continue to improve corporate governance in the face of disruptive financial technologies and the need to balance the ostensibly contradictory demands of innovation and risk management. Innovative data and financial management systems introduce the potential for hacking, identity theft and misrepresentation. Systems integrity is an important element of corporate governance that should not be minimised.


RATED GCC BANKS Annualised Returns per cent (30 April 2018) Index

5 Year

10 Year

MSCI GCC Countries*



MSCI Frontier Markets



MSCI Emerging Markets



MSCI World



S&P 500



*GCC Countries include: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and United Arab Emirates. Source: CFA

The strong correlation between the price of oil, GDP growth, loan growth, bank profitability and credit ratings introduce a significant challenge for the GCC banks. Average GCC loan growth has dropped from a high of 11 per cent in 2012 to an estimated three per cent in 2017 and GDP growth has decreased from about six per cent to below two per cent. In an S&P Global Ratings presentation to CFA Society Emirates in May 2018 entitled “Bank Rating Framework and A Brief Look into GCC Banks – 2018”, the outlook is that “the story is not the same for all GCC countries. S&P believes that GCC banks’ financial profiles will start stabilising from the second half of 2018, absent any materialisation of geopolitical risk. The three key risks that we foresee for GCC banks, in addition to geopolitical risks, are muted loan growth, a higher cost of risk, and lower profitability.” Declining loan growth affects banking profitability and that has been reflected in bank credit ratings as presented by S&P Global Ratings. In 2015, there were 19 banks in the GCC rated from AA- to A-. As of April 2018, there are seven. Most of the movement has been to BBB+ category in which there were five banks in 2015 and now there are 13.



When comparing stock market indexes globally, in the GCC, the banking and financial sector is more heavily weighted by market capitalisation than in other countries or regions. The MSCI GCC Countries Index is about 49 per cent weighted in financials. By way of comparison, financials are weighted at 14 per cent of the S&P 500 index and 24 per cent in the MSCI Emerging Markets index where information technology is the largest sector by market cap in both indices. The heavy weighting in banks and financials in the GCC has impacted index performance and unsurprisingly, returns in the GCC have lagged behind developed markets in both the five year and ten-year time frames. Relative performance weakness due to macroeconomic factors strengthens the argument for the imperative of good governance. In summary, corporate governance is a multi-faceted issue that is influenced and determined by a variety of complementary factors and forces. Fundamentally good governance is dependent upon the integrity, accuracy and transparency of the processes and systems that ensure that the behaviour of the enterprise is well aligned with the interests of the stakeholders, including investors. Progress towards and consistent achievement of “duty of care”—the goal of corporate governance—is strongly determined by government regulation, the presence of an active, vigilant and independent Board of Directors, the activities and pronouncements of the major credit rating agencies and finally, the integrity and transparency of the information systems which serve the stakeholders. Each of these important components should be understood and intelligently integrated within a framework that continuously evolves to faithfully serve the stakeholders to whom the enterprise is ultimately accountable.


ADAPTING TO A NEW ERA Abdullah Al-Fozan, Chairman of KPMG MESA and KPMG Saudi Arabia, provides an exclusive commentary on the Kingdom’s business and economic landscape PHOTO CREDIT: Shutterstock/Bloomberg



n July 2017 we issued our GCC Banking Report, in which one of the predictions was that because of the oil price fluctuation from $140 in 2014 to $30, as well as the wars inYemen, Syria, and Iraq, everyone expected that the GCC region could witness an economic downturn. Fortunately, that prediction did not become a reality. Last year’s performance of the GCC region was better than the previous year because we did not see the slowdown that was talked about. When the Kingdom of Saudi Arabia started pushing ahead with an economic overhaul aimed at ending what Crown Prince Mohammed bin Salman once called the country’s “addiction” to oil, many were of the opinion that it was the wrong time to invest in Saudi Arabia. This simply means that the entire business structure of Saudi Arabia was built on wrong ideas and formulas.

I STRONGLY BELIEVE THAT IN THE LONG RUN THE PRIVATE SECTOR WILL BENEFIT FROM THE POLICIES BEING ROLLED OUT BY THE GOVERNMENT. Some businesses have no direct dealings with the Government, but they enjoy protection. There are also businesses that complain and protest when the Government cuts its spending by just one per cent—they immediately come to the wrong conclusion that the economy is suffering. Of course, when SABIC stops producing, or Aramco stops producing, then I will start worrying.

