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GLOBAL & GCC OUTLOOK: NAVIGATING IN TURBULENCE
PRESENTATION FOR ALSHALL GROUP Dr. Nasser Saidi
19 November 2018
Agenda
ü Global Outlook & Risks
ü New Oil Normal & GCC Implications
ü GCC: Geo & macroeconomic outlook
ü Investment Opportunities
ü Takeaways
Shift in Global Economic Geography: Twin Engines driving global growth @3.7%
2017 2018 2019
Advanced economies 2.3 2.4 2.1
EMEs 4.7 4.7 4.7
Global Economic Geography has shifted East driven by Demographics, Technology & Globalisation
GDP based on purchasing-power-parity (PPP) % share of world total
Source: IMF World Economic Outlook Database (Oct 2018)
50.7
6.6
7.1
8.4
3.7
10.1
6.7
2.9 4.1
G7
Advanced economies exclu. G7 & euro area CIS
Em. Asia
Em. & developing Europe
LatAm & the Caribbean
MENA
Sub-Saharan Africa
China
1990
30.2
6.4
4.4
14.5
3.6
7.5
6.5
3.0
18.7
2018
World Trade has shifted East with China’s accession to the WTO & New GVCs
Total trade (X+M) as a % share of world total (2017 vs. 1990)
Source: WTO Database
Africa 3%
China 11%
Asia excl. China 23%
CIS 3% Europe
36%
Middle East 5%
North America
16%
S. & C. America &
the Caribbean
3%
2017
Africa 3%
China 2%
Asia excl. China 19%
CIS 2%
Europe 49%
Middle East 3%
North America
19%
S. & C. America &
the Caribbean
3%
1990
This shift towards EMEs is not yet evident in global stock & debt markets
Total Nonfinancial Sector Debt ($ trn; % of GDP)
Source: IMF Global Financial Stability Report (Oct 2018)
Top 10 Stock exchanges by market cap (updated Nov 16)
NYSE 47%
Nasdaq 14%
Tokyo SE 7%
Shanghai SE 7%
Shenzhen SE 7%
Euronext 5%
London SE 4%
Hong Kong SE 4% Toronto SE
3%
Deutsche Boerse
2%
Trade wars: Close to 1% could be shaved off global growth (IMF)
Source: IIF
Real GDP in Trade Tensions Scenario (% deviation from control)
Source: IMF
Bloated Central Bank balance sheets: Quantitative Tightening (QT) contributory factor to next financial crisis
Central Banks’ Balance Sheet Assets (US$ trn), 2007-2018
Strong Growth of Global Debt since GFC Global debt toped $247 trn in Q1 2018: debt bubbles & higher credit risk with rising rates, a strong dollar & low levels of liquidity risk and trade wars are stoking volatility
Source: Global Debt Monitor, IIF, Nov 2018
Change in EM non-financial sector debt/GDP (ppt, change since end-2015)
Global Sectoral Indebtedness (all sectors)
Asset Price Inflation: Stock Markets Cyclically Adjusted Price-to-Earnings ratio
QE has sent asset prices soaring: example of real estate
Source: UBS Global Real Estate Bubble Index, Sep 2018; Note: The Index score is a weighted average of the following five standardized city sub-indices: price-to-income and price-to-rent (fundamental valuation), change in mortgage-to-GDP ratio and change in construction-to-GDP ratio (economic distortion) and relative price-city-to-country indicator.
