according to sharia principles, and used for hedging risk rather than speculation.

TO BE NOTED: From the FT:

"Derivatives forecast to make gradual return

By Robin Wigglesworth in Abu Dhabi

Published: May 20 2009 16:36 | Last updated: May 20 2009 16:36

Derivatives have become a bit of a bugbear for some regulators. They blame certain unregulated, over-the-counter instruments for exacerbating the financial crisis but sometimes lump them together with more common, listed derivatives.

The Gulf is no exception. As regulators across the world study the entrails of the financial crisis for lessons, there will be a natural slowdown in their introduction in the Gulf as well, bankers say. But most expect it only to be a matter of time before their use is more widely sanctioned.

Even in the relatively unsophisticated Gulf, many banks dabble in derivatives, but occasionally to disastrous effect.

Several Bahraini banks, and Abu Dhabi Commercial Bank in the United Arab Emirates, have lost significant amounts on credit derivatives such as asset-backed securities and collateralised debt obligations.

Most dramatically, Gulf Bank, one of Kuwait’s oldest and largest lenders, suffered a rare bank run and had to be rescued by the government after a large currency derivatives trade on behalf of a client went awry.

This has hardened attitudes among regional regulators towards such instruments, bankers admit.

Youssef Kamal, the Qatari finance minister, told the Financial Times last year that Gulf Bank’s predicament could never happen in Qatar because its institutions are prohibited from using derivatives.

But regional bankers insist a blanket ban is a mistake. “Derivatives are like a chainsaw,” observes one expert. “If you don’t know how to use one you can cause serious damage, but if you use them correctly and are well protected you will be fine.”

While the market for complex credit derivatives is unlikely to be resuscitated soon, bankers argue that simple, listed equity derivatives would be a boon for regional stock markets.

“There are some very opaque and complex derivatives, but many – such as futures, options and swaps – are very useful and important instruments for risk management and the proper functioning of capital markets,” says Jamal Al Kishi, head of Deutsche Securities Saudi Arabia.

Indeed, while Nasdaq Dubai is at present the only bourse that offers listed equity derivatives – it rolled out futures contracts on 21 UAE shares and a Nasdaq Dubai index last November – most exchanges in the region are keen to introduce full derivatives platforms to boost trading volumes.

NYSE Euronext has signed deals with the Qatar and Abu Dhabi stock exchanges to help provide technical support and expertise for derivatives, and the recently launched Bahrain Financial Exchange has targeted the instruments as a way to muscle in on the Middle East exchange market.

Though often thought of as un-Islamic, Muslim scholars say derivatives are permissible as long as they are structured according to sharia principles, and used for hedging risk rather than speculation.

Even Saudi Arabia has introduced them – albeit indirectly. Last year it introduced swap structures to allow foreigners to acquire the “economic rights” of individual Saudi stocks."

when it comes to the Emirates, it’s time to remove those rose-tinted sunglasses.

From Alphaville:

"Shakeout in Dubai Posted by Stacy-Marie Ishmael on Feb 02 13:33.

The FT’s Dubai correspondent Simeon Kerr has been ahead of the rest in his (generally bearish) reporting on the state of the emirate’s finances, and now it seems the ratings agencies are catching on.

On Monday, Moody’s warned it would be reviewing the ratings of six government-owned companies in Dubai for possible downgrade:
The six affected companies are:
- Dubai Holding Commercial Operations Group (rated A1),
- DP World (A1),
- DIFC Investments (A1),
- Dubai Electricity & Water Authority (A1),
- Jebel Ali Free Zone (A1) and
- Emaar Properties (A3).

Moody’s said the deterioration in Dubai’s macro-economic outlook was the primary driver for the review, noting:

Dubai”s open economy has been hit harder by the global economic and financial crisis than most others in the region, largely because of its higher leverage, concentration in cyclical sectors, and more limited fiscal resources.

While the ratings agency does not expect the review to lead to any downgrades of more than two notches, its macro view on the emirate is worth noting.
Emphasis FT Alphaville’s:
Moody’s believes that the liquidity of most of its rated corporations is sound, thus minimising any potential calls — if any — on government funds from its rated entities. However, Moody’s believes that material alterations will be required to reign in capital spending and thus match lower investments with lower expected cash flows over the medium term. Accordingly, flexibility to adjust corporate plans to reflect weaker global demand will be vital for long-term rating stability.

While Dubai’s economy is more diversified than regional rating peers, it is dependent on cyclical sectors such as real estate, tourism, trade, and financial services. All of these are being adversely affected by the tougher external environment. Furthermore, given its close linkages with regional oil exporters, Dubai’s economy has been affected indirectly by the slump in international oil prices even though oil generates only a small portion of the emirate’s GDP directly. Moody’s continues to believe that the Dubai government is very willing to support the large and systemically important companies that it owns, should it be required. However, the government’s capacity to support seems limited and is likely to be impaired by the worsening economic situation. Unlike most other governments in the GCC, notably that of its oil-rich neighbour Abu Dhabi, Dubai’s government is not known to hold substantial offshore liquid assets that can potentially be tapped to finance fiscal deficits and bolster the operations of the wider public sector.

Moody’s is aware of the Dubai government’s announcement in November that it held at least $90 billion in assets. Yet the composition of these assets has not been revealed and therefore their liquidity cannot be taken for granted. A request for further information regarding these assets will form a core part of Moody’s ratings review. Moody’s would be reassured if a substantial portion of these assets were liquid and unencumbered, and therefore available should any government-owned company in Dubai require extraordinary assistance with debt repayments in either local or foreign currency.

