The MYTH of Money Repatriation

05 Oct, 2002

Emotive and economic issues do not, generally, mix very well; although each can impact the other significantly in terms of the perceived well being! For instance, market sentiment is commonly cited as an explanation by the media and market observers; whenever there is a fall or rise, especially when underlying economic fundamentals do not justify the market movements. All such irrational behaviour of securities markets are then attributed glibly to 'poor sentiment' or absence of 'feel good' factors. Since the (in)famous "9/11" incident, global financial markets have been performing poorly, while regional bourses, in a contrarian manner, have seen a good turn around. The technical intelligentsia use their jargon to describe this as 'decoupling or non-co-related positives'!

A recent myth circulating in the regional markets relates to a huge surge of liquidity flooding back to the Gulf, in the aftermath of the NYK attack and the soon-accompanied drumbeats of the 'war on terrorism'. Even the Financial Times gave some credence to this and reported the widespread fear psychosis prevalent in the region. True, in the course of the anti-money laundering and tooth-combing of the terrorist financing network / exercise, the U.S. and the major economic powers may well arbitrarily freeze or sequester funds held abroad by organisations and wealthy individuals from this part of the world. Some nervousness on this score is clearly discernible and fully understandable. The high liquidity effect is being felt palpably not just in the regional money markets but also in the stock, property and bond markets. But on balance, this is not so much from repatriation which is more of a trickle than a flood. Certainly cold and calculated moves are being made by informed investors and organisations by weighing in the pros and cons. They do not, as a rule, act under the rush of blood (ROB) factors.

Another cause cited often is that the U.S. and the European stock markets are performing poorly and relatively speaking, the UAE and the regional markets offer good value. It is perhaps little more than a curious co-incidence that the 9/11 last year triggered a positive market shift here. In fact, the money is flowing into local securities because of the recognition of their good dividend yields and prospects of price appreciation. The property market has equally proved to be a major magnet for such cash flows and has been buoyant, particularly in Dubai for many years now.

Some analysts have therefore concluded that there is a huge reverse inflow, given the antipathy of the Arabs to some of the American "double standards" on Middle Eastern issues. There is also the worry of the excessive scrutiny of what and who emanates from the Middle East, not just at the airports but also by way of bank remittances etc. in the focused surveillance of their funds flow. This fear may be imagined but in all these, the big fishes usually get away or can cope with the detailed disclosure norms as required while the authorities may willy-nilly end up harassing the hapless few.

But the geo-politics apart, this economic issue of money repatriation needs to be considered carefully and dispassionately. In my view, the reverse repatriation of money is not, as yet, huge because, firstly, many Arab wealthy investors are currently sitting on unrealised losses, thanks to the steep fall in the Western public and private equity markets (Nasdaq, NYSE, Footsie, Dax etc.). On the other hand, the regional markets do not, sadly, have the depth, liquidity or investible opportunities as of today, to absorb the huge petro-dollar surpluses that are being generated month after month. This is almost in the scale of a few hundred billion U.S. Dollars (both on the personal and national fronts) and the stock and property market capitalisation in the GCC, pales into significance in comparison. Thirdly, 'direct investment' or project financing investible opportunities are few and far between as available to the private sector. Fourthly, the country risk perception in global businesses is really a major deciding factor. Whenever there is tension, it is natural for those that generate hard-earned money, even GCC residents, to seek to invest / deposit their funds in 'safe havens', as they cannot, at the personal or corporate level, afford to have any disruption or damage on this score.

There is also a tendency on the part of some individuals to aggressively "leverage" their domestic exposures by way of bank borrowings, even while they place huge investments overseas. They are thereby transferring the country and the counterparty risks, in a sense, to the concerned banks or financial institutions. This again, is often a well thought out strategy to minimise personal risk; should there be any deterioration in the domestic economic scene.

Nevertheless, in overall terms, there is a clearly discernible return of confidence and stability in the regional economies. All have benefitted from the high oil and gas prices that have prevailed over the last few years. Many GCC countries have invested very significantly in infrastructure, replacement and maintenance. Furthermore, Dubai and Abu Dhabi continue to commence a number of new projects that will not only suck in monetary / liquidity slack available in the regional money markets but also bolster business confidence - an especially sound strategy especially during troubled times. The airport expansion, air show and the announcement of a huge aircraft order running into billions of Dollars are part of a well honed tactic to reaffirm that it is business as usual or better!

Besides, the service sectors (banks, insurance etc.) and the hospitality sectors (hotels, restaurants, tourism etc.) are thriving. If one were to add developments in the health care and other service segments that are in the offing, we will soon witness considerable further investments at the private sector level. The investments required in the service sector are relatively lower in value or quantum as compared to the infrastructure requirements, which generally and globally tend to be borne by the governments and the public sector entities.

The strategic plans of countries such as the UAE and Oman give priority to the service sectors because of their huge employment generation potential. In the circumstances, it is natural that the ongoing investments from the public sector apart from the development of real estate on a massive scale are in the expansion of hotels, airport contracts as well as in communication infrastructure including the telecom sectors. The massive infrastructure in the GCC is estimated to need some US$ 200 billion over the next ten years. This will require substantial repatriation of the funds now held abroad; as the scale of future investments will outpace the scale of surpluses generated year after year in the private sector.

Currently the liquidity position in the GCC is comfortable although there is no noticeable massive inflow. What is happening however is that 'new' money being generated is staying in the region, and not going out much as in the past; given the political and economic woes in the Western market place.

This is how it should be; as the absorptive capacity in the markets needs to grow gradually and sensibly before further reverse repatriation of funds can justifiably take place. In the longer term, viable business and investment opportunities will emerge from the carefully orchestrated governmental spending. Private sector and wealthy individuals will, then, find that compared to the risks that they run in the mature markets, they can prudently diversify, in a major way, into stable opportunities in their own country and region for investing bulk of their savings and surplus liquidity.

(The author (sureshk@emiratesbank.ae) is a General Manager in Emirates Bank Group. The views expressed in this article are not necessarily shared by the Bank.)

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