Qatar: What has it done with stability?

Euromoney, January 2013

When the Arab Spring swept across the region last year, our sense of the region’s safe havens was challenged. Bahrain, which for decades had positioned itself as the hub state of the Gulf, the safe and familiar conduit through which to serve Saudi Arabia and Kuwait, was suddenly in the headlines for unwelcome and unfamiliar reasons.

So attention turned instead to the other states with the infrastructure and regulation to court international business: Dubai’s DIFC, and, closer to Bahrain, Qatar.  Qatar’s population is so small and so rich, without the Sunni/Shi’ite mix that flared in Bahrain, that there is surely nowhere in the Middle East less likely to face dissent or unrest.

In early days there were some clear indications that Qatar was gaining a few advantages from the scenes in Manama. Fund Forum, the main asset management conference in the Middle East and a long-standing fixture on the Bahrain business calendar, swiftly shifted its event to Doha – and it has stayed there this year. In conversations around the edges of events like these, foreign bankers and fund managers would ask each other about the logistics of moving their staff from Bahrain to Doha or Dubai, even if the legal incorporation of their businesses remained in Bahrain.

But, over a year on from the Arab Spring, what has Qatar really done with its advantage?

Doha’s senior figures have always insisted the Qatar Financial Centre was to be built on a different model than Dubai and Bahrain. From the outset, Qatar’s leaders have said they had no interest in creating an offshore centre; whatever they built had to have a tangible benefit to the Qatar economy. Early on, its ambitions were streamlined and truncated, and the mission became to be a hub for asset management, captive insurance and reinsurance.

In some respects, the last 12 months have shown some clear success. At the end of April, a new partnership was launched with Barclays which might well be a template for other asset management ventures with Qatar. The venture was between Qatar Asset Management Company, which is backed by both the QFC Authority and the sovereign wealth fund, the Qatar Investment Authority; and Barclays Natural Resources Investment, a private equity business.

Under the terms of the deal, the Qatari side will put in $250 million into BNRI’s portfolio companies – current and future – including an allocation into the $2.1 billion of portfolio companies held by Barclays at the point the deal was signed. In turn, the BNRI office for the Gulf is to be based in the QFC. Mark Brown, the managing director and head of the office, “will work on the ground in Doha,” according to the QFC.

Then in November, Credit Suisse struck a deal with Qatar Holding – the international arm of the sovereign wealth fund (which is to say, pretty much all of it) to form an asset management company. The new venture, to be called Aventicum Capital Management, will operate out of two hubs, one of which will be in Doha; it will be overseen be Aladdin Hangari, who heads Credit Suisse Qatar, and the CEO and CIO in Doha will be Hashem Montasser, the former head of asset management at EFG-Hermes. The Doha business, it is understood, will focus on the Middle East and Turkey, while a separate international business will be based elsewhere.

For Shashank  Srivastava, CEO of the QFC Authority, these deals are clear illustrations of progress, and this method of seeding funds is something we should expect to see more of, particularly if there is a demonstrable benefit for the development of local financial services. “There is definitely a rise in interest from firms all over the world, including Qatari ones,” he says. 25% of asset management firms are now Qatari-based, he says and the majority in the pipeline, “so clearly the platform is proving its developmental role for local industry.” Regulations continue to develop – recent additions have been around special purpose vehicles, family offices and holding companies – and awareness has been growing, he says, with several new MoUs signed with counterparts elsewhere in the world around cooperation and education.

But do ventures like these simply provide a way for Qatari money to leave the country, or do they bring money in? “In practice, that’s the reason it has taken so long for us to decide upon partners,” he says. “The strategic criteria are that it’s not just about Qatari money. The Qatari funds are truly seeding funds. They are there to seed either as fresh capital or accelerated capital. On the back of that, there has to be a commitment from the partner to raise other AUMs, and they need to be managed from here in Qatar. It is absolutely key and critical. We are going to measure our performance as a financial centre in terms of how many AUMs we have on the ground.”

Asked for what that figure is today, he says “it’s still early days” and agrees that “outside of the sovereign wealth fund, AUMs in Qatar – and in the region itself – are not that high. Qatar is a portion of that.” He points to the Barclays fund, where accelerated capital of $250 million has been put in and the total portfolio is $2.1 billion, as “the kind of momentum we are seeing”, and says that other deals like the Barclays and Credit Suisse ones are in the pipeline.

It hasn’t escaped anyone’s notice that both of these partners have links to Qatar that go beyond cooperation. Qatar has a 6% stake in Credit Suisse and owns its London headquarters. Credit Suisse now runs its GCC asset management operations out of Doha and has been steadily shifting staff there from Dubai all year. Barclays might well not even exist were it not for Qatar, which invested heavily in the bank at the depths of the financial crisis, a rescue whose terms and consequences are still being thrashed out in the UK today.

It would be no surprise, then, if the next big announcement was with Morgan Stanley, since the QIA’s Qatar Holdings has been in talks to buy or take a stake in the bank’s commodities unit all year.

However, beyond these funds, from banks that are themselves investments of Qatar, the picture is not quite so clear.