The message is that, just because the Government takes steps to conserve its resources, it does not automatically mean that there is anything wrong with the fundamentals of the economy. These wrong conclusions about the country’s economy are not fair because they cause panic and mislead the public. Even for us at KPMG, as an advisory firm, when we see steps being taken by the Government to rationalise its spending, we will try to provide solutions that businesses can use to adapt to the situation. We need to think of new ways to help businesses continue to grow and take advantage of the changing circumstances. I am not against the private sector. However, the private sector cannot expect to be protected and subsidised by the Government.



Some businesses may be affected by what is happening domestically, but they have the opportunity to go outside the country and promote their products and services abroad. The Government cannot be expected to help them, but I strongly believe that in the long run the private sector will benefit from the policies being rolled out by the Government. Saudi Arabia is a land of opportunists. Enormous opportunities are being created in the fields of healthcare, education and housing sectors. Especially the housing sector, where there is a lull in the business and a lack of investments at the moment. We are trying to create a sustainable industry, and there aren’t any players in the market that can do it. I believe the global players should come into the country and transform the housing sector, starting with a million or more units that will be required for the coming two years. The Government could explore ways by which it can help with the financing and construction. Of course, some sectors need adjusting to the changing environment, such as the cement sector. It has been benefitting from the growing economy for the last 30 years. If they have some years of hardship, that would be not be a bad thing. Over the years they have benefitted from a number of concessions such as free gas, free raw materials so they should get used to experiencing normal levels of profitability when these benefits are curtailed or the demand for cement is not as high as before due to slowdown in the housing sector. However, with the expected revival of the housing boom as a part of the vision for the country, they can expect to get back to their previous levels of profitability. As for the construction sector, businesses that did not follow the industry standards had to pay the price. The construction sector is important,


Abdullah Al-Fozan

Chairman of KPMG MESA and KPMG Saudi Arabia


and they will find their way out of the downturn. The practice of spending even when there was no justification has stopped and this will hurt some players who profited from previous practices when money was freely available. There will also definitely be some consolidation for other sectors. For anyone or any investors looking for opportunities in Saudi Arabia, there is still a lot of opportunities for midsized entrepreneurs and organisations. There are also some opportunities for big organisations. The Government is doing everything it can to attract investors. Mid-sized companies in Europe, Brazil, India, and China, are perhaps faced with challenges due to the saturated markets they operate in, where they have fewer opportunities to grow; but they could benefit from the Saudi market, that promises to open up and offer huge opportunities to grow. The Saudi economy is a real economy where there are real opportunities, purchasing power as well as a smart young population. And the Government is doing its best to ensure sustainable economic growth. Aramco itself will soon become a private sector company in the next year or two. There are opportunities in many sectors run and managed by the Government. They will soon be opened up to a certain degree for the private sector to either run independently or jointly with the Government. In conclusion I must say that the actions being taken by the Saudi Government to rationalise spending and reorganise itself will result in sustained benefits for the country’s economy. Pains felt by some businesses due to this are temporary in nature but there is enough and more opportunities for everyone to participate and benefit in the long run. So instead of complaining we must seize the enormous opportunities by adapting to the changes and moving with the times.



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JTB launches financial inclusion and financial literacy initiatives.


AND FINANCIAL Jammal Trust Bank launches financial inclusion and financial literacy initiatives in partnership with the United States Agency for International Development


ammal Trust Bank (JTB), represented by its Board of Directors and its Chairman and CEO, Anwar Jammal, hosted a luncheon to launch the “Financial Inclusion and Financial Literacy Initiatives” in partnership with the United States Agency for International Development (USAID), at Le Grey Hotel, on 20 June 2018. HE Minister of Education and Higher Education, Marwan Hamade, HE Minister of Economy and Trade, Raed Khoury, ViceGovernor of the Banque du Liban, Dr. Muhammad Baasiri, the Chargé d’Affaires of the US Embassy, Edward White, US Embassy representatives, Banque du Liban representatives, USAID representatives as well as a number of journalists and bankers attended the event. During the event, Jammal spoke about the importance of the financial inclusion and financial literacy initiatives, in converging all members and groups of society in the banking sector, in an aim to support and improve their living standards and to offer them banking services, which in turn, will boost the Lebanese economy. Hamade thanked Jammal Trust Bank for this initiative and said, “At the Ministry of Education and Higher Education, we consider ourselves partners in this cultural, economic, social and educational initiative.”

