macroeconomic update on gcc countries and egypt · gcc countries set to go a long way to keep their...

Macroeconomic Update on GCC Countries and Egypt

Head of Emerging Markets ResearchJakob Ekholdt Christensen+45 30 58 47 [email protected]

16 January 2017

Important disclosures and certifications are contained from page 26 of this reportwww.danskebank.com/CIInvestment Research

First-Year AnalystAila Mihr+45 45 13 78 [email protected]

22

• Cross-regional comparison and themes

− Oil dependence 4

− The oil price shock and macro balances 7

− Response to the oil price shock 10

− Economic growth outlook for the economies 12

− FX outlook: GCC vs Egypt 14

• Country fact sheets

− Egypt 18

− Saudi Arabia 19

− UAE 20

− Qatar 21

− Oman 22

− Bahrain 23

− Kuwait 24

Outline

33

• The recent increase in oil prices has helped stop the bleeding in Gulf Cooperation Council (GCC) countries. However, oil prices are unlikely to go back to the previous decade high.

• The OPEC/non-OPEC deal has supported the oil price but we see a risk of miscompliance. In our view, the cost of output reductions is manageable for the GCC countries.

• Despite the rise in oil prices, notably Saudi Arabia, Oman and Kuwait, as well as Egypt, face a significant fiscal adjustment in coming years, including in their public investment budgets. We believe the adjustment will weigh on their growth prospects in years to come.

• We expect the USD pegs of the GCC to hold as long as the oil price is above USD35/bl. The increase in oil prices has helped improve external balances. We estimate Saudi Arabia will lose another UISD45-50bn in 2017 with our forecast for an average oil price of USD 51/bl.

• We forecast the EGP will strengthen a bit near term on the conclusion of the IMF programme review in the next few weeks, to around 18.5. Over the next 12 months, we expect the EGP to strengthen further to around 17.5 as the fiscal measures begin to take effect.

Key points:

4

Regional comparison and themes

55

Source: IMF, Danske Bank

• High oil dependence of GCC economies, with only UAE and Bahrain relatively more diversified.

• GCC countries are now forced to reassess their state-run and oil-dependent economic models, such as the new Saudi 2030 plan.

• We expect economic growth to be substantially lower than in the 2000s.

• Non-oil fiscal deficits are still looming large.

Oil dependence of GCC economies creates vulnerabilities…

0

10

20

30

40

50

60

70

Bahrain UAE SaudiArabia

Qatar Oman Kuwait

%Share of GDP due to oil in 2014

0

20

40

60

80

100

Bahrain UAE SaudiArabia

Qatar Oman Kuwait

%Oil & gas exports (share of total) in 2014

-100

-80

-60

-40

-20

0

2000-2012

2013 2014 2015 2016(proj.)

2017(proj.)

No

n-o

il fis

cal b

alan

ce %

of

GD

P

Bahrain Kuwait Oman Saudi Arabia UAE Qatar



66Source: Macrobond Financial, Danske Bank

…but moderate crude oil price recovery awaits

0

50

100

150

200

250 USD/bbl

Fiscal B/E oil price for 2016

• We project a moderate increase in oil prices, reaching USD 61/bl at the end of 2018.

• The price recovery will benefit in particular Bahrain, Oman and Saudi Arabia, which have the highest fiscal breakeven oil prices (oil price that balances the fiscal budget).

• However, even with a moderate oil price recovery, we believe further fiscal adjustments are needed in GCC countries.

Source: Macrobond Financial, Danske Bank

77

Source: OPEC, Danske Bank

Recent OPEC deal requires further oil output cuts from Kuwait,

Saudi Arabia, UAE and Qatar

Reference Production Level Adjustment Production level effective January 2017

Kuwait 2838 -131 2707

Qatar 648 -30 618

Saudi Arabia 10544 -486 10058

UAE 3013 -139 2874

Agreed crude oil production adjustments and level (tb/d)

• Saudi Arabia has the biggest output cuts in the recent OPEC agreement.

