MENA’s 4Ts: Transformation, Transition, Turmoil & Tribulations
SEB Annual Conference
Abu Dhabi, UAE
Dr. Nasser Saidi 13 March 2017
Agenda
ü MENA macroeconomic, socio-economic and
geopolitical landscape
ü Adjusting to the “New Oil Normal": economic policy
& structural reforms
ü Opportunities and key risk factors
ü Key Takeaways
2
MENA: 47.7% of world’s proven oil reserves & 42.7% of natural gas, but wide inequality within & across countries in wealth, resources & income
Population, millions (2015) GDP per capita, USD (2016e)
Countries in Transition/turmoil
Regime change
Source: IMF World Economic Outlook database * South Sudan estimates are from World Bank (GDP est. for 2015) ** Latest estimates for 2015 for population from WB; GDP from IMF (2015e:$14bn)
Morocco 34 $3101
40 $4129 Algeria
11 $3677
Tunisia
6 $6169
Libya
12 $1741
South Sudan*
89 $3710
Egypt
31 $19922 Saudi
Arabia
1 $1908 Dijbouti
29 $1075
Yemen
4 $15080 Oman
10 $38050 UAE 4
$1244 Mauritania
2 $60733 Qatar
80 $5124 Iran
1 $24119
Bahrain
4 $26146 Kuwait
35 $4334
Iraq
19 $737
Syria**
5.0 $11271
Lebanon
8 $5092
Jordan
3
38 $2381
Sudan
Arab Youth Bulge: demographics dominate economic, social & political outlook
Source: UN World Population Prospects 2015 revision
• Population: 390mn in 2015, rise to ~500 mn by 2100; ~50% < 24yrs, ~60% < 30yrs
• Demographics drives education, health & infrastructure investment
• Jobs: need to create 60mn new jobs by 2020
• Growth rates of 6-7% p.a. needed to create jobs; need to double current growth rates!
Arab Countries Population Age Distribution
4
Nightmare of Arab Youth Unemployment
Source: The Economist, http://www.economist.com/blogs/graphicdetail/2016/08/daily-chart-7
Gender Divide is stark & daunting
Source: Arab Human Development Report 2016
Food & Water Insecurity to become more intense going forward • MENA: has some 6% of world’s population but only 1% of the world’s
renewable water resources + highest water stress levels
• GCC’s growing water crisis: growing population, urbanisation, high incomes, subsidies; growing dependence on desalination
• MENA is highly exposed to global food price volatility given its high dependency on food imports
• Challenges to improving food security:
– Introduction of sustainable water management systems
– Reforming subsidies to targeted transfer systems
– Innovate in agriculture technology & application
Deep reforms required to improve business climate & combat corruption
24
31
57
62
64
70
75
75
90
108
108
131
136
166
170
170
173
UAE
Qatar
Jordan
Saudi Arabia
Oman
Bahrain
Kuwait
Tunisia
Morocco
Algeria
Egypt
Iran
Lebanon
Iraq
Libya
Yemen
Syria
Corruption Perception Index 26
63
66
68
76
77
83
94
102
118
120
122
126
140
156
165
171
173
179
188
UAE Bahrain
Oman Morocco
Malta Tunisia
Qatar Saudi Arabia
Kuwait Jordan
Iran Egypt
Lebanon West Bank & Gaza
Algeria Iraq
Djibouti Syria
Yemen Libya
Doing Business Index
Visa Confidential
Arab Firestorm: transitions & fault lines
ü Role of Islam in Politics; ‘Mosque or Secularism’?
ü Role of Government; New Developmental model
ü Governance & Institutions
ü Role of Army/Security Forces in Politics
ü Growing Sunni-Shia Schism: a “Thirty Years War?”
