GLOBAL & GCC OUTLOOK: NAVIGATING IN TURBULENCE ......global & gcc outlook: navigating in turbulence presentation for alshall group dr. nasser saidi 19 november 2018

GLOBAL & GCC OUTLOOK: NAVIGATING IN TURBULENCE

PRESENTATION FOR ALSHALL GROUP Dr. Nasser Saidi

19 November 2018

Agenda

ü  Global Outlook & Risks

ü  New Oil Normal & GCC Implications

ü  GCC: Geo & macroeconomic outlook

ü  Investment Opportunities

ü  Takeaways

Shift in Global Economic Geography: Twin Engines driving global growth @3.7%

2017 2018 2019

Advanced economies 2.3 2.4 2.1

EMEs 4.7 4.7 4.7

Global Economic Geography has shifted East driven by Demographics, Technology & Globalisation

GDP based on purchasing-power-parity (PPP) % share of world total

Source: IMF World Economic Outlook Database (Oct 2018)

50.7

6.6

7.1

8.4

3.7

10.1

6.7

2.9 4.1

G7

Advanced economies exclu. G7 & euro area CIS

Em. Asia

Em. & developing Europe

LatAm & the Caribbean

MENA

Sub-Saharan Africa

China

1990

30.2

6.4

4.4

14.5

3.6

7.5

6.5

3.0

18.7

2018

World Trade has shifted East with China’s accession to the WTO & New GVCs

Total trade (X+M) as a % share of world total (2017 vs. 1990)

Source: WTO Database

Africa 3%

China 11%

Asia excl. China 23%

CIS 3% Europe

36%

Middle East 5%

North America

16%

S. & C. America &

the Caribbean

3%

2017

Africa 3%

China 2%

Asia excl. China 19%

CIS 2%

Europe 49%

Middle East 3%

North America

19%

S. & C. America &

the Caribbean

3%

1990

This shift towards EMEs is not yet evident in global stock & debt markets

Total Nonfinancial Sector Debt ($ trn; % of GDP)

Source: IMF Global Financial Stability Report (Oct 2018)

Top 10 Stock exchanges by market cap (updated Nov 16)

NYSE 47%

Nasdaq 14%

Tokyo SE 7%

Shanghai SE 7%

Shenzhen SE 7%

Euronext 5%

London SE 4%

Hong Kong SE 4% Toronto SE

3%

Deutsche Boerse

2%

Trade wars: Close to 1% could be shaved off global growth (IMF)

Source: IIF

Real GDP in Trade Tensions Scenario (% deviation from control)

Source: IMF

Bloated Central Bank balance sheets: Quantitative Tightening (QT) contributory factor to next financial crisis

Central Banks’ Balance Sheet Assets (US$ trn), 2007-2018

Strong Growth of Global Debt since GFC Global debt toped $247 trn in Q1 2018: debt bubbles & higher credit risk with rising rates, a strong dollar & low levels of liquidity risk and trade wars are stoking volatility

Source: Global Debt Monitor, IIF, Nov 2018

Change in EM non-financial sector debt/GDP (ppt, change since end-2015)

Global Sectoral Indebtedness (all sectors)

Asset Price Inflation: Stock Markets Cyclically Adjusted Price-to-Earnings ratio

QE has sent asset prices soaring: example of real estate

Source: UBS Global Real Estate Bubble Index, Sep 2018; Note: The Index score is a weighted average of the following five standardized city sub-indices: price-to-income and price-to-rent (fundamental valuation), change in mortgage-to-GDP ratio and change in construction-to-GDP ratio (economic distortion) and relative price-city-to-country indicator.

