View
222
Download
0
Category
Preview:
Citation preview
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 1/29
1
June 2012
Saudi and GCC Opportunities
2012-16Contents
Summary 1
Oil and Gas Resources 2
Development Plans and Visions 4
Demographic Opportunities 4 Saudi Arabia 6 6
UAE 18
Qatar 20 20
Kuwait 22
Oman 25
Bahrain 27
Economics DepartmentSamba Financial Group
P.O. Box 833, Riyadh 11421
Saudi Arabia
Summary and Key ThemesThis report tries to look beyond the short term gyrations
in the global economy and assess the medium-term
prospects for the GCC economies, focusing on likely
progress with implementing government “Visions” and
development agendas, and the associated publicspending intentions. The aim is to identify public spending
priorities and those nonoil sectors with particularly strong
growth prospects, in order to allow private sector
participants to position themselves accordingly. In
particular, we hope to identify those sectors where the
authorities have made a public commitment to involving
the private sector, and where possible have outlined any
incentives that might be on offer.
The key takeaways from our analysis are:
Revenues from hydrocarbon resources should besufficient to support planned development
spending and support private sector growth
Rapid population growth will provide an incentive
to push ahead with development programs and
economic reforms
Rising government recurrent spending is a
concern and has increased the vulnerability to oil
price fluctuations, but GCC economies and public
finances are structurally strong enough to weathertemporary dips in prices
We do not expect a return to boom times, but
strong and steady growth which will help contain
inflationary pressures
Governments across the region are keen to
diversify their economies away from oil, and have
made concrete efforts in this regard. However,
projects have been duplicated across countries
and there is a danger of overcapacity in some
sectors
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 2/29
June 2012
2
Oil and Gas Resources
Large oil and gas resources provide a solid base for growth
While global growth is likely to remain sub-par for a few more
years yet and subject to heightened risks (see Box), prospects for
the GCC through 2016 are encouraging. A key factor in the GCC’s
favour is the structural strength of members’ economies, as
reflected in healthy public and external finances, sound banking
systems; increasing integration with stronger emerging market
economies and, critically, their extensive hydrocarbon resources
(for more analysis see our 2011 report The GCC: Prospering in
Uncertain Times). These resources generate large revenues and,while endowment is mixed amongst GCC states, most have
enough reserves of oil and gas to enable them to maintain
output at current levels or higher for many years to come (see
chart), providing a solid foundation for future revenues.
The scale of such revenues will depend on prices, but they seem
likely to remain large. Longer term oil price projections are
always uncertain, but the likely evolution of global oil markets
suggests that average prices will remain relatively high over the
next five years. Risks of short-term price declines are clearly
present, but the underlying trend is positive. New empirical
research undertaken at the IMF points to a near doubling of thereal price of oil over the coming decade (see IMF Working Paper;
The Future of Oil: Geology versus Technology ) while projections
put out by major energy agencies suggest that prices will hold at
between $100-125/b for Brent through 2016 as demand for oil
continues to grow in emerging markets. Increasing global
production and use of gas will divert some consumption away
from oil but, barring a major technological breakthrough, oil will
continue to be the dominant fuel for transportation.
Even though oil output is increasing in other parts of the world,
with over a third of world proven oil reserves the GCC is still
seen as a major source of supply growth to meet this growingdemand. Saudi Arabia, the UAE, and Kuwait will be particularly
important sources of supply. While annual output levels will vary
with OPEC quota developments for those GCC states which are
members, average production in the GCC is thus expected to
remain close to current levels or higher through 2016.
Hydrocarbon revenues have surged and are likely to remain
substantial
This combination of production and prices will generate large oil
and gas revenues ensuring that GCC finances remain robust. This
in turn will allow governments to finance development anddiversification programs while still running healthy fiscal and
OPEC
77%
1068.4
of which GCC
36%
495.2
Non-OPEC
23%
314.8
Proved Oil Reserves
(000 m/b, 2010; BP)
100+94
72
45
17
100+ 96 100+
2617
0
20
40
60
80
100
120
Kuwait UAE Saudi Qatar Oman Bahrain
Hydrocarbon Reserves 2010
(years of remaining production - r/p ratio;
BP)
oil gas
Reserves b/b US$ trillion
Saudi 264.5 21.2
Kuwait 101.5 8.1
UAE 97.8 7.8
Qatar 25.9 2.1
Oman 5.5 0.4
GCC 495.2 40
Capital flows if remaining proved
oil reserves sold at $100/b
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 3/29
June 2012
3
Global growth is likely to remain sub-par through
2014 (which would mark 7 years since the start of
the crisis) with the possibility of a stronger pick-up
thereafter
current account balances. In addition, a continued build up in
external assets will also allow for a smoothing of spending
should oil prices and revenues temporarily dip.The scale of potential capital flows to the GCC over coming years
is certainly large. If remaining proved oil reserves sell for $100/b
they would generate capital inflows of around $50 trillion – over
half accounted for by Saudi Arabia. Even at $80/b, which is
probably close to the marginal cost of production, flows would
still reach $40 trillion. Added to this are the capital flows from
gas resources, including from related downstream industrial
activity. GCC states are sitting on substantial reserves of gas (see
chart), and for countries such as Qatar, and to a lesser extent
Oman, exploitation of these reserves have generated wealth and
driven development.Box 1: Global Economic Growth
Advanced economies are still undergoing an uncomfortable
period of transition in the aftermath of the bursting of housing
and credit bubbles which began in 2007-08. Large debt
overhangs, fiscal deficits, private sector deleveraging and bank
balance sheet strains continue to present headwinds to growth
and still need more time to be resolved. Aging populations make
the task even harder.
Dealing with these problems has heightened political
disagreements in the Eurozone over the balance betweenausterity to control debt and deficits, and stimulus to restore
growth and employment in the face of renewed recessions. In
these conditions the risk of politically driven policy errors
leading to another financial crisis are elevated – Greece and its
potential exit are a key concern - and prospects for growth are
clouded. Further policy stimulus is a possibility but is likely to
suffer from diminishing returns and may delay the reforms
needed to restore fiscal sustainability and competitiveness in
peripheral economies.
Growth in the US should be more robust, although deep
structural problems still need to be resolved, and these will actas a drag. With stronger public finances and more room for
monetary stimulus, emerging markets should be able to
generate healthy growth, although there will be some pull back
from slowing trade.
Under such conditions advanced economy interest rates are also
expected to stay low through 2014. However, inflation risks will
be a mounting concern as we head towards 2016 given the
exceptional monetary easing and expansion of central bank
balance sheets of recent years
-1
0
1
2
3
4
5
6
2 0 0 3
2 0 0 4
2 0 0 5
2 0 0 6
2 0 0 7
2 0 0 8
2 0 0 9
2 0 1 0
2 0 1 1
2 0 1 2
2 0 1 3
2 0 1 4
2 0 1 5
2 0 1 6
World Real GDP
( percent change; IMF,Samba)
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 4/29
June 2012
4
Development Plans and
Visions
Large development programmes aim to deliver sustained
growth
Mindful of their heavy reliance on oil and gas sectors, all GCC
states have embarked on strategies and programs designed to
diversify their economies, enhance private sector activity,
improve education standards and boost employment for
nationals. These efforts include large public spending programs
on infrastructure, education and health with supporting
investments envisaged from the private sector. Not all are fullycosted out, but Saudi Arabia’s 9th Development Plan covering
2010-14 envisages spending of $385 billion.
Kuwait’s development plan proposes $125 billion over the same
time frame, while Oman’s 2011-15 plan envisages $78 billion in
expenditure. Meanwhile, Abu Dhabi, Bahrain and Qatar have
established Vision 2030 frameworks and national development
plans/strategies to achieve those visions. The National
Development Strategy (NDS)for Qatar covering 2011-16
envisages spending totalling $226 billion, while Abu Dhabi’s
Vision 2030 report estimated spending of $160 billion during the
five year period 2008-13.All GCC plans highlight investment opportunities in such sectors
as transportation, power, water, utilities, health care, housing,
ITC, education and training. Spending on infrastructure is
expected to be particularly large in the coming years offering
large opportunities in the construction sector. Transport projects
are particularly prominent, with all GCC states planning to
develop new interlinked train networks, as well as boosting
roads, airport and port infrastructure. Demand for power is also
rising strongly throughout the region as economies develop and
older generating plants commissioned in the 1970s and 80’s
need upgrading. More country specific details are provided inthe sections that follow below.
