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The Gonu aftermath

Despite moderate inflationary pressures, Oman’s economy and market are expected to move on the growth track, leaving behind memories of Gonu as a passing phase
Vision Securities

Overview
The tropical cyclone, Gonu, had a devastating impact on Oman. It was the first such natural calamity which hit this country ever since records have started to be maintained. While the overall development achieved by the state helped reduce the losses to human lives, the economic loss is enormous, in the form of breakdown of the well-developed road infrastructure and other property destruction.

In this paper we try to analyse the likely impact of this natural disaster on the local market, with some broad comparisons to the US stock market after similar natural adversities hit that country. While it would be inappropriate to make any direct conclusion with such a comparison due to the sheer difference in size itself, the fact that economic fundamentals eventually catches up with the market realities has been highlighted.

Though the initial estimates of the damages have been put at RO1.25bn-RO1.5bn, we believe this could go up as the assessment progresses. About 100,000 tonnes of cement is being imported to assist the reconstruction work. We believe that other resources like steel, cables, pipes, ceramics and other building materials will also be consumed in large quantities in such reconstruction.

Fresh capital is expected to be raised, more jobs are likely to be created, and more physical resources are likely to be consumed for any reconstruction activity. We strongly believe that despite moderate inflationary pressures, Oman’s economy and the markets are expected to move on the growth track, leaving behind the memories of Gonu as just a passing phase.

Peaks before the cyclone
Muscat Securities Market (MSM) consistently made all-time highs during the month of May and continued the surge as we entered June 2007. The MSM 30 composite index touched its all time peak of 6275 on June 4. The investor interest – both domestic as well as foreign – was visible by the fact that MSM delivered the highest monthly return for a single month in May 2007. The index composite gained 407 points, i.e. 7.02 per cent, during the month. All sectors except the services and insurance sectors gained, with the banking sector leading the way with an 8.72 per cent return.

Fundamentally this was not surprising since year on year (YoY) the banking, industrial and services sectors saw net earnings grow by 28 per cent, 42 per cent and 19 per cent respectively at the end of first quarter 2007. This, combined with investors’ positive outlook on half-year earnings and a healthy liquidity position, contributed to the strong market performance. However, gloom set in as the entire state was shut down for four consecutive days due to the tropical cyclone Gonu, which had some devastating impact on the country.

Assessment of the impact
Official sources said that the sultanate’s eastern provinces (Sharqia region) were deluged by 24 inches of rain and a ten-inch rise in sea level. Even the capital region, Muscat, witnessed strong winds and incessant showers for almost 24 hours. Individuals suffered the biggest financial losses in the storm, as the cyclone swept through residential areas, taking vehicles with it and leaving many shops and houses damaged or destroyed.

Roads caved in, trees were uprooted and low-lying areas were flooded due to the cyclone. The estimates of the damages, put at RO1.25bn-Ro1.5bn, may or may not go up as the assessment gets completed. As a percentage of the Gross Domestic Product (GDP) of Oman, this will be a substantial figure.

There have not been reports of any major damage to the oil and gas installations or refining facilities in Oman. However, according to the Kuwait News Agency, the sultanate lost more than US$200mn (RO77mn) in the first three days of suspension of its oil exports due to the cyclone. Oman exports roughly 0.65mn barrels of oil a day.

Cost and efforts of rebuilding
The local authorities have embarked on the urgent initial tasks of rebuilding damaged roads and restoring electricity and water, with the toughest work coming in the mountainous areas that are difficult to reach. The government has set up two committees – one headed by the Minister, Diwan of Royal Court, to assess the damages to public/private property, and ano-ther headed by the Minister of National Economy to undertake the repair of core infrastructure like roads and bridges, and also restoration of electricity and water distribution.

As we write this report, Oman News Agency has reported of Oman government’s plan to construct three check dams to prevent flooding in various wilayats of the sultanate which were badly affected due to flooding. The estimated cost of the same is RO24.15mn. The road repair costs are expected to be on a much larger scale.

Though there has not been any official
estimate for the time to rebuild, the extent of devastation makes us believe that it could run into a few months to get things back in shape. It is believed that about 100,000 tonnes of cement is being imported to assist the reconstruction work, and more people would be employed in such reconstruction activity. We believe that other resources like steel, cables, pipes, ceramics and other building materials will also be consumed in large quantities in such reconstruction.

Potential gainers and losers
The Capital Market Authority (CMA) has asked corporates to disclose the amount of losses they would have suffered due to the cyclone. Though there has been no major loss reported so far by any company, we expect there could be minor dips for manufacturing companies in the second quarter arising out of any plant closure, difficulties in material movement or non-availability of power or water. However, if one overlooks these potential short term losses and take a longer term view, it can be seen that there lies a huge opportunity for the local companies through the reconstruction of public and private infrastructure.