As for the Chargé d’Affaires of the US Embassy, Edward White, said, “This American-Lebanese partnership will bring these disadvantaged groups into the financial system. It will promote saving and increase access to finance, thereby improving lives. This should generate additional economic activity to keep the Lebanese economy moving forward.” Then, a representative of the “Livelihoods and Inclusive Finance Expansion” (LIFE) Project in Lebanon, funded by USAID said, “Women such as myself and thousands more have much to offer the economy of Lebanon and appreciate very much this particular pathway toward that hope as represented by Save and Win. This programme aims to have nearly 50 per cent of previously unbanked women among the 10,000 new accounts created in the first year.” At the end, a documentary about financial inclusion with live testimonials from Jammal Trust Bank’s clients was shown.

Jammal Trust Bank has developed an innovative banking product, “Save and Win”, geared towards financial inclusion. It was designed to encourage small saving holders to join the banking world, especially that no minimum amount of money is required to open an account related to this product. In addition, it is not subject to monthly commissions similar to other accounts and it gives its owner the opportunity to obtain loans with three per cent interest fees. In order to educate and to narrow the gap between the financial sector and Lebanese citizens, JTB has cooperated with the Ministry of Education and Higher Education, to educate students on their banking rights and duties, through awareness courses in schools. JTB has already reached 8,500 students in less than a year and plans on reaching more than 20,000 students next year. In 2018, USAID and JTB have partnered to support the development of all programmes mentioned above.




ARE YOU BEING SERVED? By Tony Long, CEO, CPI Financial


came across an article published in the South China Morning Post a few months ago about how China Merchants Bank have opened a branch in Shanghai ‘manned’ entirely by ‘smiling’ robots equipped with an array of facial recognition (FR), artificial intelligence (AI) and virtual reality (VR) capabilities. Beside the slightly surreal images in the article of people interacting with the robots, it really hit home to me just how close we are to these technologies combining to deliver the kind of services that many thousands of retail banking staff are already being replaced by. Now this may all be a clever PR stunt aimed to demonstrate how far we’ve come with these technologies, but just because we can do something, it doesn’t always mean we should. Which begs the question, if we are all being conditioned to self-serve through mobile banking apps and interface with virtual assistants, will we ever want to go back to interacting with a human substitute, either in banking or in many other industries? China Merchants Bank uses a bot on WeChat to handle 1.5 to two million queries a day, a workload equivalent to around 7,000 human staff, and many people are already saying that they would prefer to engage with a virtual assistant powered by AI than a human being. The trouble with humans is that they are, well, human. In a lot of retail industries, service levels tend to be at the lower end of most customers’ expectations, and many fail to even live up to those.


Tony Long CEO, CPI Financial

THE TRUTH IS THAT SERVICE REMAINS KING, BUT WHEN EVERYONE IS DELIVERING THE SAME LEVEL OF SERVICE, CUSTOMER EXPERIENCE MAY WELL BE THE DEFINING ELEMENT OF SUCCESS. Usually you have to look to the higher margin categories, where quality, luxury, prestige and exclusivity are priced-in to find a level of service that is truly focused on customers’ needs and preferences,

but even here, AI is making advances into the wealth management sector and other premium financial services in leaps and bounds. And whilst the tech industries that disrupt everything from shop assistants to asset managers will continue to attract talent in droves, we are only at the beginning of this fourth revolution and there is unlikely to be enough talent to go round, hence, we are already seeing advanced AI skills commanding huge salary premiums in the global technology market. The big challenge for the banking and financial services sector is how is it going to attract the kind of talent it needs to serve its future customers when the future for many roles is so uncertain? PwC’s recent UK Economic Outlook report confirmed what many in banking and financial services industry regard as inevitable, forecasting that between 2017 and 2033, AI will create 18 per cent more new jobs, but at the same time displace 25 per cent of existing ones, resulting in a loss of 77,000 jobs in the UK financial and insurance services alone. The good news was that overall the displaced roles are expected to be matched by new ones, at 20 per cent on either side, but industries like manufacturing, wholesale and retail as well as transportation will be the hardest hit, along with financial services. The truth is that service remains king, but when everyone is delivering the same level of service, customer experience may well be the defining element of success.

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#208 - July 2018  
#208 - July 2018