The rapid economic changes taking place in the Arabian Gulf economies require a cadre of top global financial institutions to help see them through, and State Street Corporation fits the bill completely.
The 226-year-old American financial group, ranked among the biggest banking businesses in the world, recently joined the Dubai International Financial Center (DIFC) through its investment banking and asset management unit State Street Global Advisers (SSGA), cementing a presence in the region it has held for 26 years.
Emmanuel Laurina, the 43-year-old Belgian who heads up the Middle East business for State Street, told Arab News that the UAE was a good place to be based to exploit the new economic environment in the region, and especially the business opportunities in Saudi Arabia, undergoing rapid change as a result of the Vision 2030 strategy to diversify away from oil dependency.
“The DIFC is a well-regulated global financial center through which we can accommodate those clients for whom it is most appropriate. SSGA has had a presence in the Middle East since 1992, and opening a DIFC presence is a natural complement to that business.
“We currently serve the needs of all our Middle East and Africa clients from our Dubai and Abu Dhabi offices. Saudi Arabia has always been a key contributor to our business in the region and we look forward to further deepening our presence and business in the Kingdom,” he added.
Laurina began his career in banking at the Bank of New York’s Brussels and London offices, before moving to State Street in 2005, transferring to Dubai eight years later to head up the Middle East and Africa business.
He believes that the pace of economic growth in the region will continue to accelerate. The bank’s analysts see UAE growth at 2.5 percent this year, up from 0.5 percent in 2017, and have marked in 1.6 percent for Saudi Arabia, a jump from last year’s 0.9 percent, while the region as a whole is looking at 2.6 percent (up from 1.8 percent).
The recent stability in the oil market is the main reason for the forecast improvement in gross domestic product, and SSGA believes the current good run in oil is likely to continue. “Governments and central banks should be able to escape the tough economic decisions they have faced over the past few years,” he said.
That will be especially good for Saudi Arabia as it seeks foreign investment to help fund the economic changes under way in the Kingdom, boosted by recent upgrades to its financial markets to emerging market status.
“SSGA is very positive about the reform agenda in Saudi Arabia and the entire Vision 2030 plan. While the economic environment remains challenging, we feel that the reforms to companies, markets, and investment regulations are wholly positive.
“Of all the countries in the Gulf, Saudi represents one of the best opportunities for investors, and we are ready to support clients not only in equities, as the Tadawul opens up, but also in the debt markets, an important factor in the modernization plans of the Kingdom,” Laurina said.
Those modernization plans include the privatization of large chunks of the Kingdom’s state-dominated economy, including Saudi Aramco, the biggest oil company in the world. The partial sale of some of Aramco’s shares via an initial public offering (IPO) has been delayed, but most financial experts believe some form of sell-off will eventually take place.
“We made the point recently that the non-Aramco privatization plans were equally — if not more — important to the success of the Saudi reform agenda. These include many state assets whose valuation is relatively easy to assess and where there are clear templates for private-sector participation.
“In short, there is some lower-hanging fruit in the area of privatization and we believe this will be forthcoming. Above all, for Saudi Arabia, it is more important to see this program through correctly, rather than urgently, as the reform impetus is more valuable than the actual proceeds,” he said.
On Aramco, other options have recently emerged as an alternative to full-blown privatization, including raising debt in international markets and the multibillion-dollar acquisition of Saudi Arabian Basic Industries Corporation (SABIC). Laurina sees sense in considering these possibilities.
“The potential Aramco IPO is huge, complex, and far from straightforward. We are not surprised, and indeed we applaud, the pause for reflection that appears to be taking place.
“While the delay of IPO may have disappointed some, it may be a welcome move,” he said.
Emerging market equity investors have had a short time to adjust their portfolios for the inclusion of Saudi Arabia in the three main indices, Laurina explained. “Aramco’s IPO would likely lead to a larger weight to Saudi Arabia and lead to further turnover to fund that increase. A delay of the IPO to a later date would give investors time to adjust and accommodate the new IPO when this is issued,” he said.
“For an institution of Aramco’s size, any debt fundraising brings complexities: If Aramco was to buy the full stake Public Investment Fund holds in SABIC, for example, and fund it entirely out of debt issuance, it would be one of the biggest debt issuances ever from any corporate, and would catapult Aramco into a top-three spot in the EM debt indices. This alone brings new issues, and so again we would counsel a cautious approach,” he said.
The global investor view of the Gulf region wavers between enthusiasm for the economic opportunities presented by reform and privatization, and concern about the effects on investment prospects from geopolitical tensions, such as the current stand-off with Qatar and the increasing possibility that confrontation between Iran and the US will lead to trade dislocation in the region.
Laurina is alert to the risks, but sanguine on the overall investment climate. “Having been in the region for 26 years, through two Gulf wars and the Arab Spring, SSGA is acutely aware of the geopolitical drivers and risks in this region.
“But we remain positive on the investment prospects in the Gulf: Emerging market status is going to be a major driver of equity investment; Saudi reform, China’s Belt and Road initiative, and a stable oil price should combine to maintain our upbeat outlook on the region, in spite of regional tensions,” he said.
The Middle East, of course, is an increasingly important part of the international financial and economic system, and is subject to the swings and roundabouts of global forces. Some experts have forecast challenging times ahead, as the US economy tries to maintain the impressive growth of recent years amid the threat of all-out trade war with the second biggest global economy, China, as well as strains within European economies.
“We predict that global economic performance is likely to become less uniform in the next few years. It is expected that the US will outperform if meaningful trade sanctions are imposed on China, the European Union, Japan and Mexico. Also, a ‘No Deal Brexit’ is likely to have a negative impact on the EU,” he said.
On the US investment scene, some analysts have wondered whether soaring stock market indices — the “Trump boom” — will eventually have to give way.
“The US economy is increasingly driven by investment and technology-related growth, and this should drive productivity improvement. This, in turn, will help make the Trump boom sustainable,” Laurina said.
What does this mean for the economic prospects of the Arabian Gulf, still dominated by energy revenues?
“The global oil trade should be relatively unaffected by trade wars. However, oil exporters may see some fallout in demand if there is economic slowdown in trade-impacted countries and regions. It is also worth noting that the US is no longer a significant source of demand — it has scaled back on oil imports over the years, for example — and currently generates a surplus in its balance of trade and services with Saudi Arabia,”
SSGA’s 12-strong team in the Middle East — now based in Dubai but with a branch office also in Abu Dhabi — looks set to grow as the asset management business expands. “The Middle East and Africa market is extremely dynamic and demanding, and we believe that only those firms that are nimble and agile enough will be successful in the long run,” Laurina said.