GCC Economic Forecasts 4.0

8/7/2019 GCC Economic Forecasts 4.0

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Confidential

Usman RaufMay 2009

Subsequent to the Onset of the Global Credit CrisisGCC Economics


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Grow th Momentum to be Sustained for GCC Economies

The GCC region is expected to cross the USD1 trillion milestone for nominal GDP in the year 2008e,primarily as a result of substantial increases in oil prices from USD72 /barrel in 2007 to USD99

/barrel in 2008

Owing to a 45% reduction in oil prices to USD55 /barrel based on average futures prices for2009, GCC real economic growth is expected to decline to 3.6% in 2009e versus 5.7% in 2008e;the principal driver of the real growth in the economies will be the non-hydrocarbon economy

Qatar is expected to grow at a rapid 10.2% in real terms in 2009e, possibly topping world economic

expansion for the year

GCC Economic Outlook 2007 2008e 2009e

Oil Price - USD / barrel 72 99 55

Nominal GDP - USD Billion 821 1,065 906

Real GDP growth - % 5.5 5.7 3.6

- Hydrocarbon 1.1 4.2 1.3

- Non-hydrocarbon 7.9 6.1 4.4

Inf lation - % 7.0 12.0 7.6

Current Account - % GDP 25.1 29.3 4.6

Fiscal balance - % GDP 19.2 21.9 4.7

Real GDP Growth 2007 2008e 2009e

Saudi Arabia 3.4% 4.1% 2.3%

UAE 6.1% 5.8% 3.1%

Kuwait 4.8% 4.5% 2.4%

Qatar 12.5% 13.5% 10.2%

Oman 6.9% 6.9% 5.5%

Bahrain6.6% 5.3% 4.7%

Source: The Institute of International Finance


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Grow th Momentum to be Sustained for GCC Economies

Saudi Arabia and the UAE remain the principal drivers of economic growth in the GCC, despite theirlower expected growth in nominal GDPs during 2009e

In terms of nominal GDP, all GCC economies are expected to register declines in 2009e due to theaforementioned reversal in trend for increase in oil prices

Qatar is an exception though, as it enhances its LNG production capacity, which is expected topositively impact its economic performance in the coming years


2008e Share o f GDP for GCC Countries

SaudiArabia

47%

UAE

24%

Kuwait

14%

Qatar

8%

Oman

5%

Bahrain

2%

Nominal GDP - USD Billion 2007 2008e 2009e

Saudi Arabia 382 496 418

UAE 201 258 216

Kuwait 112 153 129

Qatar 68 85 75

Oman 40 51 47

Bahrain18 22 21


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Fiscal and Current Account Balances Remain Manageable

Based on the break even oil prices for individual countries, the 4 largest GCC economies areexpected to run fiscal surpluses during 2009 under our base case crude oil price estimate ofUSD55/barrel

UAE, Qatar and Kuwait are expected to exhibit greater resilience should crude oil register a lowerUSD50/barrel average, with Saudi Arabia breaking even

The above numbers, are estimated assuming that the fiscal expenditure to non-oil GDP ratios for allcountries are maintained at 2008 levels


Breakeven Oil Prices for Fiscal Balances

0

10

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30

40

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70

80

Bahrain Kuwait Oman Qatar SaudiArabia UAE

BreakevenPrices USDperBarrel

Fiscal Balance - % of GDP 2007 2008e 2009e

Saudi Arabia 12.3% 22.1% 2.8%

UAE 26.7% 28.1% 11.7%

Kuwait 39.3% 21.9% 4.1%

Qatar 11.2% 15.3% 4.0%

Oman 8.4% 15.3% -6.1%Bahrain 3.2% 7.8% -6.7%

Current Account Balance - %of GDP

2007 2008e 2009e

Saudi Arabia 25.1% 31.3% 0.5%

UAE 18.1% 20.4% 6.2%

Kuwait 42.4% 43.4% 21.6%

Qatar 32.2% 42.9% 12.0%

Oman 4.8% 12.2% -12.1%

Bahrain 16.1% 20.5% 7.1%


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Sensitivity to Oil P rices

Expectations for 2009

Bear Scenario

Crude oil price of USD50 / barrel

GCC fiscal surplus down to 2% of GDP

2009e current account surplus at 0.5% of GDP

Current Market Situation

2008 average crude oil price of USD99 / barrel

Average GCC country budget price of USD40-USD50 / barrel

2008e GCC fiscal surplus of 21.9% of GDP

2008e GCC current account surplus at 29.3% of GDP

Substantial increases in oil prices during the majority of the current decade led to substantial 2008efiscal & current account surpluses at 21.9% & 29.3%, respectively

