Structural adjustments here to stay
January 24th, 2021
The recent surge in oil prices, hope around the roll out of vaccines, GDP data from China, and the general sigh of relief inspired by Biden’s sharply contrasting attitude toward the world have resulted in a rising crescendo amongst economists and policy makers, forecasting a very strong H2 of 2021. The big question, with respect to all economies, is whether we will end up with a return to previous growth trends without making up the GDP lost in 2021. This is in fact likely in most cases, even if we see spectacular H2 prints.
The Biden administration’s arrival signifies a new chapter for the region, as discussions between the US and Iran are likely to resume in order to return to an agreement. We believe Biden is not going to rush into a return into the JCPOA and will seek a more enduring deal, as dossiers such as the Yemen war and relations with Israel remain prickly. Moreover, we expect the new administration to be less dovish than Obama’s was, with regional partners of the US, particularly Saudi Arabia and Israel, set to put pressure for a firm approach on Iran to be maintained. We also believe the normalisation deals that blossomed under Trump will continue during Biden’s time in office but will be less of a priority. In general, the MENA region is not going to be significant priority in Biden’s policymaking agenda, as domestic issues remain more important to the new president.
With vaccines being rolled out in some MENA countries earlier than anticipated, there is renewed optimism. The much-awaited respite would, however, come when oil price reaches around USD 60 pb and stays there, which we do not see as imminent. For now, prices remain rangebound between 50 and 55 dollars per barrel. Returning to pre-Covid growth levels is nothing to write home about, given the dire unemployment picture, especially in the populous economies, and give the lacklustre growth rates the region was wallowing in, going into 2021. Unless the recovery has enough depth to it, and momentum behind it, it will be insufficient to absorb the unemployed, never mind chipping at the perennial and now structural unemployment problems that, for example, ignited the Arab Spring.
The silver lining from the current crisis is that the larger economies in the region, particularly the GCC, are learning to turn their wheels amidst low oil demand and weak consumer confidence, judging from the push in reforms and continued momentum toward diversification seen in 2020. For example, unemployment reached a record low in Saudi Arabia, as the bold hands-on approach taken by the government on the onset of the pandemic had a positive impact in the non-oil economy. For now, it remains unclear how long lasting the reforms will be, and what growth rate GCC countries will get back to post-covid.
Could this be the start of a permanent structural adjustment to lower for longer oil prices amongst the oil exporters?
Saudi Arabia: Maintaining the Vision
November 20th, 2020
The pandemic, coupled with lower-for-longer oil prices, continue to test Saudi Arabia’s resilience, as the kingdom expands its fiscal reach to mitigate the economic slump. This week, we analyse the slight improvement in the country’s economic outlook, as the IMF revised up its forecast to a 5.4% contraction, from a 6.8% decline previously estimated in April.
The government’s sizeable fiscal response to the pandemic alleviated some of the economic damage caused by the crisis. For instance, GDP expanded by 1.2% QoQ in Q3, from a contraction of 4.9% in the previous quarter. Moreover, the IHS Markit Purchasing Managers' Index for Saudi Arabia rose to 51.0 in October from 50.7 the month before -– the highest reading in 10 months.
The present crisis accelerated the transition away from oil, with non-oil revenue outstripping oil revenue for the first time in Q3. The Ministry of Finance’s Q3 budget revealed Oil revenue in Q3 accounted for 43% of total revenue at USD 24B, a drop of around 50% YoY. Non-oil revenue, by contrast, grew by around 64% YoY to reach USD 30B in Q3. Revenue growth was primarily led by the increase in VAT to 15% in July and the acceleration in structural reforms under Vision 2030, which shift the role of the government from being the main provider of services to using investment power to create a diversified and productive economy.
Saudi Arabia has used the G20 summit as an opportunity to showcase its infrastructure and development projects under Vision 2030. But we do not expect the summit to be a major game-changer given that reform momentum is already rapid. Still, with climate change and safeguarding the environment among the key themes under Saudi Arabia’s presidency, we expect the kingdom will push for better energy efficiency through an improved regulatory and legal framework.
