The Mena region displays divergent recovery patterns in the post-Covid era, with oil exporters growing at a relatively faster pace. But a global economic downturn is looming. What are the priorities for the region’s financial community?
Medium and long-term risks in Mena (like climate change and regional conflicts) notwithstanding, the GCC, largely recovered from Covid-19, should shift on to an “Economic Diversification 2.0” path. While the so-called “Gulf falcons”, the UAE and Saudi Arabia, are the frontrunners with regard to actively diversifying away from oil, future growth prospects require a focus on the “new economy”, in addition to the “old” non-oil sectors (like tourism, infrastructure and logistics) that supported the “Economic Diversification 1.0” phase. But moving to a new diversification path necessitates new tools and investments.
There are multiple drivers of Economic Diversification 2.0. First, the new economy (including industry 5.0, the Internet of Things, AI, blockchain, FinTech and virtual assets) should be supported by an enabling set of investments and policies. This includes a broad-based embracing of the digital economy, in addition to increased investments (both domestic and regional) from the region’s financial markets and sovereign wealth funds (SWFs), which are able to deploy more than $3 trillion in liquid wealth.
This should go in tandem with developing and deploying countercyclical monetary and fiscal tools and policies. The International Monetary Fund estimates that the region’s oil producers could accumulate around $1tn in oil windfalls between 2022 and 2026. These funds should be used to secure fiscal sustainability, a move that has already been evident in the recent months with most GCC nations avoiding the temptation of increased spending. While reining in spending, policymakers could also use this opportunity to mobilise non-oil revenues and phase out costly generalised subsidies in favour of cash income transfers and targeted subsidies.
The region's oil producers could accumulate around $1tn in oil windfalls between 2022 and 2026. AFP
Policymakers could also use this opportunity to mobilise non-oil revenues and phase out costly generalised subsidies
Liberalisation and structural reforms go hand in hand with the above-mentioned policy tools. This includes labour market reforms (like long-term residency and incentives to raise female labour force participation rates), alongside encouraging more private sector activity and accelerated capital market development. Last but not least, policies that support regional economic integration should be encouraged by accelerating the outward orientation of trade and investment policies towards Asia and Africa, other Arab countries, and the development of the Red Sea Basin, among others.
As the GCC embarks on Economic Diversification 2.0, financial markets need to be the handmaiden of growth and become an enabler of economic transformation. The low hanging fruit is the use of government debt markets to finance infrastructure and development projects as well as smooth volatile government finances. Government debt markets can become a growing source of funding to diversify away from reliance on bank financing, especially for long-term projects.
Structural change requires growing the role of the private sector. The UAE and Saudi Arabia are already undertaking a concerted push towards the privatisation of certain state-owned assets and enterprises to de-risk fossil fuel assets, with the advantages of raising revenues, diversifying financial markets, and attracting foreign investment. Recently enacted public-private partnership laws will also encourage privatisation, attract new tech and innovation and foster job creation. Financing mega projects and infrastructure via capital markets, and more efficient management of public assets will boost the development of broader, deeper and more liquid capital markets, also enabling the region’s SWFs to more efficiently manage their growing wealth and domestic assets, thereby increasing financial access and deepening. Indeed, the SWFs are recalibrating their asset allocation to focus on the region to drive growth. As a case in point, Saudi Arabia’s PIF plans to invest $24 billion in six Arab nations.
The ongoing global energy crisis, along with technological innovation lowering the cost of renewables, has created the conditions for a new global energy map. Alongside the GCC’s existing energy linkages with Asia, new links can now be forged with Europe for gas and green/ blue hydrogen. These structural changes should be supported by a multi-faceted energy transition strategy by the region’s oil producers that includes focusing on renewables, clean energy, clean technology, hydrogen and nuclear projects in light of their net-zero emissions commitments. The path to achieving the region’s ambitious renewable energy targets will require massive investments, which can be financed by the issuance of green bonds and Sukuks in the regional markets and by creating dedicated “green banks” and “green funds”.
