Business conditions in Saudi Arabia's non-oil private sector economy continued to expand in February, albeit at a slower pace, as output fell.
The seasonally adjusted Purchasing Managers' Index – a gauge designed to give an overview of operating conditions in the non-oil private sector economy – slipped to 52.5 in February, from 54.9 in January.
The headline index remained above the benchmark 50 level that separates expansion from contraction.
The main factors weighing on Saudi Arabia's PMI were slower rates of output and new business growth across the non-oil private sector in February.
The increase in new work was the weakest over the past 22 months with businesses polled pointing to subdued demand and the need to offer price discounts to stimulate sales.
The bright spot in February was a slight rebound in export orders, with new contracts from abroad rising for the first time in three months.
"The latest survey data highlights a sharp loss of momentum since the start of 2020,” Tim Moore, economics associate director at IHS Markit, said.
"New order growth continued to weaken despite efforts to stimulate sales through price discounting, which led to the weakest rise in non-oil private sector output since the survey began in August 2009.”
February data also revealed additional challenges after the coronavirus outbreak disrupted international supply chains, with companies looking to build inventories and procure critical components from alternative sources.
That has resulted in “longer lead times for the delivery of raw materials and the sharpest rise in purchasing costs for almost one-and-a-half years", Mr Moore noted.
The UAE's non-oil private sector economy, on the other hand, softened for a second month in February as overall business conditions weakened and fewer new orders forced companies to limit activity.
Output expectations in the second-largest Arab economy also dropped to a near two-year low, dampened by fears around the effect the coronavirus outbreak would have on exports and supply chains.
The seasonally adjusted UAE PMI gauge fell to 49.1 in February, down from 49.3 in January.
“The headline reading of 49.1 was the lowest since August 2009, reflecting declines in output, new orders and employment,” David Owen, an economist at IHS Markit, said.
While many companies "remained upbeat for the year ahead", business expectations were hit by fears over the virus outbreak, he said.
UAE output levels contracted for the first time in more than 10 years as demand weakness forced companies to restrict activity. The rate of reduction in output though was only moderate.
Meanwhile, order book volumes decreased for the second month running, with the rate of reduction quickening from January, according to the survey.
Egypt's non-oil private sector also contracted in February for the seventh month in a row, after further declines in output, new orders and employment.
The combination of soft demand and subdued cost pressures meanwhile led companies to reduce average charges for goods and services.
Business sentiment towards future output remained positive but weakened to a five-month low.
At 47.1, the latest IHS Markit Egypt PMI Index reading was up from January's near three-year low of 46 but still indicative of another solid downturn in the non-oil private sector economy.
Faced with weaker demand and reduced output requirements, non-oil companies scaled back employment and purchasing activity in February.
Staffing numbers fell at the fastest rate since September 2017, while the drop in buying was the most marked in almost three years.
"Evidence from the survey indicates a vicious cycle of weak labour market conditions leading to lower domestic sales, and subsequently further staff cuts,” Phil Smith, principal economist at IHS Markit, said.
"Unfortunately for local businesses, the challenging domestic market conditions are being compounded by weakness in external demand, with export orders continuing to fall sharply in February."
UAE currency: the story behind the money in your pockets
Start-up hopes to end Japan's love affair with cash
Across most of Asia, people pay for taxi rides, restaurant meals and merchandise with smartphone-readable barcodes — except in Japan, where cash still rules. Now, as the country’s biggest web companies race to dominate the payments market, one Tokyo-based startup says it has a fighting chance to win with its QR app.
Origami had a head start when it introduced a QR-code payment service in late 2015 and has since signed up fast-food chain KFC, Tokyo’s largest cab company Nihon Kotsu and convenience store operator Lawson. The company raised $66 million in September to expand nationwide and plans to more than double its staff of about 100 employees, says founder Yoshiki Yasui.
Origami is betting that stores, which until now relied on direct mail and email newsletters, will pay for the ability to reach customers on their smartphones. For example, a hair salon using Origami’s payment app would be able to send a message to past customers with a coupon for their next haircut.
Quick Response codes, the dotted squares that can be read by smartphone cameras, were invented in the 1990s by a unit of Toyota Motor to track automotive parts. But when the Japanese pioneered digital payments almost two decades ago with contactless cards for train fares, they chose the so-called near-field communications technology. The high cost of rolling out NFC payments, convenient ATMs and a culture where lost wallets are often returned have all been cited as reasons why cash remains king in the archipelago. In China, however, QR codes dominate.
Cashless payments, which includes credit cards, accounted for just 20 per cent of total consumer spending in Japan during 2016, compared with 60 per cent in China and 89 per cent in South Korea, according to a report by the Bank of Japan.
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.”