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UAE: Recovery requires reinvention
November 13th, 2020
Like its GCC neighbours, the UAE has seen its 2020 economic forecast cut sharply by a 6.6% contraction as a result of low oil prices and the COVID-19 pandemic. Considering the lacklustre growth of the past five years, this will further widen the fiscal gap and strain its external position. In our Country View Issue #140, we analyse the repercussions of the decline on the UAE’s budget and debt burden while discussing the effectiveness of the UAE’s response, which appears to be once again a shift reinventing itself, as Singapore has done on multiple occasions.
The possible extension of production cuts by OPEC+ until March 2021 could weigh heavy on the recovery, particularly as the debt of government-related entities (GREs) continues to increase. We would not be surprised to see the overall debt burden reach nearly 150% of GDP going into 2021, particularly given the plans underway for further federal bond issuance to add to Abu Dhabi's and Dubai’s recent return to the debt market.
Despite the sour economic outlook this year, private sector activity and foreign investor interest in the UAE are showing signs of recovery. This, coupled with the growth-friendly modernisation reforms it has passed, and acceleration programmes it has launched, especially in Abu Dhabi are expected to contribute to a speedy recovery. The recent unveiling of secular-leaning legal laws are part and parcel of its strategy to offer an environment that is more supportive of expatriates, including foreign investors. In the coming quarters, broadening such efforts will prove imperative, particularly as the country gears up for the Dubai Expo in October 2021 and looks to attract international visitors once again.
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Bond binge to tackle deficits
November 6th, 2020
External headwinds and an extended period of low oil prices have prompted a strong wave of debt issuance across MENA in 2020. In our latest Regional Views Issue #130, we analyse the debt market in the region, highlighting how governments have responded to the pandemic by opting to borrow rather than liquidating assets to fund their fiscal deficits.
Debt issuance across the GCC has reached a 10-month high, reaching more than USD 93B, a 8% YoY increase. Record-low global interest rates and the increase in risk appetite have boosted government reliance on domestic financing, and while the demand for short-term local currency debt remains relatively weak compared to emerging market peers, investment-grade GCC markets have been able to issue longer-than-usual debt maturities in foreign currencies, attracting strong foreign demand.
We also see sovereign sukuk issuance in the GCC already getting a boost this year and expect it to continue to expand in the next few quarters, helping deepen capital markets as mounting deficits are funded. The recovery in market conditions, along with stimulus measures implemented by central banks across the GCC and easing capital requirements have normalised bond spreads and pricing correlations. We expect, going forward, that this will free up liquidity in the banking system, and support healthy demand for sukuk.
We also discuss the return of international investor appetite for Egypt’s bond market and the improvement in its yield curve, which has been inverted for the last two years. Foreigners now account for 9.4% of total local debt holdings. This has been fuelled by the Central Bank of Egypt’s ability to stabilise its currency against the dollar, with the IMF programme as an anchor.
Downside risks remain, however, as the high level of uncertainty regarding the length of the pandemic and potential renewed volatility in global oil markets continue to present a bleak economic outlook. This in turn could drive the region’s debt to GDP ratios even higher. We explain why we think regional debt is still a good deal, despite rising ratios.
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US-MENA: Biden cannot delay decline and disengagement
October 23rd, 2020
With the US presidential election less than two weeks away, our latest publication Issue #129 analyses the implications of US foreign policy towards MENA. During his first term, President Donald Trump has made radical moves in the region via his "deal of the century" and by pursuing a strategy of "maximum pressure on Iran", including through its regional acolytes. Should Trump win re-election, we expect his administration to continue in its attempt to size down Iran's regional influence via pressure on the regime and economy. But even if he is defeated, Donald Trump's policies will remain in force during the 'lame duck' window before a new administration is sworn in on January 20. Policy decisions made during this timeframe might not be easily undone under a Biden administration.
There is no standard script for what might follow if Trump refused to concede. We, however do not rule our his liberal use of executive orders to effect foreign policy, which would probably be targeted at Iran. Meanwhile, a White House led by Democrat Joe Biden could bring back elements of foreign policy we saw during the Obama administration, including US disengagement. We discuss Biden's foreign policy goals towards Iran and the rest of the region, and the implications of his decisions on the Israeli-centric goals we witnessed under Trump. Given that Biden made re-joining the JCPOA an integral part of his campaign platform, we expect the potential return of Iran to global oil markets to result in an oil glut.