• The cost of output reductions is manageable, assuming an average oil price of USD 51/bl and a duration of six months for the deal.

Adjustment in b/d Oil revenue loss in USD bn Oil revenue loss in % of 2015 GDP

Kuwait 131000 1.20 1.1%

Qatar 30000 0.28 0.2%

Saudi Arabia 486000 4.46 0.7%

UAE 139000 1.28 0.3%

Source: OPEC, Danske Bank

88


• Current account balances in GCC countries have deteriorated, as they hold onto their pegs and are dependent on oil.

• While the biggest deteriorations are in Kuwait and Qatar, the biggest external deficits are in Oman and Saudi Arabia, amounting to 21% and 7% of GDP, respectively.

Oil price shock taking its toll on oil producers’ current accounts

-30

-20

-10

0

10

20

30

40

50

Oman SaudiArabia

Egypt Bahrain Qatar UAE Kuwait

% of GDPCurrent account balance

2013 2016

99Source: IMF, Macrobond Financial, Danske Bank

• The sharp oil price decline has opened up sizeable macroeconomic imbalances, especially in Saudi Arabia, Oman and Bahrain…

• …as countries have undertaken little macroeconomic adjustment to the shock so far, drawing on foreign exchange buffers and starting to issue public debt.

Oil price fall has caused reserve decline

0

0.2

0.4

0.6

0.8

1

1.2

Egypt Bahrain Qatar UAE Kuwait Oman SaudiArabia

% of GDP Total Reserves in 2015

Source: IMF, Macrobond Financial, Danske Bank

1010


• Countries were vulnerable to falls in oil revenues due to a spending spree during the boom years.

• Fiscal balances in GCC countries have deteriorated markedly. The biggest problems are in Oman, Bahrain and Kuwait.

Budget positions have deteriorated sharply in many countries

-30

-20

-10

0

10

20

30

40

Oman Bahrain Kuwait SaudiArabia

Egypt UnitedArab

Emirates

Qatar

Fiscal balance as % of GDP 2013 2016


1111

Source: IMF, MENA Regional Economic Outlook (April 2016), Danske Bank

• Many GCC countries have adopted deficit-reduction measures as a response to the oil shock, mostly through spending cuts.

• However, new revenue measures are also being considered (Oman – corporate income tax increases, Bahrain – tobacco and alcohol taxes, GCC countries – introduction of VAT in coming years).

• Most GCC countries have also raised fuel, water and electricity charges.

• Oman and UAE have introduced automatic pricing mechanisms, although domestic energy prices remain below global benchmarks.

New public revenue sources are being explored

Fiscal consolidation measures, 2015-16

(% of non-oil GDP)

Gasoline price

(USD per litre)

Source: IMF, MENA Regional Economic Outlook (April 2016), Danske Bank

1212


• Several countries have cut back on their spending packages in response to the price shock.

• However, although Saudi Arabia has adopted a budget for 2016 entailing a 14% cut in spending, hitting petroleum subsidies and public investment, spending is still higher than in 2013.

• Other GCC countries are trying to spend their way out of crisis, notably Kuwait and Qatar.

• Egypt and UAE have achieved a reduction in government spending over the period 2013-16, due to bold fiscal consolidation programmes.

Most GCC countries are spending their way out of the crisis

-5

0

5

10

15

20

Kuwait Qatar Oman Bahrain SaudiArabia

UnitedArab

Emirates

Egypt

% of GDPChange in government spending 2013-16

Spending adjustment?

Increase Decrease

1313Source: IMF, Macrobond Financial, Danske Bank

• Growth has slowed down substantially on the back of the oil shock.

• Average GDP growth was almost 5% over 2003-14, while it was only 2.3% in 2016.

• Looking ahead, the IMF expects Egypt to be the fastest growing country in the region, followed by the relatively diversified UAE economy.

