roundtable • banking & finance

8 | Business Roundtable Magazine | Jan - Feb | 2014

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2014 | Jan - Feb | Business Roundtable Magazine | 9

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Powerpoint • banking & finance

oreign banks operating in international markets traditionally find the regulatory environment, competition with other international banks and staffing problems as the most difficult part of doing business. Now they are coming up against stiffer competition from domestic banks and such is the case in the UAE, where a total of 23 domestic and 28 foreign banks operate, with another 36 representative offices of foreign banks located in the country. Local banks there are flushed with liquidity and receive the support of the federal government but excess cash comes with its own problems, forcing them to compete in areas previously dominated by international banks such as currency and capital market trading. This is as well intensifying competition among the leading banks in the country, with more and more examples of M&As. UAE banks have mostly recovered from the 2008 financial crisis that once put the country on shaky grounds, with assets increasing and non-performing loans decreasing, showing its resilience when neighboring countries are still suffering from the effect of the continuing Arab Spring. But increased competition has led to depressed credit growth and a decline in profit margins, forcing local banks to venture into new financial territories to grow market share and in certain instances prompting foreign banks to downsize their operations especially that they are more exposed to global risks. Leading this roundtable is Byblos bank as well as a host of internationals and experts who shed light on this interesting development in the UAE’s financial market. The discussion expands to include talks about the need to introduce more regulatory frameworks including a credit bureau, Commercial companies’ and bankruptcy laws aimed at ironing out certain procedures that handicap clients as well as financial institutions. Read on.

F

Mr. Atie El Mouallem, who enjoys eight years of experience in the banking industry, is the manager of the Representative office of Byblos Bank in the UAE since 2010. Prior to joining Byblos Bank Group, El Mouallem worked with multi-national organizations including the Barclays Bank, the Royal Bank of Scotland (RBS), and Standard Chartered Bank. His experience ranges from wealth management and business banking to managing portfolios of UHNW (ultra-high-net-worth) individuals, private entities, family businesses and companies. El Mouallem has an extensive expertise in the mergers and acquisitions (M&A) sector. He holds a BDA in economics and MBA in finance.

Atie El Mouallem

UAE REPRESENtAtivE OffiCE MANAGE,

ByBlOS BANk GROUP

Mr. Banan Abdalla is founder and managing director of Dubai-based Soft Source, a private company specializing in providing systems for government on investment basis (PPP). the company, which has offices in Ottawa, Canada and Amman, Jordan, provides technology and products to local and regional banks; some of their clients are Arab Bank, RAk Bank, kuwait National Bank, Gulf Bank of kuwait and Burgan Bank. Abdalla has more than ten years of experience in information technology, e-government and banking solutions (anti-fraud systems, money handling and coin recycling, card issuance and personalization). He was the director of Business Development and Sales at the Global information technology (Git) and the executive manager of Bayanat, a joint-venture between Git and the government of Ajman. Abdalla has a BA in Economics from Carlton University in Canada.

Banan Abdalla

fOUNDER AND MANAGiNG DiRECtOR

Of SOft SOURCE,

Mr. Nadeem Masud has been with the German lender Deutsche Bank for 15 years. He moved to Dubai in 2004 as local Head of fi and currently Co-Heads CiB Sales and Coverage for Middle East and North Africa and is the Chief Country Officer for UAE. His job focuses on sovereigns, SWf’s and top tier corporations for their financing, Asset liability management (AlM) and other strategic initiatives.Nadeem joined the Relative value Group (RvG Structuring) in Deutsche Bank in 1997, after receiving an MBA from Wharton Graduate Business School. from 2002 to 2004 he was Head of fund Derivatives for Global Markets based in london. Some of Masud’s key transaction experience include: issuance of a US$1.5 billion Abu Dhabi Government Guaranteed Bond on behalf of Waha Aerospace, advising and executing the formation of a retail mortgage joint venture between Deutsche Bank and Al Rajhi group in kSA, advising Aabar on its inaugural Sharia compliant convertible offering and advising the government of Abu Dhabi on its inaugural Bond and related ratings and its follow-on offering in April 2009 for US$3bn.