Demographic Opportunities
GCC populations are young, growing and relatively wealthy,
providing both opportunities and challenges. According to IMF
data, the total GCC population has grown by nearly 19 million
people since 1990, with more than half of the increase in Saudi
Arabia. Central bank data show that the Kingdom’s total
population has grown by an annual average rate of 3.4 percent
since 2004 to reach 27.6 million at end-2010. This rate of growthis forecast to continue for most of the forest period, though
750
560
225 205115
65
Saudi UAE Qatar Kuwait Oman Bahrain
GCC: $1.9trn of Projects Planned or
Underway
($bn, MEEDProjects)
Aviation Rail Roads Ports Total
Bahrain 4.9 7.9 1.2 0.9 14.9
Kuwait 3.4 14 8.2 2.66 28.3
Oman 12.6 2.5 10 7.9 33.0
Qatar 15.2 36.8 7.2 11.5 70.7
Saudi 19.6 40.7 4.1 9.1 73.5
UAE 8.7 17.5 25.8 3.8 55.8
Source:MEEDProjects
GCC: Planned Transportation Projects ($bn)
A.Dhabi 160 2008-13
Saudi 385 2010-14
Qatar 226 2011-16
Kuwait 125 2010-14
Oman 31 2011-15
GCC 927
GCC: Development Plans ($bn)
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 5/29
June 2012
5
there might be some softening as we move into 2016 and
beyond.
The smaller GCC states have grown even more rapidly (seechart), but from a much smaller base. Growth has come from
increases in national populations as well as large inflows of
migrants. These expanding populations have been key drivers of
economic development in the region, and the increasingly
urbanised GCC middle class has provided a growing consumer
base for businesses.
Looking ahead the total GCC population is projected to grow by
another 8.5 million people between 2011 and 2016, the bulk
accounted for by Saudi Arabia (5.1 million). In the UAE, the past
extremely rapid rate of expatriate driven growth is expected to
slow significantly. A similar trend is expected in Qatar, althoughit is likely to see a temporary surge in expatriate numbers as
workers are pulled in to implement the NDS and world cup
preparations. Elsewhere population growth is expected to
continue at around 3 percent pa.
Growing populations will require increased provision of
infrastructure and services and act as a strong incentive to GCC
governments to press ahead with their development and
diversification programs in order to provide employment for the
growing labour force. Population profiles in the GCC are
distinctly youthful (around 30 percent of Saudi’s are aged
between 15-29), which makes job creation a pressing issue, and
this has been the key principle guiding economic policy for some
time Younger people also have distinctive consumption patterns
and despite the brisk rate of population growth are expected to
benefit from rising per capita incomes. Strong growth will create
particularly wealthy consumers in the smaller oil rich states of
Qatar, Kuwait and Abu Dhabi (see table).
+131% +303% +83% +69%+174%
+72%
+0.6 +1.3 +1.4 +1.5 +3.2
+10.9
0
5
10
15
20
25
Bahrain Qatar Oman Kuwait UAE Saudi
GCC: Population Growth 1990-2010
(million; IMF)
1990 2010
2010 2016 increase
Saudi 28.5 33.6 5.1UAE 4.7 5.2 0.5
Kuwait 3.1 3.5 0.4
Oman 2.9 3.6 0.7
Qatar 1.6 2.0 0.4
Bahrain 1.3 1.5 0.3
GCC 40.9 49.4 8.5
GCC: Population Change (million)
2010 2011 2012f 2013f 2014f 2015f 2016f Saudi 16.2 20.2 20.3 20.2 21.3 22.7 24.2
UAE 65.3 72.6 79.5 80.4 84.3 89.0 92.8
Kuwait 41.4 55.2 61.5 59.0 59.9 62.8 67.0
Qatar 82.7 108.8 113.2 120.9 125.6 127.2 128.4
Oman 20.0 25.4 27.3 25.9 26.3 26.3 26.5
Bahrain 18.5 20.6 20.4 20.6 20.7 20.7 20.8
GCC 26.5 32.4 33.9 33.8 35.2 36.9 38.7
GCC: Per Capita Income ($,000)
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 6/29
June 2012
6
Saudi Arabia
Economic Prospects
The Kingdom can expect medium term growth of 5 percent plus
Saudi Arabia’s formidable mineral resources will form the
platform for a period of strong economic growth in 2012-16. We
expect real GDP growth to average 5 percent in 2012-16, with
the rate of real nonoil growth averaging 5 percent. Inflationary
pressures should remain manageable, with a good deal of
domestic demand neutralised through the import channel. Rents
will remain a source of price pressure, but efforts to expand the
housing stock should help to soften this as we move through the
next five years, and inflation should stabilise at around 5.5
percent per annum. Interest rates will move broadly in line with
US rates (there will be no change to the currency peg) and are
thus expected to remain at historic lows at least until the end of
2014. A gentle increase in rates is in prospect for 2015-16.
Government spending will remain the engine of economic
growth. History has shown that increased government spending
feeds through rapidly and significantly to the nonoil private
sector (see chart). Encouragingly, under our oil price and
production assumptions we expect that the government will
have plenty of money to spend during the forecast period.Overall hydrocarbon earnings are expected to stabilise at around
$285 billion. Add in non-oil revenues and total government
revenue is expected to hold at around $300 billion a year during
2012-16.
Wages and salaries will continue to claim the bulk of current
spending
With very little debt to service or pay down the main call on
government revenue is wages and salaries, which tends to
absorb 25-40 percent. Spending on this item varies in line withthe Hijri calendar (a 13th month of salary is payable in 2013 and
2016) but the overall trend is decidedly upwards. The public
0
00
00
00
00
00
00
00
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Saudi Arabia: Government Spending and Revenue
(SR billion; MOF, Samba)
Spending Revenue
udi Arabia 2010 2011 2012f 2013f 2014f 2015f 2016f
eal GDP (% change) 4.1 6.8 4.8 4.0 4.5 5.6 6.1
ominal GDP ($ billion) 447.8 576.8 596.9 616.4 671.9 738.7 813.5
PI (ave. % change) 5.4 5.0 4.9 5.5 5.6 5.6 5.7
udget Balance (% GDP) 5.2 14.8 15.2 9.0 8.0 5.3 2.7
urrent Account (% GDP) 15.4 27.8 27.5 18.7 15.8 11.7 7.6
l production (mb/d) 8.24 9.32 9.83 9.73 9.83 10.03 10.23
opulation (million) 27.6 28.5 29.5 30.5 31.5 32.5 33.6
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 7/29
June 2012
7
sector is still the “employer of first resort” for most Saudis. Thus
the strong population growth rate and a brisk rate of inflation (5
percent plus) means that spending on wages and salaries willlikely increase by around 6.5 percent a year during the forecast
period. Spending on supplies and services should increase at a
similar rate, while subsidy spending—which encompasses
domestic fuels and certain foodstuffs—will grow at a brisk pace
given the rate of domestic consumption of gasoline, etc.
Spending on unemployment benefit is also likely to show some
strength in the first part of the forecast period as more people
register for the first time. Overall current spending is therefore
likely to grow at an annual average rate of around 3.5 percent.
Public investment growth is set to cool, but it will remain firm
Despite increasing recurrent spending demands there remainsroom to sustain large capital spending while still keeping the
fiscal accounts in surplus through 2016. Historically, capital
spending has been quite volatile, tending to be cut back sharply
during years of low oil prices, and recovering rapidly when oil
prices bounce back. However, since 2002 when the steady
ascent of oil prices began, capital spending has been
exceptionally firm, reflecting in part the authorities’ efforts to
make up the Kingdom’s infrastructural deficit. From 2003-2011
capital spending grew by an annual average of 26 percent. The
country’s infrastructural needs are still pressing, as we will
discuss below, but the deficit in many sectors has narrowed andthe overall rate of capital spending growth is forecast to cool to
an annual rate of around 12 percent in 2012-16.
Saudi Development strategies and
opportunities
The Ninth Development Plan will guide public investment
The government’s capital spending will form the basis of
opportunities for private business. These in turn will be guided
by the country’s Ninth Development Plan (NDP), which is worth
$385 billion (some 67 percent higher than the previous plan) and
runs from 2010-14. The NDP, which is prepared by the Ministry
of Economy and Planning (MEP), is a general framework for
capital spending, and actual capital spending (in terms of the
amounts and direction) may well differ from the plan as
circumstances change. Indeed, the authorities’ development
priorities were altered somewhat in early 2011 when HM King
Abdullah announced two extra budgetary spending
programmes. Most of the items detailed within these
programmes affected current spending, but there was also
greater emphasis on the need to expand the country’s
affordable housing stock.
Wages
35%
Supplies &
services
16%
Subsidies
4%
Specialised
credit
institutions
14%
Interest
payments
1%
Capital spending
30%
Saudi Arabia: Government Spending by Type
(percent of total; IMF)
tor
n)
Eighth Plan
(2005-09)
Ninth Plan
(2010-14) % increase
man Resources
ucation) 128.0 195.1 52.4
lth 41.1 73.0 75.7nomic Resources 28.2 60.7 115.1
nsport & Communications 15.1 29.6 96.0
nicipal & Housing Services 17.5 26.8 53
al 229.9 385.2 67.2
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 8/29
June 2012
8
The authorities are keen to encourage investment in the lesser-developed regions
The MEP has traditionally played a low key role in economic
policy and development, but following the appointment of the
former SAMA Governor, Mohammed al-Jasser, as Minister inDecember 2011, it is expected to take a more vigorous and
proactive approach.
