Gulf must expand economy

Mohammad Al-Tuwaijri, regional head of global banking and markets at HSBC in the Middle East and North Africa (MENA) spoke to Arab News on different aspects and plans of HSBC. Al-Tuwaijri, a well-known banking professional with over 18 years of senior banking experience and in-depth knowledge of MENA market, held leading positions with reputable companies like JP Morgan and the Saudi British Bank (SABB) in the past. Al-Tuwaijri is confident about the growth prospects of the region and advises to look beyond hydrocarbon wealth. Arab News: Being a top banking professional with more than 18 years’ experience, and also acting as non-executive board member representing HSBC Holding at the board of the Saudi British Bank ... could you please tell us the Middle East’s growth prospects? I think they are strong. But I also think that it’s important to look beyond just hydrocarbon wealth, which the region is so famous for. We’re witnessing a maturing of the region, corporations growing and exporting more, and outside investment coming into the region. One of our business lines is “multinationals” and this team is set up to help the subsidiaries of these companies not only to come to the UAE but also expand their footprint across the MENA region. I was talking to a leading US soft-drink manufacturer, which set up a subsidiary in Pakistan about 4 years ago. For one of its brands, it is now the second biggest market after the US. This is consistent with other consumer brand companies that include markets such as Egypt and Pakistan as global priority countries. This regional growth story is fundamentally connected to Asia. The advent of the “New Silk Road,” the re-emergence of the ancient historical trade routes between the Middle East and Asia, has been well documented. But it’s accompanied by a fundamental shift in relationships between the Middle East and Asia. The Middle East is metamorphosing from being a commodity depot, from where fast-growing Asian economies collect the energy required to power their growth in a simple cash transaction, into a new relationship, a strategic investment partnership in mutual growth. The past decade has seen the region move from a Depot to Strategic Partner with Asia, and this trend is now irreversible in my view. What is the impact of Arab Spring on banking in the Gulf in general and HSBC in particular? It’s difficult to give one answer to this, as I think one of the lasting affects of the Arab Spring will be to remind the world that there’s no one Gulf. When Arab Spring started to gain momentum, it did so quickly and I don’t think that anyone could have predicted the speed and the breadth of the changes we saw. The international world woke up to the difference between Saudi Arabia and Egypt, for instance, and for some people that was entirely new. They understood that there were regional differences and acted accordingly. However, when we look at its long-term impact — for us at least — it’s minimal. During Arab Spring, HSBC was there for its customers: We were the first bank to reopen in Egypt following the revolution, and in Bahrain, Algeria, Libya and other countries that saw unrest, we kept our retail branches and channels functioning, corporate customers’ employee payrolls being paid, and our people and premises safe. But, turning to the UAE as a whole, it was a net beneficiary of Arab Spring. What we saw was a real flow of capital into the UAE and away from ‘risky’ areas. HSBC too clearly benefited from this as we were seen as the ‘safe choice’ for all manner of customers — whether international corporates or retail customers — and business didn’t just stop. So, this idea that the region was in complete paralysis was not correct. We saw tension clearly, but through this we saw a banking system that was arguably more important than ever. Has unrest in the region curtailed the flow of money to the region? I don’t think it has when you look over a medium- to long-term horizon. There are a number of reasons for this. First of all, it’s important to note that the region has a number of strong fundamentals — such as hydrocarbon wealth (which has increased given the surge in oil prices) and young populations, and the Arab Spring hasn’t altered this. Second, when we look at the low returns in the West, the Emerging Markets — which of course, includes MENA — remains attractive just on a percentage return basis. But finally, I think it’s important to look at the pace of development in the region — whether it’s of the capital markets, or physical infrastructure building. Our project finance team is advising on tangible projects — such as Kuwait’s wastewater plant — that really help develop the region and help populations. The scale of these projects is immense, looking at the Kuwait plant for example — it will increase the southern region of Kuwait’s capacity for dealing with its wastewater by nearly 20 times. Why? Because the growth of the population requires this. There’s tremendous opportunity in MENA — wherever investors look — and that remains attractive. In the first month of the year, we issued four sukuk for investors — including one for Saudi Arabia’s GACA (General Authority of Civil Aviation) that really changed the Saudi sukuk market. We were seeing news reports of the market being stalled and quiet, and it just didn’t match what we — and our customers — were seeing. Could you please tell us more on the issuance of sukuk in the region? Sukuk is an asset class, which is firing on all cylinders. Last year saw a record volume of issuances and this year, we expect the market to hit another high. Globally, we think we’ll see an increase of 66 percent in sukuk issuance this year to $44 billion. MENA, which is also set for a good year, should contribute 32 percent, or $14 billion, of issuances. What is going to fuel this strong performance is the abundant liquidity, which is looking for Islamic homes. If you set this against a historically limited supply and the euro zone debt credit, you’ll see why we are so bullish. Do you think Saudi Arabia and the UAE will dominate the regional sukuk issuance? Can you substantiate it with some figures? So far this year, Saudi Arabia and the UAE have led the sukuk market and we expect this to continue. In the UAE, there has been about $1.7 billion of issuance since January 2012. We expect total issuance out of the UAE to be between $4 billion and $5 billion in 2012. Saudi Arabia, so far has issued $4 billion. The General Authority for Civil Aviation sukuk, on which HSBC was the lead manager, is the largest single tranche sukuk to date. We expect sukuk in Saudi Arabia to be highest ever in 2012, both in terms of the number of issuers and the amount raised. High level of domestic liquidity and an increasingly diverse investor base are attracting larger number of issuers to fund through sukuk. We also expect some of the infrastructure projects to be financed through sukuk, including some of the government-backed mega projects that will add to the diversity of issuers. But I think it’s important that we don’t just see sukuk as trailing, or replicating, the bond markets. There’s real innovation too. Not only did the GACA sukuk establish a ‘risk free’ pricing point for future sukuk in the region but we also helped establish the first ever sukuk program in Saudi Arabia for Almarai Company. This effectively allows a company to raise money by launching sukuk into the market quickly and efficiently, which is ideal for issuers intending to access the market frequently and flexibly. Being a global bank, how do you consider other regional banks in terms of competitiveness? HSBC is in a unique position. To our regional customers, we are a regional bank. We’ve been in the UAE for over 60 years, and have a presence throughout MENA — we’ve even got a Global Markets dealing room in Abu Dhabi. We are part of the fabric of society and remain resolutely committed to it. We take Emiritization very seriously indeed. Our CEO of the UAE is Emirati and we have a dedicated graduate program to attract the best Emirati graduates. They rotate through the bank, and we’re getting good feedback that this is really helping develop the breadth and depth of their careers. Likewise, when we look at Saudi Arabia, our deal teams are largely Saudi nationals. This matters to us and our client base. They know they are dealing with real local experts who have often grown up in the same regions as our clients. However, what we can do that a pure regional bank cannot is ‘connect’ your business. What we mean by this is that we can issue a bond in MENA, but take it to Asian investors as we recently did for Emirates NBD. Likewise, we can identify investment opportunities for our local Global Banking customers in Latin America, Europe — wherever. Again, a local bank could not do that for customers. It’s also important that we’re not seen as just a global bank. While we operate globally, our model is different. We are present here — in scale — and don’t just fly in from London or New York to execute a deal and leave. For instance, while our global competitors have closed their local trading desks, we’ve kept ours open. The reason for this is very simple. That’s the best way for us to give our customer local knowledge. Our customers can be sure that we are committed to MENA, and that consistency is incredibly important. Are there signs that it are starting to emerge from the downturn? What will be your future strategy? I think there are signs. Part of the reason HSBC remained strong is that our business model is diversified, so we made money with custody and clearing even though — for instance - equity markets dropped. As we entered into 2012, what was interesting was the initial flurry of sukuk. Part of that was issuance from entities that didn’t want to launch bonds or sukuk last year — and the new interest suggests that people are at least a little more confident now. There are also signs that the maturing of the regional markets is gathering pace. It remains to be seen whether the UAE and Qatar will form part of the MSCI Emerging Markets Index this year. This certainly isn’t a foregone conclusion — but if successful, this would lead to more international money come into the region as global Emerging Markets funds will flow toward these important markets. At present, these markets are classified as “Frontier” and very little Institutional money follows the MSCI Frontier indices. Some press reports indicate that HSBC has plans to scale down its private banking operations in the Middle East? Is it true? Only partly. The press reports concentrated just on the numbers aspect of this, what wasn’t clear in the article was the direction we’re taking the business in. We came to a decision that what was important to our clients was our ability and our reach. So, identifying international opportunities through the HSBC global network for our clients — whether its investments in Latin America, or Saudi Arabia — wherever. That’s our key differentiator. What this meant was that we didn’t need the infrastructure locally — there’s no value for our clients in processing money locally. We could do that at our centers far more effectively. So, it was a shift in the business rather than an issue of pull back. HSBC is involved in various in-depth economic reports. What are the issues of focus? HSBC has two local research departments — one that looks at the macro, that is, what regionally is happening and one that looks at particular stocks. Our equity research team is one of the largest on the ground, and we’re particularly proud of the fact that we’re spread across the region, with a presence in Saudi Arabia, Cairo and the UAE. Our research team has won a number of awards for their work — from being named “Best Research House — Economics” by Euromoney to Best Brokerage House in the Middle East and North Africa in the annual Extel Survey Please tell us about HSBC activities in the Gulf region? That’s a broad question. We run a very diversified business in MENA — helping our retail, corporate, or Global Banking and Markets customers. What this effectively means is that, whatever you need to do in MENA, we can help you — whether you’re a retail customer looking for an account, or a corporate bank looking for a loan or help with your currency exposure or a large corporation looking to issue a bond. And, with our Islamic Business (HSBC Amanah) fully embedded in our business, we can easily issue a sukuk for our customers who want Shariah-compliant financing. When we look at our Global Banking and Markets business, we have the scale and ability to help our customers with their broad needs. Our bond and sukuk business is by far the largest and most successful in the region and our Project Finance business the largest advisory business in the region. This scale matters to our customers because it means we have the ‘fire power’ to help. But, this isn’t all we do. We’ve seen the region’s banking market mature and now help many of our customers — small and large — with their currency exposures and their risk management. The Middle East is a key area for HSBC, so how are you going to make more profit from the region? HSBC in the Middle East and North Africa reinforced its position in 2011 as the leading international bank in the region, reporting $1.5 billion in profit before tax. In view of the social and political events that took place in MENA last year, this near-doubling of profit before tax is a clear demonstration of the progress we have made. However, I’m focused on the regional Global Banking and Markets business and our core strategy hasn’t changed as a result of Arab Spring. We are committed to helping our international customer base succeed in MENA. We are committed to the region, and committed to joining up the world for our customers. If we look at the M&A market, that is something where you need an international presence. Qatar has become one of the fastest growing economies... Are you going to focus on Doha? If yes, please elaborate your plans. HSBC has a presence of over 58 years in Qatar and has throughout played an important role in the local economy. We will be very keen to replicate some of the past successes. Continued efforts will include our advisory services to the government or related entities on specific initiatives that may require substantial financing, or we will look into opportunities of project financing or funding.