9
Region going through a historic transition period starting with fall of Ottomans & unraveling of Sykes-Picot (1916)
Long-term prosperity & stability depends on addressing the fault lines
ü Gender Gap & Role of Women
Geo-Political Landscape: عدو عدوي هو صديقي أنا وأخي على ابن عمي وأنا وابن عمي على الغريب
Source: The Economist (http://www.economist.com/blogs/graphicdetail/2016/01/grid-grievances) 10
New Oil Normal: downside risk for oil prices & resources • Demand side: cyclical, structural & tech factors imply downward
trend in oil demand relative to activity – Slowdown in EMEs, China
– Greater Energy Efficiency Trend: falling (E/GDP) ratios
– Climate Change & COP21 commitments; changing energy mix
• Supply side: tech is making RE, CE, shale more competitive
– Shale: technology & exploitable resources widely available
– Renewable & Clean Energy increasingly competitive
– Return of Iran, Libya, Iraq to oil market
• Technological innovation affects both demand and supply side: energy storage, e-cars, flexible capacity, 4th Industrial Revolution
∴ Decarbonisation implies growing risk of stranded fossil fuel assets
12
Zaki Yamani: “The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil.” (2002)
13
Implications of the New Oil Normal & spillover to oil importers/labour exporters
14
Oil Exporters
Decline in oil revenues
Tighter fiscal constraints & budget deficits
Decline in current account balance
Drop in net foreign asset accumulation
Lower government spending
Lower growth prospects
Oil Importers
Lower spending on oil imports (+)
Lower remittances (-)
Drop in tourism (-)
Decline in FDI (-)
Drop in foreign aid levels (-)
MENA economies: Adapting to New Oil Normal; in Turmoil; in Transformation
GDP($bn)
RealGDPgrowth(%change) Fiscalbalance(%GDP)
Currentaccountbalance(%GDP)
2016 2016 2017 2018 2016 2017 2018 2016 2017 2018Bahrain 32 3.2 2.4 2.6 -12.5 -10.2 -7.9 -3.8 -1.3 -1.2Kuwait 113 3.7 2.3 3.0 -2.6 0.2 2.5 -2.1 1.8 4.0Oman 68 1.3 1.7 4.6 -20.8 -9.0 -6.0 -17.8 -7.2 -4.5Qatar 161 2.4 3.0 3.2 -4.0 -0.8 -0.3 -3.4 -1.2 1.0SaudiArabia 640 1.4 0.8 1.8 -16.8 -8.4 -5.8 -5.0 -0.3 0.1UAE 371 2.2 1.9 3.0 -3.2 -1.2 -0.7 2.4 3.2 3.9 Algeria 151 3.3 2.8 3.1 -13.3 -8.5 -6.3 -19.2 -14.0 -12.9Iran 376 5.2 3.0 2.7 -0.6 -0.3 -0.4 2.7 3.2 2.9Iraq 141 6.1 1.0 1.2 -10.6 -5.3 -4.0 -8.6 -4.9 -4.1Libya 48 2.1 15.1 12.1 -33.0 -16.5 -5.5 -40.8 -19.2 -8.9 Egypt 347 3.7 3.3 4.6 -12.2 -9.8 -7.8 -5.5 -6.2 -4.5Jordan 39 2.7 3.2 4.0 -3.2 -2.7 -2.5 -7.7 -8.0 -3.0Lebanon 52 1.4 3.0 3.5 -8.2 -7.8 -7.0 -17.1 -15.8 -14.3Morocco 104 1.2 3.6 3.3 -3.5 -3.4 -3.0 -3.3 -3.5 -3.0Tunisia 47 1.4 2.7 3.0 -5.5 -5.1 -4.5 -8.1 -7.0 -5.4Turkey 573 2.7 2.9 3.3 -2.8 -3.5 -3.0 -4.5 -5.3 -5.5
Source: IIF MENA Outlook, Feb 2017, IMF
GCC need major economic & structural reforms to adjust to New Oil Normal
16
New Economic
Development Model & Social
Contract Required
Economic, Trade & Revenue
Diversification
Expenditure rationalisation &
switching policies; Subsidy reform
New Tax Regimes for revenue &
economic policy management
Domestic Financial Markets
for deficit, infrastructure & development
finance
Countercyclical Monetary &
Fiscal Policies
GCC: substantial fiscal & forex buffers and low debt levels
GCC Net Foreign Assets ($bn) are stabilising
Gross government debt remains low (% of GDP)
Source: IMF
43.9
6.5 5.1
32.6
2.2
15.8
82.3
22.4 24.5
66.2
19.9 18.8
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
Bahrain Kuwait Oman Qatar Saudi Arabia
United Arab
Emirates
2013 2014 2015 2016 2017
1595
2493
2151 2102 2103
0
500
1000
1500
2000
2500
3000
2011 2012 2013 2014 2015 2016 2017 2018
Source: IIF. Note: Foreign assets are inclusive of official reserves, foreign assets of autonomous government entities and Sovereign Wealth Funds
Ongoing GCC Fiscal Consolidation & Adjustment to New Oil Normal
Reforms undertaken in the GCC in the New Oil normal era
Break-even Oil Prices in the MENA region
Source: IIF estimates, Feb 2017
Revenue side Subsidy reform
Fees Taxation Fuel Water Electricity
Bahrain ✓ ✓ ✓
Kuwait ✓ ✓ ✓ ✓
Oman ✓ ✓ ✓ ✓
Qatar ✓ ✓ ✓
Saudi Arabia
✓ ✓ ✓ ✓
UAE ✓ ✓ ✓ ✓ 0
20
40
60
80
100
120
Saudi Arabia
Iran Iraq Kuwait Qatar UAE Oman Bahrain
2015 2016 2017
