Financial centres need to boost investor confidence

The most prosperous financial centres in the Middle East may be ill-prepared for uncertain times ahead, according to panellists at the launch of the Association of Corporate Treasurers (ACT) in the Middle East. "The main concern is the lack of confidence and trust in the prospects in this region," said Fabio Scacciavillani, the director of macroeconomics and statistics at the Dubai International Financial Centre (DIFC). "We suggest that strong statements be made saying projects will go ahead, resources are available and that the money is there to keep the economy going. It should be done in the most forceful fashion."

Although the region enjoys strong economic fundamentals, a current-account surplus that serves as a safety net and positive government responses to the global financial storm, industry officials expect several issues to emerge in the next two quarters. "In months ahead, there will be problems in financing or refinancing debt; there might be repercussions in private projects, especially in the petrochemicals sector for companies that had leveraged," said Mr Scacciavillani. He added that firms that had made plans to build refineries by borrowing 70 per cent of capital were facing problems due to the global credit crunch. He thinks some of these projects will be deferred until the situation clears over the next two to three quarters.

Concerns are not limited to the overheating property sector, with a variety of issues facing regional treasurers across all sectors, according to the panellists, which included Mr Scacciavillani, Richard Raeburn, the chief executive of ACT and Jan Willem Plantagie, the regional manager of Standard & Poor's in the Middle East. They said that it would be a challenge to forecast company budgets and growth rates, as the crux of the financial crisis comes at a time when corporations are completing their budgets for next year. Industry officials predict that forecasts will be on the conservative side as a result.

Another difficulty will be in determining asset valuations for illiquid assets, which is "more an art than a science during these turbulent times" as it becomes harder to apply standard models to assess accurate figures. As stockmarkets continue to slump and banks in the Gulf come under increasing pressure, there were also calls for closer economic union in the region. "We could have a sizeable economy with one central bank and a common capital market, and the capability of tailoring economic policies to specific needs," said Mr Scacciavillani.

"Now, we have five small economies and one large one in Saudi Arabia, too many stock exchanges and a fragmented financial sector." Guidelines are being drawn up for one central bank to serve all GCC nations. The deadline for a common GCC currency remains on track for January 1, 2010, according to Mr Scacciavillani. [e-mail]