World Economic Forum: Global Business and government experts met in Abu Dhabi to address rapid globalisation and rising sovereign debt

 

The UAE participated in the 2011 G20 summit in Cannes and it also hosted IRENA, the global clean energy body. This shows and indicates that the UAE is increasingly becoming a global citizen in economic affairs around the world. According to leading political figures at the third World Economic Forum Summit in Abu Dhabi last month, this is a good indication of where the UAE is headed. Over 800 leading experts in academia, business and government convened in the UAE capital to discuss new models for the world’s most pressing challenges, including public debt, climate change and food security.

The continuing uncertain global economic outlook could drive a wedge between international interests if left unchecked. Unstable financial markets combined with rapid globalization and technology uptake are all new factors stoking the need for urgent global conversations. The rise in global wealth has lead to a richer world for many, but many millions are poorer than ever. There is a global inequality. We need to rethink our global competitiveness strategy because we need to address the quality of economic growth. Velocity and country interconnectivity have become so complex at the tipping point that the whole system may collapse. We need new models to survive. The great recession has blinded us to the great revolution.

In addition to increased connectivity across countries and continents, globalization has been paralleled by a shift in power towards the East, as China continues on its incredible growth trajectory and the US buckles under debt pressure and stagnant jobs data. In the last century, global production and consumption was heavily weighted to the west, but recent years have seen a dramatic shift as the BRICS consume and produce more global resources that ever before. Only 40 percent of the worlds production output is in the West and only 43 percent of investment goes to the West. The world is changing very fast. Producers and consumers must work together at this historical juncture.

The prolonged indecision on Europe’s debt woes has also set the stage for mistrust and a need for increased global co-operation. Europe is at the epicenter of today’s crisis. It has fiscal, banking and growth problems and the Euro will not survive. The European Central Bank will have to work to find a solution. What happens in one continent affects another. In a recent WEF poll of 1500 CEOs and academics, less than 10 percent of respondents expressed confidence in the state of global governance over the next 12 months. The world urgently needs to rebuild trust in leaders, government systems and among countries if the international community is to shape new models to solve global challenges

Business Opportunities and the Financial Services Market in the GCC region

                 

Dubai Palm Island

The Gulf Cooperation Council (GCC) region brings together the oil-rich states of Saudi Arabia, Oman, Qatar, Kuwait, Bahrain and the United Arab Emirates (UAE). The GCC economies have been growing rapidly on the back of rising energy prices and economic diversification that includes some $700 billion worth of development projects either under way or in the pipeline. The potential for international financial services groups is vast, in areas ranging from project finance to fast-expanding mortgage, consumer finance and private banking markets. Rapid economic growth and commercial diversification within the GCC region offer valuable opportunities for international financial services groups. GCC markets are increasingly being opened up to foreign investment and ownership. With $700 billion worth of developments either under way or in the pipeline, the GCC is now the world’s largest project finance market. The investment spans leisure, residential, infrastructure and industrial developments as the GCC seeks to forge a stronger and more diversified economic future. The real estate boom in Dubai and other emirates of the UAE is being increasingly mirrored across the GCC region. This includes Saudi Arabia, where the scale of new and planned developments is expected to overtake Dubai in the next five years. While some naturally question whether the boom is sustainable, demand continues to outstrip supply in most real estate sectors for now. Expatriates in most GCC countries can now own property, which is helping to open up a new mass market in mortgages. Owning property can also provide the right of abode and, from this, the attraction of low taxation and the right to set up businesses in the country of residence. Consumer finance is expanding as a relatively young and fast-growing population increasingly embraces consumerism. Key growth sectors include credit cards and vehicle financing. Islamic financial services are growing faster than the sector as a whole. 
                 International groups are seeking to extend the range and sophistication of Sharia-compliant products and services into areas such as project finance and alternative investment funds. Recent milestones include the $3.5 billion sukuk (Islamic bond) issue in November 2006 by the Nakheel Group, the developers of Dubai’s Palm Islands and other landmark projects. This was the most valuable sukuk issue ever. The population of the GCC has accumulated $1.5 trillion in personal wealth. Clients increasingly prefer wealth and asset management services provided locally rather than offshore, which is leading to strong growth in these sectors. Dubai, an emirate of the federal UAE, has been hailed as an excellent example of economic diversification by the World Bank and has become a model for development in other parts of the GCC region. As such, Dubai highlights the opportunities this diversification and development could open up for the international financial services industry. Oil and gas represent only 6% of Dubai’s GDP and are due to run out in ten years. The emirate has therefore sought to become a leading regional and global service and trading centre – 1.5 billion people are within two hours’ flying time of Dubai. The first key opportunity for financial services groups lies in project finance.

