Report predicts investment growth

Despite exuberant investor appetite and market volatility, the investment climate in the Middle East is unparalleled and set to exceed projection for some of the fastest growing markets in the world, according to the US investment bank Merrill Lynch.

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By  Massoud A. Derhally Published  October 15, 2006

Despite exuberant investor appetite and market volatility, the investment climate in the Middle East is unparalleled and set to exceed projection for some of the fastest growing markets in the world, according to the US investment bank Merrill Lynch. The cumulative 2005-07 current account surplus for the GCC, according to the bank is US$585bn, bigger than China’s (US$52bn) and Japan’s (US$437bn). The bank estimated that revenue from high oil prices “is set to purchase US$450bn of foreign assets in 2006-07,” and that net effect of this liquidity will be felt in global real estate markets, private equity and equity markets in the Middle East, India and China. Underpinning the growth are high oil prices, strong regional economic growth, undervalued currencies and stable interest rates. “Higher oil prices have lifted the aggregate nominal GDP in the six Gulf Cooperation Council countries by 7% in the last three years,” according to the report. Despite market volatility and concern about inflationary stock markets, the report does point to a continuation in the boom that has pervaded the region since the spring of 2003. “Anyone bold enough to have invested in the Middle East and North Africa equity markets at this time is still sitting on gargantuan returns, albeit well down from peak levels. Egyptian equities are up 861% since March 2003 and the region’s largest market Saudi Arabia is up 348%, despite a plunge from peak prices,” the report noted, adding that the Saudi Arabian and UAE markets, two of the three most expensive in the region remain expensive by emerging markets standards. “GCC markets were in a bubble and post-bubble work outs are notoriously tough. Sharp stock-market falls often have a negative impact on the banking and real estate sectors, although thus far, the secondary impact has been slight in the Gulf,” the report held, adding that most attractive are the markets of Egypt, Bahrain, Oman and Kuwait. The bank estimates there is over US$1trillion in projects that are planned or underway in the Gulf with much of the spending expected to take place in the infrastructure sector and consumer services and the top markets being the UAE, Kuwait, Qatar and Bahrain. “Oil revenues are being used to finance another regional investment boom. The good news is that this time around, there is more private sector investment and greater public sector restraint, which should make the spending growth more durable,” the report noted. “As in other emerging markets, the need to improve infrastructure and increase the supply of housing in the Gulf is huge, as capital expenditures have not kept up with rapid population growth.” As a result of the high oil prices and swelling of coffers the bank points to more liquidity being retained in the region than in previous oil booms, consequently impacting regional investment and the rising real estate prices. Also to be expected is an increase in international investments in European and Asian companies and a flow of funds into the US bond market and European financial centres. A separate report by the international credit risk agency maintains that higher business volumes are a key driver of Saudi Bank’s soaring profitability. “Saudi bank’s bottom line in 2004—05 were driven by both rapid expansion of their net interest income and noninterest revenues. Fees and commissions quadrupled over the past three years to reach US$3.3bn in 2005,” according to the report. The rating agency said it expected Saudi bank loan growth activity, which has been the main driver behind the rise in Saudi banks’ intermediation income in 2004-05, to remain high, at 20%. Brokerage fees, which also have contributed to bank’s bottom lines, are expected to remain high despite the downturn of the Saudi stock market.

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