Irrational Exuberance and the Economic Cities

Abstract

Financial Markets in the 1990's were labeled as Irrational Exuberance, yet they produced the Internet. Sometimes flooding the market with cash feeds innovation and the creation of magnificent things. I love the Internet. same thing can be said about the GCC region in the first decade of the 21st Century. A flood of money has created the 8th and 9th Wonders of the World. Take a look at the Tallest Buildings and the Palm Shaped Islands that have appeared in less than a decade. growth continues despite the Financial Crises and the decline in Tourism.Now we are working on Economic Cities to develope Industrial Zones, Universities, and Tourism Locations. fact is 2010 is going to see some extraordinary growth be it on the Internet with the Facebook IPO or in the real world with Economic Cities.We are living in interesting times.Welcome to 2010...... Economic City Case Study.Status Quo Dec, 24th 2009:The Economic Cities are Master Developers who derive their revenues from leases and sale of land. They also intend to own a significant percentage of a number of the manufacturers in the Economic Cities (EC). I have interviewed a series of Senior level Managers at three Economic Cities. Their responses were merely an echo of the original Master Plan that was created by SAGIA prior to The Global Financial Crises. There was a tone of innocence in their voices, as they repeated the same rehearsed speeches. They are depending upon the Saudi Govt. loans, foreign direct investment from of manufacturers and tenants, and they firmly believe they deserve unsecuritized term loans.In terms of the Saudi Budget: news was just released last Monday. I have posted links to the recent articles discussing details.In terms of the Financial Markets and the Global Economy: I spent about a month explaining the state of the financial markets, defining Private Equity, defining CDS's, IPO's, Rights offerings (Secondary Stock), Sukuk, Murabaha, and all the conventional products.In terms of their desire to attain unsecuritized term loans: This remains challenging for the international Islamic Banking market. first reason is fundamentally Islamic Banking is collateral based loans (An unsecuritized loan by definition is against that protocol). second reason is based on the limitations of the local banks in terms of their own PAID UP CAPITAL. They can't invest large amounts of money for an extended period of time (5 to 7 years is the norm for a Sukuk offering).In terms of waiting for Multinational Corporation to approach the EC with an investment: I believe that the EC has not fully grasped the full scope of the Financial Crises, and the subsequent ramifications on their respective balance sheets.* As if the manufacturers are able to maintain their own working capital requirements.* As if the manufacturers could afford the relocation expenses .* As if the EC's are oblivious to the job cuts, bankruptcies, and production cuts around the world.* As if every Multinational Corporation isn't trying to guarantee their investments with Credit Default Swaps.* As if Credit Default Swaps are being regulated in an exchange like the CBOE.Our Recommendation:We believe they could benefit from the status quo of the financial markets by acquiring manufacturers that are liquidity starved. Thus vitalizing the economy & facilitating growth by hiring the engineers & acquiring the equipment. At least then the Economic Cities could claim to have some assets on their respective balance sheets. Our other recommendation was to sell portions of the Economic city as a form of collateral to the financiers. I did presentations on Quasi Equity Deals (Convertible Debentures) and Pipe Mezzanine Financing. Then the Govt. of KSA announces a 14% increase in the 2010 Budget.Macro Economic View of Local Markets and the Economic Cities :The Kingdom of Saudi Arabia announced an annual budget for 2010 of SR540bn ($144bn) – 14 percent more than its 2009 budget, and the largest in the Kingdom’s history. Thus His Excellency King Abdullah bin Abdulaziz is spurring the growth of the local economy and the prospects of the Economic Cities.Micro Economic view of the Economic Cities:A. International sources of financing are available and more financial engineering solutions are being developed. (ie: Islamic Finance, Islamic CDS, Conventional products, etc.)B. Acquisition Strategy is the appropriate Strategy for the Master Developer, and the Manufacturers in this Global Financial Crises.* Assume the market is liquidity starved* Assume Manufacturers are Acquisition Targets* Assume the Master Developers are interested in running the manufacturers like a conglomerate.* Mergers and Acquisition specialists will be working around the clock on acquiring the manufacturers for the EC's.* Furthermore the Master Developer can spin off the companies in the form of IPO's on the Tadawul the Saudi Arabian Stock Market.Stay Tuned to the Evolution of Kingdom of Saudi Arabia.