One of the first trophy names to commit to Qatar was Axa. This was a natural partner for the QFC, as an institution with plenty of heft in asset management and insurance but none to speak of in investment banking; Qatar’s priorities matched exactly with Axa’s.

Today, though, Axa’s enthusiasm seems a little more tempered. Scott Callender, who ran the office when it was set up in 2006, is no longer based in Doha and, while Axa is still positive about the regulatory environment of the place, there is a sense of disappointment at the shortage of assets that have come its way within Qatar. At the heart of this problem is the QIA which – as discussed in last month’s sovereign wealth fund feature – hardly puts any money out to external fund managers, in sharp contrast to the Abu Dhabi Investment Authority or Kuwait Investment Authority.

“At the moment, we have a team that is essentially a distribution team in Doha,” says Bettina Ducat, head of Southern Europe and Middle East at Axa Investment Management. “We don’t have managers there. It’s something we have been discussing with the QFCA, but given the situation in Europe, the situation has to become clear there before we could do anything else in Qatar.” There is nothing unusual in this: almost the entire DIFC is built on distribution teams rather than any on-the-ground managers. But the problem concerns who is available for those distribution teams to distribute to.

“We are essentially focusing on sovereign wealth funds, and are working with almost all the key funds in the region,” she says. “They are our key natural clients.” But when Euromoney points out that the sovereign fund closest to it in Doha is the only one that doesn’t really outsource, she doesn’t disagree. “It’s a recent trend, but you are right that the QIA is not investing so much with asset managers anymore, but instead making direct investments.”

Ducat is at pains to point out that Axa is still committed to Qatar, and that the place still has plenty to recommend it. “It is a safe and stable place, and from a regulatory standpoint it’s very transparent,” she adds. “We feel very comfortable there.” She admires the co-investments Qatar has made, and also its willingness to issue bonds not because there is any need for the money but in order to create a yield curve. “For all those reasons they are taking measures to be a serious financial centre.” But again, there is a caveat. “What is it offering? It offers transparency, stability, and a number of other things, but it also has to offer potential from a business perspective.” While there is no hint of a withdrawal, it will be interesting to see if Axa still bases its regional headquarters in Doha a few years from now.

It’s not as if the QIA is the only game in town, but it is utterly dominant in asset terms. Axa is far from alone in feeling disappointed in the QIA’s approach to external managers in comparison to its regional peers. As one fund manager says: “There are other clients –  institutions, foundations, family offices – that we are working with, but it is a bit destabilizing to see that the main sovereign fund is doing direct investments, which means it is tougher for us to get some bandwidth.”

So what can be done about that? While plenty in the asset management industry like to have a gripe about the QIA, one can’t state that its policy is wrong. It’s true that its track record of buying big-name assets – Madame Tussaud’s, Harrods – smacks of trophy investing, but it does clearly represent a diversification away from domestic hydrocarbon wealth, even if there isn’t a clear asset allocation strategy underpinning it. It’s possible that the QFCA could prevail upon the QIA to outsource some of its funds as a method of seeding the asset management industry itself, but instead it’s more likely we will see more of what we have seen so far: a commitment of funds in areas where it suits the state of Qatar, such as to gain exposure to natural resources private equity in the Barclays deal.

There are other strands to Qatar’s asset management strategy; it has opened retail asset management up, and now allows the marketing of foreign funds in Qatar at both an institutional and a retail level. “It can be domiciled somewhere else, we are agnostic to that,” says Srivastava. One might wonder what appeal retail holds in a country with a total resident population of 1.7 million, much of that expatriate; but then again, Qatar also has the largest proportion of millionaires relative to the national population in the world, a 49% savings rate, and one of the highest per capita income levels on the planet. There’s clearly plenty to aim at in the high net worth segment.

There’s also the insurance side. Three insurance firms licensed within the QFC in 2012 (Daman Health Insurance Qatar, Allianz Worldwide Care, and Zurich Insurance); by October 31 there were 17 licensed active insurance and reinsurance firms, and a further eight licensed active insurance intermediaries. Going for insurance may well prove to have been a smart move for Qatar, since the sums involved are potentially large, they are more recession-proof than investment banking, and no other Gulf centre has really made much of a play for this area.

And however Qatar’s financial centre evolves, it’s not going to change the generally stellar growth of the economy itself. Qatar should grow about 6% this year, based on Bloomberg’s regular survey of 12 economists, which is the highest rate in the Gulf and clearly dramatically ahead of the industrialised world. In Srivastava’s view, it’s these numbers, rather than any perception of safety, that underpin the country’s outlook. “Qatar’s development as an economy as well as its financial services industry is based upon the fundamentals of Qatar,” he says. “That is exclusive of other forces. Having said that, through the global financial crisis and the Arab Spring people have recognized and appreciated the stable political and economic environment we have in Qatar.”