For digitalisation to transform the region’s economies, investments will be required in disruptive technologies and digital payments, in addition to financing digital infrastructure to expand the reach of the digital economy. Many GCC governments are already on the forefront when it comes to adoption of digital technologies: be it e-government or embracing blockchain technology in the public sector or digital currencies (for instance, Project Aber, created by the central banks of the UAE and Saudi Arabia). The region’s financial regulators and capital markets led by the Gulf Falcons are embracing FinTech and crypto assets. Supporting mainstream digital solutions like MedTech, AgriTech and EduTech will increase the pace of digitalisation, assisting economic transformation.
The global political economy is under strain. The GCC has an opportunity to benefit from global decoupling and fragmentation by its unfolding “regionalised globalisation” strategy, driving and supporting regional economic integration. A growing number of free trade agreements are linking new economic partners and strengthening existing relations, while tools like foreign aid, finance of regional trade, building and sharing the services of infrastructure facilities as well as FDI and portfolio investments are transforming and improving the growth and development prospects of a broad GCC-connected region, including Mena, East Africa and Asia.
UAE currency: the story behind the money in your pockets
Winner: Art Du Val, William Buick, Charlie Appleby
8.50pm: Balanchine Group 2 (TB) | $250,000 (T) | 1,800m
Winner: Poetic Charm, William Buick, Charlie Appleby
9.25pm: Handicap (TB) | $135,000 (D) | 1,200m
Winner: Lava Spin, Richard Mullen, Satish Seemar
10pm: Handicap (TB) | $175,000 (T) | 2,410m
Winner: Mountain Hunter, Christophe Soumillon, Saeed bin Suroor
Five ways to get fit like Craig David (we tried for seven but ran out of time)
Start the week as you mean to go on. So get your training on strong on a Monday.
Train hard, but don’t take it all so seriously that it gets to the point where you’re not having fun and enjoying your friends and your family and going out for nice meals and doing that stuff.
Think about what you’re training or eating a certain way for — don’t, for example, get a six-pack to impress somebody else or lose weight to conform to society’s norms. It’s all nonsense.
Get your priorities right.
And last but not least, you should always, always chill on Sundays.
The biog
Favourite pet: cats. She has two: Eva and Bito
Favourite city: Cape Town, South Africa
Hobby: Running. "I like to think I’m artsy but I’m not".
Favourite move: Romantic comedies, specifically Return to me. "I cry every time".
Favourite spot in Abu Dhabi: Saadiyat beach
Racecard
6.35pm: The Madjani Stakes – Group 2 (PA) Dh97,500 (Dirt) 1,900m
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.”
GOLF’S RAHMBO
- 5 wins in 22 months as pro
- Three wins in past 10 starts
- 45 pro starts worldwide: 5 wins, 17 top 5s
- Ranked 551th in world on debut, now No 4 (was No 2 earlier this year)
- 5th player in last 30 years to win 3 European Tour and 2 PGA Tour titles before age 24 (Woods, Garcia, McIlroy, Spieth)
Keane on …
Liverpool’s Uefa Champions League bid: “They’re great. With the attacking force they have, for me, they’re certainly one of the favourites. You look at the teams left in it - they’re capable of scoring against anybody at any given time. Defensively they’ve been good, so I don’t see any reason why they couldn’t go on and win it.”
Mohamed Salah’s debut campaign at Anfield: “Unbelievable. He’s been phenomenal. You can name the front three, but for him on a personal level, he’s been unreal. He’s been great to watch and hopefully he can continue now until the end of the season - which I’m sure he will, because he’s been in fine form. He’s been incredible this season.”
Zlatan Ibrahimovic’s instant impact at former club LA Galaxy: “Brilliant. It’s been a great start for him and for the club. They were crying out for another big name there. They were lacking that, for the prestige of LA Galaxy. And now they have one of the finest stars. I hope they can go win something this year.”
