10 September 2012
Saudi Arabia will show a great deal of resilience in the context of the euro zone debt crisis and Arab Spring, according to Jamal Al-Kishi, CEO, Deutsche Securities Saudi Arabia. The European crisis may impact the Gulf in the significant retrenchment of European banks from business outside their home countries as they seek to repair their strained balance sheets and accommodate national governments' demands, Al-Kishi said in an exclusive interview with Khalil Hanware of Arab News. "The impact of this (European crisis) on the Saudi economy is very minimal given Saudi Arabia›s negligible dependence on foreign bank financing. However, the impact is significant on other countries in the Gulf where foreign lenders are major contributors to project and corporate finance transactions," he added.
What is the economic impact of the Arab Spring do you see in the Gulf?
With the exception of Bahrain, the impact of the so-called Arab Spring on Gulf economies will be minimal to mildly positive as some wealth and investment from affected countries gravitate toward the Gulf, which is viewed as a safe haven in relative terms. In the medium to long-term, as stability and security return to these countries, trade and investment with the Gulf and into these countries by Gulf investors will likely benefit. Dubai appears to stand out as the most visible beneficiary of the turmoil gripping some countries in the region and it's my view that this gain by Dubai is likely to outlast the instability being seen in countries affected by this phenomenon.
The euro zone debt crisis has dented the economies of various countries in Europe and in the world. What impact will it have on the Gulf region?
It is reasonable to expect that to the extent such a crisis had precipitated economic recession in Europe and a significant slowdown in economic growth in Asia and globally, the economies of the oil exporting countries of the Gulf have been affected. Recession in Europe and slowdown globally has reduced the growth in demand for crude oil and petrochemicals reducing these commodities' prices and thus translating into lower revenues for Gulf countries. The impact on state spending is not likely to be appreciable in the short term but if the situation in Europe drags on much longer, governments in the region might be forced to scale back spending plans. That said, I do think Saudi Arabia will show a great deal of resilience. Another facet of the European crisis impacting the Gulf region is the significant retrenchment of European banks from business outside their home countries as they seek to repair their strained balance sheets and accommodate national governments' demands. The impact of this on the Saudi economy is very minimal given Saudi Arabia' s negligible dependence on foreign bank financing. However, the impact is significant on other countries in the Gulf where foreign lenders are major contributors to project and corporate finance transactions.
Oil prices are trading around $ 100 a barrel. The IEA recently predicted that oil prices would reach $ 150 a barrel. Do you agree with the IEA predication?
Predicting volatile commodity prices is an exercise that lacks any sense of accuracy by design and therefore I am not eager to participate. That said, recent research by Deutsche Bank predicts that oil prices will hover around $ 96 a barrel for WTI in 2013 and $ 100 a barrel in 2014 and 2015. For Brent, Deutsche Bank expects the price in 2013 to be in the $ 104 a barrel range and to be close to $ 110 a barrel in 2014 and 2015. But it's a volatile market that is prone to all kinds of factors.
Is the euro in trouble due to the euro zone debt crisis? Will the dollar continue to dominate the Forex market?
The euro has been affected negatively by the sovereign debt crisis in Europe but it is holding up remarkably well given the level of negative attention placed on the sovereign debt situation in Europe. The euro's survival and strength are political and economic propositions. I do think that the euro will be defended and supported strongly by the powerhouses of Europe, Germany and France as we have been seeing in reality since the inception of this situation in Europe. The dollar will continue to be a very important reserve currency for the world for a long time to come, but there is definitely room for the euro to play an important role going forward and perhaps more prominently as the European situation improves.
Everybody is talking about rising inflation and food prices. Do you think inflation and food prices will come down in the near future in the Kingdom?
Food prices and inflation is not a Saudi phenomenon, it is a global one. It is driven predominantly by structural changes in Asia that will likely persist for some time to come and by natural causes that tend to have a short-term inflationary impact. I do expect the impact on Saudi to become less pronounced as the impact of natural phenomena such as droughts wanes.
Saudi Arabia has improved its ranking in the Global Competitiveness Report released recently despite the global economic slowdown. Do you think the Kingdom's bold economic policies are paying off?
Most certainly but we should not sit on our laurels and slow down the reform process under way. We still have a long way to go in terms of improving Saudi Arabia's global competitiveness and attractiveness from a foreign investment perspective. Some of the reforms will take time, hard work, steely determination and commitment including in areas such as the legal system, business regulations and the educational complex.