Nadeem Masud

CHiEf COUNtRy OffiCER, UAE, CO-HEAD CiB SAlES & COvERAGE, MENA, DEUtSCHE BANk

Dr. Alexander von Pock has more than 10 years of experience in strategy consulting with a focus on financial services. He is a Partner with the financial institutions Group of A.t. kearney, and covers the Middle East out of A.t. kearney’s Dubai office. His clients include leading financial institutions – both conventional and islamic – in Europe and the Middle East, where he has worked on diverse management issues, including overall business strategy, M&A, product and pricing strategies, market entry strategy, growth strategy, post-merger-integration, reorganization and operations improvement. He also regularly writes on banking and islamic finance issues.Dr. von Pock is a graduate both in economics and in Near and Middle Eastern studies from the University of Bonn. He has received a doctorate in economics from the University of Bochum with a thesis on “Strategic Management in islamic finance”.

Dr. Alexander von Pock

PARtNER, A.t. kEARNEy MiDDlE EASt


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When Royal Bank of Scotland (RBS) opened its offshore banking office in Dubai 2008, it had big plans for the region. One year on, the office was closed down, and the bank’s retail assets were sold to Abu Dhabi Commercial Bank the year after. The former chief executive of RBS’s Middle East and Africa, Simon Penney, now heads the wholesale banking division at the Abu Dhabi-based lender First Gulf Bank.

It may be tempting to dismiss RBS’s experience as a result of the worsening financial conditions back home. But RBS wasn’t a single case; other global banks were soon to follow. In 2012, HSBC Holdings bought Lloyds Banking Group’s onshore retail, corporate and commercial banking business in the UAE for an undisclosed sum. Soon after, HSBC announced that it was cutting down lending to small businesses in the UAE and scaling down its retail and wealth management services in the Middle East.

In September, Barclays Bank announced its decision to put its UAE retail arm up for sale. Barclays, which has a small retail UAE presence with two branches and a total loan book of about $980 million, cited stricter rules on capital risk and competition as a reason for the move.

Traditionally, foreign banks operating in international markets found the regulatory environment, competition with other international banks and staffing problems as the most difficult part of doing business in foreign markets. Times have changed, though. Now, across most big emerging markets, international banks are coming up against stiffer competition from domestic banks than from their global competitors, which is particularly the case in the UAE.

Banking on itNamed as the most competitive banking sector and biggest banking market (in terms of assets) in the Gulf region, the UAE has a total of 23 domestic and 28 foreign banks operating in the country, with another 36 representative offices of foreign banks operating in the country.

As per the UAE Central Bank’s rules, there are five principal categories of financial institutions in the UAE: commercial banks, investment banks, financial establishments, financial intermediaries, and monetary intermediaries – all of which must be licensed by both the Central Bank and the local licensing authorities.

Until 2003, foreign banks were not allowed to open more than eight branches, but since not the case although a special permission is still needed. According to last year’s UAE Banks Federation’s Annual Report, by the end of 2012, there were 805

UAE’s banking sector: The More, the Merrier?It was always inevitable, but the competition in the UAE’s banking sector is heating up

By: Badar Salem

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Roundtable • banking & finance

local branches for local banks (compared to 768 branches in 2011), in comparison to 83 branches for foreign banks.

The UAE banking sector has more than 34,400 staff as of mid-2013, with five domestic banks controlling more than half of the loan and deposit share. According to one study, only two foreign banks (HSBC and Standard Chartered) made it to the “top-ten list of the banks operating in the UAE, based on deposits and loans”.

“There is no question that the market is a bit skewed towards local banks, and I’m all for it,” Banan Abdalla, the founder and managing director of Dubai-based Soft Source, a leading provider of financial services and technology to banks and governments, tells Business Roundtable. “They have unlimited number of branches, minimal exposure to vulnerable international markets, they’re mostly flushed with cash and have the support of the government.”

“There is a strong competitive intensity in the UAE banking industry,” says Dr. Alexander von Pock, a partner at A.T. Kearney Middle East, a global management consulting firm. “The top four players hold 54 percent of the market.”

He adds, “Clearly, there is room for consolidation. In fact, the UAE has already seen some mergers and acquisitions, with the merger of Emirates Bank and National Bank of Dubai to create

Emirates NBD being the best-known example. Others include Emirates NBD’s merger with Dubai Bank and Abu Dhabi Commercial Bank’s acquisition of Royal Bank of Scotland’s UAE retail banking business.”

