Gulf’s private sector boom still vulnerable
Gulf’s private sector boom still vulnerable
Corporate executives and economists at the Reuters Middle East Investment Summit this week said the private sector's gains were vulnerable, warning growth could quickly slow if oil prices retreat or governments slow spending in order to conserve their financial reserves.
"The current good growth we are seeing is cyclical and has its roots in government spending, but there are structural impediments to longer term private sector growth," said Liz Martins, senior regional economist at HSBC.
The oil market slide of 2008, in which prices slumped by as much as three-quarters in the space of six months, revealed the vulnerability of the Gulf countries and their big state-owned oil sectors; Saudi Arabia only barely escaped recession in 2009.
Now high oil prices have ignited a consumer spending spree that is buoying private firms across the Gulf Cooperation Council (GCC), which comprises Saudi Arabia, the United Arab Emirates, Kuwait, Qatar, Bahrain and Oman.
Middle East oil exporters will enjoy a near-record surplus in trade of goods and services worth about $400 billion this year, the International Monetary Fund estimates. Governments in the Gulf are channeling much of those oil earnings into social welfare and infrastructure projects.
This is helping private companies in two ways: Directly, through contracts awarded by Gulf governments, and indirectly, by fattening the wallets of consumers who work for the government or receive welfare benefits.
"Stable growth we have seen across the GCC over the last six to eight quarters comes ... from the public sector boost, which has stimulated the private sector as well," said Fabio Scacciavillani, chief economist at Oman Investment Fund.
For Gulf governments, developing the private sector has been a top policy goal since the 2008 crash as they seek to diversify their economies away from oil to reduce the risk of a similar setback in future.
Fostering small private companies has become even more important since last year's Arab Spring uprisings, because such firms tend to create most jobs. Although Gulf governments largely escaped the unrest, they are keen to cut unemployment to remove a potential political threat.
Trends over the last year suggest they are having some success. Bank lending growth to the private sector in Saudi Arabia, Qatar and Oman has climbed into double digits and the annual rate hit 14.8 percent in Saudi Arabia during September, the fastest pace since March 2009.
The Saudi Ministry of Labor said in September that 380,000 jobs had been created in the past 10 months. Oman says it added 155,000 new private sector jobs in January-September.
The private sector boom is typified by companies such as Saudi Arabia's Jarir Marketing Co., a retailer of books, office supplies and electronics, which plans to boost the number of its stores by at least 70 percent in the next five years and expand into other GCC countries.
"We are growing in Saudi and in the Gulf, and we want to see that we populate the GCC," Jarir Chairman Muhammad Al-Agil, who co-founded the chain with his family in 1979, told the Summit, taking place at Reuters offices in the region.
In the United Arab Emirates, one of the most diversified economies in the Gulf with the nonoil sector accounting for 62 percent of output, bank lending growth has been slower as the country grapples with the aftermath of a real estate crash.
But the hospitality sector, a focus of private sector firms, is booming; tourist arrivals grew 10 percent and hotel revenue 19 percent in the first half of 2012.
Yet private business in the Gulf remains far from being able to fuel its own growth, withstanding fluctuations in oil prices and state spending. One problem is its access to financing.
Debt and equity capital markets are small so it's difficult for small and medium-sized enterprises (SMEs) to use them to raise money, said Martins at HSBC. That leaves bank loans, but many banks in the Gulf are traditionally unwilling to lend to small, little-known firms, preferring the security and predictability of lending to big companies, preferably those with state connections.
"Financial institutions look at them (SMEs) as toxic assets," said Abdullah Al-Darmaki, chief executive of the Khalifa Fund for Enterprise Development, the Abu Dhabi government's SME development agency.
Rick Pudner, chief executive of Dubai's biggest bank, Emirates NBD, told the Reuters Summit that, historically, "you have to have a three-year track record before you can come to the table and ask for some money."
Pudner said that partly because of government efforts, the access of SMEs to bank loans would improve: "You'll see it probably getting a lot easier to access finance from banks, maybe supported by some quasi-element of government support."
But even then, private companies may face another major obstacle: regulation.
The risks of intrusive rule-setting were underlined last week when Saudi Arabia said it would fine private sector firms that employed more foreign workers than Saudis - a stance that could have a big impact given that roughly nine in 10 employees of private companies in Saudi Arabia are expatriates, according to official estimates.
In other cases, opaque and complex regulation, or the lack of any rules at all, is holding up private companies.
"One major area is bankruptcy law - also labor laws and labor protection are skewed towards national citizens and lag for foreigners. The other area is in terms of investor protection," Scacciavillani said of the GCC.
"Awareness is there but in terms of delivery, little has been done."
Abraaj gets $50 mln Abu Dhabi bid for investment management business
- Abu Dhabi Capital Management's (ADCM) bid is well below the $125 million
- Abraaj, which declined to comment on ADCM's offer, has debt estimated at more than $1 billion
ABU DHABI: An Abu Dhabi Financial Group company has made a conditional $50 million offer to buy private equity firm Abraaj's investment management business, a document reviewed by Reuters shows.
Abu Dhabi Capital Management's (ADCM) bid is well below the $125 million offered by New York-based Cerberus Capital Management before Dubai-based Abraaj filed for provisional liquidation in the Cayman Islands last week.
It was unclear whether the terms of the offer that Cerberus made were different from the one made by ADCM.
ADCM stated its terms in a letter to Abraaj's financial adviser Houlihan Lokey dated June 17, which said it will not buy any companies owned by Abraaj and its affiliates and will not assuume any liabilities.
Abraaj has been bruised by a row with four of its investors, including the Bill & Melinda Gates Foundation and International Finance Corp (IFC), in a $1 billion healthcare fund.
It has denied it misused the funds.
Abraaj Holdings said on Tuesday a court in the Cayman Islands ordered the appointment of PwC as provisional liquidators of Abraaj Holdings and Deloitte as provisional liquidators of Abraaj Investment Management Ltd., Abraaj's fund management business.
ADCM, an ADFG entity based in Cayman Islands, wants to become the General Partner of the limited partnerships, which have committed money to Abraaj's various private equity funds.
Abraaj acts as the general partner for these limited partnerships.
Some Gulf limited partners - ranging from financial institutions to pension funds and family businesses - in funds of Abraaj had asked ADFG to explore a buyout of Abraaj's investments business as they were concerned about their holdings, two sources familiar with the talks told Reuters.
Abraaj, which declined to comment on ADCM's offer, has debt estimated at more than $1 billion, sources have told Reuters.
Since the dispute went public early this year, Abraaj has split its investment management business and holding company, while its founder Arif Naqvi stepped aside from the day-to-day running of its private equity fund unit and the firm halted its investment activities.