UAE withdraws from GCC monetary union

The UAE has decided not to take part in the proposed monetary union agreement between the states of the Gulf Cooperation Council (GCC), an official source at the Foreign Ministry has said. The source said the General Secretariat of the GCC has been officially notified of the UAE’s decision. “The UAE extends its best wishes for success to those GCC member states who will join the monetary union agreement,” the source said, according to a statement published by the UAE’s official news agency WAM.

The source further said that the UAE will continue to act in the best interest of the citizens of the GCC member states and will also carry out its role as a founding member of the Council, to help it to achieve its mission and goals.“The UAE’s past record of implementing the GCC’s resolutions is strong proof of its belief in joint GCC action,” the source concluded.

Oman, another of the six-member GCC, had withdrawn from the union in 2006, maintaining that a more independent policy would be better for the Sultanate’s economy. The UAE’s decision now to withdraw from the union will be a serious blow to the monetary union plans, experts believe. “With the UAE now pulling out, the likelihood of a GCC currency coming into existence is increasingly low,” said Caroline Grady of Deutsche  Bank research.

“The withdrawal of the UAE is a serious setback for the prospects of the monetary union,” wrote Marios Maratheftis, Head of Research, Standard Chartered Bank, in a research note he co-authored with the bank’s Economist, Mary Nicola.

“The withdrawal of the Gulf’s second largest economy from monetary union is a major blow to the single currency project, noted Simon Williams, Regional Economist, HSBC Middle East. “However, we had long assumed that the single currency would not be launched on schedule at the start of 2010, and the UAE’s withdrawal therefore has no meaningful impact on our view on economic performance or on regional monetary policy,” he said.

In addition, commenting on the UAE’s monetary policy, the Governor of the UAE Central Bank, Sultan Nasser Al Suwaidi, said that the UAE will continue to maintain its expansionary monetary policy, without change, and that, therefore, it will maintain the UAE dirham’s exchange rate pegged to the US dollar.

The announcement followed weeks after the UAE expressed “reservations” over the GCC’s decision to locate a planned GCC Central Bank in Riyadh. “The UAE was the first country to officially request, in 2004, the hosting of the planned Central Bank of the GCC as part of the arrangements for entry into the Council’s monetary union,” said a statement published by WAM. “The UAE does not currently host any organisation or body affiliated with the GCC,” the statement concluded.

“The UAE is the second largest economy in the GCC and holds great prominence in the region. With the UAE’s decision to withdraw, it now leaves four out of the six GCC countries to enter into the single currency… Therefore, it remains questionable as to whether or not this will proceed,” the Standard Chartered note read.

“The timing of today’s announcement seems strange given the uncertainties in the UAE’s macro outlook with the financing concerns in Dubai and lack of clarity over any potential debt restructuring, particularly for Nakheel,” Deutsche Bank’s Grady notes. “It also comes a day after the surprise removal of Nasser al-Shaikh as Chief of Dubai’s Department of Finance. Our best guess is that the UAE decision simply reflects unhappiness over the central bank location,” she writes.

There were growing concerns in the UAE over the dominance of Saudi Arabia in the GCC common currency area. Different GCC countries were expected to host different institutions. However, with the GCC secretariat already based in Saudi Arabia and with the decision to host the GCC central bank in Saudi Arabia as well, the UAE’s concerns intensified, the Standard Chartered research note points out.

“This led to the UAE expressing its reservations over the decision in public, shedding doubts over the prospects of the common currency. The decision to walk away should therefore not come as a big surprise,” it says.

“We estimate that UAE trade with the rest of the GCC is about 10 per cent of total trade. The common currency agenda was mainly led by politics rather than economics. Hence, the economic cost of the UAE’s withdrawal should be limited,” the bank’s analysts point out.

“Markets were not convinced that the introduction of a common currency was imminent. Convergence trades never kicked off. We, therefore, believe that market impact will be limited… Not joining the common currency will give the UAE greater flexibility to manage its currency in the future. However, given the current economic downturn, we do not believe that currency reform is high on the agenda at the moment.”

