A sustained slowdown in emerging markets would shave as much as 2 per cent off GCC GDP, Standard & Poor’s said in a report yesterday.
The warning comes as recent gloomy economic data point towards rocky growth in China, the world's second biggest economy and one of the biggest markets for GCC oil. Wobbles have also hit the economies of India, Brazil, Russia and Turkey, although the former appears to be now picking up.
The credit ratings agency said it did not anticipate a sustained pullback in emerging markets in its principal forecast. But the threat of a further capital markets sell-off remained “significant”, it warned.
“We think that GCC countries would be hit mainly through the falling oil market price rather than through capital outflows as experienced by some other emerging markets,” said Sophie Tahiri, S&P’s economist and one of the authors of the report, in an emailed response to questions.
Trade between the GCC and emerging markets, particularly those in Asia, has intensified in recent years at the expense of Europe, the US and Japan. GCC exports of goods to the US, EU and Japan slipped to less than 30 per cent of total exports in 2012, from 51 per cent in 1995, according to the report. Over the same period, exports to China swelled from 1 to 9 per cent, with exports to India growing from 5 to 11 per cent.
Investment ties are also growing, with a clutch of GCC investors active in a range of sectors in Asia, spanning financial services to telecoms.
But investor worries have focused on China’s growth path in recent months. The country’s exports unexpectedly slumped in February and other economic data and business sentiment surveys have also consistently fallen below expectations.
At the same time, GDP growth also edged down across the rest of the Brics (Brazil, Russia, India, China and South Africa) at the start of the year. Many emerging markets outside the GCC have also been hit by a capital market sell-off, hastened by the US Federal Reserve's decision in January to begin tapering its asset purchases programme.
S&P estimated that under a scenario involving an intensification of a capital flight along with a 2.4 per cent dip in GDP in the Brics nations between next year and 2016, oil prices would be dented by US$12 per barrel by 2016 to $90 per barrel.
The oil price drop would cut GCC GDP by 0.8 per cent next year and 1.2 per cent in 2016 compared with S&P’s baseline forecast, it said. North Sea Brent crude was trading at $107.88 per barrel yesterday.
“In Saudi Arabia, we would expect the government fiscal balance to fall into deficit, declining significantly by five percentage points,” said Ms Tahiri. “This is because most of government’s revenues come from the oil sector. The UAE fiscal balance, by contrast, would stay in positive territory, only falling by 1 percentage point to about 5 per cent due to more diversified government revenues.”
Many analysts are forecasting a slight climbdown in oil prices in the coming years as growth demand ebbs in China and as the US and other markets ramp up domestic energy output.
“What happens in China will affect the Middle East through demand for oil,” said William Jackson, an emerging markets economist at Capital Economics. “We think that growth in demand will slow in China over the next few years and with the rise in energy production in the US, it means we’re not likely to see the same sort of growth in the GCC we did in the past.”
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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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