Dramatic growth in the Middle Easts economies is prompting a race to create a viable regional financial center
Cities in four of the six member states of the Gulf Cooperation Council (GCC) are vying to become the leading financial center of the Middle East or, more accurately, of the wider region stretching from the Atlantic Ocean shores of western North Africa to the Pacific coast of Indonesia, comprising countries with primarily Muslim populations.
Bahrain, Dubai, Qatar and, most recently, Riyadh have all announced plans to create world-class financial centers on a par with New York, London and Hong Kong to invest the Middle Easts growing oil surpluses and to meet the needs of the regions fast-growing and diversifying economies.
Dubai, the commercial and financial center of the United Arab Emirates, appears to have sprinted to an early lead. Sheikh Mohammed Bin Rashid Al Maktoum, crown prince of Dubai, declared his vision in 2002 to create a financial marketplace spanning the time zones between London and Hong Kong and serving a region of more than 2 billion people with a combined gross domestic product of about $2 trillion.
The Dubai International Financial Centre (DIFC) was established in September 2004, and a year later its electronic stock exchange opened for trading of stocks, bonds, funds and derivatives. As of last month, 183 firms from around the world were active at the DIFC, a 110-acre site with its distinctive Gate office building looking like a modern Arc de Triomphe. Symbolically, at least, Sheikh Mohammeds vision of a regional gateway for the flow of capital and investment into and out of the region has taken on a concrete form.
One hundred and ten acres may not be enough, says Assem Kabesh, the DIFCs chief business development officer. Dubais new financial district will include offices, apartments, hotels, shops, restaurants, a museum, an art gallery and a performing arts center. It also will be home to the Dubai Financial Services Authority, an independent regulator and licensor headed by David Knott, former chairman of the Australian Securities & Investments Commission. The Dubai government gifted $1 billion of property for the site, but thereafter the DIFC will be self-financing, generating revenue from licensing fees.
Kabesh says Dubais DIFC will succeed as an international financial center because of its regulation and transparency. Carved out of Dubai as a free zone with its own laws, the DIFC, or the Financial Free Zone of the Emirate of Dubai, offers such incentives as 100% foreign ownership, no income tax, no currency restrictions and freedom to repatriate capital and profits.
The DIFC adopted the best rules from the leading global financial centers after consulting with financial institutions, Kabesh says. The DIFCs judicial system is based on English common law. Regulations are based on those of the US Securities and Exchange Commission and the UK Financial Services Authority.
As is the case in Europe, there is room for more than one financial center in the Middle East, Kabesh says. The more there are, all the better for the region and for the financial institutions, he says. There is a huge amount of wealth and investment opportunities in the region that have been untapped for so long.
Governments Boost Confidence
Massive government investments in infrastructure in the region are giving investors confidence. Along with Dubai Internet City (which has attracted 1,500 companies including Hewlett Packard and Microsoft), Dubai Media City and many other Dubai industry clusters in the planning stages, the DIFC is part of a design to further diversify the oil-based economy of the UAE and stimulate growth.
In a region where stock markets are relatively underdeveloped, the DIFC will facilitate privatizations and initial public offerings by privately owned companies, according to its backers. The DIFC also plans to create a reinsurance hub and a global center for Islamic finance. The DIFCs banking services are focused on corporate banking and trade finance. Dubai is the worlds third-largest re-export center following Hong Kong and Singapore. The new financial center also will house firms offering asset management and fund registration services, as well as back-office operations. HSBC will offer sub-custody services to institutional investors on the Dubai International Financial Exchange.
Rana Sugars recently became the second India-based company to list on the DIFX. The sugar refiner listed global depositary receipts, following an $18 million capital-raising issue. Fortune Management of Germany, listed on the Frankfurt stock exchange, has also dual-listed its shares. Dual listings could appeal to companies across the region seeking to tap the Gulfs liquidity. Bank lending accounts for more than 70% of business financing in the Gulf region, but capital markets are evolving.
New Rivals Emerge
Saudi Arabia, which has the largest economy in the GCC and the biggest stock-market capitalization, announced plans on May 9 to launch the King Abdullah Financial District in Riyadh, the capital city. Construction of the district will begin in 2007 and is scheduled to be complete in 2010. The center will be the Middle Easts first financial district on a scale, and of regulatory and technological standards, to match the global financial centers, according to a statement by King Abdullah. We are blessed with a strong economy, a stable currency and a strong financial sector with equally strong financial supervision, he said in announcing plans for the district.