While the UAE banking sector’s profitability declined in 2009 as a result of the global economic, UAE banks have managed to bounce back quickly, thanks to government’s support and dense branch bank networks – Abu Dhabi-based banks received a capital funding amounting to $4 billion (AED 16 billion) distributed among the four major banks. “Between 2006 and 2008, banking asset growth slowed down. While assets grew 32% per year, they grew only 6% between 2010 and 2012. During the financial crisis, [nonperforming loans] NPLs rose dramatically across the GCC. Profitability has also come under pressure,” Pock explains. “Many banks, however, have reported improvements in growth, revenues and profits throughout this year.”

According to the 2013 UAE Monthly Banking Indicators published by the UAE Central Bank, the first seven months of 2013 saw the UAE banking sector growing by 4.3%. This growth was championed by local banks such as Abu Dhabi Commercial Bank, Emirates NBD, Mashreq and First Gulf Bank, according to a report by Gulf Business magazine.


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“The UAE’s banking sector has gone through a very serious test during the international financial crisis, given the fact that the county’s banking sector is an open and international one,” says Atie El Mouallem, the UAE Representative Office Manager of Lebanon’s Byblos Bank Group. “It is clear, though, that the UAE’s banking sector has successfully weathered the financial crisis, and has shown a strong resilience.”

El Mouallem adds that the UAE’s Central Bank’s supportive actions had also helped in strengthening the sector against any contagion effect from the global crisis, “without compromising the openness of the banking sector”. While the successful restructuring of Dubai World’s $25 billion debt has helped in gaining business confidence back, the oil-rich country also took advantage from the flight of both wealth and people from other neighboring countries affected by the ‘Arab Spring’. “The UAE is the most politically-stable and most secure country in the Middle East; this has made it a safe haven for many investors,” notes El Mouallem. “Moreover, the flexible regulations, and the advanced infrastructure helped in attracting investors and opportunities to the country.”

But while the UAE’s banking sector was entering the recovery mode, lending by European banks in emerging markets was in decline. According to data compiled by Freeman, a New York-based consulting company, the share of fees for US and Western European firms in Latin America, the Middle East, China, India, Russia and Eastern Europe plunged to 43% in 2012 from 69% in 2005.

“It’s always the case in banking, as one set of players goes off the pitch because they are injured, you get another set of players who come on to try and play the same game,” Paul Skelton, HSBC Holdings’ Dubai-based regional co-head of global banking in the MENA told the consulting company.

Soon after, foreign banks operating in the UAE were waking up to a new reality. “Our real competition is now coming from local banks as opposed to international banks,” said Jonathan Morris, Standard Chartered’s country head in an interaction with the UAE media in September.

“It is clear that following the international financial crisis, [local] banks have emerged much stronger and more willing to take risks, leading to a tougher competition between peers,” says El Mouallem.

Local banks know betterLocal banks were gaining ground, competition was heating up, affecting the speed and scope of foreign

“ “while the UAE’s banking sector was entering the recovery mode, lending by European banks in emerging markets was in decline.



banks’ operations in the UAE, with some experts arguing that the UAE’s biggest banks have become too secure and too dominant.

According to El Mouallem competition has negatively impacted the UAE’s banking sector due to depressed credit growth, huge influx of liquidity and low deal flow. “It also affected the loan to deposit ratio which decreased to 90%. The result is a decline in profit margins,” he adds noting that competition also has its advantages, “giving local banks the opportunity to increase their market share, while enhancing their expertise in the retail/wealth management business.”

Abdalla agrees that the UAE’s local banks are in a good position to grab a bigger share of the market, although he notes that facing stiffer competition from local banks was always inevitable. For him, local banks will always have an advantage simply because they’re local. “Locality is a huge advantage in understanding the market and tailor-fit products and services such as Islamic banking, separate branches for women and men and more personalized services.”

So, can we say that competition is forcing foreign banks to cut down their operations in the country? Abdalla says that such decisions have more to do with the bank itself than with the domestic climate.

“Some banks do fail in a market due to unfair practices and laws, but this is not the case in the UAE. I would say that not a single bank that lost business or had to close down branches did so because of these reasons,” he claims. “On the contrary, all of the banks operating in the UAE that stopped operating has done so due to external reasons and/or under assessment of the local market.”

El Mouallem agrees with Abdalla noting that the decision taken by some international banks to downsize their operations in the UAE “is related to modification of the strategic objectives of these international players,” without dismissing the role competition plays in these decisions.

