This edition’s Market View is provided by Maninder Bhandari, managing director, Middle East & Africa, treasury services, BNY Mellon.
GTR: Any signs of recovery yet in the Mena region?
Bhandari: We are seeing a recovery in this region, with an increasing number of transactions, particularly on the trade side, coming to the market. Trade deals are seen as safer assets, as they are shorter in tenor, and you can assess the counterparty risk of the bank involved. Liquidity is definitely flowing into this asset class. People are no longer looking solely for returns, but taking on calculated risks with reasonable returns.
GTR: How liquid is the Mena market?
Bhandari: Liquidity is not an issue in the Mena market with some institutions even having an asset:deposit ratio as low as 60%, when over the last few years the same institutions would have had a ratio closer to 105-110%.
Liquidity is available, and risk appetite is slowly returning. There are incremental enquiries from the market for transactions. For instance, Mena institutions are less likely to look for higher yielding East European risk now in comparison to earlier, and are now potentially looking at trade transactions/risks in the Mena region.
Though available, the return of liquidity is slow, but I would envisage liquidity to be looking more buoyant in the early part of 2010.
GTR: What about demand for trade finance in the region?
Bhandari: Demand has increased year on year, but it must be noted that 2008 was an exceptional year for trade finance volumes and business. It would perhaps be better to compare demand and volumes between 2007 and 2009.
With some institutions becoming more risk averse, the market is not always able to meet this demand, even at this reduced level. However, banks are looking to use their liquidity towards better quality assets.
GTR: Which markets in the Mena region are showing the strongest potential?
Bhandari: In comparison to the rest of the world, the Mena region is showing excellent future potential with each market reflecting a resilience and buoyancy, although each market will have local circumstances that will differentiate it from its neighbours.
As an example, Saudi Arabia is looking strong with the government’s high infrastructure spend as well as increasing local demand fuelling a need for more trade finance. The extent of the spending is obviously dependent on the price of oil.
Other markets are similarly looking to pick up, with economic indicators showing some countries a little ahead of the others. Markets like Libya are still not fully explored and hold incremental potential for strong growth while others like Egypt, with its larger population and increasing consumption, are opportunities always worth exploring.
An important point worth mentioning is that no Mena market has defaulted or taken stringent measures to restrict the flow of trade, though markets like Algeria have changed some rules on trade to better monitor, not restrict, the same.
GTR: Can you give some indication on the pricing trends in the MENA region?
Bhandari: Pricing was higher from the latter half of 2008 into the first quarter of 2009 after which it dropped a bit but is looking to rise again – though not significantly.
Recent issues on two banks in the Gulf Cooperation Council (GCC) region have adversely affected, to a small extent, the risk profile of the Mena region but I think it is a short-term view. If you take a look at recent reduced CDS spreads for some GCC countries you will see that a level of comfort in this market is returning.
GTR: Has the problems with the troubled Saudi conglomerates Algosaibi Group and Saad Group affected banks and investors risk perceptions of the Mena region?
Similarly, with the Bahrain-based bank, TIBC [owned by Algosaibi] going into administration, has this heightened banks’ perceptions of counterparty risk in the region?
Bhandari: I think it has, more for those sitting remote to the region. However, as far as BNY Mellon is concerned – our active local presence ensured we had no exposure.
Overall, even before these events, we have been getting enquiries from institutions which are either looking for safe havens for liquidity or looking for solutions which would help avoid some of the problems encountered as a result of increased risk. At the various forums at which I have been a speaker, the question of risk and the change in the local environment is often a subject of questions – reflecting the concern.
Due to these developments, people are a little more wary now, but I believe there is no harm in being more cautious. In today’s market you need to be clear on what one is looking for, what risks you are taking and how you can leverage on institutions like BNY Mellon to increase both your risk and processing capacity.
In some respects institutions can protect themselves with available solutions like CLS (the multi-currency cash settlement system) or portfolio insurance, which unfortunately not all institutions are subscribing to or actively seeking.
GTR: Where is BNY Mellon positioning itself in the Mena region?
Bhandari: As an institution, we are committed and continuously expanding. We have been serving clients in the Middle East and Africa regions for nearly 100 years and during this time we have remained committed to helping clients grow their business through sometimes challenging market conditions. Mena consistently remains an integral part of our global presence, with the execution of treasury services (payments, liquidity, trade and foreign exchange services) to clients consistently part of the strategy.
As a solutions provider, we partner with local and regional institutions to support their reach into various markets.