August 2009

A growing population in the Middle East has intensified the problems of water scarcity and wastewater management in the region. Regional governments are responding by speeding up reforms and involving the private sector which should create significant business opportunities, reported the Saudi Gazette in a special wastewater report.

The region uses 80% of the available water resources for agricultural consumption of which 80% comes from non-renewable sources. Despite the heavy water usage, local food production accounts for only 10% of GCC food supplies. It is therefore clear that existing water management techniques are unsustainable and wastewater management is of prime importance to fully utilize existing water resources.

The Saudi Gazette report refers to 'Water Market Middle East 2010' published by Global Water Intelligence and draws attention to the high level of investment required to develop an efficient wastewater system in the region. The capital expenditure, as per the report, will grow from $5.3 billion in 2009 to $13.3 billion in 2016 to increase wastewater reuse.
With existing investment focused on commissioning new water production facilities, a dedicated policy framework is required to ensure investment is also directed to maintaining and improving existing facilities. The report forecasts that private operators who enter this sector are expected to enjoy annual growth rates above 20% for the foreseeable future.
Whether such growth rates will actually be achieved through private sector involvement in the wastewater sector remains to be seen but the policy setting role of government will be pivotal in attracting capital from the private sector. The news from Saudi Arabia about government owned National Water Company planning to ditch private sector involvement in new wastewater plants around Riyadh illustrates that there will be challenges along the way.

Sources: Middle East invests $8b in desalination industry

The Oman Economic Review has recently published a report on the Omani Banking Sector1. The report ranks the 5 biggest banks based on three parameters: growth, profitability and sustainability. The largest bank in the country, Bank Muscat, came out clearly at the top, followed by Oman Arab Bank and Bank Dhofar. The small but aggressive National Bank of Oman comes in at #4, while the list is rounded up by Oman International Bank at #5.
 
The Omani banking sector witnessed solid growth during the boom years 2004-2007. But what had made the sector different is its performance in the face of recession. None of the banks have so far opted for any part of the $2 billion bailout fund set aside by the CBO late last year. Total assets in 2008 grew by 33% and profitability grew by over 10% while all but one, Bank Sohar, reported positive numbers for the first quarter of 2009 as well.
 
A major cause of this stellar performance has been the role played by the Central Bank of Oman.  Historically, the CBO has been very proactive in policymaking and regulation. Indeed, Oman was rated the 6th best regulated credit market3 in the world by The Fraser Institute in 2007. It can be argued that the small size of the sector makes it easier to manage, but that alone does not explain the situation. The actual reasons include extensive reporting requirements, a close working relationship between the CBO and domestic banks and a conservative monetary policy. The sector should return to growth in the next few years.
 
Sources: 1-Omani Banking Sector, 2-Oman joins bailout bandwagon, 3-Credit Market Rating

The sheer breadth and depth of the financial crisis has taken everybody by surprise and financial services are amongst the worst hit sectors. Nevertheless, even in these turbulent times the UAE has emerged as the best performing geography for private equity deals according to a report by Business 24|7 but the report also went on to say that overall M&A and private equity activity declined sharply in H1 2009.

UAE topped the GCC ranking based on the number of private equity deals executed during the first six months. The UAE logged 7 transactions (out of a total of 13 in the region), in a diverse range of sectors including Information Technology, Education and Media. Two out of these seven transactions were traditional LBO style deals while the remaining transactions were minority stake acquisitions by regional PE firms.

Total deal value was not disclosed which depressed the UAE's ranking in terms of 'deal value' to last on the list. However in terms of overall M&A activity in the region, the UAE was the most active geography, i.e. 36 of the 122 deals were linked to the UAE.

This does not mask the fact that deal value has plummeted. Some glaring statistics include: a 79% slump in PE deal value (US$314 million in H1'09 vs. US$1.5 billion in H2'08) and a 70% decline in overall M&A deals (US$6.24 billion in H1'09 vs. US$21.03 billion in H2'08).
 
The outlook for the rest of the year is positive. Oil prices have rebounded and stabilized in the $60 - $70 range allowing GCC economies to post surplus budgets. This should filter through and boost deal activity.
 
Sources: UAE tops Mideast private equity deals