Outlook for banks in the GCC will remain stable through to 2015 despite falling oil prices, Moody’s Investors Service said yesterday.
The ratings agency is expecting 10 per cent credit growth for the GCC banking sector for 2014-15, but growth will be more subdued compared to the boom of the past couple of years.
“More moderate credit growth isn’t a bad thing for the Gulf,” said Khalid Howladar, the vice president and senior credit officer at Moody’s.
“But if the government spends less, the non-oil economic growth will also reduce, which will subdue credit growth.”
Late last month, Moody’s kept its ratings outlook for UAE banks at stable.
It said it was still upbeat about the prospects of UAE banks because bad loans are declining as the country’s economy booms.
However, the psychological effect of falling oil prices will also have an impact on the economy, said Mr Howladar.
Brent crude dropped by $2 yesterday to $67.54 per barrel.
“Overall it is not necessarily a bad thing. There are no real problems as such compared to the last time when oil prices fell, which was much more dramatic,” said Mr Howladar.
“The banks are better capitalised and more liquid and in a more fundamentally sound position than they were in last time.”
The IMF is predicting oil prices per barrel will range from $50 to $80 over the next 10 years.
But Standard Chartered has taken a more cautious approach and is expecting credit growth to be flat for the next year.
“Our view is that credit growth will be flat in the next 12 months driven on the back of two things,” said Syed Khizer Pasha, a senior credit manager at Standard Chartered.
“Falling oil prices means shrinkage in the corporate sector and the other reason is the quantitative easing which will start very soon. Interest will rise a little bit and that will put downward pressure on credit growth.”
Mr Khizer Pasha said he has not seen any uptick in borrowing in the UAE. “There are a lot of deals out there, but a lot of it is refinancing,” he said.
Overall, however, the GCC is expected to fair reasonably well.
“In very basic aggregate terms, oil prices will affect both the fiscal position of the GCC and also the external,” said Lucio Vinhas de Souza, managing director and sovereign chief economist at Moody’s.
“The implication is a natural one, the lower the oil price goes, the greater the fiscal deficit the countries will face, but even if oil prices falls to $60 the GCC countries will still have current account surplus.”
The UAE has enough external sovereign wealth assets in terms of expenditures to keep it going for more than five years, according to Moody’s.thamid@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.”
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