London, Asharq Al-Awsat—Egypt and the Gulf have the largest economies in the Arab world, but are facing vastly different challenges. Egypt is in the process of recovering from an unstable political transition, while its vital tourist sector has witnessed significant deterioration following popular unrest and a worsening security crisis. As for the Gulf, while it was not overly affected by the global recession, it is now looking to diversify and build on its economic strengths. Cairo is seeking to overcome its economic problems by promoting stability and securing foreign investment, while the Gulf States, they are seeking to promote a stable expansion and establish a good business environment.
As the GCC uses its own economic strength and stability to bolster Egypt during this period of instability, Asharq Al-Awsat spoke with Richard Banks, the head of Eurozone Conference’s emerging markets unit. His company is currently co-hosting the Egypt/GCC Investment Forum in Cairo, which will address the challenges facing both Egypt and the Gulf and how the GCC states can support their neighbor.
Asharq Al-Awsat: I would like to touch on Egypt. May I ask what kind of advice you would give to Egypt’s leaders to help rebuild its economy?
Richard Ensor: I think the first thing we said to the new administration in Egypt was, ‘Get out and talk to people.’ You know, you need to be talking and having a dialogue with investors and financiers and communicating clearly the reality of the situation on the ground in Egypt. We’ve seen a lot of pictures in the media—particularly on television—of crowds and violence and trouble, and really, I have been there throughout. I was there for the June change, I was there in the revolution of the 25th of January. At the moment, Cairo is not an unsafe place—no more than it normally is, in the sense that what worries me about coming to Egypt is the traffic, especially on the ring road. But the government has not been out there, there’s been no real voice for Egypt to say to the international media: Look, you see photographs and pictures of violence. Those are very isolated incidents, and in the vast majority of the rest of the country, even throughout this transition, life has gone on pretty much as normal. So that was the first thing we said to them.
And then, I think the other thing that they really need to address as a matter of urgency is what’s happening in the courts. There are court cases against businessmen and against investment, particularly privatization that has occurred over the last five years. That is the one thing that investors hate, that their investments might be legally insecure and subject to legal action. Now, of course, if there is corruption and wrongdoing, or anything like that, then they should be subject to legal action. We would never advocate people behaving in a criminal or corrupt way. But, this isn’t what is going on. There are cases, in our opinion, where they are being taken to court for no reason other than a technicality. They are not politically motivated—the government is not against private enterprise or against foreign investors, there is no question of that—but it’s still a very damaging thing. They need to address that very, very quickly, if they are to get capital to flow back into the country.
Q: So how would you evaluate the business environment in Egypt right now?
Well we don’t do technical analysis of the environment, because there are plenty of other people doing that. I think the best thing you can say about Egypt is that S&P [credit rating agency Standard & Poor’s] upgraded Egypt’s credit rating [in November]. Ok, admittedly, it’s still quite low, but the point is that the momentum is turning. It is moving back to the right sort of area. There’s a long way to go, many things to do. I think the environment is poor, but improving quite rapidly. . .
Q: Last question about Egypt. In your opinion, which sector is the most crucial to Egypt’s economic recovery?
Tourism. I mean, Egypt has four major sources of foreign currency: remittances from Egyptian workers overseas, the Suez Canal, and previously they used to have FDI [Foreign Direct Investment], but by far the most important is tourism. And Egypt has a very—in principle at least—a very attractive tourist product, both in the Red Sea coastal areas and, of course, in the monuments in the pharaonic part of Egypt. Now, it desperately needs an upgrade in the quality of its tourism infrastructure. But it is a market that, with political stability, can come back. Egypt does have a very strong, competitive product. It’s a 365-days-a-year business, unlike in Turkey, which is very seasonal. It has an established track record and is, relatively speaking, quite low cost. So, that is an area where I think Egypt’s economy is and remains competitive. It needs more investment, but it is also an area that could return very quickly as travel restrictions [are lifted] and as the political situation improves.
Q: Can we talk about the Gulf Cooperation Council initiative on Egypt?
Yes, Euromoney is involved—very pleased to be involved—in co-organizing a major event in Cairo on the 4th and 5th of December, which is called the Egypt/GCC Investment Forum. That is being put together as a government-to-government initiative by the GCC, in partnership with the UAE government in particular (although all the other over governments are involved) and the government of Egypt. We are involved there in helping to bring about 200 Gulf investors to meet with their counterparts in Egypt, to try and get capital flowing again.
Q: What are Euromoney’s goals in the GCC states?
