The Saudi finance ministry in Riyadh. Emirates NBD's PMI for the kingdom's non-oil private sector has ticked up. Fayez Nureldine / AFP
The Saudi finance ministry in Riyadh. Emirates NBD's PMI for the kingdom's non-oil private sector has ticked up. Fayez Nureldine / AFP

Saudi non-oil private sector looking up



Growth in Saudi Arabia's non-oil private sector picked up at the start of the third quarter on the back of sharper increases in output and new orders. Greater demand encouraged companies to purchase more materials and stimulated job creation in the sector.

The headline seasonally adjusted Emirates NBD Saudi Arabia Purchasing Managers’ Index – a composite gauge designed to give a single-figure snapshot of operating conditions in the non-oil private sector economy – rose from 54.3 in June to 55.7 in July. The PMI survey is sponsored by Emirates NBD and produced by IHS Markit.

This was alongside a robust improvement in overall business conditions, the strongest since April. However, the latest performance was weaker than the long-run series trend.

The main factors contributing to the upward trajectory of the non-oil private sector economy were sharper expansions in both new orders and output, the PMI report found. Anecdotal evidence highlighted greater projects, good economic conditions, stronger underlying demand and higher construction activity.

“Faster growth in output and new orders helped the headline PMI in Saudi Arabia rise in July, signalling the fastest rate of non-oil sector expansion in three months. Firms were more optimistic last month, and this likely contributed to increased buying activity and inventory accumulation,” said Khatija Haque, the head of Mena research at Emirates NBD.

Concurrently, June’s increase in new export orders was short-lived, with non-oil private sector companies reporting contraction in July.  The rate of decline was fractional, however. Analysts cited weaker demand from international markets for Saudi Arabian goods and services.

Underlying data provided evidence of ongoing pressures on operating capacity as backlogs rose for the ninth consecutive month. Subsequently, firms increased their payroll numbers, but only marginally, the report found.

In response to greater output requirements, businesses scaled up their purchasing activity during July. Moreover, the upturn in input buying was the quickest since April. Subsequently, inventories rose substantially.

On the price front, input cost inflation quickened to the fastest since April and was solid overall. Underlying data suggested that cost pressures mainly came from higher purchasing prices. Staff costs rose only modestly in comparison, but at the fastest rate in 10 months. Analysts pointed to a general rise in market prices for raw materials. Firms raised their output charges, but only marginally amid reports of intense competitive conditions.

Future output data indicated that business confidence improved in July. Forecasts of a better economic scenario and promotional activities were the key factors boosting optimism at the start of the third quarter, the report found

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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.”