Saudi Arabia is adopting various reforms to attract foreign direct investment (FDI).
How can investments be brought into the Kingdom and in which sectors?
As I need above, significant progress has been achieved but we have some way to go. Some fundamental reforms, which are being considered by the government, including in the legal and regulatory systems governing business, intellectual property and investor rights are critical. Foreign ownership rules will have to be relaxed further. We will also have to modernize our labor laws and institute effective incentives for the private sector to train and retain Saudi nationals. We will also have to make it easier for foreign investors and professionals to travel into and establish residence in the country. Investors will invest in places that welcome them. Finally, we have to invest in our airports and improve the country's accessibility for travelers from abroad and intra-country. Modernizing and streamlining our import-export and shipping infrastructure will also be important. I have always maintained that Saudi Arabia is not in need of foreign capital because it doesn't have enough of it. We need access to technology, know-how and best practice and one of the best ways for ensuring that those are brought into the country is to have foreign capital come into the country. If foreign capital is deployed in the country, the investors will have a genuine interest in achieving success. That is, they have "skin in the game." I think foreign investors should be welcomed in manufacturing, especially downstream industries from our hydrocarbon and mineral resources, infrastructure projects, including power, water, aviation and transportation, construction and contracting as well as services.
How important is the Kingdom's role in the global economy? What role do you see for Saudi Arabia in the G2O?
Saudi Arabia's role in the global economy and G2O is very significant as the largest and most influential player in the global energy field, playing a critical role in providing stability, security and predictability to the world's crude oil supply. Beyond oil, Saudi Arabia's role as a leader of moderate Muslim and Arab states is similarly critical for regional and global stability. Saudi Arabia will continue to play a remarkably important role within the G2O.
Do you think the ongoing Nitagat program will create more jobs for Saudis?
It will force companies to hire Saudis to meet the required quotas. However, this will not guarantee Saudis sustainable high-quality jobs. It should be viewed as a single element in a broad set of measures that are designed to give Saudis the opportunity to pursue high quality jobs. And like many other well-intended measures or laws, it is susceptible to abuse by parties who are intent on achieving no more than optical compliance with the law.
What will be the impact of the mortgage law on the Saudi housing market?
The mortgage law is an important step forward for the Saudi housing market. It is a necessary law but not sufficient by itself to address the key challenges Saudi Arabia faces in the area for housing shortage. The law will help attract more capital from banks and private sector finance companies into funding residential properties but will need to be complemented by measures that will address the major challenge in this area which is the availability of affordable housing. Affordability is the major issue in the Kingdom. Measures to develop land for residential use and thus lower prices of residential real estate will help. It will also be important to establish the mechanisms of channeling funding from capital markets (domestic and international) into financing homes. Government and bank funding alone will not be sufficient.
Saudi banks offer home loans on a limited basis. What role should banks play in housing development?
Banks originate mortgage loans and extend credit to other mortgage originators. They also buy loans from mortgage originators in some instances. In addition, they provide the necessary financing for developers and contractors in order to execute these projects. As such, their role in the development of housing schemes is vital. Their reluctance to embark on large scale mortgage lending was rooted in the lack of a clear legal framework for enforcing security over financed properties. The mortgage law will help in this regard. It is important to note that banks' appetite for this type of risk will be enhanced significantly if the law is tested in court and enforcement is executed reasonably and predictably.
Saudi Stock market is undergoing a very turbulent period. Despite CMA's (Capital Market Authority's) efforts, the market has not stabilized yet. In which direction is the market heading?
Stock market volatility is not unique to Saudi Arabia. All equity markets globally are showing higher levels of volatility due to the turbulence in Europe, the uncertainty in the US and the slowdown in key emerging markets such as China.
The Saudi market's volatility is exacerbated by the disproportionately large participation of retail investors in the market, whose behavior and buy/sell decisions are driven by rumors and hearsay. A higher participation by institutional investors will lower the market's volatility.
So far the Saudi stock market has not opened directly for expatriates though they can invest through mutual funds. Do you think it is time for Tadawul to open doors to expatriates?
Foreign investors can access the market not just through mutual funds but also through total return swaps, a market in which Deutsche Securities is quite active. We are very supportive of CMA and Tadawul in their approach toward opening the market to foreign investors and fully understand and appreciate their desire for a well thought-out and measured approach. After all, it is not in anyone's interest to create massive imbalances in or disruptions to the market just for the sake of claiming to have an open market.
