Business

Saudi Arabia's oil GDP declines 6.4% for year

Strong growth in Saudi Arabia's non-oil sector offset a fall of 6.4 per cent in oil GDP this year.

Asa Fitch

December 27, 2009

Strong growth in Saudi Arabia's non-oil sector offset a fall of 6.4 per cent in oil GDP this year, leading to an overall increase of 0.15 per cent in inflation-adjusted GDP, say government figures released yesterday. More than half of the country's economic activity is connected with oil, and the decline in oil GDP can be traced to crude output and prices, which have tapered off from the historic highs they reached last year.

A US Energy Information Agency report this month showed oil averaged US$78 a barrel last month. The average oil price last year was more than $90 a barrel. Producers moved last year to restrict oil supply to keep prices high. The limits went into effect early this year, with prices rising from the $30 range to about $78 today. Saudi Arabia's output declined by 18 per cent between July last year and February, OPEC said.

While analysts project a weak performance for Saudi GDP this year - the IMF has predicted a 0.9 per cent decline - the outlook for next year is more positive. EFG-Hermes, the Egyptian investment bank, on Saturday predicted GDP growth would reach 4.1 per cent next year, due to expectations of stronger domestic consumption, steady government spending and stable oil prices. Monica Malik, an analyst at EFG-Hermes in Dubai, predicted an even stronger rise - 4.4 per cent for non-oil GDP next year.

The outlook is similar for the UAE and other Gulf oil exporters, which have stuck to spending plans despite the financial crisis and the dip in oil prices. The Emirates' GDP this year is expected to decline by 0.8 per cent, according to an average of forecasts from 10 analysts and international finance bodies. EFG-Hermes expects economic output in to fall by 4 per cent this year but foresees 4.3 per cent growth next year.

Inflation-adjusted GDP growth in the UAE was 7.4 per cent last year. @Email:afitch@thenational.ae

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.”

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