MenA booM or bust by liaoqinmei


r e g i O n a l s P Ot l i g h t

                                                                Parts of the MENA region have proved among the biggest casualties
                                                                of the credit crunch. Jennifer Hill says there are green shoots of
                                                                recovery, but businesses need to understand and manage the risks.

                                   MenA: booM or bust?

                                                    conomic boom and bust has been witnessed the              permits and visas were being cancelled daily as companies made
                                                    world over, and although some parts of the Middle         staff redundant, and thousands of cars were abandoned at the
                                                    East and north Africa (MEnA) have suffered far less       airport as expats departed in droves.
                                                    from the global financial crisis than the uS or Europe,      Other parts of the region have escaped relatively unscathed.
                                     others have proved a prime example of what can happen when rapid                                                                    ”
                                                                                                              “Outside Dubai the direct impact has been relatively small, says
                                     economic growth is fuelled by easy credit.                               giles Ward, MEnA managing director for AcE. “Some projects were
                                        gaurav Bhatnagar, a construction industry broker at Aon in            delayed to take advantage of reduced pricing but, except for a few
                                     Bahrain, witnessed this first-hand. “A decade ago, an infrastructure     of the more extreme ‘vanity’ schemes, few have been cancelled
                                     project in the millions of dollars was considered ‘good-sized’ , he      outright. Although it is damaged, the banking sector is generally
                                     says. “With the boom, that changed. Projects started running into        very well-capitalised, hence there have been few failures. And
                                     billions. contractor order books were full. The project finance          employment remains relatively robust.  ”
                                     market was flush with funds. Projects became ever-more ambitious:
                                     bigger values, increased complexity, cutting-edge technology.            financial fallout
                                     Projected construction spend in 2007-8 was trillions of dollars.         nevertheless, the fallout from the financial crisis has been felt
                                        “Everyone was gearing up, and the insurance market was no             throughout the Arab world. in January 2009, kuwait’s foreign
                                     exception; it wanted a piece of the action. When the global economic     minister Sheikh Mohammad al-Sabah said Arab investors had lost
                                     downturn hit, the finance market dried up. Projects, particularly the    $2.5 trillion. Tumbling stockmarkets contributed more than
                                     more ambitious ones, were shelved – some indefinitely. financiers,       $600 billion to losses, while investors were also hit by plummeting
                                     developers and contractors started approaching projects with             oil revenues and property prices. news in november that Dubai
                                     extreme caution. fewer projects got approved and, as a result, the       World, with $59 billion of debts, had asked creditors to defer
                                     pipeline of those coming to the market has dried out.  ”                 payments shook world stockmarkets and sparked fears of a
                                                                                                              deeper crisis.
                                     Dubai                                                                       That has not materialised, and talks in July on restructuring the
                                     Dubai has been by far the biggest credit crunch casualty in the          debts of Dubai World were seen as heralding a positive new phase
                                     MEnA region. Real estate and construction account for around             for the uAE economy and wider region. “Once this Dubai World
                                     30% of Dubai’s gDP, and property prices have tumbled 50% from                                                                        ”
                                                                                                              restructuring is done, the economy will find the bottom, says Okan
                                     their peak in October 2008. At one stage, an average of 1,500 work       Akin, emerging corporate strategist at RBS in London.
                                                                                                                             Broadly speaking, the coming year looks more positive
                                                                                                                          for the MEnA region, especially if the economy continues
                                                                                                                          to be supported by higher oil prices, a recovering global
                                                   “The MENA region is seeing some of                                     economy and relaxed domestic policy, according to
                                                                                                                          the Economist intelligence unit (Eiu). Saudi Arabia,
                                                   the lowest prices globally as insurance                                the largest of the Arab markets and a country that
                                                   companies try to establish a foothold in                               derives 45% of its gDP from oil, is forecast to enjoy
                                                                                                                          the strongest growth in 2010–11, at 3.4%, while other
                                                   what is still a fairly small market.”                                  gulf cooperation council (gcc) countries expect low
                                                   Giles Ward, MENA managing director, ACE                                single-digit growth. The Eiu expects a rise in oil output,
                                                                                                                          coupled with high government spending in oil-producing

Pr Ogress sePt embe r 2 0 10

                in Dubai property
                prices since
                October 2008

                lost by Arab
                investors during the

                of people
                are now aged
                between 15 and 29 in
                the Middle East

