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Wed 23 Nov 2011 03:09 PM

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State of emergency

Spending on flashy cars, houses and holidays has left GCC residents facing a savings crisis, says National Bonds CEO Mohammed Qasim Al Ali

State of emergency
National bonds CEO Mohammed Qasim Al Ali says the GCC is facing a savings crisis

Beaches, bright lights, luxury hotels and high-end shopping. Not for nothing are countries like the UAE known as beacons for tourism. However, for expatriates and nationals living in the Gulf states, it is tough to get the message through that life here is not one perpetual holiday. Far too few are putting enough money aside for the future, and the result is a ticking time bomb that could leave thousands without adequate savings when they retire.

Mohammed Qasim Al Ali believes it’s time to tell people that they must change their outlook before it’s too late.

“Each country is a bit different, but I would say yes; if you are rich you won’t worry about saving, but the thing is do you have an investment strategy?” he asks.

As the CEO of the National Bonds Corporation, the Dubai government-owned Islamic saving scheme, you would expect him to say that but the results of the agency’s recent GCC-wide savings index has thrown up some interesting results.

While the International Monetary Fund (IMF) stated earlier this year that Qatar had surpassed Luxembourg as the world’s richest nation in 2010 and its wealth was almost twice that of the US, 29 percent of Qataris say they saved “significantly less” in the last year.

The IMF research shows Qatar’s gross domestic product per capita was $88,221 in 2010 and is likely to reach $111,963 by 2016, while the US is forecast to not exceed an average per capita GDP of $55,622 over the next five years.

With this much potential cash at their disposal, it is rather surprising that 87 percent of Qataris surveyed believe their savings are not adequate for their future needs and only 26 percent save 10 percent or less of their salary.

“Remember, in certain countries, like Qatar, the government is giving more, in terms of subsidies, access to housing or higher education. Qataris are not saving for higher education because they have free access from the government,” says Al Ali.

With up to 90 percent of Saudi residents believing their savings are not adequate for their future financial needs and an average of 68 percent of respondents admitting their savings are less than they had originally planned, Al Ali believes this is a major problem in the Gulf and even goes as far as to call it a “national crisis”.

“The consistency in the lack of awareness about the importance of savings and the lack of there being a financial plan is epidemic across the GCC countries,” he says. “That’s where the gigantic task is ahead.”

Tough economic conditions, including the soaring cost of food, could threaten citizens with an already unstable financial situation, he believes. “Our mission is to alert the decision makers that this is a national crisis that could have dire results somewhere down the road.”

The fact that an average of 84 percent of Gulf residents who took part in the survey say they do not have enough money for the future, while, at the same time, their biggest expenditure is eating out, shows they have a very short-sighted view of their finances, says Al Ali.

“People are having a short-term view about their financial health because they are locked into a certain living standard. There is a mental defeat that says ‘I can’t save as I don’t have enough money to save’ but if they start thinking about how structured their approach should be when it comes to handling their own finances I know they will find ways.”

“A small kid in Europe maybe knows far better how to handle money or the importance of money than somebody in the Middle East and we need to build on their experiences through the last 40 or 50 years and import such culture of changes into our environment. [Authorities must] address the root causes of this critical GCC-wide dilemma through education… from the kindergarten to the college,” says Al Ali.

“There is too much of a spend culture among a lot of expats,” adds Nigel Sillitoe, CEO of research firm Insight Discovery. “There should be more education over here about why it’s so essential to save for your retirement. The worst thing you can do is spend a lot of time in the Middle East — five or ten years — and not save a nest egg when you are in a tax-free environment.”

Many Gulf governments have opted to bolster their social spending plans in the wake of the Arab Spring unrest. Saudi Arabia, the wealthiest Gulf state, has pledged to spend $43bn on its poorer citizens and religious institutions, while the UAE said it would invest $1.6bn in overhauling roads and ensuring citizens in its poorer northern emirates received uninterrupted electricity.

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Kuwait last year voted in favour of a bill that required its government to take responsibility of $23.3bn worth of consumer loans belonging to its citizens. Under the terms of the bill, banks wiped the accumulated interest on the loans and rescheduled the payments over a ten-year period.

It’s not the first time Kuwait has bailed out its indebted citizens. On at least two previous occasions, after the Souk Al Manakh stock market crash in 1982 and following the Iraqi occupation in 1991, the Gulf state has assumed the debts of its nationals.

“When people need to be bailed out, for example in Kuwait, there was a big argument whether we should bail out these people who had invested in the stock market or we shouldn’t, but you shouldn’t reach that stage as it is the aftermath,” says Al Ali. “Make them financially independent so they don’t end up in trouble.

