Transparency holds key to greater inflow of investments

The UAE could see more international investors coming into the country if transparency is improved, Ziad Makkawi, Founder and Chairman of Algebra Capital, said.

Makkawi, who used to be the boss of Shuaa Capital and Dubai Bank, said "substantial" liquidity had shied away from investing here due to the opaqueness of the system.

He said the tightening gap on credit default swaps – which had been a good measure of risk – should not be taken for granted.

"From a sovereign point of view, the transparency has to come from the UAE first and foremost," Makkawi told Emirates Business. "There has to be an economic department within the ministry of finance that is capable of giving out these numbers.''

"Between the Central Bank and the Ministry of Finance, you have to have consolidated financials. And at the emirates level – it's the same thing," he said. "The emirates need to be able to give the market information. Otherwise you are going to have a hell of a time attracting investors at a time when you really need them," he said.

With regard to the banking sector, Makkawi urged the banks to act as one instead of "just hoarding deposits".

"Their job is to be financial intermediaries and take that money and deploy that in the economy otherwise they will have a serious impact on growth," he said.


Recovery and confidence are two of the most used words these days. What is the status of recovery in the UAE?

The current scenario in the UAE is not different from anywhere else. You have to differentiate between the UAE as a whole and Dubai in particular. Dubai has a greater degree of challenges because they have a greater degree of indebtedness. The UAE as a whole is a wealthy country. It has a banking system which is relatively sound, it has no systemic risk to it, a lot of major projects taking place.

In the medium-term, the UAE and GCC story is intact. They have a young population, there is a need to create jobs, need to create infrastructure, and they have the money to do it. Yes they have been affected. Yes we have been affected but overall we are a lot better than other regions, which need more foreign direct investments. We do need it but we need it less. This is a rich country.

Dubai has been in the hot seat because of its liabilities, especially now that Nakheel's bond is maturing in December. Do you believe a default is a possibility?

The market is pricing a no-default scenario. The spread of Dubai Government, Nakheel, so on and so forth have all tightened incredibly, so the market is not stupid and I do think that the market has priced in a repayment of the obligations. If you look at 2010, the amount of indebtedness is not that big. It seems that things have improved. I do think though that more should be done in terms of transparency.

How can we improve transparency?

The transparency has to come – from a sovereign point of view – from the UAE first and foremost. There have to be economic departments within the ministry of finance, which are capable of giving out these numbers. Between the Central Bank and the Ministry of Finance, you have to have consolidated financials. And at the emirates level – it is the same thing. The emirates needs to be able to give the market information. Otherwise you are going to have a hell of a time attracting investors at a time when you really need them.

Are investors now reluctant to invest due to lack of transparency?

Of course. Would you not be if you do not know what somebody's state is? You need transparency from risk point of view and from pricing point of view.

Global investors do not have to come here, they can go to a lot of different places. Today the world offers fantastic opportunities everywhere so you have to fight for that money to come here and you cannot fight being behind closed doors and not having transparency.

Despite the limited transparency, we have seen Dubai CDS Spreads almost halved from the peak of seven to eight months ago…

People at the end of the day make their investments decisions based on the information that they have. Maybe some people have more information than others and I think that is wrong. You need to be able to make it a level playing field.

Very often it is getting information that is mostly hearsay. Why has it tightened? Spreads all over the world, not only here, have tightened. Has the tightening in Dubai CDS been a result of a Dubai action or is it because there is quite a bit of money and people are looking for returns and all CDS in the world have fallen? We should not take it for granted. If a rumour allows you to go from a thousand to 300 basis points, a rumour can take you from 300 to a thousand basis points. To avoid that kind of volatility, you need to be more transparent.

Can you quantify how much investments or investors have shied away due to lack of transparency?

I cannot really give you a number but it is substantial. It is not only a short-term thing. It is difficult to quantify but there is no doubt about it. If you do not know, you do not invest, that is rule number one.

As long as you do not have that transparency you are going to have very hard time accessing investor flows and you will probably be paying more than you should.

Just a bit of recap, Algebra Capital was incorporated in the DIFC and in September of 2007, you entered into a joint venture, which saw Franklin Templeton holding 40 per cent stake in the firm. Can you update us on how many funds do you have currently and your plans on issuing new ones?

We have three Algebra funds – two are equity and one is fixed income. We are also sub-advisors/managers to five of Franklin Templeton's Mena funds and we also have managed accounts for large institutional investors. These are all open ended.

Most of our investors are institutional investors and historically we have a lot of that come from more developed markets.

What's the value of these funds?

We are not yet disclosing how much is our AUMs (asset under management). Our peak in terms of AUMs was in July 2008, with the crisis we have lost quite a bit of assets because prices in the markets have dropped. But things have picked up in the last three months so things have definitely improved in the market and for us.