“The decision of the UAE to withdraw from the GCC currency union, if final, would seem to have effectively killed off the project given that the UAE is the second-largest economy in the GCC and that Oman has already withdrawn from the plan,” Tristan Cooper of Moody’s Sovereign Risk Group said.

3,892,179,868,480,350,000,000

That’s the number of new digital information bits created in 2008.

Says John Gantz, Chief Research Officer for IDC: “Contrary to popular belief, as the economy deteriorated in late 2008, the pace of digital information created and transmitted over the Internet, phone networks, and airwaves actually increased.”

Going forward, the digital universe is expected to double in size every 18 months. Which means that, in 2012, that number will be five times as it was in 2008. Do the math.

According to the new EMC-sponsored IDC study titled As the Economy Contracts, the Digital Universe Expands, the amount of digital information created in 2008 grew 3 per cent faster than IDC’s prior projection.

The new findings highlight the third update to the groundbreaking digital universe study, which measures and forecasts the vast amounts and diverse types of digital information created and copied annually. Calculated to be 487 billion gigabytes 2 in size, the amount of information created in 2008 is the equivalent of more than:
• 237 billion fully loaded Amazon Kindle wireless reading devices
• 121.8 billion 4GB Apple iPods
• 4.8 quadrillion online bank transactions
• 3 quadrillion Twitter feeds
• 162 trillion digital photos
• 30 billion fully-loaded Apple iPod Touches
• 19 billion fully-loaded Blu-ray DVDs

Key findings from the 2009 IDC Digital Universe study signal fundamental shifts in the areas of information growth, security, compliance and management.

Growth drivers:
• Over the next four years, the number of information-generation technologies and interactions will increase dramatically:
o Mobile users will grow by a factor of 3.0. Over the next four years, 600 million more people will become Internet users. Nearly two-thirds of all Internet users will use mobile devices at least some of the time.
o Non-traditional IT devices such as wireless meters, automobile navigation systems, industrial machines, RFID readers, and intelligent sensor controllers – will grow by a factor of 3.6.
o Interactions between people via email, messaging, social networks, etc. – will grow by a factor of 8.0.

• Most of the world’s economic stimulus efforts will also increase the amount of digital information created, the result of increased access to broadband communications, electronic patient records, smart electric grids, smart buildings and autos, etc.

• By 2012, 850 million people will buy and sell products and services on the Internet and twice as much Internet commerce will take place versus 2008. By 2012, Internet commerce will be a $13 trillion industry, mostly involving sensitive business-to-business commerce.3

Information Security:
• More than 30% of information created today is “security-intensive,” thus requiring high standards of protection. That number will grow to roughly 45% by the end of 2012.

• Most of the information IT organizations will need to keep secure is created outside the data center, often outside the company. More and more of that information originates from mobile users – workers, customers, suppliers, partners – which adds an additional layer of management and security complexity to the equation.

• Examples of security-intensive includes patient medical records and images, credit card and social security numbers, Internet commerce and other transaction data, video surveillance, sensitive legal documents and corporate intellectual property.

Information Compliance:
• The amount of information considered “compliance-intensive,” or subject to rules that govern what information must be stored and accessible to regulating authorities and auditors, will grow from 25% of the Digital Universe in 2008 to 35% of the Digital Universe in 2012.

• The financial collapse will clearly lead to more regulation and government oversight, which will drive more mandated record-keeping compliance, and hence, more digital information.

• Examples of compliance-intensive information include personally identifiable information, employee email archives, financial and human resources records and litigation documents.

NY Times threatens to shut down the Boston Globe

The New York Times Co., owner of The Boston Globe, is threatening to begin the process of shutting down the 137-year-old New England newspaper in a dispute with its unions over $20 million in cuts.

