Islamic finance holds lessons for advanced economies, according to Nouriel Roubini

When Nouriel Roubini speaks, you would do well to listen carefully.

The 55-year-old American economist was a voice in the wilderness in the run-up to the global financial crisis of 2008 and 2009, predicting a collapse of property prices, banking disasters and economic recession.

Islamic finance holds lessons for advanced economies, according to Nouriel Roubini

Islamic finance holds lessons for advanced economies, according to Nouriel Roubini

When he was introduced at the Global Islamic Economy Summit in Dubai last week, he was billed as “Doctor Doom” for the gloominess of his forecasts, but also as one of the leading economic thinkers of his generation.

So how does he see the world as it heads into 2014? The good news is that, in global terms, there is an uneven but meaningful recovery under way pretty much everywhere.

The bad news is that asset inflation and “frothiness” could create the conditions for another bust.

“Until now, growth in advanced economies has been below trend, but there are some signs of acceleration. But you have to ask how strong is the recovery in advanced economies? Are there still structural problems there?” he says.

“Recovery has been anaemic in the West, around 2 per cent on average and slower in Japan.

“There is still deleveraging going on. The name of the game is monetary stimulus, but this is causing asset inflation, rather than goods inflation or increased employment. We are beginning to see signs of frothiness in global markets again, while equity prices are high and price [to] earnings ratios [a measurement of equity values] above historical averages,” he adds.

The characteristic Roubini “permabear” mentality is still just below the surface. “Quantitative easing leads to a risk of financial instability, and greed in financial markets can still cause bubbles and crashes,” he warns.

But when he turns to the Middle East economies, and to the growing sector of Islamic finance, his tone brightens noticeably.

“There is a need for a more resilient system, and that’s where there is potential for the Islamic system. It is less volatile and potentially more stable than conventional financial systems. The advanced economies can learn from the Islamic system in this respect,” he says.

Mr Roubini has roots in the region. Born in Istanbul to a family of Iranian émigrés, he got his early education in the region and has come back regularly for speaking engagements and field research.

He believes the Middle East has its own special characteristics, but must still be seen against the backdrop of the emerging market economies of Asia, Africa and South America.

“The prospect for emerging economies is still positive, with 5 per cent growth averages compared with 1 [to] 2 per cent over [the] past few years in the rest of the world. There are demographic dividends with young workforces, and the rise of more affluent middle classes. All this adds up to a long-term trend that is putting these countries at the centre of growth in the global economies,” he says.

The Islamic world has its own opportunities and challenges. “The Organisation of Islamic Cooperation [OIC] consists of 57 states, and they are all very different. In the Gulf, they are mostly oil-rich and the priority is to diversify, and the UAE and some other Arabian Gulf countries have been quite successful in that respect. For oil importers such as Egypt and Syria, it is more difficult, but there are other unstable elements in the region, too: Yemen, Iraq, Iran.

“Islamic countries in South East Asia have been quite successful, like Malaysia and Indonesia, and Turkey also is quite dynamic,” he adds.

The challenge lies in how to exploit what Mr Roubini calls “the democratic dividend”. Having a growing young population is a good thing, but they need education, training and jobs, and in this area some fall short, he believes.

And there is still the challenge of diversification away from oil dependence. While some countries have been partially successful, the extent of the problem lies in one statistic, Mr Roubini says. “This encapsulates the problem: excluding oil and gas revenue, the GDP of the Middle East, with 400 million people, is roughly the same as that of Belgium, with around 10 million people.”

The other good news is that he believes Islamic finance and economy can help span the diversification gap. “The halal economy is a real opportunity, but it needs to be more standardised and integrated into global markets,” he says.

Mr Roubini seems uncharacteristically optimistic with regard to Islamic finance, with some key reservations, and the prospects for Dubai to be a centre for the growing industry.

“I’m all in favour of less risk, and some elements of Islamic finance involve profit-sharing and risk-spreading, which is good. There are many things in Islamic finance that can lead to more stability. There is a lot Islamic finance can teach us,” he says.

“I do not see Islamic finance competing with conventional finance, rather it is complementary to it. The main focus will be on the Islamic world, but others will also seek to get involved, like London.

“One of the challenges of the Islamic financial systems is the issue of insolvency. Creditors have a claim over the underlying assets, which is a good thing, but bankruptcy regimes in Islamic countries are not very strong,” he says.

“Dubai at the moment has good prospects. There has been a recovery in the real estate sector. The lifestyle here is less restrictive than in other countries in the region, and there is safety and security. In the longer term, Dubai can be an important financial centre and a key economy of the region. Sometimes you make mistakes, but if you manage growth more cautiously and manage diversification properly, I’m optimistic about Dubai,” he says.

Can the UAE challenge London and Malaysia, the other major global centres for Islamic finance? “I don’t believe Middle East capital is likely to suddenly fly off to Malaysia, and London is barely starting in the Islamic finance business. It could have a role, but I see no situation where London will supplant Dubai or Kuala Lumpur,” Mr Roubini says.

“The other thought is that perhaps there are too many financial centres in the Gulf. There are at least four, which I believe is too many. In the long term, a couple of them might emerge as the leaders, and I think Dubai and Abu Dhabi could do that.”

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Islamic Finance News: Aldar Properties

Aldar Properties PJSC has raised 750 million by issuing a 5-year sukuk issued at par. At three and half times oversubscription there was considerable interest from investors in Asia, the Middle East and Europe.

Islamic Finance News: Aldar Properties

Islamic Finance News: Aldar Properties

The transaction, which represents Aldar’s first debt capital markets issuance since the merger with Sorouh, was priced very competitively at a spread of 290bps over USD Mid Swaps for a fixed profit rate of 4.348 per cent.

Earlier in the month, First Gulf Bank raised 500 million at a final price for the bonds at 180 basis points above interpolated midswaps (bps).

Aldar’s transaction is another important milestone in the company’s debt strategy focussed on reducing the cost of borrowing, extending its maturity profile and lowering it leverage levels. The sukuk follows the Dh4 billion in bank financings, announced on November 7, that carried an average margin of 1.3 per cent above base rate and an average maturity of three and half years.

These facilities remain undrawn at this time and will be used for refinancing purposes. This followed a successful margin reduction on a Dh2.1 billion syndicated loan during the second quarter 2013.

At the end of the third quarter 2013, total assets were Dh44.8 billion and gearing (net debt to equity) was 55 per cent. Aldar also continued to have a strong cash position with Dh6.3 billion of cash and available liquidity at the end of the third quarter. Abubaker Seddiq Al Khoori, chairman of Aldar, said the sukuk marks an important milestone for Aldar and we are pleased with the overwhelming response. Chief financial officer Greg Fewer added, “This transaction fits in well with our financing strategy as it reduces our cost of capital and expands the breadth and depth of our investor base.”

Aldar’s credit fundamentals are very strong and “The market has responded so positively to our first capital markets transaction since the merger with Sorouh,” he said.

Aldar’s improved credit profile was marked out recently by Moody’s and Standard & Poor’s (S&P) who both significantly upgraded their ratings on the Company. Moody’s moved Aldar three notches from B1 to Ba1 with a positive outlook.

This was on top of the one notch upgrade in July. S&P raised Aldar to BB, a two notch upgrade.