The Libyan president Muammar Qaddafi has maintained a 'closed' financial system that did not encourage foreign investment. Above, Libyans queue outside a bank to get cash in Benghazi.
The Libyan president Muammar Qaddafi has maintained a 'closed' financial system that did not encourage foreign investment. Above, Libyans queue outside a bank to get cash in Benghazi.

Middle East and North Africa region faces mixed fortunes



Sulaiman al Mazroui, an executive with the UAE's banking champion Emirates NBD, is quick to point out the significance of the turmoil engulfing parts of the Middle East.

"We are witnessing the biggest changes in the region since the decline of the Ottoman empire," Mr al Mazroui told an audience last week at Dubai's Capital Club.

In the space of a couple of months, old certainties about the Arab world have been swept away, along with some of the rulers who have dominated the region for decades.

But the bankers and financiers at the Capital Club wanted to hear more about the economic and financial repercussions of the changes. Above all, the audience wanted an answer to one big question: will the transformation of the region's political landscape be a force for good or otherwise for the region's economies?

There is no clear-cut answer. Some believe the changes will liberate the economies of the Mena region and usher in a new age of dynamism and entrepreneurialism. Others see a period of chaos and instability that can only damage financial markets and commercial order.

Still others believe the rest of the world will slow the flow of foreign investment on which many economies in the region depend.

Already there have been signs that is happening. Tarek el Refai, an Egyptian banker with the US bank BNY Mellon, has years of experience in the region. Mr el Refai estimates some US$16 billion (Dh58.76bn) of foreign capital has left Egypt since the start of the turmoil.

"We don't see any great influx of investment into the region in the short term", he says.

A recent study by HSBC Middle East underlined the repercussions for the wider Mena region.

"Foreign capital flows are likely to be very weak," said the report by the bank's economic team, based in Dubai. "Access to international debt and equity markets is likely to be curtailed until a convincing new order has been established and foreign direct investment plans are likely to be out on hold."

For Egypt, the most populous state in the Mena region, which suffered severe disruption in the period leading up to the resignation of the former president Hosni Mubarak, the challenges were highlighted when the Cairo stock exchange reopened after a long closure. The index fell like a stone on the first day as mainly foreigners pulled out of Egyptian investment.

Coupled with a threat to the country's vital tourism industry, which earns it billions of dollars in hard currency every year, that makes for a depressing picture, at least in the short term. As for the long term, Mr el Refai believes there are some encouraging signs.

"The stock market has gained around 5 per cent average [a day] since the first big falls, which shows the fundamentals of Egypt's economy are unchanged," he says.

"The market is deep and remittances [from expatriate workers in other Mena states] and tourism will endure. Already, things are getting back to normal."

In Tunisia, the country that sparked the "Arab Spring" when its president Zine el Abidine Ben Ali was forced from power in January, the transition to stability has been more or less orderly.

Dr Jamal Zarrouk, a Tunisian banker who heads economic research for the Arab Monetary Fund, says the economy is recovering from the problems of the early days. "We are moving slowly towards a form of parliamentary democracy and the economy is moving away from disarray and stoppages," Dr Zarrouk says. "The speed of that recovery will depend very much on the elections in July."

In Libya, the transition to democracy is still uncertain and laden with dangers. The country under Muammar Qaddafi was a major oil exporter, but he maintained a largely "closed" financial system that did not encourage foreign investment.

Hatim Gheriani, a Libyan executive with HSBC and the former chief investment officer of the Libyan Investment Authority, remains optimistic about the long-term prospects.

"The removal of Qaddafi will be like an exorcism for the economy. Money can work miracles, and we have plenty of oil money, if it is properly used," Mr Gheriani says.

Nonetheless, the professional economists are sceptical that Mena economies will bounce back, at least in the short term.

"We find it hard to imagine the region can simply return to the status quo," the HSBC report said. "The events of the first quarter of 2011 will have lasting negative economic consequences. Even in the more politically stable countries of the region, we expect more sluggish private-sector growth performances as perceptions of regional political risk arise, reducing confidence among lenders, investors, tourists and consumers alike."

There is a danger, HSBC warned, that the divide between the oil producers and non-oil producers will widen and exacerbate the asymmetric economic development of the Mena region.

"For the region's oil producers, higher prices and production will keep them in surplus even as they expand [state] spending, mitigating the impact of this lower private sector growth," the report said.

"For the non-oil producers, rising commodity prices will exacerbate already weak fiscal positions, potentially crowding out the private sector and keeping unemployment levels elevated."

The economic fall-out of the unprecedented political situation in the region will not be evenly spread.

"The economic impact of recent events will vary from state to state and promises of increases in spending will support domestic demand. As a consequence, we have cut our forecasts for 2011 non-oil growth in virtually every Mena state, and cut our projections for the economies that have been most directly affected by as much as 6 percentage points," said HSBC, downgrading Egypt and Bahrain significantly.

The message is the Arab Spring will reduce the overall size of the economic cake in the region, even if some countries, mainly oil-producing Gulf states such as the UAE and trading centres such as Dubai, manage to carve out a bigger slice.

Drivers’ championship standings after Singapore:

1. Lewis Hamilton, Mercedes - 263
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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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