The New York Times Co, which bought the Globe for $1.1 billion in 1993, has said that of all its newspaper properties, the Globe has been the most dramatically affected by the recession and the advertising downturn. The money-losing, award-winning broadsheet had $50 million in operating losses in 2008 and is projected to lose $85 million this year. The paper’s circulation dropped 14 per cent to 302,638 for the six months to March 31 from a year earlier, according to the Audit Bureau of Circulations.

The newspaper’s largest union, the Boston Newspaper Guild, has called the move a “bullying” tactic by the Times Co., which last month threatened to close the Globe unless its unions agreed to $20 million in cuts, including half from the Newspaper Guild.

In a toughly worded statement, the Globe management said: “Filing the WARN [Worker Adjustment and Retraining Notification] notice is a difficult step that we would like to avoid. But, unfortunately, given the state of the negotiations, it is one we must be prepared to take.”

Observers are sceptic of Times Co. Chairman Arthur Sulzberger Jr.’s willingness to actually shut down the Globe, and some believe that the move is a mere negotiating ploy to extract further concessions from the Globe’s unions since the notice does not require the Times Co. to close the paper after 60 days. The deadline, however, is bound to put the unions under fierce pressure to produce additional savings. Others believe that the Times Co. is itself responsible for the Globe’s dismal performance – when the Times bought it, the Globe was believed to be among the most profitable newspapers in the US.

Having said that, however, the Times Co. itself is under strong financial pressure, and ended 2008 with $1.1 billion in debt. It recently mortgaged its new Manhattan headquarters, borrowed $250 million from a Mexican billionaire at 14 per cent interest, laid off 100 newsroom staffers and cut salaries by 5 per cent.

REVEALED: The Best (and the Worst) Banks in the GCC

The results of Gulf Business’ 11th annual survey of the region’s Top 50 banks are out – and the numbers, expectedly, fail to impress.

For the first time in more than eight years, net profits for the Top 50 GCC banks fell in 2008. The fall of a significant 26 per cent in aggregated net profits to $15.9 billion was in part due to substantial losses at a few banks, including Kuwait’s Gulf Bank, and Bahrain’s Arab Banking Corporation and Investcorp.

However, more than half the Top 50 banks registered weaker than before net profits in 2008, with some also affected by the fallout of the sub-prime and associated asset write-downs, which first surfaced in 2007.

The UAE’s Emirates NBD was, once again, the top-ranked bank by assets, with 2008 assets of $76.99 billion (2007: $69 billion). The National Commercial Bank of Saudi Arabia won out in the shareholders’ equity stakes, boasting equity of $7.34 billion (2007: $8.1 billion), while Al Rajhi Banking and Investment Corporation, also from Saudi Arabia, was the top bank in terms of net profits, weighing in at $1.74 billion (2007: $1.76 billion).

Nevertheless, although growth slowed compared with previous years, it did not halt altogether. Consolidated assets of the GCC Top 50 Banks rose by 15 per cent in 2008 to more than $1 trillion. This compares to a 35 per cent rise on an aggregated basis in 2007, with assets of $877 billion.

Total equity for the GCC Top 50 Banks grew by 11 per cent in 2008 to $124 billion. Get your copy of the May edition of Gulf Business for an in-depth analysis of the 2008 banking results, and a full list of the Top 50 GCC Banks.

Below is preview of the top achievers:

Emaar net profits down 74%

This just in:

Emaar Properties has recorded a 38.7 per cent drop in revenues and a 73.6 per cent drop in net profits for the first quarter of 2009, compared with the corresponding period last year.

In the first three months of this year, revenues were Dhs1.546 billion ($0.421 billion), compared with Q1 2008 revenue of Dhs2.522 billion ($0.687 billion) and Q4 2008 revenue of Dhs1.833 billion ($0.499 billion).

The profits for the first three months of the year stood at Dhs0.237 billion ($0.065 billion), compared with profits in the first quarter of 2008 of Dhs0.896 billion ($0.244 billion) and net operating loss of Dhs0.658 billion ($0.179 billion) in the fourth quarter of 2008.