First, we will consider the main spending allocations detailed in
the NDP, before “drilling down” to consider some of the
subsectors.
Education and health continue to claim large share of spending
The biggest single allocation is to education (“human
resources”). This fits with the demographic challenge outlined
above and is aimed at all levels of education, with the overall
goal of making school leavers and graduates more likely tosecure jobs in the private sector, although it is notable that its
share of spending between the two plans declined. Health is
another major area of spending. Its share of spending was
increased in recognition of the Kingdom’s pressing health issues,
stemming largely from population growth and the increasing
prevalence of “lifestyle” diseases (see below).
Economic resources, which is dominated by utilities, sees its
allocation more than doubled and its share of spending rise
sharply. This reflects the pressing need to provide enough power
and water for a country where demand is increasing by around
8-10 percent a year. Saudi Electricity Company (SEC) says it iscommitted to spending $60 billion over the next ten years.
Transport also sees a near doubling of its allocation. Road
building continues apace, and will remain a cornerstone of
transport policy in the Kingdom, however, rail and ports are also
moving up the agenda.
Municipal and Housing services has often been overlooked, but
this is likely to become more important over the next five years.
First, urbanisation is putting significant pressure on municipal
services. Second, as noted above, housing has taken on much
greater importance recently. As such, more than the $26.8
billion committed will likely be allocated as the government bids
to expand affordable housing. Both housing and municipal
services offer good scope for private participation.
The authorities are pushing to close the developmental gap
between regions
Comparing the Eighth and Ninth plans provides some shifts of
emphasis. Achieving “balanced development among regions” of
the Kingdom is mentioned much earlier in the preamble to the
Ninth plan (objective number 4 compared to number 8 in the
Eighth Plan). This appears to be tacit acknowledgement that
certain regions of the country have lagged the overalldevelopment progress witnessed in the traditional commercial
Education
56%
Health
18%
Economic
Resources
12%
Transport
6%
Municipal
Services
8%
Saudi Arabia: 2004-08 Plan Spending Allocations
(MOEP)
Education
50%
Health
19%
Economic
Resources
16%
Transport
8%
Municipal
Services
7%
Saudi Arabia: 2009-14 Plan Spdending Allocations
(MOEP)
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 9/29
June 2012
9
Tax incentives for regional investment are on the
table
SIMPLIFIED PETROCHEMICALS PRODUCT CHAIN
heartlands of Riyadh, Jeddah and the Eastern Province. Jizan
Economic City and Prince Abdul-Aziz Bin Mousaed Economic City
in Hail represent attempts to steer more investment to under-developed areas of the country. The Ninth Plan is explicit in
stating that it will strive to implement Council of Ministers
Resolution No. 359 of 2008, which grants tax incentives to
investment in less developed regions. Specifically, this
Resolution grants investors up to 50 percent of the cost of
training and the annual wages of Saudi employees working in
projects established in Hail, Northern Borders, Jizan, Najran,
Baha and Jawf. The Resolution also grants industrial projects and
capital expansion in these areas “additional tax incentives at a
rate not exceeding 15% of paid up capital”. More vaguely, the
Ninth Plan says that a link will be made between the “provision
of assistance in the Economic Cities to employment of Saudimanpower”.
Economic diversification is making solid progress and will
continue to shape the economy
A further broad priority is the effort to diversify the economy.
This has been a maxim of all five-year plans, but in the preamble
to the NDP it is put firmly in the context of “maximising the
return on competitive advantages”. Saudi Arabia’s comparative
advantage lies in hydrocarbons (it has at least 90 years’ worth of
oil reserves) and it makes sense to exploit this by creating
greater value-added. Oil refining generates value-added in itsown right and also opens the door to a variety of industrial
products—and jobs—through the petrochemicals product chain.
The key to this is the use of naphtha, from which can be derived
a much larger variety of “building blocks” than ethane, which
has been the feedstock of choice for the Kingdom’s producers,
but which is in short supply. Naphtha can produce “aromatics”,
such as xylenes, benzene and butadiene. These in turn are the
basis for products including polyurethane, solvents, nylon,
styrene, polystyrene, synthetic rubber and polybutenes. These
have far reaching applications, including for packaging,
pharmaceuticals, construction and automotive. For investors,the close proximity to raw materials producers negates the need
for large inventories; for the authorities, fostering these
domestic industries opens up the possibility of significant job
creation.
A vertically integrated approach is also being adopted in the
aluminium sector, where there are plans to harness the
country’s bauxite reserves by constructing what will become the
world’s largest aluminium complex at Ras al-Khair. The $10.8
billion project, which is a joint venture between Maaden and the
US’ Alcoa, is designed to attract a large number of conversion
industries to cluster around the site. Aluminium clearly has a
solvents, flexiblefoams, coatings
XylenesToluene
plasticizers, apparel,home furnishings,
wheels, rollers,automtive parts
transparent sheeting,molding & extruding,
pharmaceuticals,cosmetics, resins
Benzene
AROMATICS
plastics for packaging,toys, etc; detergents,
paper, textiles, polyesterfibre & resins
ethylene/propylene
OLEFINS
ETHANE/METHANE/NAPHTHA
NAPHTHA
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 10/29
June 2012
10
Automotive is an industry that is likely to receive a
lot of support
host of uses, but the authorities are most keen to foster a
sizeable automotive industry.
Competing with established automotive manufacturers, such asChina and India, might not be realistic, at least in the short- to
medium-term. As such, the authorities appear prepared to
protect those industries it deems a priority. The Industrial
Strategy for 2020, which was prepared by the Ministry of
Commerce and Industry, notes that “It is commonly held that
dumping by competing foreign products may be an obstacle in
the way of industrial development…*anti-dumping legislation]
represent an important incentive [that might be used] to attract
more local and foreign industrial investments”.
Authorities are keen to support a number of nonoil export
sectors
The authorities are also looking to boost the nonoil export
sector more broadly in a bid to enhance diversity, reduce
vulnerability to external shocks and create a platform for more
sustainable and predicable growth. Evidence suggests that
economies based on a single commodity will become effectively
diversified only when they successfully create a robust quantity
and variety of exports and world-wide purchasers for them.
Norway, and to a lesser extent, Canada, provide examples of
nations that have done this successfully. Norway invested labour
and capital and explored knowledge and technology in
industries—such as manufacturing—that were doing well but
had some dependence on oil, so that they could diversify.
The Saudi authorities have identified a group of second-tier
nonoil exports that have shown growth rates of between 8% and
25% during 2004-07. The government believes that these
industries are ripe for additional help in terms of offering
information on demand in export markets, organising export
promotions, providing competitor information, technical
specifications and packaging requirements of key markets.
Taking appropriate measures against import “dumping” is also
mentioned again.
Fostering a “knowledge based economy” is given greater
prominence in the NDP than in the eighth development plan.
This is an important element of hydrocarbons-based economies
that have successfully diversified—again, Norway is the best
example of this. Specifically, the government wants to promote
“strategic alliances between private national companies and
technically advanced international companies” in order to foster
technology transfer. In addition, the authorities are prepared to
use “soft loans” to encourage the use of modern technologies,
especially in the export sector, while simultaneously
discouraging the use of unskilled foreign labour. The authoritiesare especially keen to make a stronger link between education
and business by establishing research and development centres
Saudi Arabia: Exports Targetted for Official Support
Source: Ministry of Economy & Planning
Agricultural products
Copper
Leather products
Various plastics
Paints and derivatives
Jewellery
Aluminium
Glass
PVC
Various steel products
Vehicle spare parts & accessories
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 11/29
June 2012
11
There are grants available to support the
establishment of strategic research centres
ICT is given prominence in the Ninth Development Plan, but its financial allocation is relatively small
(such as technology incubators and centres of excellence) that
can serve the needs of business. The NDP provides grants for
strategic research centres to the tune of $240 million a year, andalso speaks of providing an annual $80 million to government
agencies and $53 million to private sector firms. The NDP is also
explicit in “linking the incentives offered to national and foreign
private investment with the extent of their contribution to the
training and qualifications of national employment”.
ICT is deemed to be an important sector, though its allocation
is small
ICT is an important adjunct of the effort to deepen and widen
the knowledge-based economy, and has strong potential growth
prospects. The Ministry of Economy expects demand for fixed
line services to increase by 4.4 percent a year, while demand formobile services is expected to climb by 5.6 percent a year, with
the penetration rate reaching about 194 percent by 2014.
Broadband demand is forecast to grow even more briskly, by
about 10 percent, with the number of subscribers climbing from
2 million to 3.25 million by 2014 (total penetration will reach
11.4 percent, while residential coverage will reach 47.4 percent).
The government wants to narrow the “digital divide” between
the regions. To do this, it has established the Universal Service
Fund, which aims to provide full coverage in areas where the
market does not provide ICT services. The government also
plans to extend broadband networks to all schools, universities,
hospitals, government agencies and civil society institutions.