UBS Global Real Estate Bubble Index

Climate Risk underpriced: one of “top risks” facing financial & insurance sector The Intergovernmental Panel on Climate Change report on Global Warming: an additional 1.5% in global investment needed to hold global warming to 1.5 deg C

Source: FSB Recommendations of the Task Force on Climate-related Financial Disclosures (June 2017)

Top 10 Global Geopolitical risks Risks Risk index since 2014

Global trade tensions

US-China relations

Gulf tensions

European fragmentation

Major cyberattack(s)

LatAm populism

North Korea conflict

South China Sea conflict

Russia-NATO tensions

Major terror attack(s)

Source: BlackRock geopolitical risk dashboard, Oct 2018

Geo-political Risks are high & highest in MENA region

Downside risks to the Global Economy have grown => Lower Trade & Investment and Growth: Financial Fragility/Crisis

Financial Market Correction •  Asset overvaluation •  Tightening of global financial

conditions •  Financial conditions between US,

EU & EME markets are diverging •  EME debt vulnerability •  Currency wars

Investment growth •  Policy uncertainties: Brexit, Italy,

“New EU”? •  Impact from US tax & policy

changes: higher deficits & benefiting markets and the ‘1%’

•  Technology disruption: AI, DLT, Big Data and FinTech

Trade & Protectionist policies •  US Trade wars: China, EU,

Russia, RoW •  Increased barriers to labour flows •  Growing investment and trade

barriers vis-a-vis China

Non-Economic factors •  Extreme weather & climate

events: climate risk underpriced •  Geopolitical tensions, conflicts &

population displacement •  Nationalism & Populism •  Cyber crime

Agenda





ü  Takeaways

New Oil Normal Disruption: downside risks for oil prices. Stranded Assets?

Demand side: positive cyclical; but, structural & tech factors imply downward trend in oil demand relative to activity

Global growth recovery

Energy Efficiency Trend: falling (E/GDP) ratios

Climate Change & COP21 commitments; changing

energy mix

Growing awareness of climate change risks &

costs

Supply side: Tech is making RE, shale more

competitive; disruptions

Shale competitive: technology &

exploitable resources widely available

OPEC production cut agreement; Non-OPEC alliances

RE increasingly competitive; lower

battery costs address intermittency

Return of Libya, Iraq to oil market; Iran

sanctions; Venezuela

Technological innovation

affecting both demand and supply

side: energy storage, AI,

Blockchain, e-transport, flexible

capacity, distributed energy, 4th Industrial

Revolution

The medium-term outlook for oil prices remains uncertain

Source: IMF Regional Economic Outlook, Nov 2018

40

45

50

55

60

65

70

75

80

85

WTI

Brent Crude

Crude Oil Spot Prices ($)

Top 10 oil consumers (share of total)

2017 1990 US ê 20.2% US 25.5%

China é 13.0% Japan 7.9%

India é 4.8% Russia 7.6%

Japan ê 4.1% Germany 4.0%

Saudi Arabia é 4.0% China 3.5%

Russia ê 3.3% Italy 2.9%

Brazil é 3.1% France 2.8%

South Korea é 2.8% UK 2.6%

Germany ê 2.5% Canada 2.6%

Canada ê 2.5% Mexico 2.4%

New Oil Normal Market Dynamics: production shifts West, consumption East

Top 10 oil producers (share of total)

2017 1990

US é 15% Russia 17%

Saudi Arabia é 13% US 14.6%

Russia ê 12% Saudi Arabia 10.6%

Canadaé 5% Iran 4.7%

Iran é 5% Mexico 4.5%

Iraq é 5% China 4.2%

China é 5% Venezuela 3.4%

UAE é 4% UAE 3.4%

Brazil é 3% Iraq 3.1%

Kuwait é 3% Canada 3.1% Source: BP Statistical Review of World Energy 2018 Source: EIA

New Geography Of Energy Demand: a massive shift to EMEs & Asia

In 2000, more than 40% of global demand was in Europe & North America and some 20% in developing economies in Asia. By 2040, this situation is completely reversed. Source: World Energy Outlook 2018, IEA

Kuwait’s Export market: shift to Asia

2016: $40.8bn 2000: $18.4bn

Wind and Solar are set to surge to almost “50 by 50” – 50% of world generation by 2050