“While the UAE’s local banks grow more confident after emerging successfully from the financial crisis, they need to grab the opportunity and fill the gap that will be left by international banks – especially in retail and wealth management operations, to avoid existing clients turning to cross-border services rather than turning to Emirati banks,” says El Mouallem. He stresses, though, that the UAE banking sector will always need the expertise of the international banks when it comes to investment banking.

For Nadeem Masud, the UAE’s Chief Country Officer at Deutsche Bank, the presence of international banks alongside the local ones is ‘essential’.

“If you study the development of the capital markets closely across the world, you’ll find that it always requires more than one institution to get the capital markets moving and benefit the client, either through competitive pricings or advanced solutions,” he says. “International and local banks compete and cooperate, as should be the case, to bring some differentiated skills to the table.”

Deutsche Bank is well-recognized for its leading role on some of the most prestigious regional transactions. So, what differentiates


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it from other banks operating in the UAE? Masud says that the bank’s competitive advantage comes from the ‘unique’ combination of global capital market strengths in addition to its commitment to regional structuring expertise both for conventional and Islamic finance instruments.

He explains, “The presence of a mature full service investment banking operation on the ground for the last several years also allows us to understand our client needs and provide them with value- added bespoke solutions.”

While Abdalla agrees that international banks have the advantage in terms of technology and international expertise, they’re exposed to greater risks. He notes that one of the deterrents in dealing with international banks in the UAE is the’ conservatism’ that international banks operate within in comparison to local banks “in terms of loan amounts and financial approval fluctuation.”

He clarifies, “International banks are tied up to their respective international markets, which make them more vulnerable to bank’s closures, and fluctuating interest rate –reasons that are unrelated to the local market.”

At first sight, UAE’s banking market may seem in favor of local banks, but on closer look, the sector still highly diverse, and many foreign banks are doing very well in this part of the world, especially the ones that are able to serve local as well as multinational firms.

Completing, not competingMore banks equal more options, and happier customers – happier maybe, but they’re also less royal to their banks. According to analysts, strong competition make customers more tempted to switch banks easily and maintain multiple accounts.

A recent research from the Spanish bank Santander on customers’ relationship with their banks in the UK found that banking customers there tend to stick to “one bank longer than they stick to a spouse or partner”. The research also showed that more than half (58%) of the respondents have been with their current account provider for more than a decade, with the average bank relationship lasting just over 16 years.

It’s hardly the case in the UAE. “The majority of UAE banking customers do not have the same level of high loyalty compared to depositors in the UK,” Jad Rammal, director of measurement solutions at Ethos Consultancy told Gulf News. “[Customers tend to] look for better services and offers from the banks and there are many tempting offers and choices in the market today. … it is easy to change providers.”



It might be easy to change providers, but it’s harder to change the laws that govern them. Asked if the UAE banking sector needs more laws to regulate the market and control competition, Masud says that the UAE has already developed the necessary eco-system to facilitate a strong banking sector.

“The UAE Banking sector is going in the right direction, a natural result of the significant investments and hard work made to improve the financial sector’s infrastructure along with its operational and legal framework,” Masud adds.

In contrast, other banking experts argue that the banking sector needs more regulations such as the need to introduce a well-established credit bureau, or the finalization of the bankruptcy law and measures to stop criminalizing the issuance of bounced checks – a criminal offense in the UAE.

For El Mouallem, introducing a bankruptcy law, which has been in discussion since 2009, is a priority. “The lack of the bankruptcy law is a serious problem to the development of the UAE’s financial market,” he notes adding that the UAE’s regulators are also working on a new Commercial Companies law and an Investment Management regulation.

Abdalla is in agreement. “I’m for more regulations,” he says. “At the moment, the lending practices in the UAE are mainly dependent on bank’s financial statements rather than the credit history of the customer. There is also a lack of inter-bank cooperation.”

He adds, “Another issue has to do with using law enforcement as a tool to enforce debt-repayment, which creates one of two things, absconding or jail terms. At the end of the day, the relationship between banks and customers is a commercial one rather than a legal one.”

