Deutsche CEO talks Fed cuts and world market
Henry Azzam, Chief Executive Officer of the Middle East and North Africa division of Deutsche Bank, has been at the forefront of financial innovation in the Middle East for many years, especially the development of the Dubai International Financial Exchange.
Before joining Deutsche Bank on May 1, 2007, Dr Azzam was CEO of Amwal Invest, an investment bank he founded in May 2005 and has guided it through its first two years of operations, and the Chairman of Dubai International Financial Exchange. Before establishing Amwal Invest, Dr Azzam was the CEO of Jordinvest (2001-2004), MD of Middle East Capital Group (1998-2001), AGM and Chief Economist of the National Commercial Bank, Jeddah Saudi Arabia (1990-1998) and Vice-President and Chief Economist of Gulf International Bank, Bahrain (1983-1990). He has five books published in the UK, the last one being The Arab Economies Facing the Challenge of the New Millennium.
Azzam (pictured above) tells Emirates Business of his reaction to the US Federal Reserve’s dramatic move to cut interest rates last week in the wake of global market turbulence, his belief that there will be at least another one per cent cut later this year, and his assessment of how Deutsche Bank is placed in the whirlwind blowing through the world’s financial markets.
What is your reaction to the surprise rate cut by the US Federal Reserve as a response to the recent declines in world stock markets?
Well, it was the biggest cut in 20 years, and the message sent to the markets is that the Fed is worried that the gloomy sentiment on Wall Street and around the world could make recessionary expectations come true. By lowering rates in a surprising way, the Fed wanted to be ahead of market expectation in the hope of changing the sentiment and the mindset of investors, inject liquidity and encourage lending and spending.
Several commentators have argued that big rate cuts bring a deflationary risk, as was the case in Japan in the late 1980s. How do you assess this risk?
I would not go that far. The US economy is more dynamic today than that of Japan in the late 1980s, and policy-makers in the US tend to be more proactive – they tend to take action on the monetary and fiscal stand faster with the aim of shaping future expectations. We also have a more visible phenomenon in the US than elsewhere of “creative destruction” – where the weaker institutions that fail tend to be acquired by stronger ones.
Do you think the Fed has been forced into these measures by Wall Street to rescue the markets?
I don’t think the Fed took these measures to help rescue stock markets. These measures were implemented mainly for economic reasons. Recently, more and more people were raising the spectre of a recession, and if more people talk about it and expect it, then there is a good chance that it will happen. This is why the Fed stepped in at the right time in a big way, hoping that lower rates could eventually work more into the system to help spur capital investments by businesses, provide some relief to home-adjusted mortgages and encourage more consumption. Therefore, the Fed acted in the interest of the broader economy, not just stock markets.
Has the Fed done enough?
I think it is too early to say that. The Fed gave the system an injection in the hope of reviving it, but more needs to be done. In the weeks and months ahead, markets expect Fed funds to drop further to 2.5 per cent, from their current levels of 3.5 per cent, supported by the $150 billion (Dh550bn) fiscal stimulus package.
What is your view of the strength of the American banking system now? Is there still a danger of collapse?
Banks with huge losses need to recapitalise, and they have started to do so. Some are drawing on the capital resources of the sovereign wealth funds. These funds have a historic opportunity to acquire assets in major financial institutions of the world and, therefore, it is expected there will be more capital-raising activities in the months ahead. As such, I don’t think we will see collapses on the US banking scene, but that does not preclude mergers or acquisitions down the road. Some banks may decide to sell assets or businesses, while others may put more emphasis on certain banking activities and downgrade others.
How is Deutsche Bank’s position in all this?
Deutsche Bank is well placed against the competition, and was less affected by the sub-prime market crisis compared to others. Our financial results are due next month, and then the markets will get first-hand information on our overall performance.
Can you summarise the strategy of Deutsche Bank in the Middle East?
Internationally, we are a global investment bank with a strong retail presence in Germany, East Europe, and some other parts of the world. In the Middle East and North Africa we are a wholesale investment bank, not a retail bank. Our emphasis is on investment banking, across the full range of activities – corporate finance, mergers and acquisitions, IPOs, debt issuance, transaction banking, Islamic finance and global markets. We are also strong in asset management, and provide services to sovereign wealth funds, corporations and big family funds. We also have a flourishing private wealth management business in the region, and as more wealth filters down to people in the Gulf we stand ready to provide them with a sophisticated wealth management service.
