Saudi Arabia is now the world’s biggest importer of defence equipment, with spending expected to reach US$9.8 billion in 2015, according to a report from the research firm IHS. That is a rise of 42 per cent compared to the previous year.
“Growth in Saudi Arabia has been dramatic, and based on previous orders, these numbers are not going to slow down,” said Ben Moores, a defence analyst at IHS.
Planned defence spending in Saudi Arabia shot up following the Arab Spring and the rise of ISIL, leading the kingdom to overtake Russia as the world’s third-largest overall spender on defence at $80bn annually.
Saudi Arabia’s 2015 fiscal budget was the largest in the country’s history, with expenditures of 860bn Saudi riyals (Dh842.22bn) planned. The budget did not include an estimate for total defence spending, although in 2014 military expenditure accounted for about 35 per cent of planned expenditure.
The UAE and Saudi Arabia imported more arms from the US last year than all of western Europe combined, spending $8.6bn between them on defence imports.
At the recently concluded Idex in Abu Dhabi, the UAE Armed Forces signed 33 deals worth Dh18.3bn with local and overseas defence companies.
Instability in Libya, Yemen, Syria and Iraq, tensions with Iran and the Arab Spring have concentrated the minds of the region’s defence ministers in recent years.
“There is an immediate military threat emerging on the Saudi periphery,” said Sabahat Khan, a defence analyst at the Institute for Near East and Gulf Military Analysis.
“The threat from ISIL has reached the Saudi border. It’s going to be a battle that will span many years. In Yemen, to the south, the [Houthi] rebels are creating problems ... that’s in addition to the long-standing threat from Iran.”
The Middle East is also the world’s fastest growing defence market, with annual spending totalling about $150bn, according to the Stockholm International Peace Research Institute (Sipri).
Global defence spending totalled about $1.75 trillion last year, says Sipri.
“When we look at the likely export-addressable opportunities at the global level for the defence industry, five of the 10 leading countries are from the Middle East,” Mr Moores said.
Governments across the Middle East and North Africa are expected to spend about $920bn on arms over the next decade, IHS estimates.
The global arms import-export trade grew to $64.4bn in 2014, up from $56.8bn the previous year.
The US remains the world’s largest exporter of arms, followed by Russia, France and the UK.
Bilateral trade in defence accounts for less than 1 per cent of the overall defence market. The militaries of Europe and the US, which account for the majority of global arms spending, prefer to buy from domestic suppliers, aiming to boost their own economies.
China, the world’s second-largest spender on defence, is to step up its military spending by 10 per cent to $144.2bn in 2015. This is still some way short of the $581bn spent by the US last year.
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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.”
