Regional investors set to flee Cyprus

Middle Eastern investors are primed to pull cash from Cyprus over fears of a controversial tax on deposits, according to currency traders.

Forex trading firms based outside the euro zone have reported inquiries from clients in the region as Middle Eastern firms seek to flee a depositor levy intended to pull Cyprus's banking system from the brink of collapse.

This past weekend, Cyprus announced a levy on deposits - also known as a bail-in - starting at 6.75 per cent on all bank deposits, with the rate rising to 9.9 per cent for those with more than €100,000 (Dh475,709) in savings.

The levy was intended to ensure that local depositors did not suffer at the expense of overseas banks and investors, many of them presumed to be Russian.

But the plan has been met with widespread protests and fears of a bank run as Cypriot savers rushed to withdraw their cash from ATMs.

Middle Eastern and Arabian Gulf investors were also showing "considerable concern" over whether they would be able to relocate deposits to avoid being hit, said Marc Aspinall, the global head of sales at ADS Securities, the Abu Dhabi-based forex brokerage.

"The Cypriot FX market accounts for a huge number of brokers," he said. "We've seen a significant number of FX brokers register themselves in Cyprus using it as an entrance to European markets."

Investors in the Middle East who had funds deposited with forex brokers in Cyprus were now trying to determine how to transfer accounts back to the region to avoid the levy, Mr Aspinall added.

Saxo Bank's Middle Eastern clients have also explored transferring accounts from Cyprus to outside the euro zone during the past few days, said Jakob Beck Thomsen, the bank's chief executive in the UAE.

"It is an unfortunate situation, and we are somewhat baffled by the game-changing decision in Cyprus," he said. "Saxo Bank is headquartered in Denmark, which is outside the euro zone. As such we have had a number of enquiries."

However, with banks closed for a bank holiday in Cyprus throughout the week, it was hard to tell whether capital flight would occur, Mr Thomsen added.

"The effect will only be truly evident over the coming days," he said.

Cyprus is seeking to raise €5.8 billion from its bank depositors to unlock €10bn in emergency loans from the IMF, European Union and European Central Bank, known collectively as the troika.

The country's lenders have been hammered by the effects of Greece's sovereign debt crisis, which led Athens to seek a bailout from the EU last year, becoming the fifth euro-zone country to do so.

But the troika is reluctant to provide fresh capital to Cypriot banks because of the political cost of making whole foreign depositors. Russian investors are able to use the country as a tax shelter because of a double-taxation agreement with Cyprus.

If Middle Eastern investors also withdraw capital from Cyprus, the result for the UAE's banking sector may be increased inflows of foreign capital to local banks.

Deposits by individuals and companies living outside the UAE rose substantially last year, especially during the first nine months.

ghunter@thenational.ae

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”