For El Mouallem, the other challenge facing the UAE’s banking sector is low profitability. “The UAE’s profitability is lower than its GCC counterparts; with the average net interest margin being 2.9%, whilst it is 3.2% in Kuwait, 3.4% in Qatar and 3.5% in KSA.” According to Abu Dhabi Islamic Bank’s ‘GCC Banking Competitiveness Report’, low customer charges, the presence of high levels of non-performing assets and the competitive dynamics, “have all negatively impacted banking profitability.”

Despite having different views on the challenges facing the UAE’s banking sector and the way forward, the four experts agree the UAE will always be a focal point for those looking to invest, or establish a presence in the MENA region. For them, the UAE’s fast-growing banking sector will continue to offer mouth-watering returns, but we must wait and see which banks will be the most successful at garnering them.

Note: Business Roundtable has contacted more than five local banks in the UAE to get their views on the subject, but all declined to comment citing various reasons.


www.businessroundtable.mebanking & finance • In Session

In S

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on J.P. Morgan

Private Bank reveals end of year Currency outlookTThe end of Q3/start of Q4 was

dominated by events that did not happen in the US. The Fed did not taper. The US government did not agree on the budget for 2014, and, in the absence of a continuing resolution, caused a partial shutdown of the government. Although a last-minute deal allowed the government to re-open and raise the debt ceiling, it is only for a limited period of time.

The political backdrop will help steady the Fed’s tapering hand until Q1 of 2014. The delay in tapering has four implications on FX markets: • The USD’s resurgence has been pushed back. As a consequence we have become less aggressive on our bullish USD view against other G10 currencies. • ‘‘Risk on’’ currencies are likely to stay supported into year end. The substantial outflows from many EM currencies over the summer means that positioning is now much lighter. Financial conditions have also loosened because of the delay in tapering. This is a near-term supportive environment for risk.• High-yielding currencies are still likely to face challenges when tapering begins. The delay in tapering provides countries with a limited window to address their structural problems. However, this is likely to be a challenging agenda and we believe further currency weakness may also be needed. • Good for low yielders. Low-yielding currencies whose economies are well linked into the US cycle are likely to perform despite rising US yields.

A gradual USD comebackThe Fed’s decision to delay tapering and the political impasse over the US budget caused the USD to underperform. We expect this weakness to be short lived and remain bullish on the USD. Nonetheless, with US yields likely to rise more slowly, we are expecting a more lethargic USD comeback. We remain bullish on USDJPY and USDCHF, but have adjusted down our 1y forecasts to 103 and 0.96 respectively due to the delay in tapering.

Sara Yates GlOBAl HEAD Of fX

StRAtEGy| J.P.MORGAN PRivAtE BANk


In Session • banking & finance

If we look past the impact of the US budget negotiations on the USD, we see more good news for the currency. For multiple decades, the USD’s terminal decline has largely been attributed to the country’s growing fiscal and current account deficits. However, the recent focus on budgetary discipline has seen the fiscal deficit halve. Similarly, the US’s current account deficit is on an improving trend and may benefit further from the shale gas/oil revolution.

The main fallout for the USD from the political noise will be a slower pace of appreciation. We do not expect tapering to start until Q1 2014. This would suggest less near-term urgency for US yields to rise, and less near-term support for the USD.• We remain bearish on the JPY and on the CHF. The Bank of Japan’s determination to double the monetary base within two years will keep Japanese monetary conditions looser than those in the US for some time. We also see scope for outflows from all sectors of the Japanese economy to increase. With the US debt issues resolved for now and the Q1 discussions likely to be less fraught, we expect retail demand for foreign assets to return. In addition to the retail sector, Japanese corporates have also delivered a meaningful outflow lately. Longer term, the risk is of the government’s pension fund (which manages around 120trn JPY) re-jigging its asset allocation towards a greater holding of foreign assets, which would provide a further weight on the currency. • On the CHF, we expect the European recovery to gather steam and for the market’s need for a European safe haven to fall. With Swiss balance of payments data showing a net repatriation flow for Swiss institutions between 2010 and 2012, we think there is substantial scope for legacy long CHF positions to unwind.