What advice do you have for investors in 2012?
My advice is to seek quality, be prepared for volatility persisting for some time, diversify across asset classes and avoid excessive leverage.
SMEs are considered the backbone of an economy. What role do you see for them in the Kingdom's economic development?
Like in any other country, small businesses should be nurtured and supported to grow our nonoil economy, provide high quality jobs for Saudis and improve the prospects of the national economy on a long-term basis. We are pleased to see the amount of attention and support given by the government to small business, most notably including the Kafala program, the guarantee scheme offered to SMEs.
Where is the global economy heading?
I think addressing the structural issues in Europe will take time, meaning that Europe's growth will be weak for a few years to come. The US economy, with a massive debt burden and massive deficits, will also grow at a rate that is not likely to exceed 2.5 percent per annum over the next few years. China's growth will likely moderate to the 7 percent ballpark, which may be required to achieve some necessary structural changes to the Chinese economy. The era of abundant credit, cheap commodities and low-labor costs that we saw prior to the sub-prime crisis is not likely to return. The process of deleveraging and restructuring under way at present is likely to take a few years.
What role is Deutsche Bank playing in the Kingdom?
Deutsche Bank has two legal entities in Saudi Arabia -- a branch that is licensed by SAMA (Saudi Arabian Monetary Agency) to conduct commercial banking activities and a securities company, Deutsche Securities Saudi Arabia, to conduct securities business as licensed by the Capital Market Authority. The bank also has a minority stake in a mortgage finance company that provides Shariah-compliant home financing solutions.
The bank is fully committed to Saudi Arabia across all its divisions and is very bullish on the prospects of the Saudi market. Deutsche's business in Saudi has grown significantly and the bank has won several important awards recently including Best Foreign Investment Bank in Saudi Arabia, in addition to many others. We see our role as helping bring financial know-how to the country, helping develop the local capital markets and financial industry, developing local financial talent, providing our Saudi-based clients with advice and innovative solutions and giving them access to global markets and opportunities. We also help attract foreign capital and investments to Saudi Arabia.
Saudi Arabia will show a great deal of resilience in the context of the euro zone debt crisis and Arab Spring, according to Jamal Al-Kishi, CEO, Deutsche Securities Saudi Arabia. The European crisis may impact the Gulf in the significant retrenchment of European banks from business outside their home countries as they seek to repair their strained balance sheets and accommodate national governments' demands, Al-Kishi said in an exclusive interview with Khalil Hanware of Arab News. "The impact of this (European crisis) on the Saudi economy is very minimal given Saudi Arabia›s negligible dependence on foreign bank financing. However, the impact is significant on other countries in the Gulf where foreign lenders are major contributors to project and corporate finance transactions," he added.
What is the economic impact of the Arab Spring do you see in the Gulf?
With the exception of Bahrain, the impact of the so-called Arab Spring on Gulf economies will be minimal to mildly positive as some wealth and investment from affected countries gravitate toward the Gulf, which is viewed as a safe haven in relative terms. In the medium to long-term, as stability and security return to these countries, trade and investment with the Gulf and into these countries by Gulf investors will likely benefit. Dubai appears to stand out as the most visible beneficiary of the turmoil gripping some countries in the region and it's my view that this gain by Dubai is likely to outlast the instability being seen in countries affected by this phenomenon.
The euro zone debt crisis has dented the economies of various countries in Europe and in the world. What impact will it have on the Gulf region?
It is reasonable to expect that to the extent such a crisis had precipitated economic recession in Europe and a significant slowdown in economic growth in Asia and globally, the economies of the oil exporting countries of the Gulf have been affected. Recession in Europe and slowdown globally has reduced the growth in demand for crude oil and petrochemicals reducing these commodities' prices and thus translating into lower revenues for Gulf countries. The impact on state spending is not likely to be appreciable in the short term but if the situation in Europe drags on much longer, governments in the region might be forced to scale back spending plans. That said, I do think Saudi Arabia will show a great deal of resilience. Another facet of the European crisis impacting the Gulf region is the significant retrenchment of European banks from business outside their home countries as they seek to repair their strained balance sheets and accommodate national governments' demands. The impact of this on the Saudi economy is very minimal given Saudi Arabia' s negligible dependence on foreign bank financing. However, the impact is significant on other countries in the Gulf where foreign lenders are major contributors to project and corporate finance transactions.
Oil prices are trading around $ 100 a barrel. The IEA recently predicted that oil prices would reach $ 150 a barrel. Do you agree with the IEA predication?
Predicting volatile commodity prices is an exercise that lacks any sense of accuracy by design and therefore I am not eager to participate. That said, recent research by Deutsche Bank predicts that oil prices will hover around $ 96 a barrel for WTI in 2013 and $ 100 a barrel in 2014 and 2015. For Brent, Deutsche Bank expects the price in 2013 to be in the $ 104 a barrel range and to be close to $ 110 a barrel in 2014 and 2015. But it's a volatile market that is prone to all kinds of factors.
Is the euro in trouble due to the euro zone debt crisis? Will the dollar continue to dominate the Forex market?
The euro has been affected negatively by the sovereign debt crisis in Europe but it is holding up remarkably well given the level of negative attention placed on the sovereign debt situation in Europe. The euro's survival and strength are political and economic propositions. I do think that the euro will be defended and supported strongly by the powerhouses of Europe, Germany and France as we have been seeing in reality since the inception of this situation in Europe. The dollar will continue to be a very important reserve currency for the world for a long time to come, but there is definitely room for the euro to play an important role going forward and perhaps more prominently as the European situation improves.
Everybody is talking about rising inflation and food prices. Do you think inflation and food prices will come down in the near future in the Kingdom?
Food prices and inflation is not a Saudi phenomenon, it is a global one. It is driven predominantly by structural changes in Asia that will likely persist for some time to come and by natural causes that tend to have a short-term inflationary impact. I do expect the impact on Saudi to become less pronounced as the impact of natural phenomena such as droughts wanes.
Saudi Arabia has improved its ranking in the Global Competitiveness Report released recently despite the global economic slowdown. Do you think the Kingdom's bold economic policies are paying off?
Most certainly but we should not sit on our laurels and slow down the reform process under way. We still have a long way to go in terms of improving Saudi Arabia's global competitiveness and attractiveness from a foreign investment perspective. Some of the reforms will take time, hard work, steely determination and commitment including in areas such as the legal system, business regulations and the educational complex.
Saudi Arabia is adopting various reforms to attract foreign direct investment (FDI).
How can investments be brought into the Kingdom and in which sectors?
As I need above, significant progress has been achieved but we have some way to go. Some fundamental reforms, which are being considered by the government, including in the legal and regulatory systems governing business, intellectual property and investor rights are critical. Foreign ownership rules will have to be relaxed further. We will also have to modernize our labor laws and institute effective incentives for the private sector to train and retain Saudi nationals. We will also have to make it easier for foreign investors and professionals to travel into and establish residence in the country. Investors will invest in places that welcome them. Finally, we have to invest in our airports and improve the country's accessibility for travelers from abroad and intra-country. Modernizing and streamlining our import-export and shipping infrastructure will also be important. I have always maintained that Saudi Arabia is not in need of foreign capital because it doesn't have enough of it. We need access to technology, know-how and best practice and one of the best ways for ensuring that those are brought into the country is to have foreign capital come into the country. If foreign capital is deployed in the country, the investors will have a genuine interest in achieving success. That is, they have "skin in the game." I think foreign investors should be welcomed in manufacturing, especially downstream industries from our hydrocarbon and mineral resources, infrastructure projects, including power, water, aviation and transportation, construction and contracting as well as services.
How important is the Kingdom's role in the global economy? What role do you see for Saudi Arabia in the G2O?
Saudi Arabia's role in the global economy and G2O is very significant as the largest and most influential player in the global energy field, playing a critical role in providing stability, security and predictability to the world's crude oil supply. Beyond oil, Saudi Arabia's role as a leader of moderate Muslim and Arab states is similarly critical for regional and global stability. Saudi Arabia will continue to play a remarkably important role within the G2O.
Do you think the ongoing Nitagat program will create more jobs for Saudis?
It will force companies to hire Saudis to meet the required quotas. However, this will not guarantee Saudis sustainable high-quality jobs. It should be viewed as a single element in a broad set of measures that are designed to give Saudis the opportunity to pursue high quality jobs. And like many other well-intended measures or laws, it is susceptible to abuse by parties who are intent on achieving no more than optical compliance with the law.
What will be the impact of the mortgage law on the Saudi housing market?
The mortgage law is an important step forward for the Saudi housing market. It is a necessary law but not sufficient by itself to address the key challenges Saudi Arabia faces in the area for housing shortage. The law will help attract more capital from banks and private sector finance companies into funding residential properties but will need to be complemented by measures that will address the major challenge in this area which is the availability of affordable housing. Affordability is the major issue in the Kingdom. Measures to develop land for residential use and thus lower prices of residential real estate will help. It will also be important to establish the mechanisms of channeling funding from capital markets (domestic and international) into financing homes. Government and bank funding alone will not be sufficient.
Saudi banks offer home loans on a limited basis. What role should banks play in housing development?
Banks originate mortgage loans and extend credit to other mortgage originators. They also buy loans from mortgage originators in some instances. In addition, they provide the necessary financing for developers and contractors in order to execute these projects. As such, their role in the development of housing schemes is vital. Their reluctance to embark on large scale mortgage lending was rooted in the lack of a clear legal framework for enforcing security over financed properties. The mortgage law will help in this regard. It is important to note that banks' appetite for this type of risk will be enhanced significantly if the law is tested in court and enforcement is executed reasonably and predictably.
Saudi Stock market is undergoing a very turbulent period. Despite CMA's (Capital Market Authority's) efforts, the market has not stabilized yet. In which direction is the market heading?
Stock market volatility is not unique to Saudi Arabia. All equity markets globally are showing higher levels of volatility due to the turbulence in Europe, the uncertainty in the US and the slowdown in key emerging markets such as China.
The Saudi market's volatility is exacerbated by the disproportionately large participation of retail investors in the market, whose behavior and buy/sell decisions are driven by rumors and hearsay. A higher participation by institutional investors will lower the market's volatility.
So far the Saudi stock market has not opened directly for expatriates though they can invest through mutual funds. Do you think it is time for Tadawul to open doors to expatriates?
Foreign investors can access the market not just through mutual funds but also through total return swaps, a market in which Deutsche Securities is quite active. We are very supportive of CMA and Tadawul in their approach toward opening the market to foreign investors and fully understand and appreciate their desire for a well thought-out and measured approach. After all, it is not in anyone's interest to create massive imbalances in or disruptions to the market just for the sake of claiming to have an open market.
What advice do you have for investors in 2012?
My advice is to seek quality, be prepared for volatility persisting for some time, diversify across asset classes and avoid excessive leverage.
SMEs are considered the backbone of an economy. What role do you see for them in the Kingdom's economic development?
Like in any other country, small businesses should be nurtured and supported to grow our nonoil economy, provide high quality jobs for Saudis and improve the prospects of the national economy on a long-term basis. We are pleased to see the amount of attention and support given by the government to small business, most notably including the Kafala program, the guarantee scheme offered to SMEs.
Where is the global economy heading?
I think addressing the structural issues in Europe will take time, meaning that Europe's growth will be weak for a few years to come. The US economy, with a massive debt burden and massive deficits, will also grow at a rate that is not likely to exceed 2.5 percent per annum over the next few years. China's growth will likely moderate to the 7 percent ballpark, which may be required to achieve some necessary structural changes to the Chinese economy. The era of abundant credit, cheap commodities and low-labor costs that we saw prior to the sub-prime crisis is not likely to return. The process of deleveraging and restructuring under way at present is likely to take a few years.
What role is Deutsche Bank playing in the Kingdom?
Deutsche Bank has two legal entities in Saudi Arabia -- a branch that is licensed by SAMA (Saudi Arabian Monetary Agency) to conduct commercial banking activities and a securities company, Deutsche Securities Saudi Arabia, to conduct securities business as licensed by the Capital Market Authority. The bank also has a minority stake in a mortgage finance company that provides Shariah-compliant home financing solutions.
The bank is fully committed to Saudi Arabia across all its divisions and is very bullish on the prospects of the Saudi market. Deutsche's business in Saudi has grown significantly and the bank has won several important awards recently including Best Foreign Investment Bank in Saudi Arabia, in addition to many others. We see our role as helping bring financial know-how to the country, helping develop the local capital markets and financial industry, developing local financial talent, providing our Saudi-based clients with advice and innovative solutions and giving them access to global markets and opportunities. We also help attract foreign capital and investments to Saudi Arabia.
© Arab News 2012
