Saudi Arabia is now the world’s biggest importer of defence equipment, with spending expected to reach US$9.8 billion in 2015, according to a report from the research firm IHS.

“Growth in Saudi Arabia has been dramatic, and based on previous orders, these numbers are not going to slow down,” said Ben Moores, a defence analyst at IHS.

Planned defence spending in Saudi Arabia shot up following the Arab Spring and the rise of ISIL, leading the kingdom to overtake Russia as the world’s third-largest spender on defence at $80bn annually.

Saudi Arabia’s 2015 fiscal budget was the largest in the country’s history, with total spending expected to reach 860bn Saudi riyals (Dh842.22bn). The budget did not include an estimate for total defence spending, although in 2014 military expenditure accounted for about 35 per cent of planned expenditure.

The UAE and Saudi Arabia imported more arms from the US last year than all of western Europe combined, spending $8.6bn between them on defence imports.

At the recently concluded Idex in Abu Dhabi, 33 deals worth Dh18.3bn were signed, with more than 1,200 exhibitors from 56 countries taking part in the event.

The collapse of state power in Libya, Yemen, Syria, Iraq and Sudan, hostility to Iran and the Arab Spring have concentrated the minds of the region’s defence ministers in recent years.

Last month, Saudi Arabia’s King Salman appointed Mohamed Al Mady, who had been running Sabic, to head up the country’s General Organization for Military Industries, which works to develop the country’s military capabilities.

“There is an immediate military threat emerging on the Saudi periphery,” said Sabahat Khan, a defence analyst at the Institute for Near East and Gulf Military Analysis.

“The threat from ISIL has reached the Saudi border. It’s going to be a battle that will span many years. In Yemen, to the south, the [Houthi] rebels are creating problems … that’s in addition to the long-standing threat from Iran.”

The Middle East is also the world’s fastest growing defence market, with annual spending totalling about $150bn, according to the Stockholm International Peace Research Institute (Sipri).

Global defence spending totalled about $1.75 trillion last year, says Sipri.

“When we look at the likely export-addressable opportunities at the global level for the defence industry, five of the 10 leading countries are from the Middle East,” Mr Moores said.

Governments across the Middle East and North Africa are expected to spend about $920bn on arms over the next decade, IHS estimates.

The global arms import-export trade grew to $64.4bn in 2014, up from $56.8bn the previous year.

The US remains the world’s largest exporter of arms, followed by Russia, France and the UK.

Bilateral trade in defence accounts for less than 1 per cent of the overall defence market. The militaries of Europe and the US, which account for the majority of global arms spending, prefer to buy from domestic suppliers, aiming to boost their own economies.

China, the world’s second-largest spender on defence, is step up its military spending by 10 per cent to $144.2bn in 2015. This is still some way short of the $581bn spent by the US last year.

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Between his Nokia and his second-hand Samsung Galaxy Mini, Roshan Ghale, an Abu Dhabi taxi driver from Nepal, spends one-tenth of his monthly salary on phone credit.

If he hits his targets he earns Dh3,000 per month. As much as Dh300 is spent on talking and texting – he thinks it is money well spent.

“I buy about 150 minutes every month, and use lots of internet to talk to my family in Nepal,” he says. “My old phone is a Nokia – I like it because the battery lasts three days. The Samsung I use mainly for Facebook.”

Consumers such as Mr Ghale are why the smartphone wars are spreading down the income ladder across the region. The trend threatens one of the world’s last big markets for the humble handset.

On building sites and taxi queues around the country, old Nokia handsets are being traded for newer and smarter models.

Worldwide smartphone sales topped one billion last year and set a new record in the fourth quarter, surging by almost 30 per cent from a year earlier to reach 367.5 million units, according to Gartner data released on Thursday.

“The availability of smartphones at lower prices accelerated the migration of feature phone users to smartphones, pushing the smartphone operating system (OS) market to double-digit growth in most emerging countries,” Gartner said

Bashir Jawwal, who works in a shop along the capital’s biggest strip of mobile phone retailers, says that almost all taxi drivers have two phones these days – a Samsung for seeing pictures and video from home, and a Nokia for the battery life.

In the UAE, smartphone sales increased last year by 31 per cent to 2.9 million units, while sales of basic “feature phones” fell 24 per cent to 1 million units, according to data from the consumer research firm Euromonitor.

Smartphone prices are expected to fall by more than a third over the next three years, driven by new market entrants and the expansion of existing product ranges.

“A lot of new players have moved into the market,” says Ashish Panjabi, the chief operating officer of Jacky’s Retail, one of the UAE’s biggest electronics retailers. “But even established brands like Samsung have introduced a large range of new products. Once upon a time the Galaxy was exclusively a high-end product, but now you have the Galaxy Ace, the Galaxy Grand, the Galaxy Mini – all different products that have joined the family to address different price points for different market segments.”

