Monday, November 30, 2009

Hands at the pump

For decades now it has been the hands at the pump of retail petrol stations throughout the West that have pumped up the assets of the oil pumping countries, primarily located in the Middle East, and particularly Saudi Arabia and more importantly little UAE's Abu Dhabi.

With the prospect of another leg down in the global meltdown of credit intermediaries, Abu Dhabi has held out a helping hand to ostensibly pump up the region's debtors, but more particularly its creditors.

Such pumping has allayed the fears of those worried about jumping from the high ledges of finance, especially brokerage, houses. Market's are rebounding fearlessly today.

So, time, again, for a bit of perspective on the situation, which has been characterized in Guambat posts here and here over the last couple of days.

Here's the latest teaser/hook on the developing story:

U.A.E. Eases Credit After Dubai World Debt Delay (Update1)
Dubai, the second-biggest of seven states that make up the U.A.E., and its state-owned companies borrowed $80 billion to fund an economic boom and diversify its economy. The global credit crisis and a decline in property prices hurt companies like Dubai World as they struggled to raise loans and forced the emirate to turn for help to Abu Dhabi, the U.A.E. capital and holder of 8 percent of the world’s oil reserves.

U.A.E. banks are already facing rising loan losses stemming from the global recession as the economy slowed and two Saudi Arabian business groups defaulted on at least $15.7 billion of loans. Provisions for bad loans at U.A.E. banks rose to 2.76 percent of the total as of the end of October from 1.92 percent a year ago, according to central bank data.

The U.A.E.’s banking industry is already the biggest among the six Gulf Arab states including Saudi Arabia, Kuwait and Qatar, with 1.54 trillion dirhams ($418 billion) in assets, central bank data shows.

Now, what about that UAE support for faltering Dubai?

First of all, it is not the end all and be all of everything gone wrong.

Abu Dhabi Extends Cautious Helping Hand to Dubai
Abu Dhabi says it intends to "pick and choose" how to assist its debt-laden neighbor Dubai. "We will look at Dubai's commitments and approach them on a case-by-case basis," a high-ranking government official in Abu Dhabi told Reuters on Saturday. "It does not mean that Abu Dhabi will underwrite all of their debts."

Al Jazeera on Saturday reported that the "case-by-case" support "is likely to disappoint many investors who assumed the city would provide a safety net for its neighbor."

U.A.E. Bank Pledge No Comfort to Dubai
The United Arab Emirates central bank said Sunday it would make fresh funding available to local banks if needed, but didn't offer specific support to Dubai. The federal government in Abu Dhabi, which bailed out Dubai to the tune of $10 billion earlier this year, hasn't yet indicated fresh support.

The central bank said it "stands behind" U.A.E. banks and would make available funds to local institutions, including local subsidiaries of foreign banks.

But the statement pointedly didn't mention Dubai. The central bank could still issue a more explicit statement of support.

Secondly, it ain't free.

Liquidity prop for UAE banks
The United Arab Emirates’ central bank set up an emergency facility today to support bank liquidity.

The bank said it was making available to domestic and foreign banks a special additional liquidity facility linked to their current accounts at the central bank, at the rate of 50 basis points above the three months Emirates interbank offered rate.

Which may go a little ways towards helping things if this is simply a liquidity issue and not a solvency issue -- see AS THIS STORY GATHERS MOMENTUM....

Finally, and to Guambat most critically, none of this addresses the fundamental structural flaws in the whole concept of Islamic finance.

Dubai Illustrates That Sukuks May Be Junk Bonds
It seems as though shariah-compliant bonds issued to expand this Islamic Beverly Hills are deemed to have little asset quality behind them. One bond analyst stated on Friday "We are of the opinion that the underlying assets are worth very little."

In short, unless Dubai or their neighbor Abu Dhabi ponies up with government backing, sukuks as an investment may be in deep trouble throughout the Islamic investment community. So much for trying to do an endaround on a religious principle.

Dubai Debts Test Islamic Finance
CAIRO – As the world is still recovering from an economic meltdown, an unfolding debt crisis in the flashy lifestyle-Gulf state of Dubai is sending shockwaves around the world, putting the booming Islamic finance to a test.

Islamic finance is one of the fastest growing sectors in the global financial industry.

Starting almost three decades ago, the Islamic banking industry has made substantial growth and attracted the attention of investors and bankers across the world.

A long list of international institutions, including Citigroup, HSBC and Deutsche Bank, are going into the Islamic banking business.

Currently, there are nearly 300 Islamic banks and financial institutions worldwide whose assets are predicted to grow to $1 trillion by 2013.

The Asia Legal Business website has coverage on the subject of so-called Islamic bonds and finance from a perspective of the business of lawyers. One such article discusses the attempts to issue them in North Asia, such as Japan and Korea. It notes,
The Korean Ministry of Strategy and Finance announced earlier this month that it had submitted a tax revision to the National Assembly, which if approved would pave the way for local companies to start issuing sukuk (Islamic bonds). Yet even if the law is passed Islamic finance faces stormy times. Regulators and lawyers may benefit from looking at the troubles that Japan has had in kickstarting its own industry.

Under existing Korean legislation uncertainty surrounds whether a sukuk meets the definition of a bond.
And it quantifies and characterizes some of the impetus of these non-Arab/Islamic countries to run with the other financial bulls with these statistics and comments:
In the past fear may have been a deterrent to the success of the Islamic finance industry, yet worldwide this is something that Korean companies can no longer afford to be frightened of.

Latest estimates indicate that Islamic financial assets are expected to surpass US$1trn in 2010. Sukuk issuance grew five-fold over the past four years to reach US$120bn in 2008 and the mutual fund market is estimated to reach more than US$11bn.

Korea's chaebol have made no secret of their desire to tap into the Gulf region's ever-increasing pool of investors to feed their infrastructure activities in the region. But as the GFC dries up financing funds from traditional funding markets, this "want" is quickly transforming into a "need".

The sub-prime crisis “as well as the bankruptcy of Lehman Brothers“ has limited the sources of funding available for Korean companies: and while this has started to improve, Korean companies may still find it difficult to raise and obtain capital in traditional markets like the US and Europe, said Park Soo Man, a partner at Kim & Chang.

No doubt, to be continued.

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