Signs of slowing Saudi consumer spending could prove a drag on nation’s economy



Saudi Arabians are not spending as much as some economists have predicted, leading to concerns that consumption in the region’s juggernaut economy could be stalling.

While the kingdom’s economy has been on a roll — helped by firm oil prices — some economists are concerned that higher interest rates and a lack of fresh stimulus may dampen consumption growth. That may have a knock-on effect on the overall economy later this year.

“There are signs that domestic demand is weakening,” said William Jackson, an emerging markets economist at the London-based Capital Economics. “Credit growth has slowed in recent months while non-oil imports — a proxy for consumer spending and investment — continue to fall in annual terms. This data chimes with other low-profile indicators that suggest the consumer spending may not be as strong as people think.”

Capital Economics forecasts that GDP growth in Saudi Arabia will slow to between 3 per cent and 3.5 per cent over the next couple of years, well below the 6 per cent to 7 per cent seen over the past decade. Still, GDP growth in February may have accelerated to 5 per cent year-on-year from 4 per cent at the end of last year, mostly on a rebound in the oil sector, according to Mr Jackson.

Unlike many emerging markets, countries in the Arabian Gulf have been protected from a fall in asset prices this year because of current-account surpluses and currencies pegged to the US dollar.

Despite the recent dip, consumer lending has been on the rise since Saudi Arabia started a $130 billion social spending stimulus package in the aftermath of the Arab Spring in 2011. Loans to individuals rose 21 per cent last year to a record 332bn riyals (Dh325.15bn), according to data from the country’s central bank.

Demand for property loans last year increased 26 per cent while financing for cars advanced 17 per cent, according to the central bank. That may slow with higher US Federal Reserve interest rates next year and the absence of further stimulus by the government of Saudi Arabia.

“Lending is not going to grow at the same rate,” said Paul Wetterwald, the chief economist at Crédit Agricole Private Banking. “Nominal GDP is plateauing somewhat. We are at a very high level and it is difficult to go much higher very quickly. Also, the transfer from the state to the households that followed the Arab uprisings they are not likely to be repeated every year. Oil prices have more or less stabilised, so you don’t have this bonanza of price increases that you can redistribute to the population.”

Mr Wetterwald said he was not too concerned about the rise of US interest rates, pointing out that there was enough demand for credit that higher rates would not pose too much of a constraint. He noted that while the monthly purchasing managers index in Saudi Arabia — a gauge of the non-oil private sector — declined last month to 57 from 58.6 in February, it was still above the crucial level of 50 — a threshold that indicates continued economic growth.

Even though most banks in Saudi Arabia are set to report record first-quarter earnings because of the increase in demand for loans by consumers, Al Rahji Bank, the country’s biggest publicly traded lender, said its first quarter profit fell to 1.71bn riyals from 2.05bn riyals last year because of increased expenses. Demand for credit by businesses has also been easing, leaving the bank with three consecutive quarters of lower profit growth, according to Bloomberg data.

mkassem@thenational.ae

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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.”