Middle East and North Africa Area Note

Transcription

1 Middle East and North Africa Area Note GDP growth seen to accelerate in 2017 sustained by the recovery of oil prices and by a stronger non-oil economy. Risks to growth stem from fiscal adjustment in oil exporting countries and from political developments in countries involved in conflicts. During the last two-year period the general economy of the MENA Area has suffered both from the negative cycle of oil prices, which halfway through 2014 struck the net exporting Countries of hydrocarbons (especially the Gulf Area) and the still ongoing conflicts arisen after the political upheavals that have affected the region since In some Countries (Libya, Syria, Iraq, Yemen). The average annual growth rate of the gross domestic product of the area in amounted to 2.5%, down from the average of 3.5% during the five-year period Estimates for the two-year period expect a partial recovery to an average of 3.2%, assuming that the inversion of the cycle of the price of hydrocarbons, from its lowest point of 30 dollars reached in December 2015, keeps steady during the next years. The price increase, however, is still affected by several factors, both extra-economic and economic, particularly by the possibility (and by the success) of an agreement between the main OPEC and non-opec producers on the distribution of production shares among the different Countries, in compliance to a fixed overall ceiling, and by the limit set to price increases by the gradual decrease of shale oil production prices. In this context, IMF, IIF and the main observers expect a gradual recovery, which should settle around 60 dollars. The dynamic of oil prices and political conflicts has an effect on economy growth and on the dynamic of the markets of the area through several channels, both of real (direct production) and financial nature (the financial flows that will originate from it). The latter have an impact, on the one hand, with an opposite sign, on the public (via tax revenues) and private spending (via disposable income) capability of producer and net consumer Countries of hydrocarbons and, on the other hand, on the dynamic of the Official Reserves and Sovereign Funds accumulated by the producer Countries with oil and gas incomes. The impact of the oil cycle on the producer Countries is different according to the diversification level of the economy, therefore it s more limited in those Countries where the weight of the hydrocarbon sector on GDP, tax revenues and export is lower (such as the United Arab Emirates) compared to the Countries where it s higher (such as Saudi Arabia). In detail, on the public finances side, the decline of hydrocarbons price (from the over 100 dollar per barrel on average of to 30 dollar per barrel by the end of 2015), on one side, and the resurgence of fights in the Countries with political conflicts, on the other, have caused a rapid shift from the positive trade balance of , equal to 1% in comparison with the annual average GDP of the whole area (with peaks, among the GCC, of 30.7% in Kuwait, 12.4% in Qatar and 5.4% in Saudi Arabia) to a negative one already in 2014 (-2.3%), rapidly declining in 2015, with -9.3% (with peaks of about -16% in Algeria, Saudi Arabia and Oman, without considering the -52.5% in Libya, where a civil war is currently undergoing). Should oil prices reach 60 dollar per barrel, they would still be, in most cases, well behind the current breakeven prices of the public budgets (in the last years they exceeded 100 dollar in Algeria and over 90 dollar in Saudi Arabia, without considering, even in this case, the situation of Libya, where the estimated break-even price has reached 200 dollar per barrel). Therefore, there had to be implemented measures of fiscal consolidation (and the same goes for the foreseeable future) which slowed down growth in order to bring the budgets back to a sustainable path in the medium term and avoiding, at the same time, a sharp decrease of the activity of Sovereign Funds (partly in the form of government deposits in the banking system) or, in parallel, the growth of a stock of Public Debt securities to allocate on the market to cover the deficit. For Saudi Arabia the measures involved, among the others, the cancellation of investment projects deemed not of primary importance for about 20 billion dollars, the decrease of subsidies Intesa Sanpaolo Research Department International Research Network Gianluca Salsecci Head Giancarlo Frigoli Economist This Note will be also published in the VI Annual Report by SRM on the Economic Relations between Italy and the Mediterranean Area and presented in a Conference in Naples on 25 November For further information on this event see the website See the final page for important information.