While the unfolding geopolitical power play is likely to prolong instability, there is room for US-MENA trade to expand. Despite global trade slowing down due to the pandemic, the new regional normalisation accords could pave the way for new trade markets for the region with the US. We are already witnessing talks around the potential sale of US defence aircraft to the UAE. However, with US military presence retreating and bilateral relations with regional players redefined, the stage is set for MENA to continue its pivot eastward toward Asia, with China becoming a central player in the region.
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The MENA Green Finance Frontier
October 9th, 2020
With lower for longer oil prices and production, oil-dependent economies in MENA are accelerating the transition to renewable energy, driving environmental policies along at the same time. The green finance sector in the region, while still in its infancy, provides unexplored business opportunities for both public and private investors, particularly as economic diversification becomes ever more urgent.
The surge in demand for clean energy and the growing investments in the pipeline are propelling governments to push for green financing regulatory frameworks. This is designed to position the region at the forefront of the green market. Green financing commitments in MENA account for only 1% (around USD 2B) of the global share, which is around USD 31T. This is however changing. Both renewable energy capacity in MENA and government participation in the provision of sustainable financing have been rapidly growing, doubling over the past 10 years to 40GW and set to reach 80GW by 2024. Green investments are expected to grow by 18 times from current levels, to reach USD 180B in the next five years.
Sukuks are taking on a new shade of green across the region -- which given the demand for sharia-compliant vehicles suggests large potential. Sovereign debt issuance in the region has been growing, particularly since the onset of the pandemic as governments seek to deep capital markets and fund mounting deficits. Expansion is likely to continue on an upward trend in the next few quarters as the green sukuk market provides a new frontier. In our Regional View Issue #127 we highlight the potential of the green sukuk market in creating attractive opportunities for private investor participation. We particularly expect to see an increase in the flow of investments from overseas into the region’s green start-ups.
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GCC Banking & Finance: Ushering in the age of the consumer
October 2nd, 2020
As global growth grapples with the dual challenge of suboptimal oil prices and the impact of COVID-19, our regional theme this quarter looks at the banking and finance industry in the GCC, and how it is having to adjust via digitalisation and accelerating disruptive innovation. Stimulus measures implemented by central banks across the Gulf dwarf any previous support. The easing of capital requirements and prudential liquidity measures have to some degree absorbed the hit, which in turn is allowing the sector to navigate through these short-term uncertainties.
While the focus across the banking and finance sector is now shifting more to preserving asset quality than stimulating new business activity, we think the economic cycle has started to turn in some areas. For now, growth across the sector will hover around the single-digits range particularly as lending growth across conventional and Islamic banks is enduring the slowdown on the back of lower oil prices, subdued spending and geopolitical risk. This will hold back overall growth in the sector this year. Going forward, we expect to see growth fuelled by the acceleration of investments in digital infrastructure as the financial sector absorbs the shift in consumer demand.
Appetite across investment banking activity in the GCC is expected to remain robust, as external headwinds have prompted a strong wave of M&A and debt issuance. Sovereign sukuk issuance is getting a boost this year, and we expect it to continue to expand in the next few quarters, helping deepen capital markets as mounting deficits are funded.
While the region was already experiencing an acceleration in e-commerce and fintech activity prior to COVID-19, the rapid expansion in mobile banking and digital branch opportunities brought on by the pandemic and lockdowns now present a new frontier. We expect vast improvements in the fintech regulatory framework across the GCC to favour growth in open banking, including the entry of new investors. The UAE-Bahrain-Israel peace deal could usher in unexplored business opportunities in this sector.
For our Q4 MENA Outlook, we also analyse how MENA countries are adjusting to the prospect of oil prices lower for longer. Past bouts of belt-tightening tended to rely on a rapid rebound in oil prices to refill state coffers, this time the risks are greater as a gloomy demand outlook makes an oil market recovery unlikely this year. We also analyse the economic impact of the pandemic on sectors such as tourism and give our view on the potential for recovery as lockdown measures ease. The rebound from the pandemic-induced contraction, combined with the deep deficit spending, will not come easily across the board — we see some GCC countries undergoing a U-shaped, wide-bottomed recovery.
