mena: new oil normal & adapting to...

MENA: New Oil Normal & Adapting to Disruption

Dr. Nasser Saidi

Presentation to the Society of Family Offices King Abdullah Economic City

10 April 2017

Agenda

ü  Global Macroeconomic developments in

the backdrop of the New Oil Normal

ü  Macroeconomic Outlook for the MENA

region

ü  GCC: New Economic Development Model?

ü  Growth Drivers for the region

ü  Key Takeaways 2

Global outlook & underlying risks; 2016-17 anni horribiles

Outlook

•  IMF: Global real GDP growth to rise to 3.4% in 2017; EMEs: 4.5%

•  Productivity growth is stagnant in advanced economies: secular stagnation?

•  Sluggish global trade & industrial activity

•  Uncertain & changing US policy mix: fiscal expansion, taxation, monetary tightening, deregulation, trade policy

Macroeconomic Risks

•  Growing policy uncertainty

•  Inward-looking policies & protectionism

•  Low commodity prices => vulnerable exporters

•  Divergent US EU policies

•  EU banking sector vulnerabilities: Italy, Greece

•  Strong $ and higher interest rates: EME debt vulnerability, currency wars

Geo-political risks

•  Trump policies re. Iran, Russia, EU, China, ME

•  New Cold War?

•  Elections in France, Italy, Germany, Iran

•  Brexit =>UK & EU

•  Eurozone uncertainty

•  Ongoing conflicts & spillovers

•  End of Neoliberalism & Globalisation

3

“New Oil Normal”: Disruptive tech driving costs down for shale, renewables. Shale has become the ‘marginal producer’ & backstop technology

4

Development in wellhead breakeven prices for key shale plays

Source: Rystad Energy NAS WellCube, Feb 2017

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 away from oil

•  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 disrupting demand and supply side: energy storage, e-cars, distributed energy storage, 4th Industrial Revolution

∴ Decarbonisation implies growing risk of stranded fossil fuel assets

5

Trumpism, Trumponomics & Potential Impact on Middle East Economies

Oil & deregulation

-  Voted in with promise of oil sector deregulation; many allies of the oil industry part of his cabinet

-  Moving forward on stalled Dakota Access & Keystone XL projects; Unlocking shale oil & gas deposits

-  Legislation to repeal a regulation that would have required energy companies to disclose payments to foreign governments

Trade -  US gearing towards

more protectionist policies + “re-negotiating” trade deals

-  But 21st-century globalization is knowledge-led, not trade-led

-  Trump’s oil policies would mean increased supply of crude=> downward pressure on oil prices

Geo-politics

-  More military solutions

-  Proxy war with Iran

-  “War” against ISIS

-  Syria civil war

-  Backing off a 2-state Palestine peace solution

-  Policies towards Turkey, Egypt

-  Refugee “ban”, electronics “ban” & growing immigration barriers?

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)

7

Agenda

ü  Global Macroeconomic Developments in



region




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

9

38 $2381

Sudan

Implications of the New Oil Normal & spillover to oil importers/labour exporters

10

Oil Exporters

Decline in oil revenues

Budget deficits & fiscal constraints

Decline in current account balance

Drop in net foreign asset accumulation

Lower government spending growth

Lower growth prospects

Oil Importers

Lower spending on oil imports, improves trade balance (+)

Lower remittances (-)

Drop in tourism (-)

Decline in FDI (-)

Drop in foreign aid levels (-)

MENA economies: Adapting to New Oil Normal; in Transition; 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

Doing Business in MENA

•  UAE and Bahrain are the two top ranking MENA countries and two of the top ten global improvers, according to the Doing Business 2017 global rankings

•  15 of the Mena region’s 20 economies implemented a total of 35 reforms to facilitate the ease of doing business. This is a significant increase from the annual average of 19 reforms during the past five years.