GCC government policies are likely to remain fiscal expansionary with primary focus onexpenditures related to infrastructure with a view on long term development plans

Our price band of USD50-USD60 /barrel for crude oil suggests that fiscal and current accountbalances for the GCC countries are expected to drop significantly, but are unlikely to turn intodeficits

Bull Scenario

Crude oil price of USD60 / barrel

GCC fiscal surplus dow n to 6.9% of GDP

2009e current account surplus at 6.9% of GDP

Source: The Institute of International Finance; My Estimates


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GCC Inflation Edging Downwards

High commodity prices and excessive rentscomplemented by speculative inflows, inanticipation of FCY revaluations, andaggressive domestic credit induced growthperpetuated inflation to levels as high as12%

Lower rental yields, a reversal in CRB-Reuters, foreign direct withdrawals, tighterregional liquidity and central bankdirectives to reign in lending as concernsgrow over asset quality is expected toreduce inflation to 7.6% in 2009e

Reduced lending capacity of domestic banks dueto a drying up of foreign credit markets

CRB-Reuters declined to 314.7 at the end of2008

Deleveraging process expected to reducevelocity of money

Withdrawal of hot money out of the bankingsystem has tightened regional liquidity

2009e Inflation at 7.6%

Credit driven growth in real estate and otherasset markets

Reuters Commodity I ndex, CRB-Reuters, peakedat 481 in July 2008

Excessive leverage in the foreign and domesticmarkets

Speculative inflows driven by expectations forrevaluations of GCC currency pegs

2008e Inflation of 12%

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50

60

SaudiArabia UAE Kuwait Qatar Oman Bahrain

Jun08

Credit

Growth

%

Change

YOY Jun

08

Inflation

%

Change

YOY

Credit Growth and Inflation


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Currency Exchange Rate Peg Fuelled Real Estate Asset PriceBubble?

Limited scope for supply exceeding demand

Price appreciations continued

2007

Demand strong from both local and international markets

Property prices increased through local & international investor demand which was fuelled by global economic growth

Asset price inflation was further fuelled through cu rrency pegs, which resulted in importing inflation

Speculative investments in property also encouraged by depreciating US Dollar, in addition to high loan-to-value ratios,

and declining global prospects for investments

Price appreciations gathered pace

Currency revaluation speculation as dollar declined and GCC countries faced increased inflation levels due to a relaxedmonetary policy stance, encouraged by declines in US interest rates

First Three Quarters of 2008

Investor demand in property nosedived, starting from international investor demand, due to lack of liquidity anderosion in wealth, follow ed by local investors who faced low er loan-to-value ratios, and later on declining values on

investments in stock markets

Decreasing liquidity for mortgage providers necessitated tighter loan-to-value ratios, initially amongst mortgageproviders and later on, the banking sector also low ered loan-to-value ratios

Mortgage providers presented greater risk since mortgages represent long term assets which were not financedthrough domestic long-term liabilities, since the long term bond market does not exist

Banking and financial sector liquidity issues surfaced, which are attributed to mismatches in assets and liabilitiesfinanced through foreign long term debt that was available at exorbitant rates

Last Quarter of 2008

Reuters conducted an analyst poll suggesting that supply could exceed demand by 2H FY09


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Reliance on Long Term Foreign Debt Led to the Infusion ofthe Global Credit Crunch?

Middle East has historically been averse to the development of the debt capital markets in theregion, primarily due to the non-Shariah nature of interest based debt securities

Of late however, sukuk asset backed securitization structures have injected growth in local debtsecurities markets, and we expect a continuation of these growth trends in the coming years as thelocal banking sector reduces its reliance on long term foreign lending

Asset liability mismatches in the balance sheets for banking and non-banking institutions in thefinancial sector, which were financed through long term foreign funding, was the principal

contributor to liquidity issues that surfaced in GCC countriesSource: International Monetary Fund

90.7%

76.6%

134.8%

49.2%

5.4%

39.8%

133.9%

142.3%Global

Emerging

Middle East

Asia

Debt Securit ies to GDP - % Bank Assets to GDP - %

Debt Contribution to GDP - 2006


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Underdeveloped Debt Capital Markets Poised to GrowSubstantially in the GCC Economies

Source: Nomura Research Institute Ltd.