Our goals are to provide a platform for the GCC—and the MENA region and wider, as we are not focused specifically on that region, but we do have a very strong franchise there— for governments and private sector businesses from the region to tell their economic story to an international audience. [We also want] to bring people from all over the world, from Europe, from America, from Asia, from Latin America. We’ve taken delegations from Brazil to the UAE and to Qatar. We’ve taken Chinese people there, to say that this is what the real picture of this region is. This is what this region is doing, this is how it works, and here are the people that are running this. [And we want] to provide an environment—both in a physical sense, in a conference, or online, or through publications—that explains the reality of the GCC and MENA story to a global audience of financiers, investors, companies and business partners.
Q: There has been talk of Euromoney trying to help Saudi Arabia position its economy as a financial services leader in the Middle East region. What are Saudi Arabia’s chances of success, given the strength of financial service hubs in the region, such as Dubai and Bahrain?
Saudi Arabia is the leader in region. Saudi Arabia is by a long way the biggest economy, [and] by a long way the most important economy, in terms of its hydrocarbons. In terms of its real economy—its non-oil economy—it’s the leading economy. In terms of the financial power of the country, it is far more powerful and carries far more weight in global circumstances and the global environment than any of the other countries, hence its membership of the G20.
You shouldn’t compare Saudi Arabia with Bahrain or Dubai, which operate essentially as offshore centers. The reason you locate a financial business in Bahrain is not primarily to serve the Bahraini market, but rather to act as a conduit for other markets, particularly Saudi Arabia, because of different regulations. And Saudi Arabia, I think, has no desire to be an offshore center. It is an onshore center. I mean, London is effectively the offshore center for the entirety of Europe, and indeed for many other parts of the world with different markets.
But Frankfurt and Germany, from an industrial point of view, is a far more important economy than the UK. So, you know, if you compared European economies with GCC economies, London would be Dubai and Frankfurt would be Riyadh. So that’s the role that Saudi Arabia will play, I think. You know it’s an economic powerhouse in its own right, so it doesn’t need to exist as a service center, which is what Dubai does very successfully—and Bahrain, too—for other parts of the world. Saudi is Saudi and it should be being Saudi and not an offshore place.
Q: Saudi Arabia does not yet have a bond market, but it has built the King Abdullah City, a financial city similar to London’s Canary Wharf, in the hopes that it will develop into another Canary Wharf.
The region needs bond markets. Absolutely, that is something we advocate every single day. In fact, I was doing a broadcast recently that was about that, saying that it’s absolutely vital for the future development of the region that there are deeper, more liquid capital markets. The policymakers know that. All the central banks—and SAMA [the Saudi central bank] is included in that—are aware that they need to have more tools to be able to manage liquidity, inflation and all these sorts of things. And of course, the currencies in the region —and I think that is the correct thing—remain pegged in some form to the [US] dollar, and that does limit the monetary policy tools that a central bank governor has. As the region’s economies become more integrated into the global economy, then if you were a central bank governor you would think to yourself, ‘Well, what do I do to manage liquidity and manage inflation in the system?’
The bond market is a method of doing that. There are others, like capital management—the way you manage the capital of banks and the banking system, and liquidity within the banking system. But, generally speaking, bond markets, right from the short end to the long end, are relatively good ways of sterilizing the shocks within the financial system. So, you need them.
Now, the question for Saudi Arabia [is] whether there should there be sovereign bonds. Should the government of Saudi Arabia be issuing sovereign debt? And from my point of view, the answer is unequivocally, absolutely yes. It’s not about borrowing because we need the money. It’s about how you manage the economy.
Q: But they’ve started. For example, the Ministry of Finance supported the General Authority of Civil Aviation’s (GACA) Islamic bonds, or sukuk, for building airports.
That’s a different thing. It’s a good thing, don’t get me wrong. I think GACA’s sukuk, and also those of Saudi Electricity, which is quasi-sovereign, are brilliant. Very important for the future development of the Kingdom to make the investment needs more efficient, and to make the companies that are making those investments more transparent and more compliant with good governance. It will also shift some of those financial requirements off the central government’s balance sheet. These are all good things.
But, what those bond issues don’t do is provide the government with the ability to manage certain aspects of the financial sector or the financial system. I believe—and I’m sure Fahad Al-Mubarak would disagree with me, but whatever, he’s the central bank governor, not me—that the government of Saudi Arabia should be issuing T-bills, they should have a repo market, they should have a properly functioning fixed-income market, whether that’s sukuk-style transactions [or otherwise].
Q: How do you evaluate the banking sector in the GCC generally—especially since they have begun to follow certain international regulatory standards, including the Basel III regulation that governs bank liquidity, among other things?