Beyond this, it wants to expand “e-government” services and
envisages a “shared role” for the private sector in this. “Various
incentives” (unspecified) are mooted in the 9 th Plan to attract
FDI to the ICT sector.
Despite the prominence given to ICT and the Knowledge
Economy more generally, financial allocations to ICT under the
9th Plan amount to a comparatively meagre $239 million, with a
far larger amount of $2.3 billion given over to developing the
Saudi postal service. This presumably reflects the advanced
liberalisation of the ICT sector and the large role envisaged for
the private sector, both domestic and foreign.
Box 2: Contracting Spans All Sectors
This report has sought to identify those areas of investment that
the authorities deem to be priorities and, where possible, the
amounts of money that might be allocated to them. Contracting
is an activity that spans sectors and benefits from most types of
fixed investment. In fact, contracting represents the main
transmission mechanism between government spending and the
private economy. Saudi contractors are almost always involved
in providing at least some of the materials and labour for many
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 12/29
June 2012
12
Contracting is a key activity and its outlook is
extremely positive
SME’s are a key economic building block, but the
authorities would like to see more consolidation in
the sector
different types of construction projects. In highly technical and
complex industrial projects, this might be confined to civil works,
whereas in civil infrastructure projects (such as transport, healthor education) they might provide most of the inputs.
The general outlook for contracting is extremely positive. This
report has confined itself to the nonoil sector, but Saudi
Aramco’s investment seems set to pick up again given the
pressing need to source and supply more natural gas. In the
nonoil industrial sector, downstream petrochemicals will
provide plenty of scope for Saudi contractors, largely on the civil
side. A challenge here is the rise of Chinese firms, which appear
willing to import all labour and materials themselves. Beyond
this, the contracting environment will be supported by
government investment in infrastructure of all types, and withthe potential for much stronger growth as the push to develop
more affordable real estate moves into high gear. Nevertheless,
the real estate developer segment is very fragmented, and is
hampered by a lack of finance and high land prices.
SME’s gain support, but the authorities would like to see more
M&A
Support for SMEs is a staple of Saudi development plans, though
it is notable that this appears lower in the list of objectives in the
preamble of the NDP compared to the Eighth Plan. There is
recognition of the important economic role that SMEs play in
Saudi Arabia, particularly with regard to employment (they arethe main source of employment in the private sector), and there
is a restated commitment to “remove obstacles to the
development of SMEs”, with a focus on supporting and
developing the Kafalah Programme run by the Saudi Industrial
Development Fund1.
However, there is also recognition that the small scale of many
Saudi firms is a constraint in terms of putting in place the most
effective technological or corporate governance systems, and
also in accessing finance to allow investment growth.
Consequently, the Ninth Plan speaks of encouraging enterprises
to merge to allow more competitive outfits that can “benefitfrom economies of scale”, as well as listing on the stock market
to facilitate capital raising. The authorities are especially eager
to see mergers and acquisitions in the construction sector,
which suffers from fragmentation, particularly in residential
housing.
Housing is now near the top of the economic agenda
Indeed, housing has become a critical social (and hence political)
issue and we expect the government to devote increasing
1 Under the Kafalah Programme the state underwrites up to 75 percent of the
value of a loan extended by banks to SMEs (to a maximum of SR1.5 million).
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 13/29
June 2012
13
There are significant funding constraints to be
overcome on the supply and demand side
We expect the mortgage law to be passed and
this should herald a period of major real estate
expansion
resources to the problem. King Abdullah made this plain when
he pledged, in March 2011, that the government would build
500,000 housing units over an unspecified time period. In fact,the NDP estimated that the number of additional housing units
needed during the time frame of the plan is 1.25 million. The
Plan identifies an important constraint to an expansion of the
housing stock: the provision of buildable land supplied with
adequate infrastructure and public services (the Plan estimates
that the 1.25 million units will require 350m sq metres of land).
The Plan notes that such land is at a premium and advocates the
“vertical expansion” of cities, and re-development of so-called
brownfield land within urban areas, as well as the
redevelopment of old residential areas and unplanned
settlements.
Funding constraints are affecting housing on the supply and
demand sides
The other main constraint is funding, which affects both supply
and demand. On the supply side, many real estate developers —
especially the smaller ones—complain that bank credit is hard to
come by, and requires significant collateral to secure. Off plan
selling is still officially banned—an understandable reaction to
the lessons from Dubai—though the authorities appear willing
to consider the issue on a case-by-case basis.
Financing is more problematic on the demand side. The NDP
makes reference to strengthening the financial resources of the
Real Estate Development Fund (REDF), which provides interest
free loans to Saudi nationals for home purchases, and the REDF
duly had its capital increased by $10.7 billion in the King’s
speech. We think further financing will be made available,
though the REDF’s institutional capacity will also need to be
expanded and improved if waiting lists that stretch into decades
are to be reduced.
Funding sources will also need to be expanded beyond the REDF
if the government is to make meaningful progress in reducing
the Kingdom’s housing deficit. A mortgage law is still awaiting
approval. Banks have in the meantime stepped up mortgage
lending, though this has mainly targeted the upper and upper-
middle segments, where large down payments are the norm.
Passage of the long-awaited mortgage law will become the
motor for a sustained period of real estate expansion
Despite the long wait for the mortgage law, we are confident
that it will be passed and will provide the basis for substantial
growth in the country’s housing sector over the next five years
and beyond, and will in time become one of the main drivers of
the construction/contracting sector. This will also foster ancillary
services, such as real estate, surveying, and insurance.
0
100
200
300
2000-04 2005-09 2010-14
Saudi Arabia: Housing Construction:
Planned vs Actual
('000 units per year; Saudi Arabia Five Year Plans,
MOEP)
Demographic based demand (nationals)
Government's construction target
Actual construction
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 14/29
June 2012
14
There is potentially a large role for the private
sector in the Health sector, though an important
catalyst would be the introduction of compulsory
health insurance for Saudi nationals
Box 3: Housing and Consumption
Home ownership has a significant influence on consumer
spending. Currently, the dearth of affordable housing means
that many young people tend to stay at home with their families
for extended periods of time, in the process delaying marriage.
Without mortgages or rent to pay, or children to raise, more
disposable income can be devoted to items such as cars, clothes,
and electronic items. If the mortgage market took off and
affordable housing became much more widely available, then
young Saudis would be able to leave the family home and marry
and start families earlier. This would therefore accelerate the
shift away from electronics, cars, etc, towards consumer
durables, furniture and financial services. One might also expecta softening of overall spending by this segment as mortgage
payments began to eat into disposable income. In the long term
however, the demographic cycle might turn again: it is possible
that the liberalisation of home ownership would in turn
encourage a fresh baby boom, which would point to a new
“youth bulge” in the decades to come.
Health is another “big ticket” area, and one where the
government is keen to encourage greater private participation:
“the Kingdom clearly supports expansion of the role of the
private sector in providing healthcare services”, according to the
NDP. Expatriates are already obliged to have health insurance,
and that has spurred considerable competition in an
overcrowded sector. The sheer volume of infrastructure projects
set to be built over the next five years suggest that demand for
expatriates—and associated health insurance—is likely to keep
expanding rapidly.
Compulsory health insurance for nationals would be a fillip for
the health sector
A major additional catalyst would be the introduction of
compulsory insurance for Saudi nationals. In March of this year,the Chairman of the Shura (Advisory) Council’s Medical
Insurance Committee Dr Al-Eneizi said that the authorities are
studying a health insurance program that is expected to be
implemented in the next four years. The authorities are
probably uneasy about placing a financial burden on the
population, but the hard-pressed Ministry of Health is struggling
to provide all the services that Saudis demand in a timely
manner. Consequently, we think that is just a matter of time
before some sort of compulsory insurance scheme—most likely
heavily subsidised by the authorities—is passed. Islamic
insurance (Takaful) would appear to offer substantial potentialgrowth opportunities in this regard.
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 15/29
June 2012
15
Subsidies for agriculture and power will need to be
adjusted in order to attract major private sector
investment, though IPPs will continue to have an
important role
The issue of insurance aside, the country’s demographics, along
with the increasing prevalence of “lifestyle diseases” such as
type 2 diabetes and heart disease, will remain powerful driversof health care spending by the government.
Water demand set to grow by an annual 8.5 percent over next
five years
Power and water are two sectors that require substantial
investment to keep pace with demand. In the NDP it is assumed
that total water demand will decline by around 2.5 percent a
year from 18.5 billion cu metres a year to 16.3 million cu m/y
largely as a result of the withdrawal of subsidies for agriculture.
However, we think this is optimistic, and that an increase in
demand is more likely as a result of water consumption for
industrial and residential use, powered by population growth of around 2.5 percent a year; independent forecasts suggest that
water consumption will rise by almost 8.5 percent a year over
the next five years. However, although subsidies to agriculture
are indeed being (gradually) withdrawn, there is no sign yet that
subsidies will be lifted on residential and industrial water use.