The center will include the headquarters of the Capital Markets Authority, or CMA, and the stock exchange, the Tadawul, which will be renamed the Saudi Arabian Financial Exchange. The kingdom plans to sell a majority stake in the exchange to investors.
The district will include a new financial academy and conference facilities for the financial services industry, Jammaz Al-Suhaimi, then-chairman of the CMA, said in a May 9 release. The center will house financial institutions and related service providers, such as accountants, auditors, lawyers, rating agencies and consultants, he said.
Al-Suhaimi, a reformer, was removed as CMA chief less than a week later to shoulder the blame for a stock market correction that erased nearly half of the markets capitalization earlier this year. The new CMA head, Abdulrahman Al-Tuwaijri, a former representative to the International Monetary Fund, is trying to restore confidence in the market. The steep correction has the potential to dampen consumer spending and trim bank earnings growth later this year.
Brad Bourland, chief economist at Samba Financial Group, says that as many as 500,000 retail investors may have lost money in the market decline, but he says that as many as 9 million others made money in initial public offerings and are still well ahead of where they entered the market. Eight of the 10 largest IPOs on the Saudi stock market since 2003 are showing gains ranging from 50% to 770%, while only two have losses, Bourland says.
Meanwhile, just off Saudi Arabias east coast, Bahrain, which has a long history of hosting offshore banks, is developing Financial Harbour, a $1.3 billion complex that will be home to the Bahrain Stock Exchange, as well as investment banks and insurance companies. The first tenants are expected to begin moving into the center by the end of this year.
Financial Harbour is really just a construction project, according to one banker in the region. Other than creating a community of like-minded people, it will offer no real advantage to Bahrains current regulatory environment, he says.
In neighboring Doha, the Qatar Financial Centre, which opened for business in May 2005, has carved out a niche in project finance and is looking into other areas, such as wealth management. In September 2005 Ansbacher, the private banking subsidiary of Qatar National Bank, the largest bank in Qatar, became the first bank to be granted a license to operate in the new financial center. A commercial authority and a regulator, which will be independent from each other and from the government of Qatar, will run the center.
Qatar has 9 trillion cubic feet of natural gas and the ability to export liquefied natural gas. The country is blessed with the fuel of choice, says Stuart Pearce, CEO and director general of the Qatar Financial Centre Authority. The chemical, alternative fuels and gas-to-liquids projects that can be developed from this resource will require substantial financial investment, which is the reason for the new financial marketplace, he says. Qatar has a tremendous need for financial services to support the $130 billion in spending planned by the government in various sectors by 2012, he says.
The Qatar Financial Centre is not an offshore center or a free zone, Pearce says. It was built for Qatar and not as an international service center, he says. It will contribute to the modernization of Qatar.
The large government investment program is reason enough to come to the QFC, according to Pearce. You dont need more than that, he says. However, the government is offering a no-tax policy until April 30, 2008, after which a 10% maximum tax will be imposed on financial institutions that wish to participate in the new financial market. Since the central bank has not licensed any foreign banks, the QFC will be the only way for these banks to enter the Qatari market.
Qatar is one of the fastest-growing countries in the world, with nominal gross domestic product expected to increase about 33% in 2006. Financial institutions operating at the QFC are expected to focus on investment banking and asset management, according to Pearce. There will be broader offerings here than in other centers where you are not allowed to trade onshore, he says.
Some bankers believe the Middle East doesnt need four financial centers. Saudi Arabia has the largest market, but there are too many restrictions, says one foreign banker in the region. The Saudis could win the competition if they open up completely, but I dont think they will win, he says. The King Abdullah Financial District is still just a plan, and teething problems already have started to emerge. The rationale for the district, similar to Qatars financial center, is to serve the huge domestic market for projects that are starting to line up, beginning with the $26 billion King Abdullah Economic City and a pair of $6 billion Aramco joint ventures with Total and ConocoPhilips.
Bahrain is the only proven financial center that has survived two business cycles, its bankers boast. And while Dubai has come a long way, its entrepreneurial flair implies a certain level of laxity, they say. Traditionally, Bahrain has been the regions banking center and Dubai its trading and transportation hub. The Saudi stock market has developed the fastest, however, and Qatar is a fast-growing economy with enormous reserves of natural gas. Dont count anybody out.