Leasing finance companies, and to some extent, banks could face loss of collaterals like cars, etc. which could force them to make provisions in their books. From our talks with the senior leasing industry people, we understand that the provisions that may arise out of the collateral loss is likely to be insignificant due to the comprehensive insurance coverage, including the storm, tempest and flood (STF) features, on most of the leased assets, mainly vehicles.

A more positive view is being taken by the companies on the import of new vehicles, which could add to the existing volumes. We expect banks and construction-related industries (like cement, contracting companies, etc.) to be the potential gainers from the reconstruction activity.

Materials directly consumed in construction of a civic infrastructure, like steel, cables, tiles, pipes, etc. also would be in demand. And the companies producing such material could witness fresh demand as the reconstruction work progresses.

The biggest negative impact is being viewed on insurance companies, who will have to cope with the increasing number of claims arising out of the losses incurred by customers. However, senior officials from both the industry and regulatory authorities have expressed confidence that the claims burden could be overcome with strong reinsurance support and that the local insurance companies will not go bust.

RESEARCH

Investor perceptions on the market performance
MSM opened with a strong negative bias on Monday, June 11, 2007, with broad-based selling in most large counters. The MSM30 index closed about 3.13 per cent down, just above the 6000-mark.

However, most of our institutional investors appeared to be of the belief that there could only be a temporary blip in the market and if the downtrend sustains, they would not hesitate to buy stocks at attractive valuations. Exactly the same was witnessed on June 12, when the market recouped almost 80 per cent of its previous day’s losses.

Statements by official sources, including the Ministry of National Economy, suggest that the economic momentum being witnessed in Oman will continue unabated, despite more attention being paid to the reconstruction activities currently.

Comparisons with similar instances in history
There is no similar instance to compare in the brief history of Muscat Securities Market which could give us a perspective on how the markets behaved after a natural calamity. However, worldwide there have been numerous instances when markets confronted the fury of nature and got over it. Just to understand the market impact after such instances, we have taken five natural disasters that occurred in the recent American history and tried to analyse them. The US has survived nature's fury ranging from Hurricane Camille in 1969 to the Midwest Flooding in 1993.

Hurricane Camille was a Category 5 hurricane that cost billions in economic damages and caused loss of life in the hundreds. The drought and heat wave in the summer of 1988 that blanketed the eastern and central US caused an estimated US$40bn in damages to the agricultural and related industries, and over 5,000 deaths.

Hurricane Andrew, a Category 4 hurricane, hit Florida in 1992, destroying over 125,000 homes leading to US$27bn in damages. One year after Andrew, the Midwest suffered massive flooding due to heavy rains and thunderstorms causing US$21bn in damages.

Hurricane Katrina, a Category 4 hurricane that hit in August of 2005, could well be the costliest natural disaster yet. Katrina damaged oil production capabilities for the Gulf Coast region, sending oil and gas prices dramatically up. The entire city of New Orleans had to be evacuated, with a majority of structures suffering severe water damage from flooding. The loss of life could well be in the thousands for this terrible event and the economic losses occurred were estimated to be well above US$60bn.

The chart illustrates the cumulative return of stocks following five natural disasters in the American history. In the short term, uncertainty from such external shocks may create sudden drops in value.

For example, stocks had negative returns one month after the 1988 drought and 1993 flooding. Over a longer period of time such as six months, one year, and three years, how-ever, returns were positive.

The market forecast
MSM has been having a strong momentum after the announcement of the Q1 2007 numbers by the companies listed in the market. Even after the re-opening, after a day’s panic, the market was back on its feet, suggesting that investors are betting on the long term prospects of local companies. Even though retail participation in the market is likely to be affected for a while, institutional activity is expected to remain firm. There have been numerous instances in the past where summer season volumes were generally lower than other times of the year and that if true, coupled with lesser retail interest, could adversely affect the market turnover.

Moving ahead
Natural disasters are particularly difficult for people to deal with because of their unpredictability. Fear and uncertainty may lead investors to sell their investments, putting downward pressure on prices.

By selling during a falling market, investors tend to realise short-term losses and then, as they wait and hesitate to get back into the market, they miss parts of the potential recovery. Though at times this behaviour could be necessitated due to the need to reconstruct other personal assets destroyed in the calamity, in most cases, the fear and uncertainty over the market recovery triggers the short-term negative sentiment.

In the current economic backdrop, with a strong commitment from the government, the reconstruction activity is a reality in Oman. Fresh capital is expected to be raised, more jobs are likely to be created, more physical resources are likely to be consumed and productivity would be a key consideration for the stakeholders.

And this is exactly why economists around the world anticipate an era of prosperity to
follow a natural disaster. Despite moderate inflationary pressures, the sultanate’s eco-nomy and the markets are expected to move on the growth track, leaving behind the memories of Gonu as just a passing phase.

Disclaimer: information and opinions contained in this document have been compiled or arrived at by by Vision Securities Co in good faith from sources believed to be reliable, but no representation or warranty, express or implied, is made as to its accuracy, completeness or correctness. All opinions and estimates contained in this document constitute Vision’s judgment as of the date of this document.