Consequently, capital investment will remain intensive: the
state-owned National Water Company has already announced
that it will fund $66.8 billion worth of water and wastewater
developments through 2020; around $30.1 billion of this will be
capital expenditure, with much of the spending targeted at
wastewater projects as water recycling is a major focus.
Power demand is also robust, and a stream of IPPs are
expected
Power demand is witnessing growth of some 8-10 percent.
State‐owned Saudi Electricity Company’s (SEC’s) work program
includes 33 tenders between 2010 and 2018 for new or
expanded power plants, which will boost total capacity by
21.065GW. Saudi Arabia also has 11 new projects under way or
due to start in 2012, valued at $8.6 billion, including the $2
billion Al Qurrayah Independent Power Plant (IPP). More IPPs
are expected, with one well-placed observer suggesting that SEC
will place at least one IPP with the market every year.
SEC has not said that any of this additional capacity will come
from renewables. Nevertheless, this form of energy is being
pursued with vigour by other government agencies because
under current projections in 20 years’ time around half of the
country’s electricity output will be powered by hydrocarbons—
oil that could be sold on international markets or gas that could
be used as feedstock for petrochemicals plants. The King
Abdullah City for Atomic and Renewable Energy (KA-CARE) is
advising the government to diversify its energy mix by adding 41
udi Arabia: Selected Industrial and Infrastructure Projects
urce: BNP Paribas, Samba Estimated capital cost ($ bn)
rochemicals
Yanbu Integrated Refinery & Petrochem. Complex 20.0
Jubail (Sadara) New Petrochem. Complex 10.0
Saudi Aramco-Sinopec JV 10.0
Jizan Refinery 7.0
Ma'aden Phosphates Mining Complex 7.0
Petro-Rabigh 2 Extension 7.0
Sabic-Exxon Mobil JV (KEMYA) 4.5
Sipchem 0.7
Aramco Refineries Upgrade
wer
Pan-Arab Grid (KSA-Egypt Undersea Link) 8.5
Rabigh IPP2 5.8
newables
KA-CARE 82.0
w Economic Cities
King Abdullah Economic City 93.0
rts
King Abdulaziz Port (Dammam) 0.4
King Fahd Industrial Port (Yanbu) 0.2
Jizan Port
ports
King Abdulaziz International Airport 8.2
ads
KSA Road Network 4.0
l
Landbridge Rail Scheme 7.0
Al-Haramai High-Speed Rail Link 6.8
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 16/29
June 2012
16
IPPs could also play role in renewable energy,
though again the tariff system will require
adjustment
Finding a way of enticing private investment into
the Transport sector will also prove tricky
GW of solar, 17GW of nuclear, 4GW of geothermal and waste-to-
energy capacity over the next 20 years. KA-CARE says that
installing that much solar would meet a third of projected powerdemand in 2032, leaving a sixth for nuclear and cutting oil and gas
demand in half. According to KA-CARE the capital cost of installing
the 41GW would be $81.9 billion, with $26.7 billion for operational
costs. KA-CARE officials are confident these plans will be approved,
and competitive bidding will be started with 2GW in the first
quarter of 2013. The strategy includes new regulations and
unspecified “financial incentives” for private investors according to
KA-CARE.
IPPs could also form the basis of development in the solar sector
KACARE has devised a procurement scheme under which solar‐
powered independent power producers (IPPs) sell electricity to anoff‐take organization called Sustainable Energy Procurement
Company (SEPC). However, the purchase price will need to be
higher than the prevailing power price charged by SEC of around 4
cents/kilowatt‐hour (kwh). Saudi Arabia has raised the price of
power to industry users, but is unlikely to end the subsidy to
residential users any time soon. A mechanism will also have to be
found to allow solar to compete with the price that SEC pays Saudi
Aramco for gas, reckoned to be $0.75/btu.
Transport is a big sector which is intimately tied to economic
growth
Transport is an area that has received a good deal of funding in the
NDP. The report acknowledges this, but also says that dependence
on public funding should “be avoided”, particularly given the
inherent volatility of oil revenues. Hence, the sector should be
opened up to the private sector by “liberalising transport markets
and promoting competition within them” while also “taking into
account the social dimension in the provision of public transport
services”. As other Gulf states have discovered, the latter is a
difficult tension to overcome, and it is not clear how the
authorities will attract private investors to the transport sector
unless prices are fully liberalised. The Medina airport extension is
an important exception, though this is on a comparatively small
scale. For the moment, the government seems willing to finance
large transport projects, such as the rail Landbridge project and the
Riyadh metro scheme, itself. With the populations of the
Kingdom’s major cities and new industrial hubs requiring cargo
links, the demand for transport links of all types are likely to grow
substantially.
Finally, municipal services is an area that the authorities are
actively seeking to involve the private sector in. Privatisation of the
following areas is on the agenda:
Operation of public gardens and parks
Municipal transport services
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 17/29
June 2012
17
Implementation of well-intentioned schemes
has often been lacking, but we are more
confident now about the authorities’
willingness to press ahead with its ambitiousdevelopment agenda
Collection of municipal revenues
Cleaning services
Waste management
Generally speaking, municipalities are unable to cover their
running costs. Municipal revenues have grown significantly in
recent years, but still constitute no more than 30 percent of
operating expenses, and this is why privatisation is being pushed.
Implementation prospects are better than in previous years
As with any five year plan in any country, the reality of
implementation often differs markedly from the objectives. Saudi
Arabia, like many developing countries, has institutional capacity
constraints in some areas that might inhibit effectiveimplementation. The Ministry of Economy and Planning’s will have
to work hard to ensure that its writ is respected by different
government agencies.
Yet despite these caveats, we feel that the government as a whole
recognises that diversifying the economy, improving infrastructure,
and equipping Saudi nationals with the necessary skills are the
most appropriate routes to economic sustainability.
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 18/29
June 2012
18
The UAE as a whole should grow steadily at
around 3-4 percent p.a. through 2016
United Arab Emirates
Economic Prospects We expect that the UAE as a whole will grow steadily at around 3-4
percent p.a. through 2016, although Dubai is likely to lag as debt
problems and real estate weakness prevent a more rapid
expansion. The emirate is currently doing well in restructuring and
refinancing its GREs, but still has some way to go and faces a surge
in repayment obligations in 2014 and beyond when restructured
debt falls due. For some GREs this is likely to be a struggle (those in
traditionally strong sectors such as transport, trade and hospitality
should fare OK), and with the government running a deficit it
seems likely that Abu Dhabi will be asked to roll over the $20bn orso in funding it has provided the emirate.
Abu Dhabi’s fiscal position is robust
Fortunately, offsetting the more strained position in Dubai is the
positive outlook for Abu Dhabi where rising oil revenues have
restored public finances to rude health following exceptionally
large outlays in 2009-10 to support the economy in the wake of the
global crisis. Funds should be available for Dubai as necessary and,
following the recent decision to push ahead with its development
program, Abu Dhabi should benefit from strong public spending
with positive spill over effects for the whole UAE economy.Meanwhile, Dubai’s established trade and services sector should
also show steady growth, although they will be vulnerable to global
developments.
The UAE’s consolidated fiscal accounts and current account
balance will remain in surplus, albeit declining and vulnerable to oil
price fluctuations. But Abu Dhabi in particular will be able to call on
large holdings of external assets if needed. Domestic bank lending
will take time to revive strongly given still rising NPLs and the need
to digest more GRE restructuring, but the financial system remains
sound and well capitalised and should start to contribute more
positively further out. Inflation is expected to pick up from itscurrent lows, but should remain contained at less that 5 percent.
UAE Development Strategies and
Opportunities
Abu Dhabi Vision 2030 underway but trimmed down
The Abu Dhabi Economic Vision 2030 report was published in
January 2009 and indicated that some $160 billion of development
projects were on the table over the next five years, including a
major airport expansion, large new port and several mega real
2010 2011 2012f 2013f 2014f 2015f 2016f
GDP (% change) 0.9 4.9 3.4 3.0 3.1 3.6 3.7
i nal GDP ($ bi ll ion) 303.2 344.2 384.3 395.5 421.6 454.0 482.7
ave. % change) 0.9 1.0 1.5 2.5 3.0 4.0 4.0
get Balance (% GDP) -1.4 2.9 7.4 5.8 5.6 5.9 5.7
ent Account (% GDP) 7.6 10.4 11.6 5.5 3.3 4.7 4.9
production (mb/d) 2.30 2.48 2.53 2.50 2.50 2.51 2.54
ulation (million) 4.6 4.7 4.8 4.9 5.0 5.1 5.2
Infrastructure & Economy Housing & community
Khalifa Port & Industrial Zone Numerous residential projects
Abu Dhabi International Airport 7,608 vill as for nationals i n 2012
2 major road projects 24 new schools
Draina ge systems Healthcare
2 new industr ial zones 14 new healthcare faci l i ties
Auto City Rehabilitation centres
Renewabl e energy proj ects Cl evel and Cl ini c
Museums
Zayed, Louvre, Guggenheim
Development Projects Approved by Abu Dhabi
Executive Council January 2012
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 19/29
June 2012
19
estate projects. However, following the global crisis and its knock
on effects on the UAE, which prompted a slump in Abu Dhabi’s real
estate as well as Dubai’s, progress has stalled as the authoritieslooked to review the development program.