• However, we expect Oman, Bahrain and Saudi Arabia to witness slow growth in years to come as their economies adjust to lower oil revenues and fiscal consolidation acts as a drag on growth.

Modest growth ahead but no recession…yet

14

FX outlook

1515


• Given a sizeable FX cushion and the stabilisation of oil prices at current or slightly higher levels, we think the GCC countries will go a long way to keep their long-standing US dollar pegs.

• Despite a sharp worsening of their fiscal and current account balances, many countries are holding onto their dollar pegs (Iraq, Venezuela, Saudi Arabia, Bolivia, Kuwait, United Arab Emirates, Kuwait).

• However, given the sizable reduction in FX reserves in Saudi Arabia and significant fiscal strain, it cannot be excluded that they could be tempted to de-peg the currency at some point, like Russia and Kazakhstan.

• Even though there has been some re-emergence of devaluation fears, we think sizeable FX

reserves still provide a cushion, allowing the authorities in GCC countries to go a relatively long

way to keeping the pegs.

GCC countries set to go a long way to keep their US dollar pegs

GCC countries set to hold onto their pegs unless the oil price falls

below USD35/bl


• The countries with largest current account deficits have lost a sizeable amount of foreign exchange reserves, i.e. Bahrain, Oman and Saudi Arabia.

• Saudi Arabia alone has lost USD190bn since Q3 14, or a quarter of total reserves. Foreign reserves now amount to USD554bn compared with USD744bn before the oil price fall.

• The pickup in oil prices is reducing monthly losses: our estimates point to a loss of USD66bnin 2016, while it may lose another USD50bn in 2017.

• Hence, in our view, Saudi Arabia (and other GCC countries) will be able to maintain their

pegs in our view.

• We believe they may consider moving to a more flexible exchange rate system in future to

promote diversification of their economies.

2013 2014 2015 2015 2016 2016 2017

Q1 Q2 Q3 Q4 total Q1 Q2 Q3 DB est DB est.

Current Account 135 74 -12 -8 -15 -23 -59 -20 -7 2 -20 -7

Capital Account 0 0 0 0 0 0 0 0 0 0 0 0

Financial Account, Total -57 -57 -18 -15 -5 -4 -43 0 10 1 13 -19

Direct Investment, Balance, Total 4 3 1 1 1 1 3 0 -3 1 -2 4

Other Investment, Balance, Total -55 -33 -10 -13 -7 -4 -35 -2 12 2 15 -10

Portfolio Investment, Balance, Total -7 -27 -9 -3 2 -1 -11 2 1 -2 1 -13

Net Errors & Omissions, Total -9 -9 -4 1 -1 -11 -14 -10 -20 -18 -58 -25

Change in foreign reserves (+=increase) 69 7 -34 -22 -21 -38 -116 -29 -17 -15 -66 -50

Oil price assumption 45 51

Saudi Arabia BOP

1717

De-pegging of Egyptian pound has spurred inflation

• On 3 November 2016, Egypt’s central bank floated the Egyptian pound, leading to a significant devaluation of the currency, compared with the previous peg of EGP8.8/USD, to around EGB15.5/USD.

• Since then, the EGP has depreciated further, with USD/EGP now trading close to 19.0. We

expect the cross to fall below 18.5 once the IMF review is completed in the next few weeks

and further to around 17.5 over the next year as fiscal measures take effect on the current

account.

• The devaluation was one of the IMF’s key prerequisites to approving a loan of USD12bn over three years, which is seen as crucial to help support the economy.

• As a consequence, inflation shot up to 20.7% in November 2016, up from 15.7% in October 2016.

• The weaker EGP helps boost Egypt’s competitiveness and supports economic growth, by encouraging foreign investments. However, given the economy’s heavy import dependence, marked price increases would act as a particular burden on private consumption spending, hampering growth.