www.aCeeUrOPeangrOUP.COm               23
r e g i O n a l s P Ot l i g h t

                                                                                                             financiers are exercising caution, but according to the World Bank
                                                                                                          MEnA lenders are sitting on a cash pile ripe for lending. Despite
                                                                                                          green shoots, risks remain. Property prices in hard-hit Dubai are
                                                                                                          expected to tumble further, and there are political risks, too. Saud
                                                                                                          Masud, an independent analyst and former head of research at
                                   countries, to fuel growth of 4.5% a year between 2012 and 2014.        uBS in the region, says: “Peak-to-trough house prices could decline
                                      The MEnA region’s fate is inexorably linked to the oil price.       75–80%, so there’s still the potential for another 30% drop. This is
                                   OPEc has for the past 18 months expressed a preference for oil         due to an increase in residential and commercial property over-
                                   to remain stable at around $75 a barrel to encourage sustained         supply, which should hit around 50% in the coming years, up from
                                   investment and not threaten economic recovery; the price is            25% today.  ”
                                   hovering around that level. “Even a price of $45–$65 a barrel is          Politically, the ‘iran question’ poses a threat to businesses in the
                                   good, especially given that the cost to extract and process the        region, particularly if the uS and its allies decide to take military
                                   oil in MEnA is relatively cheap” says Ralph kabban, managing           action against it for its alleged nuclear arms programme. “Any war
                                   director at united insurance Brokers Dubai LLc. “A range of            with iran could have a destabilising effect on the region as a whole
                                   $65-$90 is optimal, but anything above that could risk damaging        and create uncertainty for oil supplies, particularly out of the Strait
                                   the delicate global recovery and ultimately damage oil producers       of hormuz [one of the world’s most strategic oil transit chokepoints],  ”
                                   in the MEnA region. Assuming that oil prices remain at ‘desirable’     says kabban.
                                   levels, kabban believes high levels of public spending will continue      in addition, the right wing government in israel has dampened
                                   to stimulate the region, including the economies of non oil-           hopes of a peaceful resolution to the Palestine conflict that has
                                   producing countries, who will benefit from oil-related liquidity in    blighted the region for years, and which will continue to be a “source
                                   the form of workers’ salaries, inward investment and tourism.          of instability and uncertainty”, kabban adds. At the same time, the
                                                                                                          “threat of various forms of terrorism” also remains.
                                   risks remain                                                              in terms of natural risks, the Middle East is relatively benign.
                                   Meanwhile, a tentative recovery in infrastructure projects is          Bhatnagar says: “There are the odd instances of a cyclone in Oman,
                                   starting to stimulate the construction industry. “in the past six      but generally speaking the region is very low risk.  ”
                                   months a few projects have been given the green light,” says Aon’s        The Middle East is experiencing an unprecedented ‘youth bulge’     ,
                                   Bhatnagar. “We’re seeing more activity in Saudi Arabia, Qatar and      with more than 30% of its population aged between 15 and 29. for
                                   Abu Dhabi compared to the other gcc countries. The activity            the past 40 years, governments in the region have spent 5% of gDP
                                   levels are in no way back to the dizzy 2008 levels, but there’s        on education, whereas most east Asian and Latin American countries
                                   positive talk and serious meetings. Things could be looking up.  ”     spent closer to 3%, according to the Middle East youth initiative.

Pr Ogress sePt embe r 2 0 10
                                           Despite an increase in access, quality of education remains low.   25%. for 2010, it looks like we may achieve something of the order
                                        “Employment remains the greatest development challenge, says   ”      of another 20%, again benefitting from the fact that our business
                                        kabban. “Educating young people is one of the key priorities of       mix is atypical; we tend to focus on specialist and technical lines –
                                        many governments in the region.    ”                                  energy, power, commercial property and so on.    ”
                                           Rapidly expanding young populations, combined with

                                                                                                                                                                                         To discuss the issues raised in this article, please
                                                                                                                                                                                                contact Steve Dixon on +973 (0)16 55 44 22
                                        government investment programmes to deal with this, also              competition
                                        represent an opportunity. “you have rapidly increasing demand         During the boom years, insurers flocked to the region, and today
                                        for consumer goods, together with investment in schools,              over-supply of insurance capacity has led to stiff competition, with
                                        hospitals, road and rail, as well as industrial diversification to    off-the-shelf insurance products reasonably easy for businesses
                                        try to generate sufficient employment opportunities for this          to procure. “We’re in a very soft part of the insurance pricing cycle,
                                        growing population, says AcE’s Ward.
                                                            ”                                                 and the MEnA region is seeing some of the lowest prices globally
                                                                                                              as international companies try to establish a foothold in what is
                                        crisis buoys insurance lines                                                                     ”
                                                                                                              still a fairly small market, adds Ward. “This pricing might not be
                                        Amid the fall-out from the financial crisis, businesses are waking    sustainable for long in several sectors, but any way you look at it it’s
                                        up to the importance of insurance. “Behind many businesses            a good time to be an insurance buyer.  ”
                                        there is a notable family name and the general consensus has             companies in the MEnA region tend to select insurance on price
                                        been that nothing can go wrong, says Bhatnagar. “This notion has                                                            .
                                                                                                              alone, and even large corporations often ‘buy down’ “if you decide
                                        been dispelled beyond doubt and companies are adopting a more         you only have a certain amount to spend on insurance, consider
                                        professional approach to risk management.     ”                       spending it to protect yourself against those events that could
                                           While insurers have suffered in the downturn, the impact has                                     ”
                                                                                                              really wreck your business, advises Ward. “companies that properly
                                        been partially offset by a rise in premiums in specific sectors.      understand the link between risk management and long-term

                                        The expansion of compulsory health insurance for employees in         profitability are the ones that will prosper over time. ”
                                        many gcc markets and increased interest in corporate liability
                                        protection, such as D&O insurance, have boosted revenues.             Giles Ward has recently been appointed CEO of ACE Australia
                                        growing awareness of potential exposure to legal action has seen      & New Zealand. Steve Dixon will be replacing him as regional
                                        demand for liability insurance rise, too, albeit from a small base.   managing director of MENA from October.
                                           Ward says: “While our gross revenues only increased by
                                        around 4% in 2009, mostly due to the slowdown in construction         Jennifer Hill is a freelance financial journalist currently working in
                                        opportunities, we were able to maximise growth in other classes       Dubai. Before going freelance she worked for The Sunday Times,
                                        of business, so our net premiums in the region grew by around         Reuters and The Scotsman.

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