This review has now been completed and it has been decided to
press ahead with many of the planned large scale projects. The
emphasis of state spending has shifted more clearly towards
social services, housing, health and education. But high profile
projects such as the branches of the Guggenheim and Louvre
museums, as well as a host of infrastructure developments have
also got the go ahead (see table).
This decision ends more than a year of uncertainty and stalled
projects, and will usher in a new period of heightened construction
activity which will have positive multiplier effects throughout theUAE providing numerous opportunities for business. Little
information is available on budgets and timings, but official
statements note that work on Khalifa port and the Shams solar
power plant will proceed this year, and that 7,608 villas will be
built over the next 12 months.
Box 4: Abu Dhabi 2030 Economic Vision: Key Agenda
- Strengthening downstream capabilities (expanding petrochemical
output, and using hydrocarbon resources to diversify into new
industrial activities).
- Developing high-end tourism – aiming for 3 million visitors per
year by 2015.
- An Urban Framework Plan that sets forth the enabling agenda for
infrastructure and utilities for the city of Abu Dhabi and its
surrounding areas.
GREs will continue to play key role
Government related enterprises (GREs) spearheaded by the
Mubadala Development Company will continue to be used to
diversify the economy using equity and loans from the governmentand funds raised in capital markets to invest in local infrastructure,
real estate, hospitality, advanced manufacturing, and supporting
services. However, the proposed scope of future investment
appears more restrained and stretched out than the ambitious
plans being discussed following the launching of the Abu Dhabi
Vision 2030. This reflects a prudent prioritisation of projects at a
time of increasing financial commitments and financial strains in
GRE, including at Mubadala which recorded a loss of $1.5 billion in
2011. That said, the company still expects capital and investment
expenditure will remain at around $5 billion in 2012, in line with
the average for the past three years. Its committed capital andinvestment expenditure stood at $8 billion at end-2011 according
to its latest bond prospectus, down somewhat on the $8.9 billion
2437
-86 -1480
2009 2010 2011
Abu Dhabi: Mubadala Total
Comprehensive Loss/Income
($ million; Bond Prospectus)
Abu Dhabi Vision 2030
12 drivers of growth
1. Oil & gas2. Petrochemicals
3. Metal s
4. Aviation, aerospace & defences
5. Pharmaceuticals, biotechnology
& li fe sciences
6. Tourism
7. Healthcare equipment & services
8. Tansportation, trade & logistics
9. Education
10. Media11. Financial services
12. Telecommunications
Corporate/Acquisitions 1,373
Healthcare 1,279
Oil, gas & energy 1,050
Industry 947
Renewable energy 779
Real estate & hospitality 642
Aerospace 587
Infrastructure 519
Semiconductor tech. 398
ICT 314
Services ventures 182
Total 8,070
Mubadala Commited Capital &
Investment Expenditure end-2011
($ million)
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 20/29
June 2012
20
Abu Dhabi sees a prominent role for the private
sector in its diversification process, while the
government’s commitment will be supported by
robust oil revenues
Dubai’s real estate overhang suggest that role of
construction will be downplayed in revised
economic plan
recorded at end-2010 (this sum reflects the amount it is legally
committed to expend in future years).
Implementation prospects are positive
Abu Dhabi remains committed to its long term strategy of
diversifying its economy away from its reliance on oil and gas, and
in encouraging the private sector as well as GREs to drive this
process. Its healthy public finances will ensure that progress will
continue to be made and that it will be able to support its GREs as
necessary, although the pace of development is now likely to be
more restrained. The government has already raised its spending
sharply in the wake of the global crisis and it seem unlikely that
further large increases are pending, although current levels should
be maintained. Project activity in the UAE as a whole remains
large. While likely to be overstated, MEED Projects estimates thatthe value of projects currently planned and underway stands at
around $560 billion.
Dubai Strategic Plan (2015) under review
The real estate and associated credit boom and bust in Dubai has
been well documented. While the authorities have done well in
implementing a widespread restructuring at its GREs, the process is
not yet complete and continues to act as a headwind to
investment and growth. Meanwhile there remains a glut in real
estate and, with most critical infrastructure projects already
completed or initiated, there appear to be limited opportunities inconstruction and development beyond the completion of already
started projects. This will include further development of Dubai
International Airport as part of the emirate’s aviation master plan.
Under the circumstances Dubai is scaling back its growth ambitions
and is in the process of reviewing its development strategy and
preparing a revised Medium Term Economic Plan. Previous
assumptions of double digit real GDP growth in its Strategic Plan
(2015) are being scrapped, and we would expect the adoption of a
more modest trajectory of around 4 percent p.a. Expectations of
population growth are also likely to be scaled down with greater
attention paid to the temporary nature of many expatriates whoare likely to leave on the completion of construction projects.
Dubai’s initial Strategic Plan focused on six core sectors (see table).
Following the review we would expect that the emphasis on
construction/real estate will be substantially diminished, but that
efforts will continue on developing Dubai’s services sector which
has done so well and still offers scope for expansion (retail, trade,
transportation and logistics, tourism, financial services). Attempts
will be made to attract international companies to establish
headquarters in Dubai and encourage Dubai based companies to
expand globally. With the authorities focusing on providing an
attractive regulatory, investment and lifestyle environment,opportunities are likely to exist for trade and services companies.
Dubai Strategic Plan 2015
6 building blocks
1. Travel & tourism
2. Financi al s ervices
3. Profess ional Services
4. Transport & logistics5. Trade & storage
6. Construction
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 21/29
June 2012
21
Inflationary pressures are likely to mount but with
overcapacity in the real estate sector, price pressures should remain manageable
However, the government will also look to develop the domestic
economy to lessen the emirate’s exposure to external
developments.Dubai capital spending has been scaled back
With most GREs financially stretched, their spending plans within
Dubai have been scaled back and are primarily focused on
completing unfinished projects. Similarly capital spending by the
Dubai government has declined and is aimed at completing
infrastructure projects. Development spending has fallen from
around $4 billion in 2008 to a budgeted $1.6 billion for 2012. Given
the government’s weak finances, it seems unlikely that it will be
looking to increase capital spending much through 2016, and levels
may dip further as projects are completed.
Qatar
Economic Prospects
Economic growth is set to slow, but capital spending will remain
brisk
Qatar is in the process of transitioning from exceptionally rapid
growth driven by development of new LNG capacity, towards a
more modest trajectory driven by expanding non-hydrocarbonsactivity. The five year outlook for the latter is positive as the
government is committed to pursuing its well-articulated National
Development Strategy (NDS), backed by large financial resources
and an experienced administration which has successfully guided
Qatar’s extraordinary development to date. Non-hydrocarbons
growth is expected to grow at around 9 percent a year, boosted by
the large public infrastructure investment program. Overall real
GDP growth is likely to slow to around 5 percent, but nominal GDP
will rise to over $250 billion by 2016, overtaking Kuwait and
providing one of the highest per capita incomes in the world.
Reported fiscal surpluses will decline as spending accelerates, but
overall state finances will remain strong on the back of large
hydrocarbon revenues which will ensure sustained current account
surpluses and allow for a further accumulation of foreign assets.
Meanwhile, the domestic banking sector is gearing up to provide
finance for the impending surge in investment and activity. Given
the scale of planned spending over the next five years, inflationary
pressures are expected to mount. However, with price recovery in
the real estate sector likely to be stretched out and muted, the
overall inflation rate should hold in the 4-8 percent range.
3.6
7.5
6.46.8
3.93.7
2.41.9
0
2
4
6
8
2008 2009 2010 2011
UAE: Government Capital Spending
($bn; IMF, national authorities
A.Dhabi Dubai (development spending)
tar 2010 2011 2012f 2013f 2014f 2015f 2016f
al GDP (% change) 16.3 14.1 6.0 4.6 4.5 5.0 5.5
mi nal GDP ($ bil li on) 127.3 174.0 186.8 205.5 219.9 235.3 251.7
(ave. % change) -2.5 1.9 3.0 4.0 5.0 6.0 8.0
dget Balance (% GDP) 2.9 8.0 5.8 3.2 2.5 2.5 2.0
rrent Account (% GDP) 17.1 28.7 31.7 23.8 18.2 17.9 13.9
production (mb/d) 0.81 0.84 0.84 0.83 0.83 0.83 0.83
pulation (million) 1.5 1.6 1.7 1.7 1.8 1.9 2.0
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 22/29
June 2012
22
Qatar Development Strategies and
OpportunitiesNational Development Strategy 2011-16
2
Qatar is embarked on a 5-year National Development Strategy
(NDS) covering 2011-16 which aims to deliver on the goals outlined
in Qatar’s Vision 2020. Having spent the last 20 years building up a
world class gas industry, the aim is now to broaden the
development focus with an emphasis on four key Pillars: Human,
Social, Economic and Environmental Development.