There are some rather large ifs, buts and maybes in those paragraphs, but what is clear is that when it comes to the Emirates, it’s time to remove those rose-tinted sunglasses."

Moi:

Don the Libertarian Democrat Feb 2 16:08

Stacie-Marie, I'm sure you're correct about Dubai, where, if I'm not mistaken, they're trying to build another tower of Babylon. HaMigdal, kara shma Bavel. But Moody's. I'm sorry, but they couldn't rate rice cookers as far as I'm concerned.

Don the Libertarian Democrat Feb 2 16:12

Stacy-Marie, I really apologize for misspelling your name. I really need a preview button.
Sorry, Don

“Switzerland is absolutely not immune to global developments, especially not as regards the financial crisis and the economy.”

Switzerland Watch on Bloomberg:

"Dec. 1 (Bloomberg) -- An isolated European country with an economy geared toward finance and winter sports is no longer a monetary bastion as credit evaporates around the globe. Banks teeter, the once-impregnable currency depreciates and a proudly independent people question whether a centuries-old go-it-alone strategy can survive.

Even Switzerland is wondering if it’s immune to the forces ravaging Iceland.

The drama playing out in the Nordic nation, whose economy the International Monetary Fund says may shrink about 10 percent next year, offers a cautionary tale for the no less fiercely independent Swiss. While they are in far better shape, their status as custodians of the world’s wealth is under threat by a global economic upheaval they can’t control and miscues by the banks that made them great.

“The Swiss model of isolationism is not an advantage” in the current environment, says Michael Baer, 46, the great- grandson of Julius Baer, founder of Switzerland’s largest independent wealth manager. “Switzerland is absolutely not immune to global developments, especially not as regards the financial crisis and the economy.”

Heads up for terrorism laws. No more going-it-alone, perhaps. I wonder if this will lead to a much more integrated financial system worldwide. Some countries have tried building up their financial independence recently, but has it worked?

"Baer -- scion of a legendary family in one of the world’s oldest financial centers -- has moved his own business to one of the youngest: In 2006, he set up Baer Capital Partners in Dubai to tap Middle Eastern wealth.

For the 7.6 million Swiss, signs of stress are evident amid a cataclysm in world markets that has besieged them with reasons to doubt a splendid isolation dating back to medieval times."

What other changes would this lead to?

"Abdullah Hajeri led a march on the Emir's palace in Kuwait last week"

Speaking of the Gulf. Bloomberg, again:

"The region's rulers are under pressure from citizens to shore up investors, not just banks, as they try to fend off what may be the worst economic crisis since December 1998, when oil at $10.35 a barrel forced them to slash spending. Crude prices have fallen 50 percent from a record $147.27 in July, and stock indexes in Dubai and Saudi Arabia are down by as much this year.

Gulf economies are more susceptible to financial turmoil than in the past because of their greater dependency on international expertise, investment and tourists to diversify away from oil. While Dubai, home to the world's tallest building and the man-made Palm Island, is considered most at risk, no part of the Persian Gulf will go untouched."

Where have we encountered this conundrum before? Citizens who don't like only the banks getting a bailout? Now that's globalization. We're all alike.

"There aren't many international investors left in the region, he added.

Regional competition to attract investors and tourists from around the world led to a surge in record-breaking projects."

Put those on hold, just like everywhere else, there's an economic credit hoovering back home going on.

"The emirate has almost 8 percent of the world's oil reserves and a sovereign wealth fund with assets between $250 billion and $875 billion, according to a range of estimates compiled by the International Monetary Fund. Even with its decline, oil still averages $110 a barrel for the year.

Residents of the region are used to government intervention. All Gulf countries are run by unelected rulers who maintain political power through tribal allegiances and marriages. Generous state welfare programs have traditionally damped demands for more political participation.

How the region's rulers cope with the turmoil may define relations with their people in the future, as they try to wean their subjects off state handouts and encourage them to find jobs and embrace market capitalism.

``There's no question that it sets back the move from socialist, paternalistic societies toward more modern capitalist states,'' said Gabriel Stein, a director at London's Lombard Street Research, which provides economic analysis to investors and companies. ``It is a trend that we have seen all over the world. The immediate reaction is that you told us to do this, so now things are going wrong it's up to you to help us out.''

Ah yes, governments will grow larger for the near term. However, helping citizens through economic downturns needn't be seen as a rush towards socialism. Nor, apparently, massive government interventions in the economy. So don't go all marxist quite yet.

``The U.S. financial crisis has ramifications for all countries, including the Gulf,'' U.S. Deputy Secretary of Treasury Robert Kimmitt said this week during a speech in Dubai, where he met representatives of sovereign wealth funds. ``Our capital markets are more integrated than ever before, allowing opportunities, but also financial difficulties, to spread rapidly across borders.''

We did some good before, look at all your wondrous buildings, so please don't blame us for this financial crisis which we started.

"Of the Gulf states, Dubai may be hardest hit by a global economic slowdown because it has borrowed more to finance its transformation from a Persian Gulf trading post to a financial and tourist hub, and has only 4 billion barrels of oil reserves.

Government-controlled companies owe at least $47 billion, more than Dubai's gross domestic product, and they will continue to accumulate debt faster than the economy grows, Moody's Investors Service estimated in an Oct. 13 report. It concluded that Dubai may need financing help from Abu Dhabi."

Let's change that from 'may' to 'will'.