Emad Mansour, chief executive officer of Qatar First Investment Bank, points to infrastructure as the medium-term driver of the national economy. As in Saudi and the UAE, large and ambitious infrastructure spending programmes are underway, and in Qatar “a lot of these have started to click,” he says. “There are a lot of projects now being released for execution after going through their design phases. A lot of the megaprojects, such as the rail and metro systems and the new port, are coming to the execution stage, so the real monetary effect of these will start to kick in to the economy from Q4 onwards.”

As a banker, he says, “it’s too early for us to start to feel this, but as we go to a couple of rounds of tendering, contractors will start to put in their bids, and then it will take three or four months before it goes to the financiers of the projects. The government doesn’t need financing, but at the execution stage you have a multitude of contractors who will need financing to get projects done.”

Mansour believes that the financial centre itself has “through no fault of its own lost some steam” as global banks have scaled down staffing and reduced their regional presence. “But I believe as soon as the world economy starts to recover, some of these banks and multinational companies will start to scale up again and Qatar will find itself in a prime position.”

He may be right; after all, nobody is flourishing in this global environment. But if we suddenly see a change of approach in the QIA’s attitude to external managers, it may not be just to diversify the nation’s wealth, but to give the financial centre a helping hand.

BOX: Finally frontier

This time last year – and the year before that – a great deal of discussion about Qatar concerned its likely ascent from the MSCI’s frontier index to its emerging markets index. Both Qatar and the UAE had been on MSCI’s watchlist for upgrade to the more senior index, and were widely expected to graduate.

Neither did. But they remain on the watchlist, so as we enter a new year, the debate will liven up again. Is this the year? And what’s the impact if it makes the step?

In terms of the impact, Euromoney reported in May 2011 estimates that Qatar would take up 62 to 100 basis points of the MSCI Emerging Market Index if included, equating to $2.5 to $4 billion of capital coming into Qatar based on the amount of institutional capital that tracks the index, even without counting the emerging markets funds that loosely track it. Those numbers still look about right today.

So what has to change for inclusion this time? MSCI is quite clear about it. “The issue around the very low foreign ownership limit levels imposed on Qatari companies is expected to be the only remaining impediment to the reclassification of the MSCI Qatar Index to Emerging Markets,” MSCI says. “The MSCI Qatar Index should meet all requirements for inclusion in the MSCI Emerging Markets Index, provided the false trade mechanism recently introduced on the Qatar Exchange is successfully tested over time.”

The foreign ownership limit is not something MSCI is going to budge on, as it is a major impediment for international institutional investors, limiting the number of shares available to them. MSCI calculates the total free float adjusted market cap of the MSCI Qatar Index available to foreign investors at US$10 billion. “In an extreme scenario, were the Qatari equity market to witness a net foreign capital inflow of US$10 billion or more, the share of free float available to foreign investors would be reduced to zero. This would make all current index constituents ineligible, leading to the discontinuation of the MSCI Qatar Index.”

MSCI has even gone so far as to suggest some ways Qatar might do it.  It suggests Qatar look at ways other countries have dealt with thee issues: increasing foreign ownership limits in non-sensitive industries, as in India; or introducing share classes open to foreign investors with limited voting rights, such as in Brazil, Mexico or Thailand.

It’s not as if Qatar can’t change things; the false trade mechanism MSCI referred to above is a reference to a new system Qatar put in place in May 2012, intended to remove requirements for international institutional investors to operate with a dual account structure.

So it may just be a question of time.  “I am reasonably confident it [ascent to emerging market index] will happen in due course,” says Emad Mansour, chief executive of Qatar First Investment Bank. “The only obstacles are legal. Legislation needs to be revised, and any legislation has to take its normal course through the concerned ministries, the cabinet, the Shariah Council… there is a process for changing legislation and obstacles cannot be wiped out at a stroke. But I think there is real and genuine intent on taking the capital markets in Qatar up a notch.”

Also, while capital inflows and increased attention sound great, Mansour points out that it requires preparation. “Obviously the capital market in Qatar is not very large, and upgrading to emerging market status could mean significant inflows from pension funds and investment funds outside the GCC, and these large flows can skew the market one way or another,” he says. “Locally, investors are concerned about large capital inflows that could result from such an upgrade. It is a difficult matter and it has to be handled with care.”

For Srivastava, an upgrade to emerging market status matters, but not really in capital terms. “I think it’s a signaling effect,” he says. “The net economic impact is definitely there, but we’ve looked at it and it is manageable, not something to be concerned about in terms of money moving in or out.” He adds: “I think we will reach that status sooner rather than later.”

Outside of the stock market, Qatar is also trying to develop its fixed income sector. It has been a steady issuer, particularly of sukuk, in order to build a yield curve for issuers to benchmark against. “The legislators are working on putting together a framework to regulate a bond market,” says Mansour. “Regionally and globally the sukuk market has been growing rapidly and legislators in Qatar are trying to capitalize on this. A lot of issuers, compliant or not, are going the sukuk way, and if you look globally there is no obvious market for this type of instrument.” This is not quite true – Malaysia certainly has a market, and within the GCC Dubai has tried to foster the listing of sukuk – but it’s certainly fair to say nobody has cornered the market for the Middle East. Qatar’s financial hub strategy to date has been to look for underserved gaps and fill them; this could be another.