Phase I Phase II IPhase II

Countries

RegulatoryFramework

CrossBorder

SecondaryMarket

PrimaryMarket

Phase (Increasing Maturity)

Lack of LegalFramework

Limited Foreign BondIssuances byGovernment

Limited TransactionVolume

Government & LimitedCorporate Transactions

Saudi Arabia & UnitedArab Emirates

Enforcement of Law s

Growing Number ofCross BorderTransactions

Benchmark Yield Curvew ith Active Transactions

of Government Bonds

Common CorporateBonds & Price

Information Available

Structured ProductsActively Issued

High Yield Bonds &Structured Products

Actively Traded

Transactions byDomestic & ForeignInvestors are Active

Identifi cation ofLoopholes & Revisions

Japan, Malaysia & SouthKorea

Paki stan, United ArabEmirates & Qatar


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Fallout of the Global Credit Crunch on GCC Economies

GCC Gross External Debt

GCC economies have been increasingly forced to resort to external sources of funding in order toeffect growth in their local economies in an environment where cash rich GCC investors andgovernments have been actively investing abroad

GCC gross external debt increased more than 3-folds from USD110 billion in 2005 to USD358 billionas of June 2008 with the share of banking institutions increasing relative to non-banking financialinstitutions from 50% in 2005 to 58% in June 2008

Concurrently, the GCC economies have also accumulated substantial foreign assets which have

doubled from USD740 billion in 2005 to USD1,468 billion in June 2008

GCC Foreign Assets

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

0

50

100

150

200

250

300

350

400

2005 2006 2007 Jun08

GrossExternalDebt USDB illion Gr owth %

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

0

200

400

600

800

1,000

1,200

1,400

1,600

2005 2006 2007 Jun08

ForeignAssets USDBillion Growth %


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Magnitude of the External Debt for GCC Economies

Composition of 2008e Foreign Assets

Benefiting from the commodity oil price boom, state wealth funds SWF have become asubstantial contributor to foreign assets in most GCC countries at 47%, with UAEs Abu DhabiInvestment Authority the largest in the region estimated at USD500 billion

The rapid increase in GCC country external debt has coincided with substantial increases in officialreserve and banking & non-banking foreign assets, which alone can provide for the total debtrequirement for GCC countries, as evidenced by debt to asset contribution of c100% or less for allGCC countries

Accounting for SWFs in debt to asset ratios, it becomes evident that all GCC countries havesufficient capacity to service their debt obligations despite the onset of the global credit crunch

2008e External Debt Relative to Foreign Assets

0%

20%

40%

60%

80%

100%

120%

GCC SaudiArabia UAE Kuwait Qatar Oman Bahrain

ExcludingSovereignWealthF unds I ncludingSovereignWealthFunds

37%

91%

15%

5%

12%

45%

18%

16%

9%

15%

17%

23%

18%82%

47%

71%78%

65%

36%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

GCC SaudiArabia UAE Kuwait Qatar Oman Bahrain

OfficialReserves BankandNonbank Financial Institutions SovereignWealthFunds


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Thoughts on Prospects for the United Arab Emirates

Currently, the global Purchasing Managers Index, based on data from Coutts, is 41.8 which isconsistent with negative growth since levels more than 50 have historically been achieved inperiods when the US and global economies have registered positive growth

The UAE economy, specifically the trade and tourism sectors, however, relies more on theperformance of the European economy which traditionally lags the US economic recovery

Slow economic performance in Europe, combined with the spillover effect of the threat of anoversupply in the property on other, affiliate sectors could drive growth down below the 3.1% realGDP growth estimate for UAE

Revaluation of currency pegs could possibly have delayed the onset of the bursting of the asset

price bubble but it was the reliance on external long term funding that proved to be the nemesis forthe Dubai market

Risk of deflation through rentals which were the primary driver for inflation in the past could proveto important since rents have also followed prices and are coming down substantially as oversupplyin the property markets remains a key concern

The current possible bottoming out of commodity prices is an important positive development.However, the threat of inflation in general is less likely for infrastructure based developingeconomies as opposed to developed economies

Though, with an enormous appetite for increasing government expenditures, enhanced spending bygovernments is likely to avert risks associated with deflation

Documents

GCC Economic Forecasts 4.0