Current investment driven by hope of future change
by: Devangshu Datta 

International capital flows are driven by various considerations. Investors enter specific businesses but some factors affect every business in a given country. Relative growth rates and relative inflation rates are only the most obvious of the macro variables cross-border investors consider. Ease of currency conversion and size of local markets are also important. Investors judge the capacity of institutions and regulators, and the transparency of legal and tax systems. They also assess political stability.

Few countries score high on all parameters. Different types of investors also have different needs. Some investors are short-term, some long-term. Some are portfolio investors looking at listed companies. Depending on type, their focus will lie in different areas.



A short-term portfolio investor will focus on capital gains rates and mechanisms. Capital controls determining the ease of entry and exit will also be important. Such an investor will demand evolved financial markets and track volatility.

A long-term portfolio investor will not be concerned about volatility but want an independent central bank and independent regulators. A direct investor who is bringing in foreign direct investment (FDI) to set up a business will be concerned about political stability, fair contract laws, independent judiciary and acceptable dispute-resolution mechanisms.

It might seem counter-intuitive but a direct investor may not care much about democracy, or desire a transparent, honest legal system. In practice, a corrupt but stable dictatorship, may be easier to deal with. Dictatorships have continuity. People who are bribed will stay in power indefinitely. A crony capitalist can get favours from a corrupt regime.

Complications arise in democratic regimes like India. On many parameters, India receives good scores. It has large domestic markets. It has sophisticated capital markets. It has a reasonably open capital regime since money can enter and exit quickly. It has good growth and independent regulators. On paper, India has an excellent legal system, though it is very, very slow in practice. However, there are downsides. India's complex laws and red tape make it hard to launch a start-up and it also is a very slow process. Capital is expensive. Infrastructure is poor. The tax regime is complex with lots of discretionary powers to officers. The federal nature of government with the division of power between states and the Centre makes it hard for businesses to go pan-India.

India also has plenty of corruption and that is a "revolving chair" because of change in regimes. Hence, different people may need to be bribed every so often. There can also be peculiar and unexpected hurdles such as retrospective taxation. In many Asian nations, capital comes from overseas investors with strong ties to the concerned nation. China, for example, receives a lot of FDI from overseas investors of Chinese origin, who are comfortable with the peculiarities of investing in China. India has a large, successful diaspora but many NRIs are professionals rather than businessmen. Hence, the FDI contribution of non-resident Indians (NRIs) to India is not as high as the FDI contribution of overseas Chinese to China.

Portfolio investors have tended to be fairly comfortable with India because of a good capital gains tax regime and many double-taxation treaties. There is some anxiety over the imposition of a new tax regime with the General Anti-Avoidance Rule (GAAR) from April 2017. Also poor earnings growth for the past two financial years and projections of low earnings growth for 2016-17 has made portfolio investors unenthusiastic.

However, FDI inflows increased in 2015-16, even as foreign institutional investor (FII) contributions dipped. NRI remittances also dipped because Indians in the Gulf are feeling the pinch. FDI investments are supposedly driven by more "permanent" factors because FDI is committed for the long term. If permanent factors are changing for the better, FIIs will return. Indeed, March saw strong portfolio inflows, though FIIs were net sellers through the financial year. However, some of the current FDI investments are being driven by hope of future change, rather than current changes. Investments could easily bog down unless there is delivery on the taxation and legislation front.

Another consideration is political stability and continuity. A series of state elections is due through the next 12-18 months. If there is a lot of violence in those election campaigns and/or the Bharatiya Janata Party loses ground in them, there could be a negative re-rating of India as an FDI destination.

Source:.business-standard

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Published: 04 April 2016

As banks in the Middle East cope with the impact of the oil price slump on domestic economies by increasingly looking to new markets – Turkey and Egypt in particular – lenders from countries that had retreated in the aftermath of the global financial crisis are heading back into the region.

AbuDhabi_mainpic

The Middle Eastern banking sector has been one of the few bright spots in the global banking industry since the onset of the financial crisis. In stark contrast to many Western banks that reported catastrophic losses in 2008 and have spent the subsequent years licking their wounds, Arab banks on the whole escaped relatively unscathed.
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And so while European and US banks have been battening down the hatches, Arab banks have spent the post-crisis years blazing an expansionary trail in markets across the world.

Liquidity dries up

However, the sharp drop in the price of oil over the course of 2015 was keenly felt by the region’s banking industry, especially within the Gulf Co-operation Council (GCC) countries that derive much of their liquidity from oil exports.

And the likelihood of a quick recovery certainly does not appear to be on the horizon. Rather, there are fears that the lifting of Western sanctions on Iran in January 2016 could compound the existing problem, as the country prepares to pump more oil into the market.

The global market’s unease was reflected by the fact that on January 18, two days after sanctions on Iran were lifted, oil prices fell to their lowest level since 2003, sinking below $28 a barrel. With the outlook for oil prices remaining subdued, the trend of tightening liquidity within the GCC is expected to continue in 2016.                                            

“Expenditure cuts, lower growth prospects and tighter liquidity will lead to a significant moderation in credit growth across the Gulf in 2016,” says Alyssa Grzelak, an economist at IHS Global Insight.