18

Country fact sheets• Egypt

• Saudi Arabia

• UAE

• Qatar

• Oman

• Bahrain

• Kuwait

1919

Egypt – macro overview

Source: IMF, World Bank, Danske Bank

Industries: textiles, food processing, chemicals, hydrocarbons, metals.Main exports: petroleum, petroleum products, cotton.Credit rating (S&P): B- (Stable).

2015 2016 2017 2018

Real GDP growth 4.2 3.8 4.0 4.8

Inflation (% Y/Y) 11.0 10.2 18.2 13.1

Population (m) 89.0 91.0 93.1 95.3

Current Account (% of GDP) -3.7 -5.8 -5.2 -4.6

Budget Balance (% of GDP) -11.5 -12.0 -9.7 -8.1

Public debt (% of GDP) 89.0 94.6 93.4 88.6

Unemployment Rate 12.9 12.7 12.3 11.3

The economy should gradual improve, with the annual rate of GDP growth reaching 4.0% in 2017 and 4.8% in 2018, according to the IMF.

Responding to large fiscal imbalances, the government has, in the context of the IMF programme, introduced a bold fiscal consolidation programme with measures to increase tax revenues, control the public wage bill, shift spending from energy subsidies to targeted cash transfer programmes and undertake much-needed infrastructure investment.

Unemployment stood at 12.5% in mid-2016 (up from 9% prior to 2011) and is a particular concern, with higher rates among the youth and women. High population growth rate is placing additional pressure on infrastructure and services.

Macro imbalances still persist. Despite efforts to correct exchange rate misalignments, there is still a

parallel exchange rate (which emerged in 2013). International reserves are low and cover only three months of imports. Egypt’s investment climate and unfavourable external conditions, such as the sluggish economic recovery in Europe , sharp fall in tourist activity and less remittances from the Gulf due to lower oil prices, add to the economic challenges. The current account worsened from near balance in 2013 to a 5.8% deficit in 2016. Public debt remained high at 89% of GDP in 2015, undermining investor confidence and raising debt-servicing costs.

2020

Saudi Arabia – macro overview

Industries: crude oil production, petroleum refining, basic petrochemicals. Oil and gas sector accounts for 43% of GDP. Main exports: petroleum and petroleum products.Credit rating (S&P): A- (Stable).Fixed exchange rate peg to the USD.


2015 2016 2017 2018


Inflation (% Y/Y) 2.2 4.0 2.0 4.7

Population (m) 31.4 32.0 32.7 33.3




Saudi Arabia has begun a fundamental policy shift to respond to low oil prices. The government has introduced a series of reforms over the past year and has recently set out plans for a bold and ambitious transformation of the Saudi Arabian economy in Vision 2030. Diversifying the economy, creating jobs for

nationals in the private sector. Implementing a gradual, but sizable and sustained, fiscal consolidation to reach budget balance in five years is a key policy priority. Vision 2030 also plans to increase the private sector role in healthcare and increase average life expectancy from 74 to 80 years.

The IMF estimates real GDP growth slowed to 1.2% in 2016 due to the decline in oil prices, recovering to 2% in 2017 as the pace of fiscal consolidation slows, settling around 2.5% over the medium term.

Inflation has risen in recent months to over 4% as energy and water prices have increased and the IMF expects it to ease to 2% in 2017.

Fiscal consolidation is underway and the IMF estimates the deficit narrowed to 13% of GDP in 2016. It expects non-oil revenues to increase, while spending restraint results in a significant reduction in expenditure.

The current account deficit is projected to narrow to 6.6% of GDP in 2016 and then move close to balance by 2021 as oil prices start to recover.

2121

UAE – macro overview


Industries: oil, cotton, ginning, textiles. Oil and gas sector accounts for 34% of GDP.Main exports: petroleum and petroleum products, fishing, aluminium, fertilisers.Credit rating (Moody’s): Aa2.Fixed exchange rate peg to the USD.