EURUSD to remain range boundThroughout 2013 we have consistently viewed the outlook for EURUSD as a closely fought race between improving European sentiment (a EUR positive) and faster rising US yields (a USD positive). We expect these factors to continue to matter for EURUSD over the next 12 months. In our opinion, the European recovery is in its infancy. As European growth gathers pace, we expect investor sentiment towards Europe to improve further, which will encourage inflows and support the EUR. At the same time, we continue to see scope for the US yield curve to steepen at a faster rate than many of its peers. If true, this will cause interest-rate differentials to widen in

InFocus

UAE signs initial agreement to protect and encourage investments with GreeceIn line with a drive to further strengthen trade and investment cooperation opportunities with various countries around the world, the UAE, represented by the Ministry of Finance (MoF), recently signed an in-itial agreement to protect and encourage investments with Greece. This initial agreement mirrors the double taxation agreement signed between the two countries in January 2010 and amended in June 2013. Both of the agreements aim to provide a set of laws supportive of the economic balance and the reciprocal protection of investments between the two parties.HE Younis Haji Al Khouri, Undersecretary of MoF:

“We are delighted to have signed the initial draft of this agreement and we will work on completing

all negotiations to reach the final agreement, which will be vital in terms of protecting UAE investments from all potential risks in Greece

and for encouraging bilateral investment.HE added: “MoF strives to continuously

strengthen the bilateral relations between the UAE and various countries around the world, which is reflected by its commitment to provide all legal and administrative logistics to support the UAE invest-ment sectors. This is achieved by signing these agree-ments and MoUs, which aim to protect and promote investment or to avoid double taxation on income.” The signing of the agreement will provide a suita-ble investment environment to safeguard against non-commercial and political risks such as direct or indirect nationalisation confiscation and seizure, providing financial compensation in case investments were destroyed due to popular uprisings, conflicts or any action taken by the security force putting the investments to damage or destruction. In addition, it is important for both countries to respect their obliga-tions towards the investors and the free convertibility of dividends and return on investments which are only possible with free and immediate currency exchange, including the revenues and profits on national airlines. MoF has signed 44 agreements on the protection and promotion of investments with the UAE’s most important trading partners in an effort to strengthen its regional and global standing by creating a distinc-tive investment environment for both the private and public sector.


www.businessroundtable.mebanking & finance • In Session

favour of the US, supporting the USD. Recently a third factor has emerged as an important driver of EURUSD - short-dated relative rates. Although Bernanke’s clear communication that ‘‘tapering is not tightening’’ has kept the short end of the US curve well anchored, the ECB’s mantra that ‘‘interest rates will be low or lower for an extended period’’ has not. Until the ECB acts to contain euro area money market rates we expect EURUSD to trade around the top of our 1.371.30- range.

Patience may be required on GBPUSD UK economic data has improved and the Fed has become marginally more dovish. These changes make us less bearish on GBPUSD, and we have revised our 1y forecast to 1.54. The delay in tapering will further reduce the weight on GBPUSD. Nonetheless, we remain bearish on GBPUSD for several reasons. First, we think there is potentially too much good news already in the price. The PMIs got it wrong to the downside in the first half of 2013. This means it is possible that some of the recent strength is just payback for the earlier under-reporting. Moreover, the PMIs are not entirely consistent with official data. Second, we believe the market is incorrect in expecting UK rates to be tightened at a similar pace to the US When the Fed does start to move, it could move quicker than expected.

Why the prospect of US tapering was such a headache for EM economies Years of extremely accommodative monetary policy across the developed world encouraged investors to look for investment opportunities in emerging markets. This influx of often very liquid, foreign capital was used to fund domestic consumption binges rather than boost investment. This helped many current account deficits to balloon as a percentage of GDP. High-yielding EM economies were amongst the worst offenders. Bernanke’s surprising comment about tapering in May caused a reversal of capital flows and left many EM economies with a financing black hole. As current account deficits take time to adjust, the currency bore the brunt of the adjustment in the capital account. We remain cautious on the medium-term prospects for the TRY, ZAR, IDR and BRL: • TRY - current account deficit remains a worry. For Turkey, the fall in the TRY and pick-up in European prospects is helping. However, with only a modest improvement, the absolute size of the deficit remains a concern. As Fed tapering starts and capital inflows drop off, we believe the authorities will be more inclined to let the TRY weaken rather than hike rates. • ZAR - a weaker currency is yet to stimulate growth. The ZAR has underperformed the USD by