“Lower oil prices have already resulted in a drawdown in government deposits. In the United Arab Emirates and Qatar, for example, government deposits have fallen by a cumulative 10% since the second half of 2014 while Kuwait and Saudi Arabia have seen growth rates fall to near zero.”

In light of this challenging domestic operating environment, many industry observers are now questioning whether the Gulf banks will finally be forced to curb their trailblazing activities after many of them highlighted international expansion as a key pillar of their growth strategy for 2016 and beyond.

However, in 2015, the Union of Arab Banks, which represents about 330 banks and financial institutions, warned that falling oil prices could impede Arab banks’ overseas growth. Furthermore, there are concerns that the restricted liquidity will make it easier for foreign players to compete in the home markets where Arab banks are already under pressure.

Foreign banks move in

Foreign banks are regaining lost ground in the GCC’s financial sector, with Japanese, French and US banks looking to ramp up business in the region as the oil price slump compels Gulf lenders to halt the flow of their trademark cheap loans.

“The drop in oil prices has accelerated what will be a long-term trend of Asian banks building up their presence in the Gulf,” says Ms Grzelak.

“Over the longer term, Chinese banks are likely to build their presence in the Gulf to capitalise on growing trade links. So far, ample liquidity among Japanese banks has allowed them to fill the void created by tighter liquidity within the Gulf and the recent pull-back of European banks.”

Flush with the proceeds of their government’s ‘Abenomics’ quantitative easing programme, Japan’s megabanks Mitsubishi UFJ Financial Group (MUFG), Mizuho Financial Group and Sumitomo Mitsui Financial Group (SMFG) are making a noticeably strong comeback in the market. MUFG and SMFG secured second and third spots in the year to November 30, 2015 league table for Gulf syndicated lending, according to Thomson Reuters data.

By contrast, only one regional bank – Saudi Arabia’s Riyad Bank – has a top-six slot, down from fourth in 2014, while Samba Financial Group, also from Saudi Arabia, slipped to 23rd position from second in 2014.

The total value of project contracts to be awarded in the GCC in 2016 is expected to reach $140bn this year, according to a report by MEED Projects. “Despite the drop in oil prices, the region still needs to build lots of infrastructure and is continuing to invest in it. The past four to five months have proved to be our busiest period in the region for a long time,” says Elyas AlGaseer, managing director, deputy head of Middle East, at MUFG.

“Our bank has been taking a lead role in major regional transactions. Project finance and infrastructure will comprise our core projects but we are also looking to get involved in structured financing with regards to telecoms, transportation, oil and gas, and industry. And we are now seriously considering establishing public-private partnerships with GCC governments,” adds Mr AlGaseer.

“The massive contraction in liquidity over the past year has made it apparent that the Gulf banks that will continue to expand – both inside and outside the region – are those that have a clear strategy and deep pockets.”

Strategically positioned

Indeed, the National Bank of Abu Dhabi (NBAD) is a good example of that. Cognisant of the tightened liquidity, the bank has strategically positioned the duration of its balance sheet to be short term. It finished 2015 with an advances/deposits ratio of 88% versus the market benchmark of 101% and so has the ability to fund further growth.

Moreover, as one of the region’s largest banks with assets of Dh406.6bn ($110.7bn) at the end of 2015, NBAD has generated headlines for crafting an ambitious five-year international expansion plan, conceived by Alex Thursby, who was appointed group chief executive of the bank in July 2013. NBAD is half-way through this expansion plan. The bank is targeting specific client segments and focusing on strengthening its dominant position in the UAE while also building its wholesale and wealth network across the “west-east corridor”, which NBAD defines as the region from west Africa to east Asia.

“Notwithstanding the plan that we have got, a lot of the focus will come back to the home market this year,” says James Burdett, group chief financial officer of NBAD. “With a growing pressure on banks’ liquidity, there may be good opportunities for us to lend in the marketplace to our traditional client base. So my sense is that we will be more UAE and Gulf focused this year and less about the international scene.”

That said, international expansion will continue to play an important role. NBAD currently generates 21% of its revenues from its international operations, which grew at 11% in 2015 compared with a slight reduction (-1%) for its domestic operations. It predicts that its international operations will continue to grow at a faster rate than its domestic business – albeit from a lower base.

Crucial to the plan is the development of eight markets focused on providing wholesale products and an international network proposition, targeting approximately 600 clients within five specific sectors across its wholesale business. It is also planning to target what it terms ‘franchise countries’.

“If we take a long strategic timeframe, the UAE can only take us so far because the market is the market size, capped by its gross domestic product,” says Mr Burdett. “So we believe that at some point in the future, we need up to five what we are terming franchise countries. We have not selected them yet but the first one is likely to be Egypt, which will be a full franchise country that will be retail, commercial and wholesale with a big branch platform and a country that we are looking to accelerate growth in.”  