Source: New Energy Outlook, BNEF, Jun 2018

∴ Global Decarbonisation implies secular downside risk for oil prices and growing risk of stranded fossil fuel assets

Lower Oil prices:

Decline in Oil Sector

contribution to GDP

Fiscal Deficits

Current Account Deficits

Lower international reserves & build-up of

SWF assets Reduced recycling of

petrodollars

Impact on money and credit flows,

liquidity Economic

diversification is imperative

Spillovers into non-oil sector; slower economic growth • Negative impact on construction, real estate, trade, tourism

• Non-oil sector activity slows

• Lower business confidence & Investment

“New Oil Normal” implications for GCC: reforms & new economic development model

Lower government spending/ subsidies

Agenda





ü  Takeaways

GCC Macroeconomic Overview: Stabilising & Recovering in 2018-2019?

GDP ($bn)

Real GDP growth (% change)

Inflation Fiscal balance (% GDP)

Current account balance (% of GDP)

2018 2017 2018 2019 2017 2018 2019 2017 2018 2019 2017 2018 2019

Bahrain 39.3 1.4 2.5 2.7 1.4 3.0 4.8 -14.3 -8.9 -8.2 -13.2 -9.0 -7.9

Kuwait 144.5 -3.3 2.3 4.1 1.5 0.8 3.0 6.6 11.6 12.0 2.3 6.9 3.1

Oman 81.7 -0.9 1.9 5.0 1.6 1.5 3.2 -12.9 -2.0 0.8 8.4 1.5 2.9

Qatar 188.3 1.6 2.7 2.8 0.4 3.7 3.5 -1.6 3.6 10.5 -15.2 -3.3 -0.5

KSA 769.9 -0.9 2.2 2.4 -0.9 2.6 2.0 -9.3 -4.6 -1.7 3.8 4.8 6.6

UAE 432.6 0.8 2.9 3.7 2.0 3.5 1.9 -1.6 0.6 1.3 2.2 8.4 8.8

GCC 1,656.3 -0.4 2.4 3.0 0.2 2.7 2.4 -5.4 -0.9 1.7 2.9 7.1 7.7

Source: IMF Regional Economic Outlook Database, Nov 2018

Complicated MENA Geo-Political Landscape: عدو عدوي هو صديقي أنا وأخي على ابن عمي وأنا وابن عمي على الغريب

It'scomplicatedFriends Enemies

GCC Economic Diversification is an Imperative. Non-Oil Economy: varied experience across countries

Real non-oil GDP growth in the GCC (% yoy)

Source: IMF database, IMF Regional Economic Outlook (Nov 2018)

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2000-14 2015 2016 2017 2018 2019

Bahrain Kuwait

Oman Qatar

Saudi Arabia UAE

Private sector investment is still low: Decomposition of Real GDP Growth

(averages, ppt)

Direct impact from trade tensions likely small, but indirect effects could be large

Source: IMF Regional Economic Outlook Database, Nov 2018

Real GDP Growth of Major Trading Partners: risk has shifted to Asia and China


External balances are improving… Current Account Balance in MENA Oil Exporters (% of GDP)

Balance of Payments: Financial Account Flows ($bn, net lending (+)/net borrowing (–))


… but, fiscal financing risks are rising in some countries


Rapid Accumulation of Debt calls for further fiscal adjustment


•  Rapid accumulation of debt in recent years: exceeding 50% of GDP in nearly half the countries in the Middle East and Central Asia

•  Debt in Bahrain, Egypt, Jordan, Lebanon, Mauritania, Morocco, Pakistan, Sudan, and Tunisia will remain above the 60% vulnerability threshold for EMEs.