Source: Doing Business 2017 report, World Bank

Visa Confidential

MENA/ GCC Risk Landscape

Political shocks Energy price

shocks

Trumpism, Trumponomics &

US policies; China

rebalancing

Change in US Fiscal, Tax, 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

13

Agenda




region




GCC need major economic & structural reforms to adjust to New Oil Normal

15

New Economic

Development Model & Social

Contract Required

Economic, Trade & Revenue

Diversification

Expenditure rationalisation &

switching policies; Subsidy reform

New Tax Regimes for fiscal sustainability &

economic policy management

Domestic Financial Markets for deficit,

infrastructure & development finance

Countercyclical Monetary & Fiscal

Policies

Ongoing GCC Fiscal Consolidation & Adjustment to New Oil Normal

GCC New Oil Normal related Reforms Break-even Oil Prices in the MENA region

Source: IIF estimates, Feb 2017, Fitch Ratings Apr 2017 2017 est are from Fitch (Apr 2017); UAE’s 2017 break-even price is that of Abu Dhabi

Revenue Subsidy reform

Fees Taxation Fuel Water Electr.

Bahrain ✓ ✓ ✓

Kuwait ✓ ✓ ✓ ✓

Oman ✓ ✓ ✓ ✓

Qatar ✓ ✓ ✓

Saudi Arabia

✓ ✓ ✓ ✓

UAE ✓ ✓ ✓ ✓ 0

20

40

60

80

100

120

Saudi Arabia

Iraq Kuwait Qatar UAE Oman Bahrain

2015 2016

2017

GCC: substantial fiscal & forex buffers and low debt levels help smooth adjustment path

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 GCC require deficit financing of around $650bn in 2017-2021

GCC public sector remains main source of employment

Illustrative Employment Outlook in GCC (mns of new labor market entrants, cumulative)

Public Sector Employment (contributions to employment growth, %)

Source: “Economic Diversification in Oil-Exporting Arab Countries”, IMF Note, Apr 2016

Source: “Economic Prospects and Policy Challenges for the GCC Countries”, IMF Note, Oct 2016

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

19

BusinessEnvironment Spendingcuts Labour-related Supportfor

SMEsFacilitate

FDI Capitalmarketdevelopment

Bahrain

Lowercapitalrequirementsforcommercialcompanies;moreaccesstoforeigninvestors;streamlinebusinesslicensing

BahrainisaEonflexibilityforafee

Deepeningoffinancialmarkets:seMngupthecorporatecreditbureau;tradeofgovernmentbondsandsukukopentoGCCretailandinsEtuEonalinvestors

Kuwait

LabourregulaEonsprovidingdomesEcforeignworkerswithenforceablerights

SMELaw FDILaw

Oman

DraVlabourlawthatwouldgivemorebenefitstowomenandforeigners

DraVFDIlaw

Qatar

Newlabourlawwithreformstothe“kafala”employmentsponsorshipsystempassed

QatarDevelopmentBanksupporttoSMEs

Re-classificaEonasEmergingMarket

KSA

MeasuresintroducedtoreduceoverEme&allowancesofgovtemployeestolowerthepublicsectorwagebill

Foreigninvestmentlimitsintheequity&bondmarketseased,technicalchangestose^lementsystemintroduced&short-sellingallowed;AlternaEveinvestmentmarket

UAEBankruptcylawissued;personalinsolvencylawintheworks

DraVFDILaw Re-classificaEonasEmergingMarket

Source: “Economic Prospects and Policy Challenges for the GCC Countries”, IMF GCC Note, Oct 2016, Nasser Saidi & Associates, Feb 2017

GCC Government Revenues dependent on resource revenue •  Non-oil tax revenue dominated by

fees & charges and trade taxes (customs) that are being phased out due to trade liberalisation

•  Inadequate tools for counter-cyclical fiscal policy

•  Do not constitute a complete panoply of modern tax tools

•  Yield little revenue due to low rates, narrow bases, & in some cases ineffective administration and low compliance

•  Limited ability to influence behaviour of private sector

89%

87%

79%

73%

45%

41%

0% 20% 40% 60% 80% 100%

Kuwait

Bahrain

Oman

Saudi Arabia

Qatar

UAE

GCC: Oil Revenues as % of Gov’t Revenues

GCC: Non-Oil Revenue Reform Agenda VAT Excise Other

Bahrain Measure VATat5% NAIncreaseEWAadministraEonfees,sandminingfees,hotel

servicefees,costrecoveryonmunicipaliEes,andfeeonsandextracEon(2016)