The growth of low-cost smartphones has taken market share away from older manufacturers. Nokia has struggled to cope with the shift away from the basic-model market it has long dominated.

Costing as little as Dh60, feature phone sales have remained defiantly robust across the region even as sales tumbled in other markets. But that is changing fast as smarter handsets become cheaper, hurting manufacturers of basic models.

High churn rates are also lifting smartphone sales. Consumers are switching between phones more quickly, as prices fall and product ranges grow.

“We’re seeing consumers either upgrading from an entry level phone, or downgrading because they don’t see any benefit in spending more on a premium phone,” said Sharay Shams, who is in charge of Lenovo’s smartphone business in the Middle East.

“The entry and mid-tier segment is going to grow heavily,” he said. “In particular, there is little difference between Android handsets. So new handset brands are entering the market with good specifications and a good price point, and consumers are switching.”

Mr Panjabi agrees: “A lot more people come into the shop to trade up, after giving their old phones to the kids, the driver, the maid, the security guard, or whoever.”

Improved data connectivity in the home countries of expatriates has further boosted smartphone adoption.

On the Indian subcontinent, in China and in the Philippines, internet connectivity has increased and data rates are cheaper,” Mr Panjabi said. “The ability to send a picture brings a lot of joy at home.”

As another taxi journey comes to an end, Mr Ghale is looking forward to catching up on the news from home on the three-inch screen he holds in his lap.

For four of his six years in Abu Dhabi, he would have had to find an internet cafe to do so. Now, his family travels with him.

Central bankers must “screech from the rooftops that they are not producers of prosperity” as soon as the economies they supervise recover, said Sir Paul Tucker, the former deputy governor of the Bank of England, at the Global Financial Markets Forum in Abu Dhabi yesterday.

Politicians are in danger of growing dependent on central banks to deliver growth, despite clear evidence that monetary policy “cannot produce growth over the medium or long term”, Sir Paul said.

“There is a real risk in the world at the moment that the world will slip back into thinking that [central banks] are generators of growth – no, they are not,” said Sir Paul. The mandate of any central bank is clear, he said: “It’s stability, stability, stability.”

Central banks “can provide a platform of stability” that allows a market economy to allocate resources.

But only “investment and effective education” can deliver growth in the long run, he said.

The central banks of the US, the UK, the euro zone and Japan have all introduced unorthodox monetary policies, including massive purchases of sovereign debt, in a bid to avert global depression following the 2008 financial crisis.

“We have avoided a repeat of the Great Depression – and that is quite an achievement,” Sir Paul said. “But it’s not enough.”

Since the crisis, central banks have also introduced “macroprudential regimes” – new regulatory powers over key sectors of the economy.

The Bank of England established a financial policy committee in the wake of the 2008 crash that exercises supervisory powers over the country’s banks. The EU introduced the single supervisory mechanism”in 2013, which grants the European Central Bank new powers to monitor the continent’s financial sector.

Sir Paul said policymakers need to be clear-eyed about how these new powers for central bank governors will affect the way economies are run.

“If [central bank] governors have more flexibility – let’s be clear, that means they have more power,” he said.

“We do need to have [macroprudential regimes] … governors do need to have more power. But that power needs to be boxed.”

“Policymakers should ask: why have they got [specific powers], and what [are they] for? Rather than saying: ‘Hey, you seem to be good at what you do, you need to do everything for us’.”

And investors across the world “will have to get used to asking tough questions about macroprudential regimes in the same way that they have got used to asking tough questions about monetary policy”, Sir Paul said.

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Name: Simon Fasdal

Position: head of fixed income at Saxo Bank

Years of trading experience: 18

Based: Copenhagen

What is the asset class and geography you are focused on?

I am in charge of bond and fixed income trading at Saxo Bank. But my approach is multi-asset, so I also focus on equities. The environment in 2015 changes my focus, as I believe that the lower oil price will have a major impact on regional and global investment opportunities. The odds of Greece leaving the euro are much lower than they were in 2011, even with a new Greek government and the renegotiation of bailout terms. Therefore I believe that Greece will not have much room to negotiate, and the government will find it a huge task to fulfil its election promises. The EU’s quantitative easing policy will serve as a cushion should the Greek crisis escalate. So riskier assets like corporate bonds should be well supported.

What is the outlook for the months ahead?

The major factor affecting bonds in the coming months will be the low oil price. Remember that for the last five years we have had an average price of above US$100 per barrel. In the last four to five months, that price has halved. I think the market will be surprised by the magnitude of the economic impact, and by the way it will influence investment opportunities. In particular, there will be a long time lag between the oil price fall, and what could be quite dramatic effects on the real economy.

