Cases for Transparency
Global downturns have a way of forcing action. What was perhaps overly ambitious in the past could be papered over as long as investors believed in the future and money was available. The climate has changed dramatically and so too has the response from business and government.
Case in point is Emaar’s proposed merger with government run Dubai Holdings, with Dubai Properties, Sama Dubai and Tatweer under that umbrella. For those not familiar with some of the landmark projects under these property brands, they include: the Burj Dubai, Dubai Towers and the giant Dubailand entertainment complex.
For one, this will create a $53 billion entity if it comes together as planned by autumn -- sizable by any global standard. Number two, expectations have changed in the region in part because of what Dubai Inc. has done over the past few years, having introduced a greater level of transparency into the process.
The word got out that there was something in the works, so instead of waiting until the structure of the deal was complete, Emaar and others decided to flip the switch. As a result, there remains a great deal of uncertainty whether a consolidated property group will be net positive to existing shareholders.
As the desert sands settled so too did the wave of negative comments surrounding the transaction. Robert McKinnon, Managing Director of Al Mal Capital believes that "from a property market perspective it is absolutely necessary and good for the market." McKinnon says the aim by the government is to clear up the property market in two years instead of letting it linger for a decade if not longer. McKinnon raised a valid question about the valuations which will be used as part of this process. Being too generous now with valuations in the short term, will not pay dividends long term.
Ask Japanese investors what their experience was in the 1990s, which many still refer to as the lost decade. The fact the Japanese government decided to muddle through that decade without taking bolder measures though is a good lesson for everyone in the region today. This Dubai merger is designed in part to put a brave face on what has been a painful 40 percent correction in property values over the past year. Everyone will be eager to see which projects survive the merger process at the end of the day.
Even in Saudi Arabia the default by two well-known family entities in the Kingdom is being handled in a much more transparent fashion than would have been the case just a few years ago.
The Saad Group and Algosaibi restructuring of more than $6 billion in debt will incorporate nearly 40 different lenders. At least a dozen banks have come forward to say they do indeed have exposure to what many commonly refer to as the "problem" but they added it won’t be mission critical to their operations.
This debt restructuring is a tricky one for Saudi regulators and for the region in general. As family entities and not publicly traded companies, Saudi central bank officials say the long arm of the law may in these cases have limited jurisdiction. Unless laws were broken, regulators in this more transparent environment will not likely play a major part in the process.
Officials told me there is no systemic risk to the banking system, but it will indeed be painful for those who chose to lend at such prolific levels. It does not take a genius to read between the lines, that government bank bailouts won’t be in the works even if this first round of numbers is lower than the final tally in a few months time.
What perhaps has not changed, if we use the Emaar merger and the debt restructuring as our benchmarks, is the desire by government officials to remain behind the scenes as both plans take shape. It is not difficult to reach officials on the phone or approach them in person, but few if any want to be on the record before they feel all the paperwork is in order and they are confident the worst is behind us.
In this era of globalization and internet chatter, the region is indeed introducing greater transparency, but full disclosure may still be a ways off.
ABOUT THIS BLOGJohn Defterios’ blog accompanies the weekly business program, Marketplace Middle East (MME) that is dedicated to the latest financial news from the Middle East. As MME anchor, John Defterios talks to the people in the know, finding out their opinions on the big business moves in the region, he provides his views via this weekly blog. We hope you will join the discussion around the issues raised.
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