(ImplementaEondate) (2018) Feesonalcohol&tobacco(2016)Kuwait Measure VATat5% NA Businessprofitstax (ImplementaEondate) (2018) Oman Measure VATat5% NA IncreasecivilaviaEonfeesandotherfees(2015) (ImplementaEondate) (2018) Trainingtaxandmunicipaltaxonrents(2016)

Increaseincorporateincometaxfrom12to15percentandremovethethreshold(2017)

Qatar Measure VATat5% Exciseontobacco,energy&soVdrinks Increasewaterandelectricitytariffs(2015)

(ImplementaEondate) (2018) (2017) Increasegasolineprice(2016)

IntroducEonofpricingmechanismtorevisefuelpricesregularly(2016)

SaudiArabia Measure VATat5% Exciseontobacco,

energy&soVdrinks IncreasevisafeesexceptforHajj&Umrah(effecEveOct2016)

(ImplementaEondate) (2018) (2017) IntroducEonofwhitelandtaxes

UAE Measure VATat5% NA IntroducEonofa3percentmunicipalfeeonexpatpropertyrentalinAbuDhabi(2016)

(ImplementaEondate) (2018)IncreasegovernmentfeesforintellectualpropertyrightsregistraEon,includingtrademarks,patents,copyrightsand

designs(2015) Feesonalcoholandtobacco(2015)

Source: “Diversifying Government Revenue in the GCC Next Steps”, IMF GCC Note, Oct 2016, Nasser Saidi & Associates, Feb 2017

GCC VAT: the story so far

•  GCC VAT framework is expected to be finalized & formally announced by this year. The provisions of the GCC Framework Agreement will be transposed into domestic tax law in the GCC prior to the effective date

•  The GCC VAT framework treaty has been signed by all members and while it is now enforceable, two countries have to go live in order for it to be effective. UAE has announced an implementation date of Jan 2018, Saudi Arabia hopes to go live in Q1 2018.

•  GCC agreed to implement VAT regimes in 2018. Most are working to implement by 1 Jan 2018 to avoid distortions arising from intra-GCC trade. All GCC States will need to have implemented VAT by the end of 2018.

•  Main design issues: (a) Single or Multiple Rates; (b) Zero-rated and Exemptions; (c) Coverage: registration threshold; (d) international issues: VAT usually destination based. Zero-rating of exports; (e) treatment of financial services and digital products

•  Confirmed that certain essential food items and industries such as healthcare, social services and education will be exempt from VAT 22

GCC: Estimated VAT Revenue

Source: Updated by Nasser Saidi & Associates, from “Tax Policy Reforms in the GCC Countries: Now and How?”, IMF, Nov 2015

23

UsingavgC-efficiencyraEo(0.58)ofselectedsampleofcountrieswithexperiencerelevanttoGCC

Assumingthebase=90%ofprivateconsumpEon

RevenueatVATrateof RevenueatVAT

rateof

Year

Shareoffinalconsump`onin

GDP5%

Shareofprivateconsump`onin

GDP5%

Bahrain 2014 56.6 1.6 41.0 1.8

Kuwait 2015 48.2 1.4 30.0 1.4

Oman 2015 54.8 1.6 30.4 1.4

Qatar 2015 30.7 0.9 15.8 0.7

SaudiArabia 2015 57.5 1.7 33.7 1.5

UAE 2015 58.3 1.7 45.1 2.0

Saudi Arabia’s NTP: transformational but many a slip 'twixt the cup and the lip

•  NTP: total of 543 reforms. Spending of $71.5 bn through 2020; grow Public Investment Fund

•  Key policy priorities: diversification + private sector jobs for nationals + implement gradual; sustained fiscal consolidation: budget balance in 5 yrs; privatisation

•  Implementation Risk: Absorptive capacity of the economy; ability of government & related agencies to effectively implement NTP reforms.

