Another Article on MENA
Ahmad A. Ashkar
Enjoy.
Ahmad
http://www.ftadviser.com/InvestmentAdviser/Investments/Region/MENA/Features/article/20100118/941345c8-fb9b-11de-8fd9-00144f2af8e8/Focus-Mena.jsp
Focus: Mena
- Story by: Sabah al Binali
- Magazine: InvestmentAdviser
- Published Monday , January 18, 2010
There seems to be an emerging consensus that the world has endured the worst of the recent global financial crisis and that the recovery has begun. Replacing the question ‘when will the recession end?’ is the question ‘when will real growth begin?’ When it comes to North America and Europe, the view seems to be ‘not any time soon’. In contrast, China, Brazil and India are recovering faster than most predicted and appear poised to remain the centres of growth for the short to medium term.
However, one emerging region often overlooked by those seeking growth prospects is the Middle East and North Africa (Mena). This article reviews the major trends in the region over the past three decades and addresses the three commonly cited disadvantages of the region – small size, closed markets and high risks – specifically by comparing these characteristics with other emerging markets.
Taken individually, the countries of the Middle East are relatively small by standard measures such as GDP or population. Notable exceptions include Saudi Arabia, with the 23rd largest economy globally, and Egypt, with the 16th largest population. In aggregate, however, the Mena region has a GDP larger than India, Brazil or Russia and a young, fast-growing population. Even narrowing the view to include only the six countries that make up the Gulf Cooperation Council (GCC), this still yields a bloc with a $1trn (£620bn) GDP and approximately 45 per cent of the world’s proven oil reserves.
Future investment
Mena also compares well in terms of market capitalisation, having begun 2009 on par with most other Bric markets. The main difference is that Mena markets lagged last year, indicating that they may now prove attractive as the next destination for emerging market investors. With market size, natural resources wealth and favourable demographics, it is difficult to argue the Middle East lacks the scale of the Bric nations.
Market size alone does not justify investment, particularly if the market is closed to certain investors, illiquid or dominated by a single industry. Given the region’s energy reserves, it would be naive to ignore the central role of energy extraction to Mena. Nonetheless, GCC governments have made significant efforts to reinvest a portion of the oil wealth to diversify their economies and attenuate the effects of energy prices.
These efforts have included improving the investment climate, increasing market access to foreign capital and promoting business development. Again, compared with the Bric markets, the region fares quite well, contrary to accepted market views. The World Bank Group ranks Saudi Arabia 13th in the world for ease of doing business, while the United Arab Emirates (UAE) is 33rd and Kuwait 61st. By comparison, China is 89th, Russia 120th, Brazil 129th and India 133rd.
An argument might be made that Mena countries possess a more favourable business environment to compensate for much higher political risks. This argument is flawed, however, as evidenced by Economist Intelligence Unit country political risk rankings for 2009. Saudi Arabia (B), Kuwait (BB) and the UAE (BBB) all score on par or better than China (B), Russia (B), India (BBB) and Brazil (BBB).
Issues such as the recent Dubai World debt standstill have, of course, serious implications for investors and underscore the need for informed, locally based asset managers capable of understanding the nuances of decision-making. Such expertise helps avoid the panicked reaction seen among international investors, which is more a reac--tion to perceived political risk than an informed interpretation of actual risks.
The final puzzle piece is liquidity. The GCC’s daily market turnover of $1.6bn, though less than Russia’s $2.5bn and India’s $4.3bn, provides adequate liquidity for investors. Although certain ownership restrictions remain in some countries, particularly with regards to strategic industries such as oil and gas, for the most part, governments in the region have made significant strides in opening up to foreign investment. In short, a lack of liquidity or market access will not prove a barrier to investors seeking exposure to the region.
The evolution of the Mena markets, however, has not solely been a product of government initiatives aimed at creating accessible markets for foreign capital. Much of the impetus for change and growth came from within the region, from local investors seeking to channel more of their capital into regional opportunities. To understand this development, it is necessary to briefly review some history.
In times of strong oil prices, the region historically sent vast amounts of money to New York, London and Switzerland in search of investment returns. However, from about eight years ago, the outward flow began to slow. The 2001 attacks on New York and Washington drastically accelerated this trend, as evidenced by the 13 per cent jump in the Saudi Arabian M3 money supply in 2002 and 2003 as less money was sent abroad.
People sat on cash as they waited to understand the full implications of the events. However, faced with negative real cash yields, people eventually deployed these funds locally, resulting in immense private regional investment.
The investment regionally of the excess capital previously sent overseas marked a clear split from historical patterns and initiated a period of strong growth.
Sinking debts in oil
The doubling in oil prices from 2002 to 2006 amplified the effect of local private investment. Current account surpluses for oil-exporting countries like the UAE rose from 10 per cent in 2003 to 20 per cent of GDP in 2005. In Saudi Arabia, the current account surplus increased from 13 per cent of GDP in 2003 to 27.5 per cent in 2005. Governments used these to redouble efforts to diversify economies away from the hydrocarbon sector and, in contrast to western counterparts, exercised prudence by retiring most of their debt in the oil boom.
In nominal GDP terms, the GCC countries taken together had the eighth-largest GDP in the emerging world in 2007. From about £731bn in 2006, the region’s GDP grew to nearly $821bn in 2007 and crossed $1trn in 2008. Economic growth among the GCC nations averaged over 7 per cent a year during the same period.
This robust macro growth also translated into market returns, with the Saudi market’s 12 per cent internal rate of return (IRR) over the 2000-09 period beating the MSCI Emerging Markets index’s 7 per cent IRR over the same period. There is no reason for this not to repeat itself. Even if one looks at Emaar – the largest property developer in the region, with significant exposure to Dubai – the IRR from 2000 to date, including dividends, is 24 per cent.
Stimulus support
The slowdown in the US and the eurozone, and the corresponding concern about the demand for oil, put pressure on prices. The credit crunch made its way to Mena, albeit a bit later than in other markets, and as a result, liquidity dried up and the economy slowed down. Fortunately for the region, the large surpluses accumulated over the previous years allowed governments to undertake aggressive stimulus measures.
The UAE initiated a stimulus package equal to 16 per cent of its GDP, while Saudi Arabia’s equalled 27 per cent, as compared with China and Russia’s respective figures of 14 per cent and 11 per cent. The UAE Central Bank put in place two support packages worth $27bn to boost liquidity. The UAE further lowered the interest rate charged on these facilities to support liquidity of banks from 5 per cent to 3 per cent, guaranteed bank deposits and allowed lenders to perform dirham-dollar swaps.
Mena markets have clearly exhibited the ability to provide returns on par with most Bric markets, despite the Brics having benefited from investors’ familiarity with those countries. Furthermore, the Mena markets have delivered this return with a risk profile no worse than Bric markets. Now that easy equity gains have been squeezed out of the Bric markets, the last emerging market frontier left on par with Bric is Mena.
Sabah Al Binali is a principal and chief investment officer at Saffar Capital
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