UBS Global Real Estate Bubble Index
Climate Risk underpriced: one of “top risks” facing financial & insurance sector The Intergovernmental Panel on Climate Change report on Global Warming: an additional 1.5% in global investment needed to hold global warming to 1.5 deg C
Source: FSB Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017)
Top 10 Global Geopolitical risks Risks Risk index since 2014
Global trade tensions
US-China relations
Gulf tensions
European fragmentation
Major cyberattack(s)
LatAm populism
North Korea conflict
South China Sea conflict
Russia-NATO tensions
Major terror attack(s)
Source: BlackRock geopolitical risk dashboard, Oct 2018
Geo-political Risks are high & highest in MENA region
Downside risks to the Global Economy have grown => Lower Trade & Investment and Growth: Financial Fragility/Crisis
Financial Market Correction • Asset overvaluation • Tightening of global financial
conditions • Financial conditions between US,
EU & EME markets are diverging • EME debt vulnerability • Currency wars
Investment growth • Policy uncertainties: Brexit, Italy,
“New EU”? • Impact from US tax & policy
changes: higher deficits & benefiting markets and the ‘1%’
• Technology disruption: AI, DLT, Big Data and FinTech
Trade & Protectionist policies • US Trade wars: China, EU,
Russia, RoW • Increased barriers to labour flows • Growing investment and trade
barriers vis-a-vis China
Non-Economic factors • Extreme weather & climate
events: climate risk underpriced • Geopolitical tensions, conflicts &
population displacement • Nationalism & Populism • Cyber crime
Agenda
ü Global Outlook & Risks
ü New Oil Normal & GCC Implications
ü GCC: Geo & macroeconomic outlook
ü Investment Opportunities
ü Takeaways
New Oil Normal Disruption: downside risks for oil prices. Stranded Assets?
Demand side: positive cyclical; but, structural & tech factors imply downward trend in oil demand relative to activity
Global growth recovery
Energy Efficiency Trend: falling (E/GDP) ratios
Climate Change & COP21 commitments; changing
energy mix
Growing awareness of climate change risks &
costs
Supply side: Tech is making RE, shale more
competitive; disruptions
Shale competitive: technology &
exploitable resources widely available
OPEC production cut agreement; Non-OPEC alliances
RE increasingly competitive; lower
battery costs address intermittency
Return of Libya, Iraq to oil market; Iran
sanctions; Venezuela
Technological innovation
affecting both demand and supply
side: energy storage, AI,
Blockchain, e-transport, flexible
capacity, distributed energy, 4th Industrial
Revolution
The medium-term outlook for oil prices remains uncertain
Source: IMF Regional Economic Outlook, Nov 2018
40
45
50
55
60
65
70
75
80
85
WTI
Brent Crude
Crude Oil Spot Prices ($)
Top 10 oil consumers (share of total)
2017 1990 US ê 20.2% US 25.5%
China é 13.0% Japan 7.9%
India é 4.8% Russia 7.6%
Japan ê 4.1% Germany 4.0%
Saudi Arabia é 4.0% China 3.5%
Russia ê 3.3% Italy 2.9%
Brazil é 3.1% France 2.8%
South Korea é 2.8% UK 2.6%
Germany ê 2.5% Canada 2.6%
Canada ê 2.5% Mexico 2.4%
New Oil Normal Market Dynamics: production shifts West, consumption East
Top 10 oil producers (share of total)
2017 1990
US é 15% Russia 17%
Saudi Arabia é 13% US 14.6%
Russia ê 12% Saudi Arabia 10.6%
Canadaé 5% Iran 4.7%
Iran é 5% Mexico 4.5%
Iraq é 5% China 4.2%
China é 5% Venezuela 3.4%
UAE é 4% UAE 3.4%
Brazil é 3% Iraq 3.1%
Kuwait é 3% Canada 3.1% Source: BP Statistical Review of World Energy 2018 Source: EIA
New Geography Of Energy Demand: a massive shift to EMEs & Asia
In 2000, more than 40% of global demand was in Europe & North America and some 20% in developing economies in Asia. By 2040, this situation is completely reversed. Source: World Energy Outlook 2018, IEA
Kuwait’s Export market: shift to Asia
2016: $40.8bn 2000: $18.4bn
Wind and Solar are set to surge to almost “50 by 50” – 50% of world generation by 2050
Source: New Energy Outlook, BNEF, Jun 2018
∴ Global Decarbonisation implies secular downside risk for oil prices and growing risk of stranded fossil fuel assets
Lower Oil prices:
Decline in Oil Sector
contribution to GDP
Fiscal Deficits
Current Account Deficits
Lower international reserves & build-up of
SWF assets Reduced recycling of
petrodollars
Impact on money and credit flows,
liquidity Economic
diversification is imperative
Spillovers into non-oil sector; slower economic growth • Negative impact on construction, real estate, trade, tourism
• Non-oil sector activity slows
• Lower business confidence & Investment
“New Oil Normal” implications for GCC: reforms & new economic development model
Lower government spending/ subsidies
Agenda
ü Global Outlook & Risks
ü New Oil Normal & GCC Implications
ü GCC: Geo & macroeconomic outlook
ü Investment Opportunities
ü Takeaways
GCC Macroeconomic Overview: Stabilising & Recovering in 2018-2019?