What role does Islamic finance play in this overall strategy?
We are at the frontiers of Islamic finance, always introducing new structures and products to meet the needs of the sophisticated Shariah-compliant client base. Islamic finance is at the heart of our investment banking and global markets operation, not only out of our regional head office in Dubai but also from our branches and offices in London, Riyadh, Doha and elsewhere.
How important is the Gulf on the world economic scene?
I am sure you have heard the term Bric – the emerging economies of Brazil, Russia, India and China. I like to think of it as Brics, where the S stands for Saudi Arabia, including the rest of the Gulf. With a total GDP of around $800bn, the six Gulf countries have become a sizeable market for goods and services and are experiencing double-digit growth rates in nominal terms and at around an average of six per cent in real terms. They have a huge requirement for infrastructure finance over the coming few years, with the private sector itself implementing its strategy of growth and expansion.
While capital resources are available, what the region needs are financial institutions that can provide sophisticated structures and financing schemes. Both Abu Dhabi and Qatar require complicated project finance structures, and while the local banks can provide the much-needed commercial loans, the international investment banks could come up with financial structures, hedging techniques and international placements of equity and debt, including sukuks. Deutsche Bank has a presence in Egypt and Algeria, where we aim to expand our current offering to include corporate finance, global markets, asset management transaction banking, and private wealth management services.
What about the UAE, and Dubai in particular? What are the financial requirements?
Abu Dhabi and Dubai have varied financial requirements. Abu Dhabi, of course, is rich in oil and gas, and may have less requirements to raise equity capital than Dubai. But the two would require financial structuring, debt raising, hedging, project finance and asset management; services that are offered by international investment banks. Dubai was successful in attracting massive foreign investment and banks today stand ready to provide debt finance that companies and projects in the emirate require. The market is the best indicator of the viability of Dubai as an investment option, and international banks are standing in line to offer their services.
Deutsche Bank has a close relationship with the Dubai International Financial Exchange. Can you tell me about that?
Deutsche Bank was one of the first to come to the DIFC, and we are in full support of their vision and continue to play an active part in their success story. We were one of the earliest supporters of the DIFX and we stand ready to do all that is needed to make it a success. Our regional Middle East hub is in the DIFC, with more than 140 employees and growing. The DIFC has developed into a regional financial centre, and this is only the beginning. Deutsche Bank is well positioned to support future DIFC expansion and we see a promising future for the DIFX as the Region’s international exchange.
Do you think the DIFX has taken off?
Yes, with DP World as an anchor listing, trading volumes are picking up, we expect more companies from the region and around the world seeking primary or secondary listings here. The acquisition the DIFX did with the Nasdaq will add the necessary breadth and depth to the exchange. The listing of DP World has shown that the DIFX could be the market of choice to list for companies operating on the regional and international sphere. DP World was a successful flotation, many times oversubscribed, with the flotation price determined by the market through a book-building exercise. It’s worth pointing out that the flotation of DP World’s shares took place just at the time when the sub-prime market crisis was unfolding, at a time when speculation was rife regarding the possibility of a re-evaluation of regional currencies.
Will the global financial uncertainty affect the flow of investment into DIFX and other regional markets?
The UAE today attracts international portfolios seeking investments in a promising emerging market. However, the local stock markets have become less of a diversification play from what it used to be before. Therefore, if big global investors reduce their exposure to emerging markets because of the current problems then the region’s stock markets will be affected. It is all part of the process of the rebalancing of portfolios that is happening now, which gives more weight to cash and fixed income than it does to equities.
Where will the next round of flotations come from, in your opinion, from government privatisations or from the listing of family businesses?
I think there will be flotations from both. Increasingly, we expect to see more family businesses going public and government institutions being privatised through public flotation. These initial public offerings require the financial sophistication and placement power of an international investment bank, such as Deutsche Bank, to come up with the right market price, provide underwriting, placement and equity research. We bring credibility to the process and an acceptable counter-party risk for regional and international investors and portfolios. With more companies being listed on the DIFX or the DFM or the Tadawul, these exchanges will gain market depth and diversification, contributing to the financial development of the region.
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