With a number of trends pushing financial services development in the Middle East, three Gulf states are aiming to attract overseas investment and become the number one financial centre in the region
Bahrain, Dubai and Qatar are engaged in a battle to attract the biggest and best financial companies in the world. Each country has set up special financial areas to attract overseas firms and boost local players, with the aim of becoming the strongest in a region awash with investment capital, but short on home grown products. Additionally, each is developing its own areas of expertise.
Assessing the true extent of retail and institutional investment potential in the Middle East is tricky. Statistics are few and far between and fund management flows are not easily collated. Nonetheless, the potential is definitely there. Merrill Lynch calculates the Gulf Cooperation Council states are working on or planning infrastructure and energy projects worth US$1 trillion.
High energy prices have boosted current account surplus forecasts for 2005-2007 to $585bn, which has helped push up demand for property and equities. Saudi Arabian stocks rose 733% from March 2003 to their peak earlier this year, while United Arab Emirates (UAE) stocks jumped by 1,031.5% and Kuwaiti equities by 341.4%.
Eric Lorentz, senior regional director at Ansbacher, the banking and wealth management group owned by Qatar National Bank, identifies several major trends pushing financial services development in the region.
Firstly, petrodollars will continue to flow to the region. He expects China, Russia and Latin America to pick up any slack should Western economies slow down. And Middle Eastern countries are busy developing alternative markets and reducing their dependence on America and Europe.
Secondly, all Middle East countries have very high growth rates. Lorentz says: "In Qatar, growth is more than 4% and it costs nothing to have children. Education, housing and medical cover are all free and the authorities actively encourage people to have kids."
However, high birth rates are causing problems and youth unemployment has become a major issue.
Another factor is climbing wage costs. Saudi Arabia and Kuwait were the first countries to experience economic booms and they are paying the price. The region was first built up on cheap labour and wage costs are now rising sharply.
However, while initially the Middle East attracted large numbers of skilled workers from near neighbours, particularly from India, that trend has reversed sharply and skill sets are dwindling.
Lorentz adds: "Middle Eastern employment conditions have improved but not fast enough. With India booming, many skilled workers are comparing conditions in Dubai and Doha [in Qatar] with their homelands. It is not uncommon for your Indian plumber to simply not return from vacation."
Inflation is also playing its part. Simply put, says Lorentz, too much money is chasing too few goods. Central banks have little experience in controlling inflation and it is often not within their remit.
As a consequence of the skills shortage and huge supply of money in the region, three financial centres are battling for supremacy. Doha, Bahrain and Dubai have established financial centres and beefed up regulation to encourage overseas institutions into the market and to develop local banking players.
Each offers tax-free profits and a variety of incentives to attract global players. While impressive new office blocks are popping up across the region to house the inflow of workers. Lorentz says: "Ego has something to do with it, each wants to be the biggest and best."
Dubai International Finance Centre (DIFC), the newest, boasts the world's biggest covered car park and an impressive mirrored tower gateway to a 110 acre complex that will eventually employ thousands of skilled financial services workers.
Ego aside, Lorentz says there are sound business reasons for establishing the centres: "There is a strong client desire to have their investments controlled from here. Money was already being repatriated way before 9/11 and Bush's handling of events has made many people feel their money is not safe abroad."
Each centre is slowing establishing different centres of excellence. Dubai is seen as the 'big one', housing regional headquarters of the world's largest bank and asset management organisations.
Bahrain has the longest history in the region, having set up the Bahrain Financial Centre in 1975 and is home to more than 300 banking and insurance institutions. The country is currently building a $1.3bn financial harbour, which will house the Stock Exchange and other leading financial names by 2009.
Doha is establishing its name as the home of project finance, controlling a market bigger than China, with the likes of a massive Exxon energy infrastructure development.
Invesco obtained its licence to operate from the DIFC last year. The group chose to operate from the DIFC because "Dubai was quite early into the asset management market," explains Nick Tolchard, head of international development at Invesco.
"We were very interested in the regulatory regime, modelled on the FSA. Geographically it is also ideally situated between Europe and Asia."
Although the company has set up a sales office, it has no plans as yet to open a headquarters, nor domicile funds in the region.
However, distribution deals with overseas players, including Citibank and Merrill Lynch, have been put in place and Invesco is also finalising distribution contracts with local banks and wealth managers to sell to the local population. But, because business is very much based on personal contact negotiations take some time, Tolchard admits .
He adds: "There are some established intermediary players, but many serve the expat community, which is not really our target market. Overall, fund distribution is much more like the Continental model, with banks taking the lion's share."
Tolchard says capital-protected products have been strong sellers because the capital-preservation mentality is strong. But retail markets remain undeveloped, and education and consumer sophistication remain low.
He adds: "Some of the fixed-term guaranteed products are not being held to maturity. The mentality is to switch more readily than elsewhere in the world, more like trading really. There is a lot of education to be done."
Ansbacher has taken a different approach to the market, thanks to its links with parent company Qatar National Bank.
Lorentz explains: "There is more sensitivity at a local level to 'suitcase banking' than people think. Others may have relationship managers but the money still goes overseas. Local product development is still at a very early stage but demand is there."
Only one bank within the UAE has its own family of funds and most others in the region offer re-badged Zurich and London products, he says. Licensing of homegrown products is also a tortuous process.
Despite the hurdles and low investor regard for local products, Ansbacher launched the Al Watani fund last year. The product invests solely in the 32 stocks listed on the Doha Securities Market in Qatar. The group also recently closed its Prime 1 property fund, having reached its target $200m allocation from local investors.
Invesco also says property funds have been big sellers. While demand for direct bricks and mortar investment has been strong, Real Estate Investment Trusts (Reits) and other property stocks are also on the up, pushing the market towards traditional equities.
Tolchard adds: "Local stock markets have performed well and this is also helping head the market to long-only products. Investors are moving towards global institutional investment funds but there is still a lot of education needed."
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