•  KSA needs to open to trade & FDI. Legal (civil law), governance & regulatory reform

•  Short-term: growth might be stifled given fiscal consolidation & impact of reforms; Disillusionment risks; need clear prioritization & sequencing of reforms

•  Impact on the region: positive through investment & trade linkages; ‘signaling effect’ of greater private sector engagement & economic diversification

•  Caveats: wide engagement is imperative for successful implementation of reforms; Establishment of a New Social Contract

24

Saudi Arabia’s proposed Aramco floatation

•  Aramco pumps 12% of world’s oil supplies, 5X ExxonMobil + access to world’s largest oil reserves => potential to be world’s most valuable company @ ~ $2Tn. Wood Mackenzie said to estimate valuation at $400bn only.

•  5% of company to be floated => largest privatisation

•  NPV of future oil revenues ~350–700% of GDP; private participation in both upstream and downstream sectors likely to reduce rent seeking, enhance transparency, & clarify fiscal links

•  Part of revenue to create new $2 trillion SWF: turn KSA into a global investment powerhouse => monies re-invested @ home & abroad

•  Must clear uncertainties over taxation, governance, OPEC policy and ownership of reserves

•  Impact on region: encourage privatisation in other oil exporters; improve transparency & disclosure

Agenda

ü  Global Macroeconomic Developments in



region




GCC Growth Drivers Infrastructure, Technology and Economic Diversification Policy driven:

•  Investment in infrastructure & logistics (average real investment in GCC was ~24% of GDP in 2000-’14); Saudi’s economic cities are an example

•  Mega events (Expo 2020, World Cup 2022) are boosting infrastructure, hospitality, tourism & retail

•  Economic diversification policies; privatisation & PPP

•  Going Digital: harnessing FinTech, e-commerce…

•  Investment in Clean Energy and Energy Efficiency

Demographics & Cultural: young, fast-growing population adapting modern lifestyles and trends

•  Growing middle class + expanding class of high net worth individuals

•  Economic Empowerment of Women

•  Rise of Islamic economy

Infrastructure; Privatisation & PPP Infrastructure & Logistics investments are driven by demographics: Urbanisation, Smart cities, Health, Education, Retail, Hospitality

•  GCC have massive $4.4trn+ 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

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

•  Challenge 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

29

Investment in Infrastructure supports growth. Total value of projects in the Middle East: $5.8trn

Source: Zawya Projects, Mar 2017

Potential effects of privatisation on GCC (excluding oil assets & companies)

Source: “Creating a Sustainable Privatisation Programme in the GCC”, Oliver Wyman 2016. Notes: These effects exclude the privatisation of state oil companies and oil assets. If included, the benefits would be far greater

Harnessing FinTech for MENA financial access & inclusion – Empowering Youth

•  Merely setting up online & mobile banking services is not enough: banking sector needs to leverage FinTech to raise efficiency

Ø  FinTech 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

•  FinTech is key to Financial Inclusion in MENA; also enables the Human Capital Cloud & raise female LFPR

•  Countries need to bridge their FinTech gap through PPP, massive investments & RegTech support & enabling environments

32

Embracing Renewable Energy in the Region: Momentum for Solar & Wind

§  Phasing out of fossil fuel subsidies removes tax on renewable energy

§  RE policy commitments

§  GCC will be investing in excess of $700bn in RE over next 30 years

§  UAE achieved 2nd lowest prices for solar renewable power LT contracts

§  Saudi Arabia announced a $30-$50bn Renewable Energy Programme and started tendering 700MW of solar and wind energy projects in Feb

Renewable Energy Investments in MENA by Sector (USD mn)

Source: Bloomberg New Energy Finance

Agenda




region




Key Takeaways

•  Global outlook characterised by growing political & economic policy uncertainty that will impact currencies, markets, trade & investment

•  Trumpism & Trumponomics: Ô oil prices, ↑ conflicts; trade & economic disruption

•  New Oil Normal requires new Economic Development Model & deep structural reforms

•  GCC are on reform and transformation path. KSA’s NTP is key indicator for the region

•  Growth drivers: Demographics & Cultural; Infrastructure, Tech & Economic Diversification Policies

Thank you Dr. Nasser Saidi [email protected] @Nasser_Saidi @NSA_economics

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