GDP ($bn)
Real GDP growth (% change)
Inflation Fiscal balance (% GDP)
Current account balance (% of GDP)
2018 2017 2018 2019 2017 2018 2019 2017 2018 2019 2017 2018 2019
Bahrain 39.3 1.4 2.5 2.7 1.4 3.0 4.8 -14.3 -8.9 -8.2 -13.2 -9.0 -7.9
Kuwait 144.5 -3.3 2.3 4.1 1.5 0.8 3.0 6.6 11.6 12.0 2.3 6.9 3.1
Oman 81.7 -0.9 1.9 5.0 1.6 1.5 3.2 -12.9 -2.0 0.8 8.4 1.5 2.9
Qatar 188.3 1.6 2.7 2.8 0.4 3.7 3.5 -1.6 3.6 10.5 -15.2 -3.3 -0.5
KSA 769.9 -0.9 2.2 2.4 -0.9 2.6 2.0 -9.3 -4.6 -1.7 3.8 4.8 6.6
UAE 432.6 0.8 2.9 3.7 2.0 3.5 1.9 -1.6 0.6 1.3 2.2 8.4 8.8
GCC 1,656.3 -0.4 2.4 3.0 0.2 2.7 2.4 -5.4 -0.9 1.7 2.9 7.1 7.7
Source: IMF Regional Economic Outlook Database, Nov 2018
Complicated MENA Geo-Political Landscape: عدو عدوي هو صديقي أنا وأخي على ابن عمي وأنا وابن عمي على الغريب
It'scomplicatedFriends Enemies
GCC Economic Diversification is an Imperative. Non-Oil Economy: varied experience across countries
Real non-oil GDP growth in the GCC (% yoy)
Source: IMF database, IMF Regional Economic Outlook (Nov 2018)
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
2000-14 2015 2016 2017 2018 2019
Bahrain Kuwait
Oman Qatar
Saudi Arabia UAE
Private sector investment is still low: Decomposition of Real GDP Growth
(averages, ppt)
Direct impact from trade tensions likely small, but indirect effects could be large
Source: IMF Regional Economic Outlook Database, Nov 2018
Real GDP Growth of Major Trading Partners: risk has shifted to Asia and China
Source: IMF Regional Economic Outlook, Nov 2018
External balances are improving… Current Account Balance in MENA Oil Exporters (% of GDP)
Balance of Payments: Financial Account Flows ($bn, net lending (+)/net borrowing (–))
Source: IMF Regional Economic Outlook, Nov 2018
… but, fiscal financing risks are rising in some countries
Source: IMF Regional Economic Outlook, Nov 2018
Rapid Accumulation of Debt calls for further fiscal adjustment
Source: IMF Regional Economic Outlook, Nov 2018
• Rapid accumulation of debt in recent years: exceeding 50% of GDP in nearly half the countries in the Middle East and Central Asia
• Debt in Bahrain, Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Sudan, and Tunisia will remain above the 60% vulnerability threshold for EMEs.