Basel III is due to come on the 1st of January—or, rather, the beginning of the implementation of Basel III is coming then. And again, that’s something that requires the development of the capital market—you need to hold certain types of financial instruments on the bank balance sheet, and at the moment there are very few AAA-rated regional bonds that can be held. So again, that actually has a negative impact.
Q: Is the GCC banking sector ready to follow these international regulations?
I think some of them are, but I think’s that’s the same everywhere. Globally, one of the most important things that is happening in the next six months is the European banks stress test. There will be banks in Europe who are not ready and who are not adequate. And I think that there are banks in the GCC area that are just as good as other banks out there with global norms. . . It is like any banking system, it has a variety of institutions.
With the exception of Saudi Arabia we are dealing with pretty small economies, even if they are very wealthy. QNB in Qatar, NBK [National Bank of Kuwait], and a couple of the big Emirati banks have got a 40 percent or 50 percent market share, so how would you grow them? The first answer would be to grow regionally, and then you have to have a Qatari bank buying a Saudi bank or an Emirati bank buying a Qatari bank. The idea is to have two or three regional banks which have a big market share, and that is not happening. Most of the big regional banks have small branches or rep offices in the other countries, but they are not major players. For instance, there is no Kuwaiti bank that is a major player in Saudi Arabia or a Saudi bank which is a major player in the Emirates.
They have to look at the wider region. You see QNB buying NSGB [Egypt’s National Société Générale Bank], which is a fantastic deal. You get a great bank at a great price. But, unfortunately, politics seem to be sort of an obstacle.
Q: It seems that the small businesses in Saudi Arabia and the GCC do not have a major role in the economy as a whole. How can that be changed?
It is not a problem specific to Saudi Arabia and the GCC: it is a real economic challenge. I am not a believer in government aid or support for these entities. The support should be through indirect measures, like taxation. The private sector should be allowed to grow, and [government] not be an obstacle to their growth through over-regulation.
Q: The banks in the GCC do not support small businesses; they only support huge companies. . .
Yes, but from a banker’s point of view, you are lending money and you need to have collateral, you need to have security. Banks do not invest: they lend. SMEs are not able to provide this security. It is the same for mainstream commercial British banks, which do not like lending to SMEs for exactly the same reasons: they have no collateral. The government has to step in and effectively guarantee a value for the SMEs.
Many SMEs in the region do not need or want capital, they need expertise, they need advice and they need the government to get out of the way. There are quite restrictive commercial laws. Not so much in Saudi, as it is quite advanced in this sense, but in places like Kuwait, there is legislation that is counter-productive for foreign investment or to the development of the private sector. For smaller businesses in the private sector, it takes time to register a business, and it is expensive. . .
I think the solution is a special series of regulations for SMEs. Maybe through the creation of special economic zones, special legal structures that enable more businesses to operate more effectively, and maybe to free them from some labor requirements: Let them get on and do it, rather than offering financial support through delegated budgets. It is a tricky one.
Q: There is talk about a more advanced GCC union, and especially of a single currency. Do you think that could happen? Would it be beneficial to the economies of the GCC?
The GCC common currency is not a bad idea because, basically, the GCC economies are relatively similar.
Q: Although the EU’s single currency is in serious trouble.
It doesn’t need to. I don’t think that the Euro is the right example for the GCC. A common currency in the GCC is a very workable idea, because the economies are so similar. They do not have thousands of years of history and shared culture. They are all relatively new. And, what we have seen through Europe is that, if you have a common currency, you have to surrender some kind of sovereignty to others. “Others” in this case will probably be Saudi Arabia, not because it wants to take [over] the region, but because it is 65–70 percent of the region’s economy. It is bigger than everybody else, but it is not bigger than everybody else combined. Examples: If there is a GCC common currency, there will be a GCC central bank and it will be located in Saudi, for instance.
Q: Do you think that this GCC currency should be pegged to the dollar?
I think it has to be, for a while. The GCC’s major export, hydrocarbons, is priced in dollars and therefore it makes logical sense to have a currency tied to the dollar.
Q: But the dollar fluctuates a lot, and it might harm the common currency. . .
There is also imported inflation, etc. If you have an inflationary environment and you have a currency tied to the dollar, then you need tools to manage it because you can’t appreciate the currency in order to manage it. But that is not the issue. The issue is the political one. It is sacrificing sovereignty. I don’t think the Emirates or Qatar or Kuwait or Bahrain wish to sacrifice aspects of their economic sovereignty to a centralized GCC central bank, which will be effectively dominated by Saudi Arabia because of its size. And that is what is going to stop it or delay it, not the technical details.