Dubai City

The International Monetary Fund estimates that there are some $700 billion worth of developments underway or in the pipeline in the GCC, making it the world’s largest project finance market. The transformation of Dubai’s waterfront exemplifies the ambition of this construction boom. It includes the near doubling of capacity at the Jebel Ali container port as the emirate seeks to develop shipping facilities comparable to Singapore’s. Other high-profile projects include the world’s tallest building and a series of man-made ‘Palm Islands’, one of which will be larger than Manhattan. Planned projects such as Qatar’s Lusail Marina and Kuwait’s Silk Island suggest that other GCC states are keen to emulate the Palm Island blueprint. Projects like the Palm Islands are providing thousands of new homes at a time when expatriates, who make up a majority of the population of the UAE, can now own property. Other GCC states have followed suit. This is leading to the emergence of a valuable new mass market in mortgages. As the liberalization of property ownership spreads across the GCC, the potential customers not only include the many millions of people from Asia and other parts of the Middle East who have come to work in the GCC, but also the increasing numbers of people from around the world who are choosing to take up residence in the region. Owning property can provide the right of abode and, from this, the attraction of low taxation and the right to set up businesses locally.

Retail Banking: The retail banking sector has expanded rapidly over the past five years and continues to gather momentum for expansion. The main focus of growth has been the higher end of the market – estimates show that customers with financial assets of more than $25,000 contribute more than two-thirds of retail banking profits. The mortgage market, which had until recently been relatively under-developed on account of restrictive property ownership laws, is now showing considerable potential as these restrictions are gradually relaxed.

Islamic Banking: Islamic banking is expanding faster than its mainstream counterpart. For example, the cumulative annual growth rate (CAGR) for deposits in Saudi Islamic banks was 17.4% between 2002 and 2005, compared to 12.9% for the kingdom’s banking sector as a whole. Growth comes from both new customers and those switching to Sharia-compliant products and services. Leading players in the GCC include Al Rajhi, the Kuwait Finance House and the Dubai Islamic Bank. 2005 and 2006 saw a wave of dedicated start-ups including the Al Rayan Bank in Qatar, which is already one of the largest Islamic banks in the world with capital of more than $2 billion. In addition, many local and international banks have or are in the process of introducing Islamic options for their customers. Banks offering dual conventional and Islamic products include HSBC and Citigroup. However, there are particular challenges in this market, including the different interpretations of Sharia compliance. Some customers may also wish to use a pure Islamic bank in preference to a ‘hybrid’ institution that also offers conventional products

Corporate Banking: Demand for corporate finance services in the GCC has grown significantly in the last two years and is expected to increase further in the future. Developments in the region are creating ever-greater demand for project finance. This demand could create openings for foreign institutions able to offer competitive financing. It is also likely to spur the continued growth in Islamic finance as exemplified by the Nakheel sukuk. Sukuks are Sharia-compliant asset-backed trust certificates. The Nakheel sukuk issue, which was underwritten by Barclays Capital and the Dubai Islamic Bank, was more than two-times oversubscribed.15 European investors acquired 40% of the issue, subscribers from the Middle East took 38% and the remaining 22% went to Asia and the US. Developments in the region are also increasing the number of business clients.

Private Banking and Asset Management: A GCC population of just 38 million has accumulated some $1.5 trillion in private wealth. In the UAE, for example, one in 80 of the population is a dollar millionaire. The high-net-worth individuals include both Arabs and expatriates. Around two-thirds of people with investment assets of more than $400,000 in the UAE are non-resident Indians, for example. This concentration of wealth is leading to intense competition among both regional and international corporations. Rothschild’s17 is one of the latest entrants, joining the private banking arms of such leading names as Citigroup and Deutsche Bank

Insurance: Insurance penetration is extremely low in the GCC by international standards. Growth has now picked up in the retail insurance market, albeit from a low start. Life insurance premiums are in particular likely to follow the generally upward trend in affluence. Recent years have also seen acceleration in demand for Takaful Sharia-compliant insurance services. Nevertheless, the small populations of these countries mean that the primary source of insurance business and focus of near-term market growth will continue to be the corporate sector