(as % of GDP)
(as
% o
f GD
P)
Challenges to Doing Business still exist, even in the GCC
% of countries identifying the constraint among top 5
Source: Global Competitiveness Report 2017-18, IMF Regional Economic Outlook, Nov 2018
Adjusting to the “New Oil Normal”: Main Structural Reforms in the GCC (since mid-2014)
BusinessEnvironment Spendingcuts Labour-related Non-oilrevenues FacilitateFDI;SupportSMEs Capitalmarketdevelopment
Bahrain
Lowercapitalrequirementsforcommercialco’s;moreaccesstoforeigninvestors;streamlinebusinesslicensing
Hikedgasolineprices(2018)
Bahrainizationflexibilityforafee
Feesonalcohol&tobacco(2016)
Deepeningoffinancialmarkets:settingupthecorporatecreditbureau;tradeofgovernmentbondsandsukukopentoGCCretailandinstitutionalinvestors
Kuwait Draftbankruptcylaw Fuelpricesraised
Labourregulationsprovidingdomesticforeignworkerswithenforceablerights
Businessprofitstax FDILaw,SMELaw,PPPLaw
Potentialreclassificationasemergingmarket
Oman
Raisedwater,electricitytariffsforgovt,commercial,industrial
Draftlabourlawthatwouldgivemorebenefitstowomen&foreigners
Raisedcorporateincometaxto15%(2017),trainingtax&municipaltaxonrents
DraftFDIlaw;draftingPPPLaw
Qatar
Increasedwaterandelectricitytariffs(2015);Revisesfuelpriceregularly
Newlabourlawwithreformstothe“Kafala”employmentsponsorshipsystempassed
QatarDevelopmentBanksupporttoSMEs;draftingPPPLaw
Re-classificationasEmergingMarket
KSA
Openinghealth&educationsectorstofullforeignownership;Bankruptcylawissued(2018).UpdatedCompetitionLaw&CompaniesLawinfinalstages
Reducedallowancesofgov’temployees
Increasedvisafeesforforeignemployees&dependents;Prohibitionofissuingnewworkvisasfor19professionsrestrictedtoSaudis.
VATat5%(2018);Excisetaxesonalcoholandtobacco(2017);
DraftPPPLaw;establishedtheNationalCentreforPrivatisation;FundofFundscreatedbyPIF;InvestmentFundforSMEs
Foreigninvestmentlimitsintheequity&bondmarketseased,technicalchangestosettlementsystemintroduced&short-sellingallowed;Alternativeinvestmentmarket;Re-classifiedasEmergingMarket
UAE
Bankruptcylawissued;personalinsolvencylawintheworks;opensectorsforforeignparticipation;removalofsecuritydepositsonemployeevisas
Removedfuelsubsidies;pricesareannouncedmonthly;raisedwater,electricitytariffs
10-yearresidencyvisaforselectgroups;studentvisasfor5-years;
VATat5%(2018);Excisetaxesonalcoholandtobacco(2017);taxonsugarydrinks(2017)
FDILaw(Oct2018);DubaiPPPLaw(2015)
Re-classificationasEmergingMarket
Diversification Imperative: Agenda of Structural Reforms that need to be accelerated
• Budgetary reform: introduce Fiscal Rules
• Phasing out of subsidies; reform pricing of public utilities services
• Rights of Establishment: allow full ownership in non-strategic sectors to facilitate FDI
• Legal & regulatory reforms: PPP, Privatisation, digital economy, ease of doing business, insolvency, strengthening women’s legal rights etc.
