Middle East debate: Learn more about the panelists
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EXECUTIVE SUMMARY
• While business might have been disrupted by the Arab Spring, finance functions and payments systems have held up
• Even still there is greater focus on working capital management by all companies from small to large
• With less liquidity in the system a greater emphasis is being placed on visibility of cash balances
• Multinationals are still looking to enter the market and local groups are looking to expand overseas
• Partnerships between international and local banking groups in providing cash management solutions to the clients is finding strong resonance in the market |
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Nick Lord, Euromoney With all the turmoil going on in the markets, and specifically with the downgrade of US debt, what impact has this had within your banks and companies?
MH, Mubadala Everyone expected the downgrade – it was talked about for long enough. The timing has caused a bit of a liquidity shock through the markets, but the downgrade has mainly highlighted weak leadership, not just in the US but also in Europe. From a corporate perspective, I’m not changing the way we do business. Focusing on cash and liquidity has always been of paramount importance, regardless of what crisis is going on. It’s too early to start making knee-jerk changes to investment strategies or business approaches.
NL, Euromoney Ricky, how has the increased political risk in the Middle East affected your business and in particular the finance function you run?
RT, Etihad We have seen very little real impact to our operations other than assisting our passengers and offices in locations like Cairo with alternative sources of funds, such as cash when other payment methods at banks’ branch operations were not working. The initial impact with banking counterparties was limited to enquiries from counterparties about the impact from the region and the outlook – typical credit questions. Things have settled down a lot and we can see how the world has started to differentiate between the risk profile of different countries and specifically their comfort with the UAE and Abu Dhabi.
NL, Euromoney From a local bank perspective, Murali, how do you see local companies manage their working capital and cash?
MS, ADCB The landscape is mixed. There are extremely sophisticated diversified business groups that manage their treasuries centrally, and their needs are more consistent with how developed market corporates would manage their cash. At the other end, there are the smaller businesses that manage their cash in a more cost-conscious way. Everyone agrees that the goals for cash management are visibility of cash, control of liquidity and managing cost in terms of operations. But everyone’s made different progress toward all these objectives depending on their evolution in working capital management.
MK, BAML The most important thing that multinational corporations in the region have to watch is the status of the individual jurisdictions. The region has an overall high level of growth, but some markets are still contracting, some are neutral, while others continue to show growth like Qatar and the UAE. The frequency of reporting and the immediacy of information has become more important. Our clients are trying to ensure they have multiple sources of funding and multiple sources of investment vehicles. We’re seeing more clients move towards a dual plus-banking model, so that if one institution does have a problem, they still have the day-to-day capability to make those payments.
MH, Mubadala For this economy to grow, as one of the few regions in the world that has positive GDP now and forecast, it requires funding. The local banks provide an awful lot of liquidity but they can’t provide enough. So corporates need to attract international investors. With the current economic backdrop, people are sticking to what they know. Therefore, I can see banks trying to reduce exposure to emerging markets. So one of the big issues we’re going to face here is, can you get enough liquidity to support business growth? I don’t know what the banks’ executive committees are looking at, but I’ve started to feel a little bit of squeeze coming through.
NL, Euromoney Are lines being reduced?
MH, Mubadala It’s getting harder. The glut of liquidity that we saw two years ago has probably gone a bit, and banks in the region know the region, so they have a very different risk premium expectation than an international bank with no presence here.
DR, BAML The premiums you mention, certainly on the asset side, reflect not only the risk premium but also the liquidity premium. The latter’s becoming a key issue for banks. We’re seeing a big pick-up in terms of liquidity premiums paid for dollar funding, for example. I don’t know if we’re unique, but Bank of America Merrill Lynch is strengthening its local offering by adding additional infrastructure, systems, staff, risk management, governance and controls as clearly the emerging markets are an outstanding opportunity. Additionally, we are seeing fixed-income investors looking for diversification in the emerging markets. They’ve started to come in quite aggressively for the strongest credits. You’ve got big fixed-income investors buying Qatar bonds instead of US treasuries.
MH, Mubadala You’ve got a double-A sovereign that’s got a CDS spread that is on par with a triple B in the Philippines or Colombia. Investors are very keen. It’s just trying to work out what part of their portfolio they want to allocate to this part of the world. But there are some great fixed-income opportunities. Daniele, you were on the road recently, so you can say more.
DV, Majid Al Futtaim In general, there is a big misperception of the region. Why should a double-A name be priced like a triple-B country in Latin America? You get penalized simply because you’re based in Dubai and you get bad coverage from the press. Of course, there is a lot of work to do from a governance perspective: disclosure, cost of capital, right metrics for handling a business. Corporates need to do their own work on that side.