Egypt's potential

NBAD already has a substantial retail banking franchise in Egypt, but Mr Burdett says the bank is confident that the country still holds a lot of opportunity and economic upsides for the bank. “We have been there for a number of years and we are still relatively small compared with the big players so we think there is room to grow. There are a lot of trade flows between Egypt and the UAE and a lot of Egyptian expatriates in the UAE and vice versa, so we think there is a good opportunity for us to make significant inroads there,” he says.

Dubai-based Emirates NBD also views Egypt as a key market for its future growth after buying the Egyptian subsidiary of BNP Paribas for $500m in December 2012. “Following the successful rebranding and integration of the Egyptian business onto the Emirates NBD platform, the focus is now on expanding high-value customer segments,” says Shayne Nelson, group chief executive of Emirates NBD.

“We will also pursue growth in our current international markets by focusing on cross-border trade and other opportunities. In the short term we will continue to develop our footprint with more cross-selling in our core markets, namely the UAE, Saudi Arabia and Egypt.”

Another key regional player that has strong confidence in Egypt’s future is Lebanon’s Bank Audi, which also already has a strong foothold in the market. It also ranked as the bank’s most profitable overseas operation in 2015, recording a net profit after provisions and taxes of $69.5m in 2015, which equates to a 21% increase over the $57.6m recorded in 2014. The profit increase is even more impressive given it factors in the 10% depreciation of the Egyptian pound. Meanwhile, its total revenues in Egypt grew by 36% over the course of 2015.

However, Egypt’s contribution to Bank Audi’s group performance remains small – representing about 12% of the bank’s consolidated assets. “We have a strong appetite for growth in Egypt that has been confirmed in a revised business plan that was submitted to the board in the last quarter of 2015, supported by our recent very good financial performance,” says Dr Freddie Baz, group strategy director at Bank Audi.

“Certainly, Egypt suffered economically as a result of the successive political transitions it went through, but it has proved to be much more resilient than many other Arab countries in transition and the economy never fell into recession. We are now planning to recruit high-skilled staff and further invest in new business lines there.”

Bank Audi Egypt plans to add 20 branches in Egypt in the coming three years, building on its existing 34. It is also considering large funding opportunities worth more than E£11bn ($1.4bn) in various economic sectors throughout 2016.

Banking on Turkey

Along with Egypt, Bank Audi is betting big on the untapped potential of Turkey. “We are aiming to add 60% to 70% more assets in both Egypt and Turkey over the next four to five years,” says Mr Baz. “These two countries are our two main development pillars after our home market of Lebanon and we are hoping to achieve targeted market shares in both these countries.”

Bank Audi has already enjoyed considerable growth in Turkey through Odeabank, its fully owned Turkish subsidiary, which began trading in November 2012.

“We are hoping to increase Odeabank’s assets from an existing $10bn to $18bn over a three- to five-year horizon,” says Mr Baz. “We are today the 10th largest bank in Turkey among 30 private banks as ranked by deposits – that is not a bad position to be in after just three years of activity.”

Another regional heavyweight that is focusing strongly on Turkey is Qatar National Bank (QNB), which signed an agreement in December 2015 with the National Bank of Greece to acquire its 99.81% stake in Finansbank, Turkey’s fifth largest private bank as ranked by total assets, customer deposits and loans. QNB expects to finalise the transaction during the first half of 2016.

“Turkey, with its significant market size, population, growth track record, strong economic and banking sector prospects and strategic location as a gateway between Europe, Asia and Africa represents a promising market and is therefore of strategic importance to us,” says QNB Group’s executive general manager and chief business officer, Abdulla Mubarak Al-Khalifa.

“Furthermore, QNB intends to capture a growing share of the increasing trade and investment flows between Turkey’s and QNB’s international footprint. For example, Turkey’s trade with the Middle East and north Africa region has risen nearly tenfold from $5.6bn in 2000 to $52.2bn in 2014,” he adds.

QNB has been expanding its international operations significantly over the past few years, leading to an increase in loans from 19% in 2013 to 24% in 2015, deposits from 37% to 39% and net profit from 28% to 31% over the same period. It predicts that its international operations will contribute 40% of its net profit by 2017. Its goal is to become a leading bank in the Middle East and Africa region as well as south-east Asia by 2020.

Therefore, it is clear that the key regional players in the Middle East remain both committed to and bullish on expanding their international footprint. Indeed, the outlook for the Gulf banking sector remains broadly positive, with the consensus among industry analysts being that banks will be able to weather the prevailing oil slump in the near term without experiencing a significant decline in asset quality and profitability.

“Gulf banking sectors expanded their loan books at a more modest pace over the past three years than was the case leading into the global financial crisis, non-financial corporations have restructured debt taken on during the last oil price boom, banks have built up countercyclical provisions, and macroprudential regulations have been tightened,” says Ms Grzelak at IHS Global Insight. “Overall, Gulf banks are more resilient to the current slump in oil prices.”

Source:Banker

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Published: 04 April 2016