• Develop Local Financial markets; develop debt markets
• Industrial policy: digital, life sciences, health, education
• Enhance Labour Market Mobility. Long-term residency for skilled human capital, entrepreneurs, investors
• New Economic Geography dictates new trade & investment agreements with a pivot to Asia/China and COMESA countries
Saudi Arabia: Growth is edging up • Pulled out of recession; Q2 GDP:
1.6%; 2018f: 2.2%; strong non-oil activity • Inflation to drop in 2019, easing strain
on real incomes, support consumer spending
• Fiscal consolidation will continue • Great expectations: Vision 2030, NTP
2.0, NEOM; Privatizations aim to raise $100bn by 2020
• Opening up new sectors: hospitality, entertainment, multi-cultural tourism
Non-oil growth
• Financial market liberalization => opening up of Tadawul, listing of gov’t debt, FTSE & MSCI reclassification
• Challenges: growing costs of doing business & investing; crowding-out private sector; Saudization/ expat redundancy (~796k foreigners have left since start of 2017);
• Aramco IPO postponement & stake in Sabic
Saudi’s Transformation has become TBTF & TICTF
UAE: Economic Malaise?
• UAE grew by 0.8% in 2017, non-oil @2.5%; 2018f: 2.9% 2019f: 3.7%
• Non-oil sector activity has picked up: PMI stable around the 55-56 mark
• Growth supported by higher oil output, fiscal stimulus and preparations for the 2020 Expo
• VAT: inflation averaged 3.8% in H1 => dampened consumer spending
• Fiscal consolidation: removal of subsidies; VAT to raise revenue (1% of GDP)
• Retail/ real estate overhang • Challenges:
ü Nationals & private sector jobs;
ü Education reforms;
ü Risk-taking & leveraging by GREs
ü Post-Expo Dubai (?)
UAE Non-Oil Private Sector PMI
Dubai Property Prices
Macroeconomic Outlook for Kuwait • A jump in oil output will support strong
growth over the coming quarters; sluggish non-oil growth 2018f: 2.3%; 2019f: 4.1%
• But, facing New Oil Normal prices from a position of strength
• Underlying fiscal position improved on spending restraint, but financing needs have remained large
• Deposit &credit growth have slowed • Banks’ exposure to Investment
Companies (ICs) reduced to 2.5% of total loans
• Need to address labour market inefficiencies: less than 15% of new nationals entering the labour market over the next 5 years would be absorbed by the private sector.
Real GDP Growth (Contribution,%)
Fiscal &Current Account
Balances, (% of GDP)
Investment Outlook for Kuwait
Source: FT, Sep 2018 https://www.ft.com/content/960fc4c8-67fd-11e8-aee1-39f3459514fd
• Investment will be low, given resistance from the Parliament to implement development plans
• Kuwait’s balance sheet is among the strongest in the Gulf: assets held at the sovereign wealth fund amount to more than 500% of GDP
• FDI Law has supported the inflow of capital into a balanced mix of sectors
• Demographic dividend: 65% of population <30 =>attractive consumer base & workforce for a growing private sector: but skills need to be enhanced
Short- & Medium-term game changers
Economic diversification • Opportunity in major projects:
Saudi NEOM, Expo 2020
• PPP & Privatization (KSA, Kuwait, Oman)
• Digital economy & Fintech • Development of Red Sea & links
with East & Central Africa
• Massive Reconstruction needs: (Iraq, Syria, Libya, Sudan, Yemen) > than $1trn?
• Iraq reconstruction conference in Kuwait: allies promised $30bn vs. est. $90-100bn
• Saudi-UAE integration? Infrastructure: economies of scale & scope
• GCC Regional security arrangement?