2015 2016 2017 2018


Inflation (% Y/Y) 4.1 3.6 3.1 3.2

Population (m) 9.6 9.9 10.1 10.4

Current Account (% of GDP) 3.3 1.1 3.2 3.0



Overall, UAE’s economy has been relatively resilient to the oil price decline, helped by large fiscal and external buffers. Non-oil economic activity has slowed to 3.7% in 2015 driven by a contraction of public investment and domestic demand in the context of a substantial fiscal consolidation. The IMF estimates growth moderated further in 2016, before improving over the medium term as the dampening effect of fiscal consolidation is offset by oil price rises, a pickup in private investment in the run-up to Expo 2020 and stronger external demand.

Despite the strong fiscal policy response to adjust to lower oil prices, the fiscal balance turned to a deficit of 2.1% of GDP, while the current account surplus declined to 3.3% of GDP.

The IMF expects the fiscal deficit to improve to 1.9% of GDP in 2017, as authorities plan to pursue further

fiscal consolidation (introduction of VAT, excise tax increases and potential introduction of corporate income tax). The authorities have also initiated work on consolidated medium-term expenditure frameworks for education and healthcare.

For 2016, approved budgets at the Federal and Dubai levels point to a slight fiscal consolidation of 0.1% of non-oil GDP. Abu Dhabi’s budget has yet to be approved but preliminary indications point to a sharp consolidation of around 2.9% of non-oil GDP.

2222

Qatar – macro overview


Industries: crude oil production and refining, liquefied natural gas, ammonia, fertilisers.Main exports: oil and gas.Credit Rating (S&P): AA (Stable).Fixed exchange rate peg to the USD.

2015 2016 2017 2018


Inflation (% Y/Y) 1.8 3.0 3.1 2.8

Population (m) 2.4 2.6 2.7 2.7

Current Account (% of GDP) 8.4 -1.8 0.0 1.0

Budget Balance (% of GDP) 5.4 -7.6 -10.1 -6.1


The IMF estimates real GDP growth moderated to 2.7% in 2016 and projects it will reach 3.4% in 2017, due to an expansion of the non-hydrocarbon sector due to World Cup related spending, supported by added output from the new Barzan gas project. The IMF estimates inflation reached 3% in 2016, due in part to higher domestic energy costs.

The fall in international oil and gas prices has put considerable pressure on the fiscal and external positions, reducing the current account surplus, from 24% in 2014 to 8.4% of GDP in 2015. The central

government surplus fell from 12.3% in 2014 to 1.2% of GDP in 2015 and government debt to GDP moved from 32.3% to 34.9% of GDP over the same period. Authorities responded by cutting expenditure

and renewing efforts to increase non-oil revenues. The prices of some utilities (water and electricity) and gasoline have been increased. The IMF projects the fiscal deficit will peak in 2017 at -10.1%, before further subsidy cuts, increases in public fees, a recovery in global commodity prices and the implementation of VAT will lead to an improvement in public finances.

Unlike many other hydrocarbon exporting countries, Qatar financed its fiscal deficit mainly through

domestic and foreign borrowing without drawing down its sovereign wealth fund. It has already raised a total of USD14.5bn of external debt and issued USD2.6bn of domestic bonds and Sukuk (Islamic bonds).

2323

Oman – macro overview


Industries: crude oil production and refining, natural and liquefied natural gas (LNG) production. Oil and gas sector accounts for 56% of GDP.Main exports: oil.Credit Rating (S&P): BBB- (Negative).Fixed exchange rate peg to the USD.

2015 2016 2017 2018


Inflation (% Y/Y) 0.1 1.1 3.1 2.8

Population (m) 3.8 4.0 4.1 4.2




The oil price decline has adversely affected Oman’s economy and the IMF estimates non-oil growth

moderated to 4% in 2015, with a further slowdown in 2016. However, it expects growth to pick up over the medium term due to a recovery in oil prices and continuing efforts to strengthen the business environment.