The Q1 numbers for 2009 have been calculated in accordance with revised accounting policy for revenue recognition, Emaar said. The revenues and profit for the first quarter 2009 are lower than same period of 2008 due to lower deliveries and also lower sales of completed units, the company pointed out.

As of January 1, 2009, Emaar has revised its revenue recognition policy based on a new accounting recommendation that suggests recognising revenue based on completed contract method. The new procedure mandates that the revenue and related profit for a project sold can only be recognised when the project is handed over to the customers.

Until 2008, Emaar had adopted the percentage of completion method of revenue recognition for its developments, which required that the revenue be calculated based on proportion of project construction completed for units sold and a minimum level of non-refundable deposit collected. That resulted in better reflection of operational results and level of development carried out by a real estate company on a periodical basis.

However, under the completed contract method of accounting, the revenue and profits are only recognised on handover of projects, and this can result in fluctuations in quarterly revenue and profits recognised by the group, i.e. revenue will be higher in quarters with higher value of units delivered as compared to quarters with lower deliveries.

Mohamed Alabbar, Chairman, Emaar Properties, stated that Emaar has always followed a prudent and conservative accounting method for reporting its results. The land bank and the assets in Emaar books are also recorded at cost and not adjusted to market value depicting a conservative approach to the presentation of company’s results and balance sheet.

Alabbar said that the company’s growth strategy for 2009 is focused on strengthening investor confidence by completing existing projects, while simultaneously exploring growth opportunities in new markets. “The tough economic environment globally calls for tough measures and a strategic approach to ensuring sustained growth,” he said. “We have therefore streamlined our efforts to shore up consumer confidence while implementing stronger measures internally to optimise resource utilisation.”

S&P puts Dubai government-related entities on Negative CreditWatch

Ratings on Dubai government-related entities put on CreditWatch Negative on uncertainty over government support.

Standard & Poor’s Ratings Services said today (April 30) that it had placed the ratings on some of Dubai-based government-related entities (GREs), including Dubai Holding and Emaar Properties, as well as DEWA and JAFZ Sukuk’s notes on CreditWatch with negative implications.

The GREs put on negative CreditWatch include DIFC Investments, DP World, Jebel Ali Free Zone, Dubai Multi Commodities Centre Authority, Dubai Holding Commercial Operations Group (DHCOG), and Emaar Properties. The notes put on negative CreditWatch are those issued by JAFZ Sukuk, as well as those by Thor Asset Purchase (Cayman), which are securitised by cash flows from a revolving pool of existing and future receivables originated by Dubai Electricity and Water Authority.

S&P’s says that the action results from its learning that a review of debt strategy at Nakheel (not rated by S&P’s), a material subsidiary of government-owned Dubai World (also not rated by S&P’s) and a key Dubai-based GRE, may include the possibility of a debt exchange.

Recent media reports indicate that Nakheel is opening a dialogue with existing holders of its $3.5 billion Sukuk coming due in December 2009, with a view to restructuring the debt. S&P’s has discussed these reports with Dubai World and has been told that “all options” in dealing with outstanding liabilities are being considered as part of an ongoing review, including a restructuring.

“The CreditWatch placements reflect our opinion of the likelihood of downgrades of the Rated GREs and The Notes if the potential for extraordinary government support to the Rated GREs and The Notes is not affirmed by the government of Dubai,” S&P’s credit analyst Farouk Soussa said. “The need for Dubai government support is potentially increasing in the face of deteriorating fundamentals for some of the Rated GREs.”

S&P’s says it invited comment from the government of Dubai, but it “declined to either refute the possibility of a debt restructuring at any of its Rated GREs or to provide clear assurances that all debt obligations of the Rated GREs will be met in a full and timely manner as per their original terms.”

