Is the sun setting on the Middle East?

Written by: Orlando Crowcroft Posted: 09/05/2017

Middle EastWith falling oil prices and social, political and economic turmoil in the region, there’s been talk that the Middle East has lost its shine in wealth circles. Yet not everyone would seem to agree

Ever since regulatory pressures began to squeeze Jersey and Guernsey’s traditional wealth business in Europe more than a decade ago, the islands have looked to new markets. And one key target has been the Middle East, particularly Dubai and Abu Dhabi in the United Arab Emirates (UAE). 

Jersey Finance set up an office in Dubai in 2011 and Geoff Cook, the organisation’s CEO, estimates that 40 local firms now have a presence in the Middle East. As recently as July 2016, Jersey signed a double tax agreement (DTA) with the UAE – and in 2015, the Jersey Financial Services Commission (JFSC) signed a Memorandum of Understanding (MoU) with Abu Dhabi’s financial regulator. Jersey also signed a DTA with Qatar in 2012. 

Guernsey has traditionally lagged behind in terms of securing a Middle East presence, signing a DTA with Qatar in 2013. And while Jersey appointed a UAE-based Director in 2011, Guernsey Finance only opened an office in 2015. 

Guernsey catching up

As a result, Guernsey firms have historically struggled to build a profile in the region. As Naro Zimmerman, Trust Manager at Nerine Fiduciaries, who has a specific focus on the Middle East, explains, potential clients in the Middle East tend to say that they are aware of Jersey but haven’t heard of its local rival. 

“From a Guernsey point of view, I was envious of the Jersey industry because they were there early and are more visible than Guernsey,” he says. “We would go into meetings and they would say: ‘We know about Jersey but not about Guernsey’. But in the last few years, Guernsey has made a concerted effort to be in the region.” 

In the face of increased scrutiny and regulation by European and US governments since 2008 (and, arguably, before) around their citizens’ use of low-tax jurisdictions, a push towards the Middle East for Jersey and Guernsey was, in many ways, a no-brainer. 

Gulf residents have always been interested in European assets – particularly London property – while the Arab Spring and wars in Iraq, Syria and Libya have convinced wealthy individuals in the Middle East of the need to diversify their investments outside of the region. 

But while political instability was the chief concern in the Middle East between 2011 and 2013, in 2014 it was economic issues that came to the fore. In June of that year, the price of oil went into freefall, dropping from $110 per barrel to under $30 in just a year. As of April 2017, prices had levelled out to around $50 – less than half the 2014 value. 

The fall took an axe to the UAE’s budget – 80 per cent of which comes directly from oil exports – as well as Saudi Arabia’s, forcing both countries to cancel building and infrastructure projects. Dubai’s growth was 2.7 per cent in 2016 and is expected to be around 3.1 per cent in 2017. In Abu Dhabi, it was just 1.5 per cent last year.

Crossing borders

Much has been made since 2014 about economic diversification, both in the UAE and in Saudi Arabia, home to the world’s largest oil reserves. Both Saudi Arabia and Abu Dhabi have pledged to reduce their reliance on oil – something that Dubai, with its minimal reserves, has arguably already done. But it takes time to change the habit of a lifetime.
 
In many ways, say experts in both Jersey and Guernsey, the oil price crash and continuing political instability have only increased Middle East interest in the wealth management industry – particularly in structuring investments in UK assets through the islands. Just as their governments are looking to diversify, so are individuals. 

“Our clients have been looking at getting money outside the region and we’ve been able to offer solutions. For the most part, it’s been positive for us. We’ve been able to make sure they have safe-haven investments outside of the region,” Zimmerman explains. 

This interest has been buoyed by the steep drop in the value of the pound following the decision by Britain to leave the European Union last year. In April this year, the UAE dirham and the Saudi Arabian riyal – both pegged to the dollar – were worth a third more than they were in May 2016. On a £10 million London property deal, that amounts to a great deal of money.

“We’re seeing a lot of investment in UK commercial real estate from Saudi as a result of the weaker pound,” says Angela Calnan, Group Partner at Collas Crill. “We’re still seeing MENA clients with trophy properties in London.” 

Business strategy

In terms of strategy, Jersey firms have adopted a range of approaches to the region, including investing in physical operations in the Dubai International Finance Centre or other Dubai Free Zones, or in Bahrain and Qatar. Both Jersey and Guernsey use the Gulf states as hubs for investment from other Arab nations, including Egypt, Jordan and Lebanon.
 
It’s become a cliche that face-to-face is the only way to do business in the Arab world and the Far East – the Channel Islands’ other key non-European market.  While some have staff in the region, Jersey Finance sees the ‘fly-in’ model as the most common approach, with regular visits to the Gulf preferred to a permanent presence.

Alistair Rothwell, Director at the Fairway Group, travels to the region at least once a month, often to the UAE (where Fairway is a key liaison for UAE bank Emirates NBD). “You have to give the region time. People have got to know that you understand the proposition,” he says.
 
The same goes for Guernsey, says Naro Zimmerman. He visits the Middle East “every six to eight weeks” and finds that clients in the region actually prefer the fact that Nerine has no physical presence there. “We’re in the trust industry – a lot of our clients like the fact that we’re completely offshore,” he says. 

The fall in the pound has proved a double-edged sword for Channel Islands’ firms, however. While it’s meant that Gulf investors are keen to invest in Britain, it has substantially increased the cost of business trips to the region. “There’s a currency impact, as trips to the region are now more expensive for visiting firms,” says Jersey Finance’s Cook. 

Shifting sands

One of the attractions of the Middle East to the islands has traditionally been that the UAE and Saudi Arabia have no income tax and few property taxes, meaning that there is nothing like the regulatory challenges involved in serving clients in the UK and the US. But in the new era of low oil prices, that could be about to change. 

The UAE is due to introduce a value-added tax in 2017, and there’s been talk of the famously tax-free nation bringing in income and possibly even property taxes. While this may persuade more wealthy clients to consider getting their assets out of the region, it could also make life more difficult for offshore services providers to navigate a new tax code. 

It’s not all about the UAE, Saudi Arabia and Qatar, of course. Jersey and Guernsey have made marketing visits to Oman, Lebanon and Bahrain. The latter two have both experienced instability in the six years since the Arab Spring revolutions that swept the region. Egypt remains another prospect, despite its economic malaise under General Abdel Fattah al-Sisi. 

Rothwell says that the benefit of doing business in the Middle East, and particularly in the Gulf, is that clients have typically been wealthy for a long time, rather than newly rich, and therefore want to use jurisdictions that are transparent. For that reason, they often prefer Jersey and Guernsey to their rivals in the Caribbean, despite BVI or Cayman companies being cheaper. 

Even if economic malaise in the Middle East continues, diversification by regional governments was well needed and overdue. It’s prompted Saudi Arabia, under new king Salman bin Abdulaziz, to quicken the pace of liberalising its stock market. Other states have turned to the debt markets, as Dubai once did, to finance construction projects.

But even when they do, says Zimmerman, they’re borrowing at rates that are no more than those being demanded of Western states. It’s a time of change in the Middle East, but that isn’t necessarily a bad thing. 


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