Implementation of the NDS will open up numerous opportunities
for businesses, perhaps most notably through the sizeable
investments planned to improve infrastructure and expand the
industrial base by leveraging the available cheap energy anddomestic feedstock. However, there will also be opportunities in
services sectors such as health, education, environmental
consultancy, management consultancy, training, and labour
management as the state looks to bring in hundreds of thousands
of workers to deliver the infrastructure and personnel
requirements of the NDS and hosting the 2022 world Cup.
Scenarios presented in the NDS suggest that gross domestic
investment could total $226 billion over the five year period,
although much of this is envisaged to come from the private sector
and represents assumptions rather than firm plans. More concrete
are the spending plans of the government and its relatedcompanies (Q companies). Detailed officially sanctioned project
lists are not available (although extensive projects lists are
compiled by the likes of MEED and Zawya) but the NDS states that
the government will spend $65 billion on infrastructure through
2016 focusing on transportation (ports, airports, roads, trains,)
power, water, and the information and technology sector. Its non-
hydrocarbon related Q companies will spend a further $36 billion,
the bulk ($27.5 billion) accounted for by Barwa and Qatar Diar for
residential and business construction projects.
Planned investments by Qatar Petroleum and its related
companies are put at $23 billion, of which $2 billion will come from
Qatar Industries to expand petrochemical capacity, including in low
density polyethylene, ammonia and urea. There will be no
significant new investments in the upstream gas sector until the
moratorium on North Field projects is lifted, which the NDS
indicates will not occur before 2015.
Implementation outlook is positive
Qatar’s public finances are extremely healthy and it is not expected
to run into problems funding its planned spending, including
through its Q companies. Measures are being put in place to
2 See also our 2011 report Qatar: National Development Strategy & Economic
Update
Central Government 95.0
Infrastructure 66.0
power, water, Doha port, airport, roads
ITC & national fibre optic network
Rail and metro 27.0
Non-Hydro Q Companies 36.0
Barwa & Qatar Diar 27.0
residential & business construction projectsinc. Doha festival city, Bawra city
Sidra Hospital & Education City 5.0
Real estate under construction
The Pearl 14.0
Lusail 5.5
Specific World Cup Expenditures
Stadiums 3.0
Accomodation 12.4
Qatar Petroleum & related cos. 23.0
QP/Exxon Barzan gas project 8.6
Qatar: Spending considered for the NDS ($ bn)
4.8
9.3 9.210.8
12.1
14.8
2006/07 2007/08 2008/09 2009/10 2010/11 2011/12
Qatar: Government Capital Expenditure
($bn; IMF, Samba)
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 23/29
June 2012
23
Development momentum is gathering pace and
will likely reach a peak in the run up to the 2022 football World Cup
manage direct government spending through adoption of multi-
year budgets and a public investment program tied in to the NDS.
This bodes well for implementation, although there is also a sensethat the authorities are prudently proceeding with some caution,
mindful of the boom and bust experienced in Dubai. This may have
contributed to the slippages seen in the schedule (the NDS had
expected public sector investment to peak in 2011-12), but
momentum now seems to be gathering pace with the planned
hosting of the 2022 world cup providing added incentive. The
latter will also lead to additional investment in stadia and hotels,
although some of this is likely to take place beyond the 2016 NDS
time frame. Capital spending in the budget exceeded $12 billion in
fiscal 2010/11 and is estimated to have approached $15 billion in
2011/12 with similar levels expected over the next few years.
Kuwait
Economic Prospects
Finances are robust…
Kuwait’s public finances are one of the strongest in the GCC. Since
the late 1990s the state has consistently posted large fiscal and
current account surpluses, and is projected to continue doing so
through 2016. However, the government’s rising recurrent
spending commitments are a concern and the economy remainslargely dependent on the oil sector, while diversification and
growth prospects have been hampered by political disputes.
Encouragingly, an ambitious Development Plan was put forward in
late 2010 aimed at reviving the non-oil economy and reforming
policies to encourage greater private sector investment, supported
by large scale public spending. But this too has fallen hostage to
political disputes and weak implementation capacities.
…but development plans will remain subject to delay
While some progress can be expected, it is likely to be patchy and
stretched out, suggesting that growth will remain steady but
unspectacular at between 3-4 percent a year with inflation holding
at around 4 percent. The banking sector remains sound and able to
support growth, but many of Kuwait’s investment companies are
likely to continue to struggle given their exposure to still fragile
regional and international equity and real estate markets, and their
dependence on short-term foreign lending.
it 2010 2011 2012f 2013f 2014f 2015f 2016f
GDP (% change) 2.4 8.3 6.6 2.0 3.5 3.5 4.0
nal GDP ($ bi ll ion) 124.3 171.2 195.3 192.0 200.0 215.0 235.0
ve. % change) 4.1 4.7 4.5 4.5 4.5 4.0 4.0
et Balance (% GDP) 22.3 30.6 31.0 25.0 18.0 18.0 18.0
nt Account (% GDP) 30.8 41.4 44.2 40.0 35.0 30.0 30.0
oduction (mb/d) 2.30 2.43 2.44 2.40 2.40 2.42 2.43
ation (million) 3.0 3.1 3.2 3.3 3.3 3.4 3.5
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 24/29
June 2012
24
Kuwait’s democratic process has proved a
hindrance to development and this is unlikely to
change any time soon
Kuwait Development Strategies and
OpportunitiesKuwait Five-Year Plan (2010-14) sets out familiar goals
In 2010 the Kuwait national assembly approved a five year (2010-
14) development plan aimed at restoring the economy to growth
following the economic crisis post 2008. The plan forms the first
phase of a larger program known as Kuwait Vision 2035 that will
run in five-year blocks over the next 25 years, and includes 1,100
projects with an estimated value of $125 billion focused on both
the oil and non-oil sectors. Similar to other GCC development
strategies the plan focuses on economic diversification, including
turning Kuwait into a regional trade and financial hub. The
proposed development of a new port on Bubiyan Island is key is
this regard, and is aimed at serving the import/export
requirements for the reconstruction of Iraq for the next 20 year.
Large scale investments are also planned in the hydrocarbons
sector, both upstream and downstream.
Private sector involvement is envisaged mainly through build-
operate-transfer (BOT) schemes which should, through
government support for the project, ensure the banking sector is
happy to provide finance. In this way it is hoped that private
investors will meet almost half of the cost of the development
plan.Implementation constraints are significant
While Kuwait public finances are exceptionally strong,
implementation of the development plan has been stalled both by
political disagreements and institutional capacity constraints. The
government has limited experience in implementing major projects
while at the same time needs to get parliament to approve and
execute new laws aimed at supporting private sector engagement.
Strains in the relationship between the government and
parliament have long been an obstacle to reform, and are likely to
continue to be under the current parliament elected in February
this year. This is evidenced by its rejection of the bill that covers
the development plan in 2012/13 (the plan requires parliamentary
approval each fiscal year). Lawmakers have described the plan as
unrealistic, and have criticised the government for lagging in its
implementation of projects.
Opportunities in Kuwait are thus likely to remain hostage to
political wrangling’s which are hard to predict. The state clearly has
the financial resources to push ahead with its major infrastructure
projects, but implementation will probably remain halting. State
spending has certainly increased and topped $62 billion in 2011,
but much of this represents larger government transfers in the
Kuwait: Selected Mega Projects ($bn)
Silk City 77.0
Bubiyan Island Port 1.5
Kuwait University City 5.6
Residential projects 13.0
Airport expansion 1.2
Railway & metro 13.0
Source: Mega Projects Agency
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 25/29
June 2012
25
form of grants and subsidies to appease any social unrest in the
wake of the ‘Arab Spring’. This has bolstered consumption, and
may offers opportunities in retail and some services, but privatesector activity has remained muted in the absence of large
development spending.
Capital spending is estimated to have been around $7.3 billion in
2011/12 and seems unlikely to rise much more than this in
2012/13, with future levels depending on political developments.
With a small population, vast wealth and extensive oil reserves, the
incentive to move quickly ahead with economic reforms and
diversification is not so pressing in Kuwait as in other states.
Arguments instead tend to focus on how the nation’s wealth is
divided amongst its small national population which are provided a
cradle-to-grave welfare state. That said, even stop-start progresswith its development plan will provide significant opportunities in
construction and related businesses.