(as % of GDP)

(as

% o

f GD

P)

Challenges to Doing Business still exist, even in the GCC

% of countries identifying the constraint among top 5

Source: Global Competitiveness Report 2017-18, IMF Regional Economic Outlook, Nov 2018

Adjusting to the “New Oil Normal”: Main Structural Reforms in the GCC (since mid-2014)

BusinessEnvironment Spendingcuts Labour-related Non-oilrevenues FacilitateFDI;SupportSMEs Capitalmarketdevelopment

Bahrain

Lowercapitalrequirementsforcommercialco’s;moreaccesstoforeigninvestors;streamlinebusinesslicensing

Hikedgasolineprices(2018)

Bahrainizationflexibilityforafee

Feesonalcohol&tobacco(2016)

Deepeningoffinancialmarkets:settingupthecorporatecreditbureau;tradeofgovernmentbondsandsukukopentoGCCretailandinstitutionalinvestors

Kuwait Draftbankruptcylaw Fuelpricesraised

Labourregulationsprovidingdomesticforeignworkerswithenforceablerights

Businessprofitstax FDILaw,SMELaw,PPPLaw

Potentialreclassificationasemergingmarket

Oman

Raisedwater,electricitytariffsforgovt,commercial,industrial

Draftlabourlawthatwouldgivemorebenefitstowomen&foreigners

Raisedcorporateincometaxto15%(2017),trainingtax&municipaltaxonrents

DraftFDIlaw;draftingPPPLaw

Qatar

Increasedwaterandelectricitytariffs(2015);Revisesfuelpriceregularly

Newlabourlawwithreformstothe“Kafala”employmentsponsorshipsystempassed

QatarDevelopmentBanksupporttoSMEs;draftingPPPLaw

Re-classificationasEmergingMarket

KSA

Openinghealth&educationsectorstofullforeignownership;Bankruptcylawissued(2018).UpdatedCompetitionLaw&CompaniesLawinfinalstages

Reducedallowancesofgov’temployees

Increasedvisafeesforforeignemployees&dependents;Prohibitionofissuingnewworkvisasfor19professionsrestrictedtoSaudis.

VATat5%(2018);Excisetaxesonalcoholandtobacco(2017);

DraftPPPLaw;establishedtheNationalCentreforPrivatisation;FundofFundscreatedbyPIF;InvestmentFundforSMEs

Foreigninvestmentlimitsintheequity&bondmarketseased,technicalchangestosettlementsystemintroduced&short-sellingallowed;Alternativeinvestmentmarket;Re-classifiedasEmergingMarket

UAE

Bankruptcylawissued;personalinsolvencylawintheworks;opensectorsforforeignparticipation;removalofsecuritydepositsonemployeevisas

Removedfuelsubsidies;pricesareannouncedmonthly;raisedwater,electricitytariffs

10-yearresidencyvisaforselectgroups;studentvisasfor5-years;

VATat5%(2018);Excisetaxesonalcoholandtobacco(2017);taxonsugarydrinks(2017)

FDILaw(Oct2018);DubaiPPPLaw(2015)

Re-classificationasEmergingMarket

Diversification Imperative: Agenda of Structural Reforms that need to be accelerated

•  Budgetary reform: introduce Fiscal Rules

•  Phasing out of subsidies; reform pricing of public utilities services

•  Rights of Establishment: allow full ownership in non-strategic sectors to facilitate FDI

•  Legal & regulatory reforms: PPP, Privatisation, digital economy, ease of doing business, insolvency, strengthening women’s legal rights etc.

•  Develop Local Financial markets; develop debt markets

•  Industrial policy: digital, life sciences, health, education

•  Enhance Labour Market Mobility. Long-term residency for skilled human capital, entrepreneurs, investors

•  New Economic Geography dictates new trade & investment agreements with a pivot to Asia/China and COMESA countries

Saudi Arabia: Growth is edging up •  Pulled out of recession; Q2 GDP:

1.6%; 2018f: 2.2%; strong non-oil activity •  Inflation to drop in 2019, easing strain

on real incomes, support consumer spending

•  Fiscal consolidation will continue •  Great expectations: Vision 2030, NTP

2.0, NEOM; Privatizations aim to raise $100bn by 2020

•  Opening up new sectors: hospitality, entertainment, multi-cultural tourism

Non-oil growth

•  Financial market liberalization => opening up of Tadawul, listing of gov’t debt, FTSE & MSCI reclassification

•  Challenges: growing costs of doing business & investing; crowding-out private sector; Saudization/ expat redundancy (~796k foreigners have left since start of 2017);

•  Aramco IPO postponement & stake in Sabic

Saudi’s Transformation has become TBTF & TICTF

UAE: Economic Malaise?