The ratings agency claims that the mere possibility of a debt restructuring in an unrated Dubai-based GRE stands at odds with its prior expectation that the government of Dubai is committed to providing extraordinary support to its key GREs, including the Rated GREs, in order to allow them to service their respective obligations in a full and timely manner.

This expectation, it maintains, is based in part on repeated representations to S&P’s and to the public by senior government officials and other highly placed individuals, that the government of Dubai is committed to providing such extraordinary support.

S&P’s says that all of the Rated GREs reflect government creditworthiness more than stand-alone credit profiles, though this may shift should the government’s support commitment ebbs. “In our view, the consideration of a debt restructuring in any key GRE, particularly if it were deemed to be ‘distressed’, increases the uncertainty as to Dubai’s intention to provide adequate support in times of stress.

“At this stage, we have not had confirmation as to Nakheel or the government’s intentions with respect to Nakheel’s outstanding Sukuk. The CreditWatch placement will hold for the duration of our review, which will focus on confirming these intentions, and then assessing the impact this may or may not have on our view of the likelihood of extraordinary government support with respect to The Notes, and each Rated GRE and its respective obligations,” Soussa said.

“We will resolve the CreditWatch placement once the analysis is complete. There is a significant likelihood that the review may result in the downgrade of one or more Rated GREs or The Notes by one or more notches, depending on our assessment of the likelihood of support on a case-by-case basis, and on the stand-alone creditworthiness of each Rated GRE and its respective obligations.”

Are markets losing faith in Islamic finance?

Everyone has been talking about Islamic finance, viewing it as a beacon of hope in the otherwise dreary landscape of the current economic crisis. Even the Vatican believes so. The results, until now, have backed up this optimism: in 2008 the Dow Jones Islamic Market Sustainability Index outperformed the conventional Dow Jones Sustainability Index.

Also, the FTSE All-World Index has shed 42.3 per cent over the past 12 months, while the Sharia’h-compliant version of the index has lost 37.6 per cent over the same period. (See Gulf Business April 2009 edition for a detailed analysis).

However, the latest figures tell a different story. On the close of trading on April 27, the global Dow Jones Islamic Market Titans 100 Index, which measures the performance of 100 of the leading global Shari’ah-compliant stocks, had gained 3.81 per cent month-to-date. In comparison, the Dow Jones Global Titans 50 Index, which measures the 50 biggest companies worldwide, had posted a gain of 4.61 per cent.

Breaking down the performance by region, Islamic stocks have not fared better in any region save the Gulf. The Dow Jones Islamic Market Asia/Pacific Titans 25 Index rose 6.35 per cent, while the Dow Jones Asian Titans 50 Index increased 10.20 per cent.

Moving to Europe, the Dow Jones Islamic Market Europe Titans 25 Index rose 4.93 per cent. In comparison, the Dow Jones STOXX 50 Index, which measure European blue chip stocks, gained 8.53 per cent.

In the US, the Dow Jones Islamic Market US Titans 50 Index rose 2.94 per cent, as opposed to the Dow Jones Industrial Average, which gained 5.47 per cent.

The numbers are, however, a different for the GCC. The Dow Jones Islamic Market GCC Index gained 13.32 per cent over the same period, while the conventional Dow Jones GCC Index did not fare as well as its Islamic counterpart, rising only 9.98 per cent.

That conventional finance has outperformed Islamic finance could be just a temporary phenomenon. Or it could be the beginning of a long-term trend, who knows. But it’ll be wise to not discount Islamic finance just yet – although it may be prudent to invest in Shari’ah-compliant products close to home.

Tell us what do you think:

Creditworthiness of Gulf banks likely to weaken: S&P

The credit profile of Gulf banks is likely to deteriorate this year, notably because of the tougher operating environment, lower business volumes, tighter liquidity, and the region’s stock market slump since the end of third-quarter 2008, says Standard & Poor’s Ratings Services in a report published today (April 29).