Growing importance of links with China • Trade: Chinese imports to GCC to double in value by 2020 ($135bn) • Energy: More than half of China’s crude imports is extracted in ME • $70bn in new deals with KSA (2017); UAE signs 13 strategic agreements (2018) • Kuwait-China strategic partnership (2018) • Belt & Road initiative: support & participation by the GCC • Asian Infrastructure Investment Bank
Agenda
ü Global Outlook & Risks
ü New Oil Normal & GCC Implications
ü GCC: Geo & macroeconomic outlook
ü Investment Opportunities
ü Takeaways
Investment Opportunities in MENA • Infrastructure & Logistics: ü Demographics driven: urbanisation, Smart cities, health, education, retail,
hospitality
ü Leverage assets: Infrastructure, Transport, Logistics to serve region (COMESA, CA, South Asia). Integrate into New Silk Road & GVC from Asia
ü GCC have massive $2.4 trn worth of projects in the pipeline
• Structural shift to the private sector via:
ü Privatization Programs (Egypt, Saudi)
ü Public Private Partnerships (PPPs) frameworks. Opportunity in major projects: NEOM, Expo 2020, Qatar’s World Cup
• Renewable / Clean Energy • Food & Water Security • FinTech: empowering youth & harnessing technology for financial access &
inclusion
• Reconstruction & development of war-torn nations (est. at over $1 trn)
Opportunities for financing: Privatisation, PPP are on the policy agenda • GCC: cumulative budget deficits of
$294bn est. in 2018-22
• Privatisation of 25% GCC SOEs could raise GDP by $100bn => raise investment, growth, capital inflows, FDI, boost private sector, lower deficits
• SoE listings: Adnoc Distribution listed on ADX; Aramco postponed
• Egypt to raise $4.6bn in next 2.5 yrs from sale of stakes in 23 SOEs
• Financial market liberalisation, NTP, Neom => role of private sector through PPPs
• Financial Sector reforms => reclassifications; Local debt market devt: KSA
KSA currently accounts for almost half of the regional stock market capitalisation
Source: Thomson Reuters Update as of 16th Nov 2018
Total: $1167.9bn
Embracing Renewable Energy in the Region: Momentum for Solar & Wind Recent devts supporting the RE push:
• Removal & phasing out of oil subsidies
• Focus on ↑ Energy Efficiency
• Tech innovation has led to dramatic decline in RE and energy storage costs
• MENA to invest $500bn++ in RE over next twenty years; Egypt ($2.6bn) & UAE ($2.2bn) were nations investing $1bn+ in CE last year
• Key projects: Egypt’s Benban solar park & new $670mn wind farm; Shams Dubai..
• UAE & KSA achieved record low prices for solar renewable power LT contracts
Solar dominates: Renewable Energy Investments in MENA by Sector (USD mn)
Source: Bloomberg New Energy Finance
FinTech Startups in MENA
Fintech startups in MENA almost tripled since 2012
UAE has the most developed fintech ecosystem
Source: “Fintech in the MENA Region at an inflection point”, IIF, Nov 2018
Harnessing FinTech for MENA financial access and inclusion Merely setting up online & mobile banking services is not enough: banks need to leverage FinTech to raise efficiency Ø Geographic Fragmentation: many countries, with different
currencies, regulatory bodies Ø Young, Unbanked populations: FinTech = financial access
& inclusion Ø Support SMEs access to finance: currently, MENA –based
SMEs face a financing gap of up to $240bn Ø High mobile penetration rates (110 phones per 100
persons): but, so far, cash is king Ø Social media presence: almost half the population uses the
Internet & 88% of that group uses social media daily
Agenda
ü Global Outlook & Risks
ü New Oil Normal & GCC Implications
ü GCC: Geo & macroeconomic outlook
ü Investment Opportunities
ü Takeaways
Key Takeaways
• World is “Moving East”. Twin engines of growth but also risks: trade wars, growing financial vulnerabilities, climate change…
• Global debt build up poses growing risks to the financial system stemming from geopolitics, monetary policy normalisation, higher rates & CB portfolio deleveraging/Quantitative Tightening
• New Oil Normal dictates a New Development Model & Social Contract: Diversification, Private sector led growth
• Non-oil sector is developing, but structural reforms required: reducing public sector size/role, raise FLFP, policies to encourage foreign & domestic investment & human capital, develop local currency financial markets
• Ongoing reforms also imply Investment Opportunities across multiple sectors in the region: Digital Economy, infrastructure, privatisation, renewable energy, FinTech
GLOBAL & GCC OUTLOOK: NAVIGATING IN TURBULENCE
Dr. Nasser Saidi Email: nsaidi@nassersaidi.com Twitter: @ Nasser_Saidi, @NSA_economics Website: https://nassersaidi.com
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