UAE growth forecast to slip to 4%

ABU DHABI // The global financial crisis will dampen the UAE's economic growth, the Governor of the Central Bank Sultan Nasser al Suwaidi said yesterday. Mr Suwaidi said he expected growth to fall to four per cent this year, down from seven per cent last year, because of the global credit crisis and the shockwaves being felt by the domestic banking system.

He said the situation "is putting pressure on everything in the external world. Therefore, that's going to cause a slowdown in the economy". Mr Suwaidi added that banks would have to make provisions for falling property values, but was confident they would be able to service their debts. The IMF estimates gross domestic product (GDP), the benchmark measure of the value of goods and services produced in the country, grew at 7.4 per cent in 2007, after accounting for inflation.

Analysts said a slowdown was inevitable given talk of recession, even depression, in the developed world. Imran Ahmed, managing director of asset management at Mashreqbank, called the projection "reasonable growth". "The slower GDP growth rate reminds us that the United Arab Emirates is part of the global marketplace. It is subject to the high and low tides of the world economy," Mr Ahmed said. "Still, in a world plagued with talk of recessions, depressions and all sorts of crises, maintaining a reasonable growth rate demonstrates the resiliency of the economy, and the major strides made in diversifying dependency away from oil prices."

The global outlook has contributed to a drop in share values in Abu Dhabi and Dubai, by 38 and 66 per cent respectively so far this year. Faced with the prospect of a global recession, oil prices have fallen by two-thirds in four months. The credit crisis has spilled over into the domestic banking sector, with the nation's largest home loan company, Amlak Finance, announcing last week it had temporarily suspended lending.

Amlak did not fully explain its decision, saying it was a temporary measure while it reviewed its credit policy. Other lenders have also reduced lending as credit on international markets has dried up. The Central Bank has offered cash to banks to boost their deposit levels and increase confidence, but this has yet to lead to any significant increase in lending between banks, which is indispensable for a healthy economy.

Mr Suwaidi said the interbank market was tight, not because credit was unavailable, "but because rigidity has developed in the market out of fear of what will happen in the international global financial crisis. "They are not lending at the same rates as before. That is quite natural at this point in time. It's the response of banks to the interbank squeeze," he said, adding that Amlak's decision was part of this process.

"Everybody is very careful about lending at this point in time because there's a shock in the system, the interbank system." It was unclear how long this situation would last. "This is the one million dollar question," Mr Suwaidi said. On the fall in property values, he said: "In the economic downturn all sectors of the economy slow down by a certain degree and we have to take proper provisions at banks, and that is what we intend to do."

But Mr Suwaidi said he did not yet know what the volume of provisions would be. "I don't know before we see how they develop into next year. We will take whatever downturn, whatever decline in value there is, we will take it into provisions. And because UAE banks are well capitalised, we will have no problems to meet this extra provision." There was also "absolutely no problem" with foreign debts owned by banks, he added.

Some analysts have questioned the ability of some companies and institutions to refinance loans as they come due over the next few months, given the lack of credit available internationally. "In terms of banking, I don't see any danger. We are willing to meet all the external debt of banks," Mr Suwaidi said. "It's a matter of time. Whenever they mature, we will replace them and we intend to repay all of them."

He said the Government had been vindicated in its decision to keep the dirham tied directly to the US dollar amid the turmoil on global currency markets. "We were criticised for staying with the dollar when it was weak, so I don't think we should be criticised for staying with the dollar when it is strong," Mr Suwaidi said, adding that the Central Bank would stick to the policy. *With Bloomberg and Reuters


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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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