“We have stepped up security a bit at our seven branches but we are still fully operational and have not changed our lending policies,” says Naved Khan, head of ABN Amro’s operations in Pakistan. At the time of going to press, Standard Chartered Bank’s branch in Peshawar was still open. “It is business as normal,” a source told Euromoney. First-class seats on flights to Cairo and Tehran may be easier to obtain than they were following the imposition of travel restrictions by some international banks, but they are far from empty.
“I was in Tehran four days after the tragedy and there were still plenty of people around doing business,” says Gilles Franck, head of debt capital markets in the Middle East at BNP Paribas, one of the 10 firms bidding to arrange Iran’s inaugural sovereign Eurobond.
One or two banks have repatriated the families of international staff working in Egypt and Pakistan but almost all European and US bankers are still at their posts.
“I see no reason to leave,” says Joe Divis, managing director of the Egyptian British Bank (recently acquired by HSBC). “Security is an issue for anyone working in the Middle East and has been for many years. It is just a matter of keeping your head down.”
Citibank, which like HSBC, ABN Amro and Standard Chartered has a large network of representative offices and branches across the region, has adopted a similarly steadfast approach. “All our offices are open and fully staffed,” says a press official.
Like their colleagues in London and New York, Middle Eastern bankers are concerned about how the bombing of the World Trade Centre and the Pentagon will affect the world economy and their own lives.
But, perhaps because the region has been unstable for so long, they seem calmer and more philosophical. “I am worried about what will happen but we have been through bad periods before and always came out the other side,” says Konrad Petersen, ING Barings’ country manager in Lebanon.
So far the crisis appears to have had little impact on equity values across the region. In the week after September 11, the Cairo Stock Exchange fell by just 6%. The Kuwaiti stock exchange rose by 5% in anticipation of an increase in oil prices
Bonds issued by Middle Eastern borrowers have also stayed relatively stable. Spreads on the Qatar and Egypt Eurobonds, for example, widened by just 63 and 140 basis points respectively between September 12 and September 20 – not much more than the sovereign bonds of Mexico.
One reason for this resilience is that most international investors were underweight in the region before September 11. As a result, many Middle Eastern bonds and shares were already trading at low levels compared with other emerging-market paper. Another is that analysts and investors have yet to make up their minds what impact the crisis will have on the economies of the Middle East.
If Iraq gets drawn into the conflict and there are mass demonstrations in Karachi, Riyadh and Cairo against US action in Afghanistan, there is a real risk of a massive upsurge in political violence across the region and even coups. On the other hand, if the US manages to secure the support of ordinary Muslims for its war against terrorism – by convincing Israel to come to a fair and final agreement with Palestine – the region could enjoy something of an economic boom.
Over the past decade, the Middle East has grown much more slowly than Latin America or Asia largely because foreign investors would not put money into the region while the Israel/Palestine conflict was unresolved.
Against this uncertain background, most economists and analysts are sitting on the fence and waiting for events to unfold. At the time of going to press, almost no-one has made changes to their growth predictions for the region or their stock recommendations.
“It seems likely that the crisis will hurt tourism-dependent economies like Egypt, Jordan and Morocco and help oil-rich countries like Saudi Arabia and Kuwait,” predicts Sergei Volodoyov, an economist at CSFB in London. “But it is much too early to start making decisions.”
Rating agencies have been equally cautious – maintaining their ratings on all countries in the region. “Our obligation is to look at the issues very carefully and not to jump to quick conclusions,” explains David Beers, managing director of sovereign and international financial ratings at Standard&Poor’s.
Credit analysts speculate that the rating agencies will try to avoid changing Middle Eastern credit ratings for as long as possible in the interest of regional stability. “They didn’t downgrade Israel during the Gulf War and I can’t see them downgrading Pakistan now given the importance of that country’s support to the US,” says a London-based analyst.
But how much business are banks likely to do in the Middle East over the coming months? Before the tragedy, most bankers were quite bullish about the region. Citibank, SG and HSBC, for example, were all planning ambitious branch expansion programmes and were lending quite aggressively.
ABN Amro, Standard Chartered and Crédit Lyonnais, among other banks, were hunting for acquisition targets and joint venture partners. One or two European firms had even started to look at the possibility of establishing operations in Syria and Iran.
“There are huge opportunities for foreign banks in the Middle East, particularly in the underdeveloped but fast-growing retail banking market,” Jerome Guirard, managing director of SG’s operations in Egypt, told Euromoney earlier this year.
No banker will say so publicly but it seems almost certain that many will now adopt a much more cautious approach to lending and scale back expansion plans. “We haven’t had a chance to rethink our strategy yet,” says a European banker based in Cairo. “But I imagine changes will be made.”
The flow of Middle Eastern IPOs – never dramatic at the best of times – seems likely to dry up completely. With the exception of Lebanon and Jordan, most governments in the region have enough money to meet budget targets without having to resort to the fire sales of state-owned companies.
“We were expecting around 10 large firms including the state-owned telecom companies of Egypt and Morocco to come to the market by the end of the year,” says Mohammed Abdel-Hadi, an equity strategist at Merrill Lynch in London. “But I imagine they will now be postponed.”
Several Middle Eastern borrowers are looking to issue international bonds. Iran, for example, is in the process of choosing advisers for its inaugural e300 million Eurobond.
Morocco and Jordan, neither of which has issued international bonds before, are also believed to be considering Eurobond issues although they have yet to state publicly how much they wish to raise or when.
Israel recently mandated Lehman Brothers, Merrill Lynch, UBS Warburg and Salomon Smith Barney to arrange two $500 million Eurobonds. “No launch date has been set yet but we are hoping for a decision soon,” a banker close to the deal told Euromoney.
Another deal attracting attention among investment bankers in London is the $1.6 billion Shuheiwat power station project financing being arranged by seven banks led by Barclays Capital and Citibank on behalf of the Abu Dhabi government.
According to Nick Curtis, a project financier at Barclays Capital which (along with the six other arranging banks) agreed to underwrite the deal the day before the attacks on the US, a decision has been taken to move ahead with the transaction.
Under the terms of the agreement with the Abu Dhabi government, the underwriters can withdraw from the deal if an event happens which materially affects the ability of the contractor to pay back the debt.
Project finance transactions normally take a while to reach completion. But if the Shuheiwat deal gets done, and with a maturity of 19.5 years that could prove testing, it seems likely that other Middle Eastern projects will approach the syndicated loan market.
Qatar Petroleum, Shell and Exxon Mobil, for example, are looking to raise at least $1.5 billion to build a LNG plant at Ras Laffan in Qatar, and have mandated Goldman Sachs to arrange a financing package. Citibank is in the process of arranging a $1 billion refinancing for Shell and Total’s LNG plant in Oman. Meanwhile, BP is believed to be seeking a similar amount for a LNG project in Egypt.