UAE: Most diversified among GCC peers; Saudi Arabia to be supported by NTP
UAE • Fiscal reforms: fuel price reforms,
phased removal of water, electricity subsidies; VAT introduction in ‘18
• Key reforms: Bankruptcy Law; In the pipeline: Personal insolvency Law; FDI Law to relax constraints on foreign ownership
• Dubai, more diversified & with low dependence on oil; affected by strong dollar, weak external demand
• Investment to pick-up in the run-up to the Expo 2020
19
Saudi Arabia • Vision 2030 & National
Transformation Plan: diversification
• Privatization plan: Aramco; partial privatisation of Saudia, airports
• $1tn Public Investment Fund • Tapping international bond
markets to finance deficits
• Capital market reforms; AIM • Fiscal reforms: spending cuts,
energy price reforms, new non-oil revenue measures (VAT, excises)
• Implementation Risk: Absorptive capacity of the economy; ability of government & agencies
Egypt: Awaiting Gains from Painful Reforms
• Real GDP growth: 3.3% (2017); forex shortages hamper manufacturing, receipts from tourism decline
• Sharp devaluation of the pound + hike in policy rates by 300bps (Nov 2016); other reforms: phased removal of subsidies, VAT
• Inflation touching ~30% in Jan; lower real wages
• Capital flows into Egypt rising given higher FDI + disbursement of loans
• Closing financing gap via funding from UAE, G7, China + $4bn Eurobond sale
• Rise in poverty and unemployment rates threaten political stability
Real Effective Exchange Rates Index, 2010=100
Fiscal deficit as % of GDP
Source: IIF MENA report, Feb 2017
Iran: Trumpism & elections to dictate outlook and growth prospects • Iran is preparing for Presidential
elections in May
• Undermining the nuclear deal will strengthen the position of hardliners
• GDP growth to be driven by surge in exports + domestic consumption
• Absence of recovery in FDI: energy sector alone requires at least $100bn in the next five years to make up for the past decade’s under-investment
• Iran ranks 120/190 in WB’s Doing Business report
• Business discrimination, legal uncertainty and widespread corruption hinder a strong recovery in investment
Twin Shocks of Sanctions and Low Oil Prices (USD bn)
FDI, Announced Projects ($bn)
Source: IMF Article IV on Iran, Feb 2017
Turkey: Growing Below Potential • Real GDP growth: 2.9% (2017). Growth
remains consumption-driven; decline in tourism offsets savings from low energy prices
• July 2016 failed coup attempt heightened political uncertainty, and increased domestic divisions
• Fiscal policy turned expansionary in 2016: rise in minimum wage & related subsidies, hiring in education & health sectors + higher security outlays
• Prolonged uncertainty: growing populism & Islamisation; political focus on transitioning to a presidential system; future of EU-Turkey relations; tense security situation in South-East; conflicts in neighboring countries
Source: IMF, International Crisis Group
External imbalances remain high
Turkey’s terror attacks & casualties
Agenda
ü MENA macroeconomic, socio-economic and geopolitical
landscape
ü Adjusting to the “New Oil Normal": economic policy &
structural reforms
ü Opportunities and key risk factors
ü Key Takeaways
23
Trumpism, Trumponomics & Potential Impact on Middle East Economies Deregulation & Oil
- Voted in with promise of oil sector deregulation; many allies of the oil industry part of his cabinet
- Moving forward on stalled Dakota Access and Keystone XL projects; vows to unlock a $US50 trillion shale oil & gas revolution
- Signed legislation to repeal a regulation that would have required energy co’s to disclose payments to foreign governments
Impact on trade - US gearing towards
more protectionist policies + “re-negotiating” trade deals
- Missing a simple point: 21st-century globalization is knowledge-led, not trade-led
- Trump’s oil policy would mean increased supply of crude=> potentially lower oil prices
Geo-politics
- More military solutions
- Proxy war with Iran
- Backing off a 2-state Palestine peace solution
- Syria civil war
- “War” against ISIS
- Policy towards Turkey (a NATO member), Egypt?
- Refugee “ban” & growing immigration barriers?
