Trends: Gulf finance hubs gain ground

08 April 2009

Regional financial centres have held up well amid economic uncertainty.

Financial centres in the Gulf are performing well compared with those around the rest of the world, despite the increasing pressure on the region’s economies caused by low oil prices and the property market slump.

The finding appears in a new report, the Global Financial Centres Index (GFCI), which measures the competitiveness of financial hubs and outlines the views of users and regulators of financial centres around the world.

Centres likely to increase in significance
CentreNumber of times mentioned in GFCI survey
Abu Dhabi8
Source: City of London Corporation

The results of the latest GFCI, published by the City of London Corporation, suggest the efforts made by Gulf governments to develop high-quality infrastructure, service standards and regulation within their financial centres have paid off.

Such work has helped to earn financial centres such as Doha, Dubai and Manama strong reputations in the international financial market. The centres appear to be at least partially shielded from the falling confidence in other sectors of the local economy. For example, Dubai’s property market has endured a spectacular plunge in confidence. Prices have dropped by an average of 30 per cent over the past nine months and the government has been forced to step in to support banks battered by the impact on asset values and loan security.

Strong reputations

However, according to the 1,455 financial sector professionals surveyed for the GFCI, Dubai’s reputation as a banking, insurance and investment centre remains unimpaired. The index ranks Dubai in 23rd place, the same as in the previous report, which was published in September 2008. By comparison, Tokyo has fallen eight points to 15th place.

Dubai’s overall points score has dropped, however. Every one of the 62 cities that was surveyed in the index has suffered a downgrade of at least a few points. Dubai’s total points rating for the most recent index is 580, down 17 since September 2008.

The index shows that Bahrain, which remains in 43rd place after a fall of only 16 points, and Qatar, down one place in the league to 46th after an 18-point fall, have also successfully defended their positions.

While it does not rank in the league of 62 financial centres, Abu Dhabi is named by the survey’s respondents as a centre that is expected to gain in importance over the coming years. But apart from Dubai, Manama and Doha, no other Middle East city makes it onto the main index of global financial centres. However, that is not surprising: cities such as Cairo, Kuwait City, Casablanca and Riyadh have well-developed financial services industries, but cater primarily for their home markets rather than the international market.

Falling confidence

Still, the overall message for the Middle East’s financial centres is reassuring. Financial hubs that do attract a wide range of international institutions, and that place a strong focus on credible regulation, can withstand even a dramatic plunge in investor confidence in their home economies.

In contrast to the criticisms of Dubai’s overall economic strategy, which are focused around the emirate’s over-reliance on construction projects, the GFCI survey represents a clear vindication of the emirate’s approach to financial sector development, in particular the creation of the Dubai International Financial Centre (DIFC) in 2004.

Dubai created a regulatory framework specifically for international financial groups, which is separate from and more strict than the domestic financial market regulation. The DIFC’s main selling point has been its adoption of a legal and supervisory regime based on the laws governing the financial markets of London and New York.

Originally, this was designed to reassure foreign banks and asset managers that the Dubai regulators and courts would operate fairly and not favour local parties. But at a time of global market turmoil, the system has helped to shield DIFC-registered entities from the devastating impact of the Dubai property market slide, which has shaken indigenous Emirati banks that have been operating in the domestic arena.

The existence of a tough and credibly independent regulatory structure has also helped to maintain the standing of the financial services entities that operate in the DIFC as businesses that have to meet high financial standards.

Other facets of the Dubai financial sector development strategy, notably product specialis-ation and diversification - for example, with the creation of the Dubai Multi Commodities Centre (DMCC), a marketplace for gold, precious metals and other commodities, at the end of 2005 - have also helped to cushion it from the impact of the financial downturn.

The activities of the DMCC generate extra revenue streams for financial institutions, partially offsetting the impact of the problems in sectors such as investment banking and real estate finance, which have been hit the hardest by the economic crisis.

The Qatar Financial Centre (QFC) emulated Dubai’s creation of an international standards-based regulator, but with one crucial difference: it did not entirely separate the foreign institutions from the home market.

QFC-registered entities have from the outset been permitted to operate in some segments of the domestic economy. Qatar plans to create a single financial regulator so that domestic institutions will be subject to an inter-national standards supervisory structure. However, the plans have been put on hold during the financial downturn.

Meanwhile, Bahrain’s offshore banking industry has always been regulated by the country’s central bank, which also oversees the domestic banks.

So the favourable survey results for Qatar and Bahrain suggest that if the regulatory structure for international business is strong enough, Gulf states do not have to go as far as Dubai in completely separating it from the regime governing the home economy.

Bahrain’s development of a well-respected central bank supervisory regime over many decades has proved as effective in maintaining the island’s standing as a financial centre hub as the separate regulatory model adopted for the DIFC.

By contrast, despite its oil wealth and avoidance of Dubai-style bulk real estate developments, Kuwait has been badly shaken by the global economic downturn. This appears to result at least partly from weaknesses in the disclosure requirements of the Kuwait Stock Exchange, which has not forced businesses to provide comprehensive information on their financial exposure.

Kuwait’s development has also been hampered by the conservativism of its approach to product regulation, typified by restrictions on the issuance of bonds.

Meanwhile, the Gulf centres that have performed well in the GFCI index have been ready to regulate new financial products - for example, sharia-compliant investment products - that will give them an edge in the competition for business.

In collaboration with its new minority shareholder Euronext, the Doha Securities Market, for example, aims to establish itself as a regional bourse for the trading of energy derivatives, while the Abu Dhabi Securities Exchange (ADX) has ambitions to specialise in the exchange-traded fund and financial derivatives business. Bahrain is already well positioned as a centre for Islamic finance.

Growing significance

Of all the markets that are covered by the latest GFCI survey, Dubai, which is cited by 26 of the survey’s respondents, tops the list of financial centres that are expected to become ‘more significant’ throughout the next few years. Some 13 respondents predict further financial services firms will be attracted to set up in the city.

Abu Dhabi also ranks highly among centres that are expected to grow in importance, with eight respondents backing the emirate.

There has been speculation among financial centre analysts that if regulation in the West becomes much tougher because of the global economic crisis, some financial institutions could shift part of their activities to the Gulf.

Cities such as Dubai, Bahrain and Doha may be able to offer firm, professional regulation, but without the same level of probing press coverage that is an inevitable feature of Western financial markets such as London or New York.

“It will be very interesting to see how Dubai goes in the next year or two,” says one Zurich-based asset manager. “If there is a regulatory ‘knee-jerk’ by the US or UK governments, Dubai is ideally placed to benefit.”

“The development of financial centres in the Middle East and Asia should not be underestimated by policymakers in the West,” adds another asset manager, based in Geneva.

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