S&P’s credit analyst Mohamed Damak

“We believe that as a result, asset quality and profitability of the banks that we rate are likely to suffer,” said S&P’s credit analyst Mohamed DamakS&P’s credit analyst Mohamed Damak, lead author of the report titled Tougher Environment Weakens Financial Profile Of Gulf Banks And Pressures Their Credit Ratings.

S&P believes that 2009 will prove to be a difficult year for most GCC banks. “On a positive note, thanks to their good financial profile, Gulf banks have entered this tougher environment from a position of relative strength,” said Damak.

In addition, S&P maintains that GCC countries, which it classifies as interventionist toward their banking sectors, have and are likely to continue providing extraordinary support to the systemically important banks if needed. “The capacity of these countries to do so remains high in our opinion,” says S&P.

According to S&P’s estimations, real GDP growth in the GCC is likely to slow dramatically in 2009, by more than 50 per cent from about 9.1 per cent in 2008.

Gulf banks are carrying a high amount of new loans – including to the real estate sector and individuals – that the less supportive economic conditions is testing. The seriousness of the situation varies among the six GCC countries.

“We believe that the most resilient banking sectors are Saudi Arabia’s and Qatar’s. The banking sectors in the UAE – especially in Dubai – and Kuwait are under the most pressure. This explains the several negative rating actions we recently took on Dubai-based and Kuwaiti banks,” said Damak.

Dubai water and electricity consumption down: DEWA

DEWA has revealed that the total consumption of water in Dubai was reduced by 37 per cent and electricity by 6 per cent in 2008, amongst residential units, governments, schools, universities and private companies. “DEWA introduced a series of initiatives to encourage consumers to reduce consumption and eliminate wastage of electricity and water, with the goal of inculcating a culture of saving natural resources and preserving our environment,” said HE Saeed Mohammad Al Tayer, MD & CEO of DEWA.

Al Tayer said the percentage of reduction in electricity and water consumption in schools in Dubai reached 22 and 42 per cent, respectively. The hotel industry recorded a saving of 3 per cent for electricity and 14 per cent for water. Golf clubs also achieved a significant saving of 61.5 per cent in water consumption.

DEWA’s campaigns included “Now you know, Don’t let it go” campaign launched in June 2008, on the heels of the “Your Decision” campaign which began February 2008. The campaign was implemented in government departments, private organizations and shopping malls to highlight the importance of conserving electricity and water.

We wonder if the reduced consumption is thanks solely to DEWA’s campaigns or if the economic slowdown, decline in real estate projects, closure of some companies and the redundancies had some role to play as well. What do you think?

This is Dubai: Villa in Springs cheaper than a flat in Discovery Gardens

In a paradox peculiar to the vagaries of Dubai’s real estate market, it’s cheaper today to rent-out a 2-bed villa in the posh The Springs development than it is to rent-out a 2-bed apartment in Discovery Gardens, at best described as a middle-income residential accommodation.

According to Gulf Business research, a 2-bed villa in Emaar Properties’ The Springs can be rented-out for as little as Dhs80,000 today while renting out a 2-bed apartment in Nakheel’s Discovery Gardens will leave you poorer by at least Dhs90,000.

A real estate broker Gulf Business spoke with attributes the discrepancy to the high maintenance fees for the latter. “At roughly Dhs30 per square foot, the annual services charges for a 1,500-sq ft 2-bedroom apartment at Discovery Gardens work out to about Dhs45,000 a year, in effect slashing the landlord’s income by half at the current rental rate,” he explained. “Compare that with approximately Dhs7,000 that a landlord of a 2-bed villa in The Springs pays,” he pointed out.

Although rentals in Dubai have dropped by almost 50 per cent in some communities since the last quarter of 2008, high maintenance fees charged by some developers have increasingly come under criticism. A Nakheel spokesperson told local media earlier in the month that the developer is looking to reduce service charges in some of its communities, including Discovery Gardens.

Tell us what do you think: