Middle East: Cementing its Trade Credentials
Five
years on from the collapse of Lehman, has the Middle East avoided the worst of
the global financial crisis or have countries there felt some of the
fallout?
Post-crisis, the region remains robust. There
has been some disruption resulting from the Arab Spring, but trade has
maintained solid year-on-year growth and the Middle East has cemented its
position in global trade to become one of the world’s top six centres.
What of conflicts and political instability in the region? Have
both largely been restricted to individual countries, or have developments such
as the Arab Spring been destabilising for the region
generally?
It’s important not to overgeneralise, as
both the impact and the timing have shown considerable variation across the
region. This has produced some positive results for trade finance, which has
shown a rise, partly related to the increase in infrastructure spending. The
outlook is of course heavily dependent on political developments and the price
of oil. Asia remains the region’s fastest-growing trade corridor, which is led
by China, India and Vietnam.
Have conflicts reinforced
the position of wealthier countries such as Saudi Arabia and the United Arab
Emirates (UAE), to the detriment of others such as Egypt?
While the Arab Spring has had less of an impact on the Gulf
Co-operation Council (GCC) countries than some of their neighbours, we have
seen an increase in the flow of capital from the impacted countries to, for
example, the UAE. The conflicts have enabled Dubai, in particular, to establish
its position as a safe haven and subsequently become the world’s third biggest
re-export centre after Hong Kong and Singapore.
Are
major infrastructure projects still being planned and, if so, how is the
funding for these being arranged?
Yes, there are
definitely more developments to come, facilitated by programmes such as the Abu
Dhabi Economic Vision 2030. The World Bank has indicated that a US$106bn annual
spend on infrastructure will be needed between now and 2020, but the resulting
funding gap of US$60bn has to be addressed. In order to support this,
oil-producing countries may need to spend around 11% of their gross domestic
product (GDP).
That said, funding sources are available, as
evidenced by the increase in export credit agency (ECA) activity. This is
driven by power generation and transportation projects, as well as the World
Cup in Qatar, which is now on the horizon.
Is there
evidence of global banks with a Middle East presence either exiting or scaling
down their operations? If so, are local banks moving in to take available
business opportunities? Are there many partnerships or correspondent bank
relationships between global banks and local banks?
That’s an interesting question. While we’re unable to comment on European
banks’ exposure levels in the region, there could be a number of factors either
driving down or changing the sources of funding and the mix of exposures.
Some banks may be exiting because there is a surplus of liquidity, and
this is helping to drive down pricing. However, BofA Merrill continues to grow
its business in the region through local strategic alliances, and adopting a
holistic approach to clients’ needs.
Arrangements with local banks
in specific markets is part of our operating model and at the start of 2011we
announced a strategic relationship with Abu Dhabi Commercial Bank (ADCB). It
allows clients requiring services in the region to access the local
capabilities and expertise of ADCB, and for ADCB’s clients to leverage our
global network of corporate banking and cash management capabilities.
Analysts have spoken of the opportunities that exist in the Middle
East for the payments industry. Have these been realised? If not, what has held
back development?
Opportunities definitely exist as
the individual GDP and trade of these countries steadily increases, leading to
a rise in both intra-GCC and intra-country payments. However, due to the
expatriate community, remittances out of the region are also huge at around
US$80bn, of which $30bn comes from Saudi Arabia alone and goes to destinations
such as India, the Philippines and Bangladesh.
There are huge
opportunities for banks and corporates alike, but how do you capture them?
Governments are doing their best to help streamline payments processes, through
developments such as the Wages Protection System and eMIRSAL2 scheme to
electrify customs clearing processes. However, there is still a lot of cash in
the region. Cheque usage remains and the continued need for wet signatures is
proving a hindrance.
What are the main treasury issues
for those working in local companies and for treasurers within the Middle East
subsidiaries of Western companies and multinationals?
For many years, access to liquidity was undoubtedly one of the main issues,
but it’s steadily becoming less so as there is now a large number of liquid
local banks. Counterparty risk remains a major concern for both GCC companies
and the Middle East/North Africa hubs of larger organisations. Trade and bank
counterparty risk have definitely become more of an issue in the wake of the
Arab Spring.
In the past, local companies typically had one single
local treasury but many have steadily grown and moved into international
markets, introducing a need for guidance from the banking community on how
processes and payment systems differ in the West. Airlines are a good example
of this, with local carriers continuing to spread their international routes
and operations.
This means that there is a requirement to develop a
local talent pool of individuals with treasury experience. In the past, expat
treasurers provided training but locals are now becoming much more involved.
The Association of Corporate Treasurers (ACT) is a major training provider for
local talent.
How advanced is the technology used by
treasury departments in the region, or is there a wide
disparity?
There is considerable variation across
clients and even within individual corporations. You may get a situation where
the company has invested heavily in an enterprise resource planning (ERP)
system but senior individuals still want to see a piece of paper for approvals.
So investment can sometimes be ahead of adoption. Overall, this disparity makes
it difficult to generalise.
How do you see treasury in
the region developing between now and 2020? Could there potentially be a single
currency adopted as in the eurozone? If not, what factors would prevent
it?
For the past 10 years or more there has been talk
of developing a regional currency. Originally it was promoted as a potential
rival to the euro, although the eurozone’s more recent crises have put an end
to the comparison. While it’s unrealistic to expect any project to get off the
ground as early as 2020, the process may be aided by the fact that the GCC
consists of six countries rather than the eurozone’s 17 and they share similar
macroeconomic characteristics and the same export markets.
As we
consider both the opportunities and challenges at hand, trade finance and cash
management-related services in the region are more important than ever. These
treasury solutions, together with shifting trade flows and investment in
infrastructure will have huge significance as Middle East realises its
potential as a major global trade hub.