The Third City and GCC Countries Conference, 19 June 2008

The Third City & GCC Countries Conference, which took place on 19 June at the Merchant Taylors Hall, was the most successful yet, in terms of the level of support from the region, the quality of presentations and the seniority of speakers and delegates. Bringing together some 250 key financial sector representatives from the City of London and the GCC countries, the conference highlighted the leading role of the City of London, the status of the GCC as an increasingly significant global economic player, and the synergies and potential for continued City of London/GCC co-operation .

In a keynote speech that set the scene for the discussions to follow, the Lord Mayor of the City of London Alderman David Lewis thanked the MEA for promoting links between the UK and Gulf financial services industry in close cooperation with the City of London Corporation. He highlighted the continued openness of London and the UK economy to foreign investment, including by sovereign wealth funds. However openness on the one side needs to be balanced by free market access and reciprocity on the other; improving openness is a key element in the development of the Gulf’s international financial centres. He highlighted key areas where London can add value and form sustainable partnerships, including regulatory expertise; corporate governance; and project management - given the huge sums being committed to infrastructure development in the GCC countries. He also drew attention to the UK expertise in PPP; training and professional development; and Sharia compliant finance - where London has a particular expertise in structuring new products; and trilateral partnerships with Gulf investors in third markets such as North Africa .

City of London ’s openness

Kitty Ussher MP, Economic Secretary to the Treasury, also highlighted the City of London ’s openness, role in skills development and history of innovation in financial products. She reiterated that the UK government welcomes sovereign wealth funds, as long as they behave commercially, and supports the work of the OECD and IMF to develop best practices for sovereign wealth funds. The UK plays a leading role in the export of education, training and qualifications; for example in Islamic finance it has demonstrated leadership as a provider of benchmark qualifications like those for SII and CIMA. It is also a world leader in regulatory training, with the development of the new International Centre for Financial Regulation, and in new financial products, especially Islamic finance. The government’s objectives are to ensure that London remains at the forefront of developments in this area, and to ensure that everyone, whatever their religion, has an opportunity to participate in the financial system. Continuing efforts are being made to level the tax and regulatory playing field between conventional and Islamic finance. The Islamic mortgage market is worth more than £500 million and the City has the only standalone Islamic financial institutions in the EU, more than 20 Sukuks are listed on the LSE worth an estimated £10 billion and consultations continue on issuing a sterling denominated Sukuk, with the aim of issuing a rolling programme of up to around £2 billion Sukuk. The development of London ’s Islamic financial sector creates real opportunities for the GCC.

Brad Bourland, Chief Economist, Jadwa Investment Company, focused on economic developments in the GCC countries, commenting that a massive inflow of oil revenues could be expected for years to come, leading to sustained high growth and increasing GCC weight in the global economy. Financial services is emerging as a strong growth sector with strong links with the City of London , with which it has natural synergies. The regulatory environment continues to improve, liberalisation has eased barriers to entry and an increasing number of funds are being raised through IPOs. $1.9 trillion worth of projects are planned or underway in the GCC, the fastest growing sectors being petrochemicals, construction, real estate, manufacturing, tourism and telecoms. But high growth comes with the twin challenges of inflation and exchange rate pressures – inflation in the GCC countries is forecast at over 11% for 2008, to which high housing costs caused by shortages of accommodation and the global rise in food prices are contributing.

A panel moderated by Sir Thomas Harris, Vice Chairman Capital Markets, Standard Chartered Bank, debated regulation and risk based supervision in the context of the global credit crunch – the global dimension of the credit crunch was noted, although it was pointed out that the GCC countries had been relatively unaffected. The transparency of UK standards was highlighted, and the regulatory measures put in place following the Northern Rock crisis were outlined, as well as the measures to facilitate Islamic banking and finance. In the GCC itself, there is increasing cooperation on regulation. It was felt that the GCC region had not been as bold as it might have been in liberalising its own markets, although this was work in progress.

Healthy competition

The second panel on building strong foundations for GCC growth, moderated by Sir David Walker, Senior Adviser Morgan Stanley, discussed the issue of competition between the regional financial centres – it was argued that competition is healthy and that each of the financial centres has their own attractions. Whilst the GCC countries are currently enjoying an economic boom, there are a number of challenges affecting the future development and stability of the GCC, such as the need to further improve the legal and regulatory framework, to tackle youth unemployment, and to reform education systems and develop skills. The role of women in the future of the GCC is also crucial. It was noted that the ‘non-dom’ tax in the UK was encouraging some bankers to migrate to the Gulf.

Introducing the afternoon session, Baroness Symons of Vernham Dean, Vice President of the MEA, highlighted the huge investment in people underway in the region, with the growth in the numbers of schools and the increased emphasis on vocational and management skills. She also emphasized the importance of long term relationships for developing business in the Gulf.

Impressive economic status

Vanessa Rossi, Senior Research Fellow at Chatham House, summarized the findings of a new report on the Gulf as a global financial centre, which concludes that although the Gulf’s global economic status is impressive, appropriate recognition of this status is needed in order to support the GCC’s aspirations in global finance – they are typically still treated as ‘developing countries’, for example in the IMF classifications. The importance of Gulf finance and the aspirations for the development of the region’s financial sectors should also be acknowledged. The GCC is well positioned to act as a key hub in global financial markets, serving the wider Asia-MENA region. To enable the GCC to leverage its position, an important development would be the creation of a larger, deeper debt market building on the region’s strength in Islamic finance.

The Panel session on Islamic finance, moderated by Richard Thomas, Managing Director, Global Securities House (UK), highlighted the massive growth in this sector, with total Islamic finance assets worldwide expected to rise from US$500 billion in 2007 to $1300 billion by 2012. The sukuk market is growing particularly strongly as a result of factors such as marketability, versatility, sharia compliance, ratability, and zakat advantages. Also discussed were some of the challenges facing Islamic finance, such as human resources, corporate governance, standardisation and global regulation; as well as what constitutes an Islamic product. Prospects for the development of this sector in the UK were debated, including the extension to non-Muslims, in areas such as car insurance. The growing preference for ‘ethical’ products is having a positive impact on the growth of this sector.

The final panel on GCC investment flows and the role of sovereign wealth funds (SWFs), moderated by Jason Peers, Chief Executive Jasper Capital, discussed the increased activity of SWFs as a result of the region’s oil wealth and it was argued that negative perceptions of these were not justified – investments are made on a commercial basis and were not politically driven. The main source of SWFs ( Qatar , Dubai , Kuwait ) are not the most influential countries strategically and politically. The same rules on transparency should be applied to SWFs as to any other investment. The trend for Gulf investment flows to North Africa and other Middle East markets is likely to continue – and may extend to other regions such as Asia. The Middle East itself is an expanding market as a result of unprecedented liquidity, and highly educated populations are demanding innovative and bespoke investment opportunities. Distressed international markets are producing opportunities for investors with liquidity and appetite.

Lead sponsors for the Conference were Bahrain Economic Development Board, Boubyan Bank Kuwait, Emirates National Bank of Dubai and Qatar Financial Centre Authority. The MEA is most grateful for the support of all sponsors, speakers and delegates.