x Abu Dhabi, UAEMonday 24 July 2017

UAE and Greece show opposite sides of credit rating coin

The UAE's upgrade to emerging market status this year came at the same time Greece was demoted from developed market. This illustrates perfectly the complications faced by the agencies assigning market positions.

This year, two countries that had their credit ratings changed and blurred the lines between an emerging and developed market.

The UAE was upgraded from a frontier to an emerging market, and Greece was downgraded to emerging market, becoming the first developed country to suffer this fate.

These two situations perfectly illustrate the complications faced by credit rating agencies when making such decisions and convincing investors of their decision.

Given Greece’s huge debt, endless bureaucracy and huge government structural problems, it could never really be viewed as a developed market in the purest sense.

Greece now finds itself stuck neither here nor there, an investment no-man’s land that investors avoided as a developed country and are not attracted to as an emerging market one either.

The country has one of the lowest birth rates in the world, with a further 10 per cent drop in the annual birthrate reported in September. The median age of the population is 43 years, compared with 30 years for the UAE.

Greek stocks have dropped more than 90 per cent since 2007 and the country has been locked out of the bond market since 2010. To investors, Greece has practically become a dirty word.

Nick Pardini of Nomadic Capital Investors, an emerging market equity hedge fund, forecasts a difficult path ahead.

“Greece’s future is bleak in the long run because the country is fundamentally uncompetitive,” he says.

“Its current pillars of its private sector [tourism, olive exports, and a declining shipping industry] are not strong enough to support the standard of living of a western European nation.

“The Greek living standards are likely to plummet further to the levels of Latin American or emerging Asian countries in order to regain competitiveness.”

Up until now, pretty much the only investors looking to Greece were those with short positions on Greece defaulting on its debt and exiting the Euro. So far neither of these has happened.

In this sense, the country’s downgrade is not necessarily the disaster it initially seems to be.

In the developed market universe, Greece was a small fish in a very big pond. In the emerging market universe, the country will find itself a larger fish in a smaller pond. Indeed, Greece may now start to attract more investment as an emerging market than it did as a developed one.

Uniquely, Greece has characteristics of both a developed and developing market. It has a pool of highly trained personnel that at the same time are relatively cheap, and growing innovation.

A report by Europe B2C Ecommerce found Greece to be Europe’s fastest growing e-commerce market last year with 30 to 40 per cent growth compared with 10 to 15 per cent for Nordic countries.

It is also uniquely placed with good access to the European Union and the Middle East at the same time, attracting interest from other emerging market countries such as Russia and China, and it recently signed a treaty that avoided double taxation in a bid to encourage investment from the UAE.

So, while on the ground the downgrade may not spell total disaster, Greece’s biggest challenge is convincing investors of this.

It may come as a surprise that the UAE was a frontier market in the first place. At first glance, the Emirates appears to easily pass for a developed market. The region is wealthy, has attracted phenomenal investment, growth and a dynamic workforce from around the world.

However, some investors are still reluctant to view the UAE as anything more than a frontier market despite its credit rating. And as the markets have shown, the credit ratings may fix the label but if investors think the contents of the product are not up to scratch, they are not buying.

Mr. Pardini points to some fundamental issues with viewing the UAE as an emerging market.

“The UAE is a frontier market because of the limited access of liquid assets [stocks, bonds, currencies etcetera] in the country to foreign investors particularly in the West.

“The UAE needs to develop its capital markets before it can be considered a developed market for investment.”

This is a view echoed by Jan-Benedict Steenkamp, the author of Brand Breakout: How Emerging Market Brands will Go Global:

“The UAE is a special case in that it is very rich but has other aspects which nuance that picture. Its human development index is low for such a rich country, number 41 globally, around Chile and Argentina.

“Moreover, it is still very much dependent on extractive industries. One would be hard pressed to argue that the UAE’s institutions are those typically found in a developed market, he argues.

“So, in many respects the UAE is somewhat of a special case – in some respects it is a developed country, in others still an emerging market.”

This does not mean investors will be abandoning the UAE any time soon, especially with the level of GDP growth the region has displayed.

The UAE is fast becoming the major financial centre of the Middle East and has started to branch out from oil to tourism, logistics and services, among other things.

Combining this with the increasing quality of white-collar workers and a long trading culture lifts the region beyond its first impression as an emerging market and moves it firmly towards developed.

business@thenational.ae