Fallout from the euro-zone debt crisis will ripple through the UAE economy, says the Middle East director for banks at Fitch Ratings.
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His warning comes as world leaders from the Group of 20 gather today in Cannes, France, for perhaps the most important summit in the organisation's history.
Despite the possibility of Greece rejecting the latest EU benefit package, the summit of the Group of 20 leading and emerging economies (G20) will look to agree on a deal on the country's debts and ensure the financial consequences of a Greek no vote are not felt throughout Europe and the rest of world.
And Mahin Dissanayake, at Fitch Ratings, said the UAE and its banks could not avoid being affected by decisions made at the G20 on the euro zone.
"We do not agree with some of the statements being made that the UAE will be immune from issues in the euro zone and globally," said Mr Dissanayake. "We believe a further, and possibly protracted, downturn in the global economy could affect the UAE economy and therefore the banking sector."
A funding squeeze at banks is also likely to affect lending to businesses, he said.
"There's a clear link between tourism, services, manufacturing and trading segments, in particular Dubai, with what's happening globally. As a result, we believe the banks will be affected in terms of growth, asset quality and earnings. It's as simple as that," said Mr Dissanayake.
Yesterday ahead of the summit, George Papandreou, the Greek prime minister, held emergency talks with Nicolas Sarkozy, the French president, and Angela Merkel, the German chancellor.
Mr Papandreou stunned world markets earlier this week by calling for a referendum on a deal tocut the country's debts.
A euro-zone agreement had been made to write off half of Greece's bank debts, increase the size of a recently established European bailout fund and recapitalise banks. But the Greek people are expected to vote against the deal in a referendum that could be held within weeks.
Stock markets fell sharply around the world after the referendum call but stabilised somewhat yesterday ahead of the G20 meeting, which it is hoped will dispel some of the uncertainty created by the Greek announcement.
However, figures released yesterday in Germany showed that unemployment rose unexpectedly last month for the first time in more than two years and manufacturing contracted in Europe's largest economy. In addition, the final Markit Euro-zone Manufacturing Purchasing Managers' Index for last month fell to 47. 1, revised down from a preliminary reading of 47.3 and down from 48.5 in September. The survey suggests the crisis is putting a chokehold on euro-zone business and adds pressure on the European Central Bank to cut interest rates.
"It makes grim reading," said Alan Clarke, an economist at Scotia Capital. "If there was any doubt t the euro zone was headed for recession, these data should confirm it."
Despite the uncertainty in the EU, business leaders in the Middle East expect little effect from a renewed recession in Europe.
"I would be confident that if Europe went into recession we would not feel the impact here," said Gerald Lawless, the executive chairman of Jumeirah Group. "Our tourism numbers continue to increase and we always find other markets if one is peaking and slowing down."
Tourists from the UK are Jumeirah's biggest source of revenue, followed by visitors from Russia and Germany, Mr Lawless said.
Despite this, he said, the UAE's establishment as a global aviation hub would ensure Jumeirah's business would continue to be strong.
"We are very confident, without being complacent, and looking for new business as well as looking after current customers," said Mr Lawless. Rafic Fakih, the managing director for Emirates Fast Food, which owns and runs McDonald's 90 franchises in the UAE, also believes there will be little impact from decisions made at the G20 meeting.
"For retail, the risk in the UAE is not high, we do not see huge consequences," he said. "The only issue might be if banks here have relationships with European banks."
One of the key points likely to be made clear at the G20 summit is the size of the European Financial Stability Facility (EFSF), which is expected to be increased to about €1 trillion (Dh5.06tn)
The EFSF had to postpone a bond issuance of €3bn yesterday due to turbulence in the debt markets.
In afternoon trading, Germany's DAX was up 1.27 per cent, France's CAC 40 had increased 1.14 per cent and the Eurostoxx 50 had edged 0.88 per cent higher.
In the UAE, the Dubai Financial Market General Index closed down 0.38 per cent at 1,377.48 and the Abu Dhabi Securities Exchange General Index closed down 0.25 per cent at 2,490.17.
rjones@thenational.ae
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Other workplace saving schemes
- The UAE government announced a retirement savings plan for private and free zone sector employees in 2023.
- Dubai’s savings retirement scheme for foreign employees working in the emirate’s government and public sector came into effect in 2022.
- National Bonds unveiled a Golden Pension Scheme in 2022 to help private-sector foreign employees with their financial planning.
- In April 2021, Hayah Insurance unveiled a workplace savings plan to help UAE employees save for their retirement.
- Lunate, an Abu Dhabi-based investment manager, has launched a fund that will allow UAE private companies to offer employees investment returns on end-of-service benefits.
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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.”
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