•  UAE grew by 0.8% in 2017, non-oil @2.5%; 2018f: 2.9% 2019f: 3.7%

•  Non-oil sector activity has picked up: PMI stable around the 55-56 mark

•  Growth supported by higher oil output, fiscal stimulus and preparations for the 2020 Expo

•  VAT: inflation averaged 3.8% in H1 => dampened consumer spending

•  Fiscal consolidation: removal of subsidies; VAT to raise revenue (1% of GDP)

•  Retail/ real estate overhang •  Challenges:

ü Nationals & private sector jobs;

ü Education reforms;

ü Risk-taking & leveraging by GREs

ü Post-Expo Dubai (?)

UAE Non-Oil Private Sector PMI

Dubai Property Prices

Macroeconomic Outlook for Kuwait •  A jump in oil output will support strong

growth over the coming quarters; sluggish non-oil growth 2018f: 2.3%; 2019f: 4.1%

•  But, facing New Oil Normal prices from a position of strength

•  Underlying fiscal position improved on spending restraint, but financing needs have remained large

•  Deposit &credit growth have slowed •  Banks’ exposure to Investment

Companies (ICs) reduced to 2.5% of total loans

•  Need to address labour market inefficiencies: less than 15% of new nationals entering the labour market over the next 5 years would be absorbed by the private sector.

Real GDP Growth (Contribution,%)

Fiscal &Current Account

Balances, (% of GDP)

Investment Outlook for Kuwait

Source: FT, Sep 2018 https://www.ft.com/content/960fc4c8-67fd-11e8-aee1-39f3459514fd

•  Investment will be low, given resistance from the Parliament to implement development plans

•  Kuwait’s balance sheet is among the strongest in the Gulf: assets held at the sovereign wealth fund amount to more than 500% of GDP

•  FDI Law has supported the inflow of capital into a balanced mix of sectors

•  Demographic dividend: 65% of population <30 =>attractive consumer base & workforce for a growing private sector: but skills need to be enhanced

Short- & Medium-term game changers

Economic diversification •  Opportunity in major projects:

Saudi NEOM, Expo 2020

•  PPP & Privatization (KSA, Kuwait, Oman)

•  Digital economy & Fintech •  Development of Red Sea & links

with East & Central Africa

•  Massive Reconstruction needs: (Iraq, Syria, Libya, Sudan, Yemen) > than $1trn?

•  Iraq reconstruction conference in Kuwait: allies promised $30bn vs. est. $90-100bn

•  Saudi-UAE integration? Infrastructure: economies of scale & scope

•  GCC Regional security arrangement?

Growing importance of links with China •  Trade: Chinese imports to GCC to double in value by 2020 ($135bn) •  Energy: More than half of China’s crude imports is extracted in ME •  $70bn in new deals with KSA (2017); UAE signs 13 strategic agreements (2018) •  Kuwait-China strategic partnership (2018) •  Belt & Road initiative: support & participation by the GCC •  Asian Infrastructure Investment Bank

Agenda





ü  Takeaways

Investment Opportunities in MENA •  Infrastructure & Logistics: ü  Demographics driven: urbanisation, Smart cities, health, education, retail,

hospitality

ü  Leverage assets: Infrastructure, Transport, Logistics to serve region (COMESA, CA, South Asia). Integrate into New Silk Road & GVC from Asia

ü  GCC have massive $2.4 trn worth of projects in the pipeline

•  Structural shift to the private sector via:

ü  Privatization Programs (Egypt, Saudi)

ü  Public Private Partnerships (PPPs) frameworks. Opportunity in major projects: NEOM, Expo 2020, Qatar’s World Cup

•  Renewable / Clean Energy •  Food & Water Security •  FinTech: empowering youth & harnessing technology for financial access &

inclusion

•  Reconstruction & development of war-torn nations (est. at over $1 trn)

Opportunities for financing: Privatisation, PPP are on the policy agenda •  GCC: cumulative budget deficits of

$294bn est. in 2018-22

•  Privatisation of 25% GCC SOEs could raise GDP by $100bn => raise investment, growth, capital inflows, FDI, boost private sector, lower deficits

•  SoE listings: Adnoc Distribution listed on ADX; Aramco postponed

•  Egypt to raise $4.6bn in next 2.5 yrs from sale of stakes in 23 SOEs

•  Financial market liberalisation, NTP, Neom => role of private sector through PPPs

•  Financial Sector reforms => reclassifications; Local debt market devt: KSA

KSA currently accounts for almost half of the regional stock market capitalisation

Source: Thomson Reuters Update as of 16th Nov 2018

Total: $1167.9bn

Embracing Renewable Energy in the Region: Momentum for Solar & Wind Recent devts supporting the RE push:

•  Removal & phasing out of oil subsidies

•  Focus on ↑ Energy Efficiency

•  Tech innovation has led to dramatic decline in RE and energy storage costs

•  MENA to invest $500bn++ in RE over next twenty years; Egypt ($2.6bn) & UAE ($2.2bn) were nations investing $1bn+ in CE last year

•  Key projects: Egypt’s Benban solar park & new $670mn wind farm; Shams Dubai..

•  UAE & KSA achieved record low prices for solar renewable power LT contracts

Solar dominates: Renewable Energy Investments in MENA by Sector (USD mn)

Source: Bloomberg New Energy Finance

FinTech Startups in MENA

Fintech startups in MENA almost tripled since 2012

UAE has the most developed fintech ecosystem

Source: “Fintech in the MENA Region at an inflection point”, IIF, Nov 2018

Harnessing FinTech for MENA financial access and inclusion Merely setting up online & mobile banking services is not enough: banks need to leverage FinTech to raise efficiency Ø Geographic Fragmentation: many countries, with different

currencies, regulatory bodies Ø Young, Unbanked populations: FinTech = financial access

& inclusion Ø Support SMEs access to finance: currently, MENA –based

SMEs face a financing gap of up to $240bn Ø High mobile penetration rates (110 phones per 100

persons): but, so far, cash is king Ø Social media presence: almost half the population uses the

Internet & 88% of that group uses social media daily

Agenda





ü  Takeaways

Key Takeaways

•  World is “Moving East”. Twin engines of growth but also risks: trade wars, growing financial vulnerabilities, climate change…

•  Global debt build up poses growing risks to the financial system stemming from geopolitics, monetary policy normalisation, higher rates & CB portfolio deleveraging/Quantitative Tightening

•  New Oil Normal dictates a New Development Model & Social Contract: Diversification, Private sector led growth

•  Non-oil sector is developing, but structural reforms required: reducing public sector size/role, raise FLFP, policies to encourage foreign & domestic investment & human capital, develop local currency financial markets

•  Ongoing reforms also imply Investment Opportunities across multiple sectors in the region: Digital Economy, infrastructure, privatisation, renewable energy, FinTech

GLOBAL & GCC OUTLOOK: NAVIGATING IN TURBULENCE

Dr. Nasser Saidi Email: [email protected] Twitter: @ Nasser_Saidi, @NSA_economics Website: https://nassersaidi.com

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GLOBAL & GCC OUTLOOK: NAVIGATING IN TURBULENCE ......global & gcc outlook: navigating in turbulence presentation for alshall group dr. nasser saidi 19 november 2018