almost 15% this year. This sharp fall combined with modest inflation means that the ZAR is very cheap in comparison to history in real terms. More FX depreciation will be needed to facilitate a meaningful improvement in South Africa’s balance-of-payments dynamics. • IDR - still a long way to fall. A still-high IDR in real terms and a weak commodity outlook will hinder an export led recovery of the current account. Further currency adjustment will be needed. • BRL - more depreciation needed to help improve competitiveness and attract investment. The central bank’s programme of intervention and rate hikes have helped stabilize the BRL. With more rate hikes likely, we expect USDBRL to move sideways to year end. Longer term, we believe that with the relief in food price inflation and limited wage growth keeping headline CPI in check, the central bank will be comfortable with a moderately weaker BRL. • INR - the new central bank governor is proving to be a catalyst for change. The government’s quick response to hike the tax on gold to 15% combined with a cheaper currency is also reaping benefits for India’s trade deficit, which fell to a 27 month low in August. We believe these measures have significantly reduced the tail risk for the INR.

Lower yielding EM currencies shine brightestThe tapering of US policy is not necessarily bad news for everyone. We expect currencies of open economies with a strong link to the US to do well:

• KRW - a compelling long - Despite concerns about a weaker JPY undermining Korea’s export competitiveness, its export performance this year has been impressive. The KRW is structurally resilient. South Korea’s rare current account surplus and relatively low percentage of foreign holdings of its local bond market were key reasons why the KRW was

unaffected by the summer’s deleveraging flow. We expect

InFocus

The 2013 third quarter update of Qatar Central Bank’s (QCB) real estate price index underlines Qatar’s real estate market is on the path of recovery. After reporting a drop for two successive months, the index rose to a new high of 178.6 points in Septem-ber 2013.The index, that tracks the price movement of the country’s real estate market, reached a peak in 2013 April and May months with 183.9 points and 190.4 points respectively before drop-ping to 178.8 points in June. The index further slipped to 174.3 points in July and rose marginally in August reaching 176.9 per-cent. According to the Ministry of Justice the value of real estate transactions (between July 29 and August 25) was QR1.46bn.The ratings agency Standard & Poor’s recently noted that Qatar’s real estate market is expected to recover from its sharp decline

Qatar Central Bank real estate price index rises in

September


January 21 - 22, 2014 in Dubai

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In Session • banking & finance

this support to continue. Our only concern with the KRW is its recent strong performance. For this reason, we only expect modest outperformance from here and are revising our 1y forecast to 1050. • MXN - further upside expected - Delay in tapering will be unequivocally positive for the Mexican economy, providing time for the fledging momentum in the manufacturing sector to gain traction, time for the increase in government spending to trickle to the domestic economy, time for growth in its main export market (the US) to broaden, and time for progress on the long-awaited energy reforms to be delivered. We continue to recommend that investors are long the MXN and take advantage of pullbacks to add to positioning. We remain bullish on the MXN over the medium term and forecast USDMXN at 12.45 in 1y. • MYR - a good buy on weakness - There are a number of good reasons to hold the MYR. Malaysia ended Q2 2013 with a modest current account surplus. Since then the marked improvement in the trade balance and the government’s willingness to delay import intensive investment projects provides scope for the surplus to gradually increase. The high foreign ownership of local bonds worried the market in Q3 and could do this again when tapering begins. For this reason, we like to add to the MYR on pullbacks. • PLN - a relative outperformer - After successive rate cuts, recent data suggested Poland’s economy finally returned to growth in Q2 2013. We believe there is more good news to come. We expect PLN to modestly outperform EEMEA currencies and the EUR. We are less optimistic on USDPLN as we expect the fall in EURPLN to be somewhat offset by a similar fall in EURUSD.

since 2009. According to S&P, the commercial sector remained more vulnerable than the housing segment. Given its high concentration in lending to cyclical sectors like real estate and construction, this is one of the main risks faced by Qatari banking sector, S&P noted.The S&P, in its ‘banking industry country risk assessment report released in July noted that despite high stability and strong profitability, severe exposure to real estate sec-tor and aggressive expansion plans are key “weaknesses” of Qatar’s banking sector.Qatar’s lending and underwriting standards as “aggres-sive”. Concentration in the real estate and constructions sector is high at 20 percent of total loans at year-end 2012. In addition, foreign currency lending has recently increased dramatically and accounted for 51 percent of total loans at year-end 2012, it noted.However, leading Qatar-based banks, which according to S&P are exposed to the reported ‘real estate exposures’ said they are strictly adhering to the guidelines laid out by Qatar Central Bank.

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roundtable • banking & finance

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