Visa Confidential
MENA/ GCC Risk Landscape
Political shocks Energy price
shocks
Trumpism, Trumponomics &
US policies; China
rebalancing
Change in US Fiscal/Monetary
& Regulatory Policies
US$ volatility
Debt overhang & Market Liquidity/
Financial Resilience
Economic non-diversification
Lower oil/ energy prices
Geopolitical tensions
Near-term Medium-term
Daeshism Regional conflicts
Military arms
Buildup
Spillover: refugees, FDI,
aid, remittances
Political & social tensions
US$ Peg
Youth
Unemployment
25
Infrastructure, Logistics & Privatisation Infrastructure & Logistics investments are driven by demographics: Urbanisation, Smart cities, Health, Education, Retail, Hospitality
• GCC have massive $2.5trn+ worth of projects in the pipeline, despite recent slowdown
• Leverage assets: Infrastructure, Transport, Logistics to serve region (COMESA, CA, South Asia). Integrate into New Silk Road & GVC emerging from Asia
Structural shift to Private Sector for economic diversification:
• Privatisation Programs (Saudi, Kuwait, Oman)
• Public Private Partnerships (PPPs) frameworks. Opportunity in major projects: ‘Saudi New Cities’, Expo 2020, Qatar’s World Cup
• Access to finance for entrepreneurs, growth companies, innovators
• Housing Finance and Mortgage Markets
Projects in the Middle East: dominated by Gulf countries
Source: Zawya Projects, Mar 2017
Education: Great Strides, but much remains to be done for E4E
• MENA: quadrupled the average level of schooling since 1960, halved illiteracy since 1980 and achieved almost complete gender parity for primary education
• Avg public investment in education across MENA is > 5.3% of GDP
• Many challenges exist: educational quality, skills mismatch, youth bulge, Syrian crisis, nationalisation policies, preference for public sector jobs
• Time to invest in education for employment; vocational & on-the-job training
Enrollment of Students in Primary, Secondary, and Tertiary Education in MENA
• Major issue: Barriers to young women joining the workforce. Female youth unemployment is about double that of male counterparts in the region, even though more than half of university graduates are women!
15.2 10.1
64.7
48.4
101.5
85.0
37.6 38.3
81.8 76.9
107.4 103.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
School enrollment,
tertiary, male (% gross)
School enrollment,
tertiary, female (% gross)
School enrollment,
secondary, male (% gross)
School enrollment, secondary,
female (% gross)
School enrollment,
primary, male (% gross)
School enrollment,
primary, female (% gross)
1990 2000 2005 2010 2014
Harnessing FinTech for MENA financial access & inclusion – Empowering Youth
• FinTech is key to Financial Inclusion in MENA; also enables the Human Capital Cloud & raise female LFPR
• Merely setting up online & mobile banking services is not enough: banking sector needs to leverage FinTech to raise efficiency
Ø FinTech can cuts across geographic fragmentation: many countries, with different currencies, regulatory bodies
Ø Young, Unbanked populations: FinTech = financial access & inclusion
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
• Countries need to bridge their FinTech gap through PPP, massive investments & RegTech support & enabling environments
29
Embracing Renewable Energy in the Region: Momentum for Solar & Wind Recent developments supporting the renewable energy push:
• Phasing out of fossil fuel subsidies
• Focus on ↑ Energy Efficiency
• Technological change has led to dramatic decline in RE costs
• Rapid decline in energy storage costs
• COP21 historic climate agreement
GCC will be investing in excess of $700bn in RE over next 30 years
UAE achieved lowest-ever prices for solar renewable power LT contracts
UAE as Global RE Finance Hub?
Renewable Energy Investments in MENA by Sector (USD mn)
Source: Bloomberg New Energy Finance
Key Takeaways • MENA region rich in natural resources, promising demographics, strategic location
• 2017 will be characterised by growing political & economic policy uncertainty that will impact currencies, markets, trade & investment
• Trumpism: Ô oil prices, ↑ conflicts; trade & economic disruption
• ME region remains in the throes of the 4 T’s: Transformation, Transition, Turmoil & Tribulations
• New Oil Normal requires new Economic Development Model, New Social Contract & deep Structural Reform agenda
• Impact of New Oil Normal on GCC & adjustment has spillover effects on labour-exporting countries through remittances, trade, investment & FDI
• GCC is focus of MENA economic growth + regional economic & financial integration
• GCC countries are on reform path. KSA’s NTP is key indicator for the region
• Opportunities: Infrastructure, health & education, FinTech, privatisation, renewable energy
MENA’s 4Ts: Transformation, Transition, Turmoil & Tribulations
Dr. Nasser Saidi www.nassersaidi.com [email protected]