On the geopolitical front, with traditional international players that normally come to the rescue preoccupied, some countries in the region could continue to drift sideways; in the very least, the road to political and security stability could be longer this time around, especially in places like Libya, Lebanon, Syria and Yemen and Sudan. But we do see progress on the Qatar-Quartet spat, in connection with the normalisation initiatives.
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MENA Real Estate: Demand builds up
September 25th, 2020
On the back of low oil prices and the coronavirus pandemic, growth across the region is expected to be slow and anaemic. The IMF expects MENA real GDP to contract by 5.7% this year from a lacklustre growth of 0.3% in 2019. The outlook for the real estate market, which has proven integral for recovery in the past, nonetheless has been improving in some areas. This is mainly because business activity has started to see improvements as lockdowns have eased and stimulus packages have kicked in. We are monitoring this closely to determine whether this is just a rebound from a low base, or a robust new growth path.
Despite earlier fluctuations and the effects of the pandemic, real estate is expected to make a comeback by the end of the year for some countries in the region. Recovery, however, across the sector will be unbalanced as we witness the shift in consumer preference towards online shopping and a working-from-home economy. We explore this in our Regional View Issue #125.
In the UAE, the real estate market, which has been fighting sluggish conditions even before COVID, is set for a long climb back. In the residential market, though transaction activity has certainly slowed, the depth of the contraction has been relatively limited considering the severity of lockdown measures. Demand for mortgages in recent months has risen, reaching over USD 3B in July-- three times higher than the same period in 2019.
We expect the mismatch in supply and demand across the UAE to be narrowed, mainly through the housing market. Sale prices for residential properties have declined presenting an unparalleled opportunity for investing. With our expectations that prices will soften further till end of year, and if the working-from-home economy continues, demand is expected to be further boosted, with trends shifting towards larger properties. Endorsed by the UAE authorities enacting favourable legislation and providing more flexibility, the fundamentals underpinning demand for residential property are expected to be strong.
In Egypt, demand for residential properties is picking up, mainly on the back of strong market fundamentals, growing young population and the actions by the Central Bank of Egypt (CBE), mainly the decision to keep interest rates unchanged. The residential market has performed comparatively well on an annual basis as Q2 saw the completion of one residential project. The housing market in Egypt could well embark on a new and potentially sustainable growth path for the overall real estate sector as consumers grasp the opportunity of lower property prices and mortgage rates. We expect transactions will continue to grow and be more apparent by the end of Q4.
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Turning sandy-deserts green
September 18th, 2020
The MENA region continues to suffer from the world’s most acute water shortages. This, along with its fast-growing population has increased the reliance on food imports. The Global Network Against Food Crisis, an alliance of UN and partner agencies, forecasts that COVID-19 may lead to over 265 million people suffering from a food crisis. While we do not expect such insecurity to hit the MENA region this year, the high dependence on food imports due to the region’s environmental challenges, along with decades of conflict and negligence, suggests the region may be vulnerable to a food crisis in the long-term. This needs to change ; a government-driven change in the mix of agriculture is needed.
The agriculture sector in MENA contributes a relatively small share of the region’s total GDP, accounting for around 11% in 2018, albeit taking up 26.8% of the total labour market. In our Regional View Issue #121 we analyse the region’s large food import bill and discuss the alternative options that can be accelerated by governments. The high import dependence does not necessarily translate into food insecurity, but the region is highly vulnerable to supply shocks, mainly given its proclivity for political unrest and, currently, the COVID-19 pandemic. The lack of modern irrigation techniques also makes agriculture a major contributor to water scarcity. At around 87% of what is available, agriculture in MENA consumes more water than the 70% global average.
Using Qatar as a case study, which has been pushed by the boycott to self-sustain its agriculture sector, we find the use of agriculture technology or agritech is critical for the region. In recent years, we have seen across the region mainly in the GCC, Jordan, Morocco and Egypt the increase in the use of advanced technologies in farming. We expect further efforts to be directed to this new sector, with others joining the space. After all, it is needed now more than ever.
We do not forecast a food crisis in the region, at least anytime soon, the current situation requires a new approach to thinking - one that is sustainable and regionally appropriate and scalable.
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