Is the Middle East’s fixed income market likely to be affected? How?

The Middle East’s fixed income market will not be negatively affected, despite the importance of oil to the region’s economies. First of all, both Saudi Arabia and UAE are backed by huge national investment funds, which make their economies resilient even to very low oil prices in the medium term. The technical backdrop is also favourable, because Middle East asset classes will benefit from investment flows so long as global central banks continue their loose and unorthodox monetary policies. At the same time, we can expect the overall global yield environment to stay suppressed for a long time – again, due to the lower oil price.

What are the main risks, either upside or downside, to the outlook?

My two top picks are bonds in Asia and Europe. I believe that Asian economies will benefit from the lower oil price in two ways: firstly the lower cost for consumers and producers will boost economies, secondly the lower price will dampen inflation. Bonds in higher-yielding countries and corporate bonds with higher credit spreads, both local and dollar-denominated, look attractive.

In terms of upside risks, I firmly believe that the market underestimates the positive global economic impact of oil prices remaining at their present level. The lag between a lower oil price and the impact on the real economy is typically up to nine months, so we are nowhere close to seeing the impact yet.

The main downside risk to this outlook is aggressive tightening from the Federal Reserve. I believe that would be a mistake, since the strength of the dollar, and the lower oil price, should keep inflation in check.

What was the best investment you were ever involved in?

The best investment I have witnessed in the bond market has been the massive rally in peripheral Europe – Spanish 10-year bonds from the spike in 2012 at 7.50 per cent to levels below 2 per cent. It was the start of a multi-year bond rally.

What was the worst?

After the Lehman crisis, where bondholders could not sell their corporate bonds in the market, due to frozen liquidity. In some bonds this lasted for months. After markets opened, prices remained much lower for a long time.

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Etisalat was among the big winners on Thursday after the telecoms company announced a dividend with its earnings.

Etisalat, which is listed on the Abu Dhabi Securities Exchange, rose 3.9 per cent to Dh12.05.

The Abu Dhabi Securities Exchange General Index gained 1.1 per cent. The Dubai Financial Market General Index fell 0.1 per cent.

On the ADX, the National Bank of Fujairah closed up 11.3 per cent, while Invest Bank rose 4.5 per cent. Union Cement was the biggest loser, falling 9.7 per cent. Gulf Cement declined 6.8 per cent.

Abu Dhabi Ship Building, which rose 11.3 per cent to Dh1.87 on Monday, yesterday fell 4.3 per cent to Dh1.75. The company reported winning a Dh870 million contract from the UAE Armed Forces on Monday.

On the DFM, Shuaa Capital and the insurer Dar Al Takaful led gains, closing up 6 per cent and 4.5 per cent respectively. Drake & Scull International shed 3.6 per cent, while Gulf General Investment fell 2.4 per cent.

Both indexes fell significantly in December, after investors baulked at rapidly falling oil prices. They rebounded quickly and have remained relatively stable since the beginning of the year.

Thirteen shares on the ADX rose, with 10 falling and 38 remaining constant. On the DFM, 10 gained, 15 fell and 10 were unchanged.

The MSCI Emerging Markets Index rose 0.5 per cent yesterday, despite falls on the Egyptian Exchange, the Qatar Exchange, and the Saudi Tadawul. The ADX was the best performer among Middle Eastern bourses.

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The home-grown Enigma armoured personnel carrier is not just a way for the UAE to carry troops into battle; it represents how the defence industry is helping to diversify the country’s economic base.

The UAE is boosting its defence sector through the creation of a new state champion, Emirates Defence Industries Company (EDIC), and offset agreements with major international arms companies to help develop sector-specific expertise.

The country devotes about US$20 billion of its budget to military spending. That puts it in 15th place among the world’s big military spenders. But national security is not the only reason for this level of expenditure.

“It looks like increased defence spending, but really it is industrialisation,” said Sabahat Khan, senior analyst at the Institute for Near East and Gulf Military Analysis. “The increased spending is primarily for its economic benefits – and to lay the foundations for bigger things.

“From armoured vehicle manufacturing to satellites, from maintenance, repair and overhaul to flight training academies and geospatial mapping, the UAE is doing a lot,” he said.

Along with sectors such as finance, trade and tourism, defence is rapidly becoming a key plank in efforts to wean the economy away from dependence on hydrocarbons. It is a theme that is being played out across the Arabian Gulf.

“The defence sector is one of the main cornerstones of the UAE’s diversification efforts,” said Ali Majed Al Mansoori, the chairman of Abu Dhabi’s Department of Economic Development.

EDIC was formed in a merger of business units from Mubadala, Tawazun, and Emirates Advanced Industries in December. The merger “creates significant opportunities for industry growth”, Mr Al Mansoori said.