The IMF expects inflation to remain low and the large current account deficit, which it estimates at 21.3% of GDP in 2016, to persist.

The government has enacted fiscal reforms to reduce expenditure, including cutting spending on wages and benefits, subsidies, defence and capital investment by civil ministries. Furthermore, the IMF expects the planned increase in corporate income tax from 2017 and the introduction of VAT in 2018 to facilitate a decrease in the budget deficit to 7.6% of GDP in 2018. Nevertheless, to maintain fiscal sustainability in an environment of low oil prices and support the exchange-rate peg over the medium to long term, further fiscal

adjustments are needed. Additional reforms to strengthen private sector job creation and economic

diversification are also key for future sustainable growth.

2424

Bahrain – macro overview


Industries: petroleum processing and refining, aluminium smelting, Islamic and offshore banking, insurance , tourism.Main exports: petroleum, petroleum products, aluminium.Credit Rating (S&P): BB- (Stable).Fixed exchange rate peg to the USD.

2015 2016 2017 2018


Inflation (% Y/Y) 1.8 3.6 3.0 4.0

Population (m) 1.3 1.3 1.3 1.4




GDP growth slowed to 2.9% in 2015 from 4.5% in 2014, as falling oil prices negatively affected Bahrain’s fiscal and external balances. Consumer and investor sentiment also weakened. For 2016 and 2017, the IMF estimates a further moderation in growth due to fiscal adjustments and weaker investor sentiment. Though low, it estimates inflation rose in 2016 with the increase in domestic energy prices.

Authorities have implemented significant fiscal adjustment measures, including reforms of energy prices (gasoline prices raised by nearly 60%, tobacco and alcohol taxes increased). Despite the implementation of fiscal measures, the IMF estimates the budget deficit reached 14.7% of GDP in 2016,remaining high over the medium term. It estimates the current account deficit reached 4.7% of GDP in

2016, narrowing gradually thereafter.

Fiscal and external buffers are limited and vulnerabilities have risen. Further fiscal adjustments and structural reforms are needed to put debt on a downward trajectory, contain expenditure and raise competitiveness to stabilise external balances and international reserves.

2525

Kuwait – macro overview


Industries: petroleum, petrochemicals, cement, shipbuilding and repair. Oil and gas sector accounts for 63% of GDP.Main exports: oil.Credit Rating (S&P): AA (Stable).Fixed exchange rate peg to an undisclosed

currency basket.

2015 2016 2017 2018


Inflation (% Y/Y) 3.2 3.4 3.8 3.6

Population (m) 4.1 4.2 4.3 4.5

Current Account (% of GDP) 5.3 4.5 8.4 8.8

Budget Balance (% of GDP) 1.7 -3.5 3.2 3.8


Non-hydrocarbon growth moderated to 3.5% in 2015 from 5% in 2014, with overall GDP growth of

3.5% in 2016 according to the IMF’s estimate. The IMF projects non-oil growth will gain momentum over the medium term, supported by infrastructure investment. Inflation, which has been hovering at around 3%, is set to uptick this year, reflecting recent gasoline price increases, before easing gradually.Dwindling oil revenues pushed the government’s budget balance to a deficit of -3.5% of GDP in 2016, generating significant financing needs. The deficit has been financed mainly by drawing down financial buffers and issuance of domestic bonds. The underlying (non-oil) fiscal position has nevertheless improved over the past two years, reflecting a decline in the subsidy bill and efforts to curtail public expenditure.

The current account surplus has also declined significantly, reaching 5.3% of GDP in 2015, and is set to fall further to 4.5% in 2016, before recovering due to higher hydrocarbon exports over the medium term.

2626

Disclosures

This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank’). The authors of the research report are JakobChristensen, Chief Analyst and Aila Mihr, First-Year Analyst.

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2727

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macroeconomic update on gcc countries and egypt · gcc countries set to go a long way to keep their...

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