Box 4: Kuwait Infrastructure Projects Awaiting Approval
Some of the long-discussed but yet-to-be concluded key
infrastructure projects include: Silk City in Subiyah, Boubyan Island
container terminal, the Kuwait City-Subiyah causeway,
construction of several new cities, and increasing the quality and
quantity of infrastructure in the health, education, water, power,
and transport sectors (to include a metro system). Increasing oil
production capacity and upgrading hydrocarbons infrastructure are
other incomplete aspirations (source IIF).
Oman
Economic Prospects
Oman’s economy has grown at a consistently healthy pace over
the past decade and is expected to maintain solid growth through
2016. There appears to be scope for further small gains in oil
production and this will combine with increasing non-oil activity tosustain average real GDP growth at close to 5 percent a year during
2012-16. The non-oil sector now accounts for around 70 percent of
real GDP, and looks set to benefit from sustained public
investment. Meanwhile inflationary pressures are expected to be
modest, picking up to around 5 percent as spending rises.
The recent strength of oil prices has allowed the government to
raise spending in support of its diversification and development
agenda while a running a large fiscal surplus. However, this surplus
is expected to decline steadily over the next five years as recurrent
pending commitments have increased. Nonetheless, funds should
still be available to support the development agenda, including
2.6 3.1
5.05.8 5.4
7.28.6
11.2
Kuwait: Government Capital Expenditure
($bn; IMF)
n 2010 2011 2012f 2013f 2014f 2015f 2016f
GDP (% change) 4.8 5.0 6.0 5.5 4.0 4.5 4.5
nal GDP ($ billion) 57.9 73.6 82.0 83.0 87.0 90.0 95.0
ve. % change) 3.3 3.8 3.5 4.0 4.0 5.0 5.0
et Balance (% GDP) 5.2 10.0 7.0 3.0 3.0 4.0 5.0
nt Account (% GDP) 8.8 10.6 10.5 5.0 3.0 2.0 3.0oduction (mb/d) 0.74 0.76 0.78 0.80 0.81 0.82 0.83
ation (million) 2.9 2.9 3.0 3.2 3.3 3.4 3.6
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 26/29
June 2012
26
Oman will continue to make steady progress on
economic diversification, though its fiscal
resources will remain comparatively limited
from the State General Reserve Fund if necessary. In addition,
Oman’s debt levels are low and its economic management
reasonably effective, suggesting access to external funds would notbe difficult if needed.
Development Strategies and
Opportunities
Development spending on the rise
Oman suffered some minor disturbances in early 2011 in the wake
of Arab Spring movements in North Africa. These did not last long
but have had a galvanising effect on the authorities who have
moved quickly to accelerate state spending under the 8th National
Development Plan covering 2011-15. With oil production andprices at record highs the authorities have boosted both current
spending (mainly through wage increases, job creation in the
public sector and the introduction of unemployment benefit), and
capital spending. The latter rose to an estimated $7.2 billion in
2011 and is expected to rise further this year.
With oil prices and production projected to remain relatively high
over the next five years, the government is expected to press
ahead with spending consistent with the goals of the development
plan. These focus on improving infrastructure needed to develop
and expand industrial estates and free zones, with an emphasis on
airports, roads and ports, as well as investment in education,healthcare, housing and water, and support for sectors such as
tourism, agriculture and fishing. Large investments will also
continue to be made in support of the strategy of deploying gas
resources to diversify economic activity and expand the industrial
base. Oman has already had success in developing large-scale gas
based industries and related downstream activities
Much of this success has been based on the strategy of ensuring
that the private sector becomes the main source of economic
activity. As efforts accelerate to provide improved physical
infrastructure more business opportunities should emerge. The
existing free trade zones offer foreign investors a range of
incentives and the government often takes an initial equity stake in
large industrial projects to help finance start-up operations.
Steady progress expected
Oman’s hydrocarbon resources are more limited than other GCC
states, but are still sufficient to generate fiscal and current account
surpluses (excepting in 2009 when oil prices crashed) and allow a
build-up of external assets. Under our assumptions for future oil
prices finances should remain healthy and we expect that the
authorities will make good progress in implementing the latest
development plan. In terms of amounts to be spent, the oil and gassectors are expected to account for the lions share during 2011-15
8.98.3
4.33.2
1.4 1.3 1.2 0.7 0.6 0.4 0.4
Oman: Planned spending 2011-15
($ billion)
4.2 4.4 4.8 5.1
2.8 2.3 2.43.2
0
5
10
2009 2010 2011 2012
Oman: Government Capital Expenditure
($bn; IFS)
Oil/gas development
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 27/29
April 2012
27
at $8.3 and $8.8 billion respectively. Outside oil and gas, the
largest expenditures are focused on airports and roads, followed
by water and sewage, seaports and housing (see chart for figures).
Bahrain
Economic Prospects
Bahrain’s economy has shown considerable resilience in difficult
circumstances since early 2011, and has begun to revive again.
However, growth has been driven primarily by measures to boost
oil and gas production, while the non-hydrocarbons sectors
continue to struggle. Real GDP is estimated at 2 percent in 2011and seems unlikely to grow more than 2-3 percent a year through
2016. In these conditions, inflation will remain low.
Bahrain’s public finances are likely to remain strained, despite high
oil prices, following moves to take on more employees and boost
subsidies in the wake of the civil unrest. However, the state does
benefit from strong support from Saudi Arabia, and is to receive
$10 billion over the next 10 years to invest in infrastructure. As a
result spending levels will be maintained offering some support to
growth, although the budget is likely to remain in deficit.
Development Strategies and
Opportunities
Political headwinds are stiff
Bahrain, which has only small oil resources, is already the most
diversified economy in the GCC having early on developed an
offshore financial sector, tourism, and industries based on gas
feedstock. As such its Vision 2030 is primarily focused on ensuring
that the economy remains competitive and encouraging further
private sector development and job creation to promotesustainable growth. Medium-term prospects will depend on a
timely resolution of the current political impasse that has eroded
confidence. The economy is reviving following the dislocations in
2011, but growth is expected to remain modest and more reliant
1037
2041 1689 1862
917804
2009 2010 2011 budget 2012 budget
Bahrain: Government Project
Expenditure
($ million; Finance Ministry)
Infrastructure
ain 2010 2011 2012f 2013f 2014f 2015f 2016f
GDP (% change) 4.0 2.0 2.5 2.5 2.5 2.5 3.0
nal GDP ($ bill ion) 22.7 26.4 27.3 29.0 30.0 31.0 32.0
ave. % change) 2.0 1.0 1.5 2.0 2.0 2.5 2.8
et Balance (% GDP) -6.6 -2.5 -1.0 -3.0 -2.0 -2.0 -2.0ent Account(% GDP) 4.9 8.0 8.0 6.0 6.0 5.0 6.0
roduction (mb/d) 0.18 0.18 0.18 0.18 0.18 0.20 0.20
lation (million) 1.23 1.28 1.34 1.41 1.45 1.50 1.54
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 28/29
June 2012
28
Medium-term prospects will depend on a timely
resolution of the current political impasse
on positive developments in raising oil production. Confidence is
likely to remain fragile dampening private investment activity.
Nonetheless, the next five years are still likely to offer somebusiness opportunities, including for service orientated activities
aimed at supporting growth in the rest of the GCC. In addition,
Bahrain is to receive $10 billion from the GCC to invest in
infrastructure projects over the next 10 years. These will be
primarily aimed at alleviating social concerns, such as construction
of low cost housing, and improving access to education and health
facilities. The construction sector should thus benefit from a steady
flow of government contracts, despite the relatively weak outlook
for public finances which will struggle to return to surplus given the
surge in current spending commitments and the government’s
relatively low level of oil revenues. Project spending by thegovernment hit $2 billion in 2010, although this was budgeted to
drop back in 2011-12 with planned infrastructure spending put at
between $800-900 million pa.
7/29/2019 Saudi GCC Opportunities June 2012b
http://slidepdf.com/reader/full/saudi-gcc-opportunities-june-2012b 29/29
June 2012
James Reeve
Senior Economist
James.Reeve@samba.com
Andrew Gilmour
Senior Economist
Andrew.Gilmour@samba.com
Disclaimer
This publication is based on information generally available to the
public from sources believed to be reliable and up to date at the time
of publication. However, SAMBA is unable to accept any liability
whatsoever for the accuracy or completeness of its contents or for the
consequences of any reliance which may be place upon the
information it contains. Additionally, the information and opinions
contained herein:
1. Are not intended to be a complete or comprehensive study or to
provide advice and should not be treated as a substitute for
specific advice and due diligence concerning individual situations;
2. Are not intended to constitute any solicitation to buy or sell any
instrument or engage in any trading strategy; and/or
3. Are not intended to constitute a guarantee of future performance.
Accordingly, no representation or warranty is made or implied, in fact
or in law, including but not limited to the implied warranties of
merchantability and fitness for a particular purpose notwithstanding
the form (e.g., contract, negligence or otherwise), in which any legal or
equitable action may be brought against SAMBA.
Samba Financial Group
P.O. Box 833, Riyadh 11421
Saudi Arabia
Recommended