“But they cannot do it on their own, you cannot ask somebody to study maths or become a geologist at home. You need to take them to university where the experts will give them the tools so when they graduate they at least have the foundations right. We need to give them the basics, which are lacking. Even the sophisticated people, they don’t have the basics of financial planning, because they are co-mingling their savings with investments and taking high risk. So it is not only the less educated people, it is across the board,” he says, painting a worrying picture.

Earlier this year, National Bonds celebrated its fifth anniversary and in May it achieved a new milestone by breaking sales of over AED1bn, and recording 29 percent sales growth compared to the same period last year.

Dubai’s sovereign wealth fund, Investment Corporation of Dubai (ICD), also acquired the remaining 50 percent stake in National Bonds, taking full ownership in March this year.

This puts National Bonds in good company as ICD holds about $70bn in assets and its portfolio also includes Emirates Airline and stakes in Dubai’s largest bank, Emirates NBD, developer Emaar Properties and Borse Dubai.

Al Ali said National Bonds will also look at acquiring real estate assets as part of its own portfolio. “Part of our asset allocations strategy, is [investing] in income-generating real estate that gives you a return of seven-to-ten percent,” he says, adding, however, that it was only looking at real estate in the UAE at present. During the boom years, National Bonds, like many Dubai companies, got into real estate and one of its main projects was the AED1.6bn Skycourts project in Dubailand, the emirate’s theme park-focused mega development.

“We were one of the first major investments that saw the light in Dubailand. It is up and running and we have handed over nearly 75 percent and we have people living there. It has boosted the economy and the location there and added value to Dubailand so people have more confidence in restarting their projects in Dubailand,” he says in relation to the project.

This is one of the few projects National Bonds has been involved with from the start but it is interesting to note that its owner, ICD, last month announced a deal with Canada’s Brookfield Asset Management to start a $1bn fund to buy up assets in Dubai’s battered real estate market. The fund will be jointly backed by the two companies, which will each seed the fund with $100m.

In terms of investment, Al Ali believes that corporate bonds are a good way to generate good returns and says he would even consider investing in Nakheel bonds, which recently flooded onto the market as part of the master developer’s $16.1bn restructuring process.

As one of the biggest names hit by the downturn in the Dubai real estate market, which saw prices drop by about 60 percent from their peak and around half of projects stalled or cancelled, Nakheel’s trade creditors accepted a deal to receive 40 percent of what was owed to them in cash and a remaining 60 percent as a sukuk.

“Yes,” Al Ali says straight away when asked if he would consider investing in Nakheel bonds. “Nakheel, and others, which are floating in the market at really good yields.

“The corporate sukuk are now very lucrative, so we are investing in sukuk, especially as it is being traded at a discount, which increases the yield. Being a UAE-based company, naturally we will look at the corporate sukuk issued in the UAE and the yields.”

While Nakheel may have managed to get its books in order, it’s clearly vital that Gulf residents also wake up to the fact that they need to start planning for the future.

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Nameless 8 years ago

The GDP per capita may be twice that of America but cost of living is more than twice as much, hence the lack of savings.

Inflation also increases faster than your salary increases. If you bought a car for 100k and five years later went to get a new one, expect to pay 200k for the same thing. So there goes your savings unless you opt to down grade.

It just seems cost of everything goes up except a workers wage.

SAM 8 years ago

I am of the opinion that the reason for not saving enough is due to the extra charges and expenses that pop out unexpectedly every now and then and not due to culture that does not appreciate saving. A bad economy and a severe drop in asset valuation is another reason; for example, a million dollars invested four years ago in shares of the largest and most successful company in the Dubai Stock market would be worth 50,000 dollars today. The real estate market is another story. I do not believe in this sudden warmth and concern for the well being of expats, especially when schemes are being drawn to prevent expats from remitting their savings to their home countries and to force expats to invest in losing local industries.

Naveen Shetty 8 years ago

There are some real issues when it comes to investing here.
1. Most of the people do not consider any other asset class other than Real Estate as investments. This might have worked in the past but its not going to work in the future.
2. Collective Investment Schemes of the most of the banks and institutions in this part of the world are mostly driven by draws and prizes such cars etc instead of the returns. This mind set is to be changes. I am sure if someone is offering 8 to 9% returns year on year you can stop almost half of the money which is going out of the country for investment.

Mike Hails 8 years ago

The problem in Europe and North America is that SOME (and I highlight "some") people have been living beyond their means for decades and the crunch point arrived in late 2007/early 2008 as we have seen. Another major fact I believe, in UK in any event, is that Public Bodies such as Councils, Police and many others have been paying themselves far too much salaries and pensions for decades and that simply is not sustainable. After all Public sector does not contribute to GDP but provides the services that the public requires. The trouble is a certain group of senior people in those bodies have given themselves salaries and pensions that are MORE than the Prime Minister earns each year. A monkey could run their organisations but they ,arrogantly, believe they are worth more than the Prime Minister. THAT is why Europe is now in crisis.