Bank Relationships

Commentary

Saudi Arabia and the United Arab Emirates. These two countries draw a lively and enthusiastic participation every time we discuss them: they are important markets, due to their wealth, but they have historically been quite challenging. Despite their strong financial position and stable currencies, their regulations can be difficult to manage – and their position at the heart of a region of massive geopolitical tension adds to the complexities.

Saudi Arabia, while sitting on massive oil reserves, has always been very conservative. It only began allowing 100% foreign ownership of companies in many sectors in 2019: most MNCs worked via distributors, joint ventures and representative offices. So the economy is relatively open, but MNCs often have a weaker presence than would normally be expected. With recent political changes, many rules have been relaxed. Tourism and inward investment are encouraged and there are some truly massive infrastructure investments. As companies establish their onshore presence in the country, they are even required to establish a regional headquarters.

The UAE has always been more open, though this varies amongst the seven emirates which compose it. The two main ones are Dubai, which has always been a major port and trading centre, especially between India and East Africa, and Abu Dhabi. Dubai is the most open, and has traditionally welcomed foreigners and foreign investment: it is where most of our peers have operations – often managing the region - and where it is easiest for them to work.

Corporate Treasury & Banking in Saudi Arabia

Most of our corporate treasury peers are setting up RHQs in Saudi, as required by the legislation. Many of the challenges they face are part of the process of transitioning from an offshore mode of operations using distributors and representative offices, to being fully onshore. To some extent, the same can be said of the international banks.

Though the currency is pegged to the US dollar, and freely convertible, there are challenges:

• Cash pooling is only allowed with official....

Commentary

Is India the next China? 

In our recent Expert Perspectives series on India, [view it here], DBS Bank stated they believe it is. 

• Except for COVID, GDP growth is consistently above 5% [source: World Bank] 
• The government is making efforts to streamline the bureaucracy which has always been a challenge, and move it online.
• Manufacturing is being encouraged – India has long been a big provider of services. This requires an investment in infrastructure.
• Following COVID, there has been a big move towards a cashless society, with an advanced electronic banking system.
• There is comparatively little movement in FX: exchange controls remain in place. However, most transactions can be executed, including cross border loans and hedging – though cross border cash pooling is still very much forbidden. However, there is still a significant administrative burden.
• As part of the opening up, India has established a form of free trade zone, Gift City.

So – does this match our peers’ experiences?

• We will get into the detail below: the full report [14 pages - available to premium subscribers] contains a lot of useful experiences. But, in big picture terms:
• All peers view India as a major source of growth: some are investing in manufacturing. While no-one is considering scaling back in China, India has generally been earmarked for the next big investment, where it has not already happened.
• Some peers have entities which are still losing ...

Commentary

South Africa sums up a lot of what is good in Africa – and what is not so good. The country has a lot of problems, with a lot of violence and people living in poverty. At the same time, it possesses enormous mineral wealth, and has a tradition of being a business friendly environment - it is ahead of many African countries in this respect. Also, the years of isolation during the Apartheid sanctions mean that many local subsidiaries operate with a greater degree of independence than is usual.

What does this mean for multinational companies doing business there?

Basically, South Africa works. There is a lot of bureaucracy, and there are laws to promote the advancement of certain ethnic groups. Our peers’ activities there vary in size, but they are generally profitable. There are exchange controls, but the currency is convertible, and can be hedged onshore: offshore hedging is available in both deliverable and non deliverable forms, and does not drive a significant premium.

The main points:

• Banking can be a challenge. A lot of international banks have scaled down their presence, or are exiting the market – HSBC is the latest example. There is a concern that a lot of effort may go into moving to an international bank, only for them to withdraw from the country – this happened to one peer with HSBC.
• For the banks who remain, peers expressed the view that....

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Commentary

Several countries with the worst financial crises have decided to implement painful measures to improve their economies. We recently covered Turkey; this report is about Egypt, and Argentina will follow soon.

The measures are well known: significant devaluation (usually more than 40%), and raising interest rates to punitive levels - 30% to 50% is the norm. The impact on the domestic consumer is significant, but the early signs are that there is some improvement. Inflation levels are generally coming down, foreign exchange shortages have begun to ease, and foreign businesses are starting to have greater confidence, though all remain cautious.

This is certainly the case in Egypt: participants on the call all reported business levels which were difficult but not dire, and less difficulty repatriating funds. Inflation has been 36%, coming down to a reported 26% in September 2024 – but with a peak of 70% to 90% on some key food staples.

Sadly, geopolitics cannot be ignored. Turkey and Egypt live in a troubled neighbourhood: Egypt has a border with Gaza - a massive influx of refugees could destabilise the country. Its own recent history is one of constant conflict between more radical religious elements and governments which tend to be authoritarian, but relatively secular and pro business. Importantly, the United Arab Emirates and Saudi Arabia were cited by participants as a major source of foreign investment, which has considerably helped with the foreign exchange situation. In particular, the UAE has signed a multi billion dollar agreement for the development of a significant area on the Mediterranean Sea – the precise amount is not certain, but it appears to be at least USD 15bn, with total value potentially being above USD 100bn.

There is a problem on the southern border as well: Ethiopia is building a dam on the Nile. Egypt takes a very dim view of this – but it is not receiving much publicity.

What does this mean in practical terms?

• Pressure to use documentary credits (LCs) has....