It means that “the domestic defence industry will produce increasing numbers of state- of-the-art products for export, which will boost the country’s manufacturing and skills base”.

Sixteen business units, including the Advanced Military Maintenance, Repair and Overhaul Centre, previously owned by Mubadala, and Caracal Light Ammunition, previously owned by Tawazun, will form part of the new entity.

Many of these units have benefited from offset agreements with international arms companies, in which expertise and skills were provided by manufacturers like Boeing, Lockheed Martin and Airbus.

Strata, a Mubadala company, was awarded contracts for the assembly of Airbus parts as part of offset agreements.

Homaid Al Shemmari, the head of Mubadala Aerospace, talked of transforming Al Ain, where Strata is based, into “the Seattle or Toulouse” of the Middle East.

Boeing signed a similar agreement in 2011 with Tawazun Precision Industries, now part of EDIC.

The UAE’s growth comes mainly from adding labour and capital to the country’s economy, not from gains in productivity, economists have argued. This means that the UAE grows by adding more people and companies, rather than through technological change and improving skills.

The result is that UAE’s export-oriented industries make relatively unsophisticated products, said Hamed Al Hashemi, director of planning at the Abu Dhabi Department of Economic Development, at a talk last October.

But investment in defence industries, which vary in complexity from the assembly of engines to the design of satellites, should increase the “sophistication” of the country’s manufacturing output, said Mr Al Mansoori.

Mr Khan said: “It’s about capacity-building: the government is focusing on developing military support services, and building research and development capacity,”

Local defence companies also benefit from the UAE’s significant investments in state champions in aviation and aluminium.

Etihad Airways’ purchase of Abu Dhabi Aircraft Technologies, a maintenance, repair and overhaul company, from Mubadala Aerospace last May, illustrates the scope for synergies between the government’s military and civilian development spending, Mr Khan said.

Offset agreements, which are legal requirements for defence companies to contribute to the local economy, are another important part of the UAE’s procurement policy.

The government’s Offset Program Bureau (OPB) explained that defence contracts are rated in terms of their contribution to the local economy, either through technology transfers, or the establishment of joint ventures with local companies.

Defence contractors that increase employment for UAE nationals and increase skills and capacity in key industries are preferred, according to guidance published by the bureau.

The OPB credits its offset policy with having created “thousands of job opportunities for UAE nationals in knowledge-intensive and value-added projects, speeding up the transfer of technology and providing expertise through various joint ventures with foreign investors”.

Mr Khan says the offset programme has been successful. “A lot of these companies started as joint ventures as part of offset agreements, but are now developing into strong sustainable businesses,” he adds.

Mr Al Mansoori said: “[Offsets] have contributed to significant growth in the domestic defence sector in the fields of shipbuilding, systems integration, naval logistics and MRO activities.”

Regional political instability, and the UAE’s increasingly assertive role on the world stage, have further boosted defence spending. Recent military strikes against extremists in Libya and Syria have also underlined the UAE’s willingness to deploy hard power in the region.

While a low oil price may threaten revenues in the short term, the government has repeatedly expressed its determination to maintain levels of spending – including defence expenditures.

GCC defence spending accounts for 83 per cent of total Middle East military spending, the research company IHS Jane’s has said.

The Middle East remains the world’s fastest-growing market for arms, with overall spending hitting $120.6bn in 2013 – an annual increase of 12.1 per cent, according to IHS Jane’s. The region accounted for 7.8 per cent of global defence expenditures that year.

Saudi Arabia, Oman, Iraq and Bahrain were among the top five fastest-growing defence markets in 2013.

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A top credit ratings agency said it would consider raising Abu Dhabi’s rating if it increased transparency about its financial assets.

A report from Standard & Poor’s said: “Pronounced improvements in data transparency, including on fiscal assets and external data” were needed before it could consider improving its assessment of the emirate’s finances.

Holdings of the UAE’s sovereign wealth funds are equal to about 250 per cent of GDP, the SWF Institute estimates. The UAE Central Bank holds additional foreign exchange reserves equivalent to about 20 per cent of GDP.

Given the large range of estimates for the assets of the Abu Dhabi Investment Authority, the exact ratio of reserves and foreign holdings to GDP is not known.

If reserves fell below 100 per cent of GDP, “downward pressure on [Abu Dhabi’s credit] rating would mount”, the report said, but added that this was unlikely to occur within the next two years.

In its biannual report, S&P said that low oil prices were a significant threat to the credit ratings of Bahrain and Oman.

The Arabian Gulf’s remaining oil exporters have been insulated by their reserves, while oil-importing nations in North Africa are set to benefit from cheaper oil prices, which could cut inflation and boost the competitiveness of non-oil exports.

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