Greek Shippers Might Pay the Price After All

For years,Greek shippers have maintained a leading position in the international maritime business. The long shipping tradition of their home country provided a major competitive advantage that enabled them to establish a strong foothold in the global shipping industry. Greek ship owners have the largest merchant marine fleetworldwide. In particular,theycontrol about 16% of the globaldry bulkfleet and operate about ? of the world's oil tankers. Over 60% of China's oil importsare carried on Greek ships.

Up until now, Greek shippers seemed to be immune to the on-going financial turbulence in Greece and the resulting transformation of the national tax regime. As their revenue is largely derived from offshore operations, their performance is not impacted by domestic economic conditions. Moreover, for years they have been enjoying a tax-free status. Greek shipping magnates were exempted from taxes on earnings generated overseas provided that they met specific criteria such has obtaining a special permit and importing a certain amount annually to cover administrative expenses. Also, they could avail themselves with several fiscal incentives when operating ships that flew the Greek flag.

However, Greece is experiencing the sixth consequent year of economic contraction with no hope of a possible turnaround in the foreseeable future. Thus, the government is forced to implement additional fiscal measures. This time it seems like ship owners are going to pay the price. For the first time in decades, Greek officials areconsideringimposing a levyfor ships sailing under foreign flags aiming to collect about€160 million by the end of 2014.The tax will apply to tonnage of foreign-flagged vesselsand is targeting about 762 owners.While it might seem necessary,the proposed tax reform comes at a time most crucial for shipping companies.Due to the prevailing turmoiland the lack of liquidityin the sector internationally, most of the shipping giants are heavily burdened with debt obligations.

A perfect example isDryships.For the third quarter of 2012, the company saw its net voyage revenues from the dry bulk segment decline by almost 50% compared to last year causing investor's sentiment to deteriorate. As of Sept. 30, 2012, its total debt exceeded $4 billion imposing serious risks over the firm's long-termsustainability.

Recently, the company soldvia novation agreementstwo of its tankers under construction. With this deal, Dryships managed to reduce its capital expenditure by $101 million. The company remains committed to decreasing its debt pile by relying largely on thestrong performance ofits drilling business.For the first nine months of 2012, revenues generated from drilling contracts posted a robust increase ofabout $250 millioncompared to the same period in 2011.

Dryships has been using its 65% stake inOcean Rig UDWin order to address a large portion of the capital needs in the shipping segment and gain some extra time.Still, even though I do believe that Dryships could be one of the potential winners from an industry recovery, it has a long way to go before achieving financial discipline.

One of the least indebted companies within the industry is Diana Shipping. The firm has a current ratio of 8.09, which is way higher than the industry's median, and a debt-to-equity ratio of 0.33. Despite the drop in time charter equivalent rates, the company managed to sustain a comparably healthy financial position.

For the period 2007-2011, thefirm'stotal current assets grew at an impressive pace from $21.5 million to $432 million.At the end of 2011, total current liabilities stood at slightly above $48 million.As of September 30, 2012 Dianahad over$452 millionin cash and cash equivalentsand $413 million in long-term debt.

Diana's overall solid balance sheet enables the company to take advantage of attractive market opportunities and expand its fleet. By borrowing conservatively and controlling its expenses, the firm managed to grow its fleet while maintaining a firm financial position. This way Diana expects to improve its revenue generation capacity at the event of a positive turn in the industry cycle.

Overall, the favorable tax regime on shipping earnings underlined the unique contribution of the Greek maritime industry to the domestic economy. The industry is a major component of the country's foreign exchange inflow and a significant source of employment. For the period 2000-2010, the industry remitted $175 billion, which represented half the national debt of 2009. At the moment, over 200,000 people depend directly or indirectly on shipping. Even though, not yet formally introduced, a change in the tax regime, no matter how small, could result in the immediate relocation of shipping companies and possibly a general slowdown in the sector. Consequently, thousands of Greek citizens are going to lose their jobs in a time when the unemployment rate in Greece is growing at a ceaseless pace.  

With half a trillion dollars in reserves, the Government’s only financial predicament is how best to spend its wealth. In practice it focuses on defence to guard against the unpredictability of nearby Iran and the threat of local terrorism.

This is in stark contrast to the issues currently faced by austerity-pressured Western democracies, as is the fact that Saudi Arabia is an absolute monarchy ruled by King Abdullah bin Abdulaziz Al Saud. The branches of the king’s family embrace 20,000 people – the über-wealthy top tier. The merchant families come next, while the mass market is massively underdeveloped and relatively uneducated.
The honeypot also extends to the high salaries paid to expats as part of the price they have to pay for living in what is considered to be a hardship posting. All women have to cover up in public and are banned from driving, and the religious police are ever watchful.

The potential to give financial planning advice at all levels of society is amazing, yet for independent financial advisers it remains an elusive market which is extremely difficult to access.

The number of IFAs in Saudi Arabia is remarkably small in comparison to the size of its economy. Most of the financial advice given comes remotely from the UAE, big-name private banks such as Goldman Sachs or JPMorgan, which have offices in Riyadh, or the local banks.

The other key authority in the country, the Saudi Arabian Monetary Agency (SAMA), is the central bank, which also supervises commercial banks and “promotes the growth and ensures the soundness of the financial system”.

Sean Kelleher, chief executive of Mondiale Dubai, says SAMA took an aggressive stance a few years ago on anything not legal: “They made utterances about clampdowns and those trying to fly under the radar fled. Since then, the banks have taken the upper hand on financial advice to the detriment of offshore outlets and independents. With Saudi having such a large percentage of Gulf GDP, it would be a valuable market to penetrate.”

The reality is that UAE advisers may have clients who move to Saudi Arabia, raising the question of how to continue the relationship in a country that does not permit unlicensed face-to-face discussion inside the country.

Simon Naylor, managing director of Dubai-based Lime Financial Planning, says one of his clients moved to Saudi. “Ongoing advice is provided via phone, email, and our weekly newsletter,” he says. “In my experience, expats in Saudi Arabia access independent financial planning by contacting firms in Dubai or Qatar.”

Peter Duke, sales director at Fidelity Investments International, is based in its Dubai office and makes regular visits to Saudi. “It’s a more conservative place than elsewhere in the region,” he says, pointing out that restaurants reserve one section for men and another for families.