Will you be launching new funds?

We are constantly looking at doing funds. We are in discussion with several financial institutions that themselves launch funds but they need a team of experts who know how to manage it. We are not eminently going to launch another fund right now.

But is it not a good time to launch a fund considering there are a lot distressed assets and a lot of valuations trading at a discount?

The thing about the asset management industry is that it is probably the best time to launch a fund but is the worst time to invest and vise versa. From a market entry point of view, it is a very good time to launch a fund and for people to invest in a fund but from a fund raising point of few, people are still a little bit unsure and unclear so this is probably not a good time to launch a fund.

Your reluctance is thus due to the hardship in fundraising?

It is mostly because of the fact that first of all we already have funds out there and it is open ended so we do not have to launch any fund ourselves. However if you do not have one it is not a bad time to start considering the regulatory environment specifically in the UAE.

We have seen massive fiscal stimulus but until now we hear the private sector complaining there is still no lending happening. Is that right?

I think that is true. But it depends. We were talking about Qatar a few days ago; there has been growth in credit there. I have not seen the latest numbers in the UAE but based on the word on the street, the banks have not started lending yet in an aggressive fashion even though they have access to liquidity from the Central Bank. People are still nervous about what the impact of this crisis is on their corporates, but I think it is a little exaggerated and the banks should act as banks rather than just hoarding deposits. Their job is to be financial intermediaries and take that money and deploy that in the economy, otherwise they will have a serious impact on growth. Given all the facilities and guarantees that the bank has received from the central bank – whether it is guaranteeing deposits or having access to liquidity facilities from the central bank – I think bank should start lending now more aggressively. There may be certain banks that have toxic assets therefore they feel they do not want to be exposing themselves further but by and large those are very few.

Could this reluctance prolong the recovery period?

Firstly whatever we are saying here applies to the world. Banks in Europe, the US and Asia have not started lending. Very few banks have started lending because there is that element of uncertainty. If the global banking system does not get to first or second gear and start acting their intermediation function then for sure there will be a delaying effect for recovery.

What about other sources of funding such as bonds/sukuks. Are these alternatives good to look at?

Yes of course. We saw banks themselves issuing bonds to be able to fund longer-term assets. Investment bankers have seen a renewed interest by both issuers and investors in fixed income facilities. I would venture to say that such is also true in the syndicated loan market. But in the bond market, you are going to see more issues and more issuers because the liquidity is there.

Where is the liquidity coming from?

If you look at the loan to deposit ratios of the banks they have dropped – you have had recapitalisation of banks, you have had lowering of Capital Adequacy Ratio. All of these things free up potential credit so that is the liquidity I am talking about.

Number two is on a global perspective. In the largest economy – the US – a lot of liquidity went off to riskier assets such as equities into a very short-term money market such as US treasuries. That is another pot of liquidity because some of that money is moving back to bonds – that is a basic information on why you had the last rally in general – debt or equity.

You are managing accounts from institutional investors, SWFs or other banks funds. SWFs have pretty much slowed down their activities and have shifted their focus from international to their home markets. Is their investment appetite beginning to increase?

I do not think I can make a distinction between SWF and other investors. Most investors remain on the sidelines. However in the last few months we have seen renewed interest in Mena by international institutions and sovereign wealth funds. And that is because the Mena region today is trading at a discount to other emerging markets. Just as we were before the boom – the last rally in debt/equity markets is that there is an order in which institutional markets go to emerging markets and they tend to go first to large Bric economies – and then they start to go to smaller countries, more frontier markets such as Mena. We kind of come at the end of the chain.


PROFILE: Ziad Makkawi Founder, Chairman and CEO of Algebra Capital

Makkawi has over the past 22 years held top positions at international and regional investment banks and financial institutions, starting with JP Morgan in New York (1986) and Elf Aquitaine in Geneva (1990). He then moved to the Middle East to co-found Lebanon Invest (1995) and Middle-East Capital Group, the region's first merchant bank with a pan-Arab focus, in 1996.

He moved to the UAE in 2000 as Executive Managing Director of Shuaa Capital, a UAE-based investment banking institution, where he built from scratch, and ran the financial services business encompassing capital markets, asset management, brokerage and research.

Makkawi's last position prior to founding Algebra Capital was as Chief Executive Officer of Dubai Bank, one of the youngest and most dynamic banks. Makkawi has executed a large number of investment banking transactions and launched some of the region's most innovative and successful investment funds.

He holds a Masters in International Affairs from Columbia University, an MBA in Finance from New York University Stern School of Management and a BA from Rice University.

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