2 and the increase of non-oil incomes (through the upcoming reform of indirect taxation and the collocation of public companies shares on the market) for a value equal to about 3% of GDP, and the reduction of the salaries of the public sector. Due to these measures, the IMF expects the growth rate of economy to decrease anyway to 1.2% during this year, before increasing to 2% in In the UAE, thanks to the greater diversification of the economy, which benefits from a more intensive dynamic of non-oil sectors compared to the hydrocarbons sector, the expected growth is 2.3% in 2016 and 2.5% in In the GCC as a whole, the expected growth profile of the hydrocarbons component of the GDP is 1% in 2016 and 1.2% in 2017, versus respectively 1.4% and 3.1% of the component not represented by gas and oil. As for external accounts, the decline of hydrocarbons price and the civil war in the Countries with political conflicts in the last two-year period have simultaneously caused a dramatic change of the direction of net cash flows. In the MENA Area, the external current account balance went from a surplus of an annual average of almost 280 billion dollar (9% of GDP) in the five-year period (with the related accumulation of foreign activities for about 1,400 billion dollar) to a deficit of 124 billion dollar in 2015 (an average of -4.4% of GDP for the area, but with peaks of -42% in Libya, -16% in Algeria and Oman and about -8% in Saudi Arabia, which by itself accounts for over 40% of the total). The negative balance in public and external accounts have been covered thanks to both Reserves and Sovereign Funds, with a withdrawal of government deposits from the banking system (and restriction of liquidity conditions in the system), and, increasingly throughout 2016, the financing on the markets through the issuance of securities. In the case of Saudi Arabia, during the first 8 months of this year the Authorities have utilized their deposits in the SAMA for 24 billion dollar (compared to the 84 billion dollar in the same timeframe of the previous year); at the same time, they have issued securities for 25 billion dollar on the internal market and for 17.5 billion dollar on the international markets, also drawing from loans in foreign banks for 10 billion dollar. Among the non-oil MENA Area Countries, the gain in terms of trade determined by the decline of hydrocarbons prices (which has positive effects on the spending power of the public and private sector and on the external financial position of the Countries), the investment plans announced by the Authorities (in Morocco, Tunisia and especially In Egypt, to face the lack of infrastructures) and the resuming of the reform process of the economy favoured by the improvement of the internal political situation (in Egypt and Tunisia) are supporting the economy s recovery. The expected average growth rate of GDP for these countries is 3.9% in the two-year period compared to 4% in 2015 and the average of 3.1% in the fiveyear period In these Countries, the growth dynamic is however still fragile due to the deterioration of the security conditions of the region which discourages the private flows for FDI and tourism revenue the lower remittances of emigrants in oil Countries, the excessive dependency of some economies (Morocco, above all) toward climatic factors due to the weight of the agricultural sector. Outside of the MENA Area, in Turkey, in the two-year period the expected average growth is slightly lower than 3%, decreasing compared to the 4% of 2015, mainly supported by the internal demand for consumption. The investments (along with the inbound capital flows), instead, are expected to slow down due to geopolitical factors, especially the deterioration of internal and external security conditions and the increased financing costs of external deficit (the Country registers a current structural account deficit). The economy of Israel is also expected to increase in with an average of about 3%, gaining momentum compared to the 2.5% of The economy is supported by the internal demand, both for consumption which is going to benefit from the improvement of purchasing power of families (thanks to low inflation, wage increases and an unemployment rate that decreased to 4.7% in July) and investments, which are recovering significantly, after two stagnant years, thanks to the announced corporate income tax cuts, the incentives toward families on mortgages for purchasing homes, the development of high-tech sectors and the possible resuming of the exploration of gas reserves in the Mediterranean. Intesa Sanpaolo Research Department 2

3 1.1 Structure and development of economy The geographic region considered in this note (Widened MENA Area) includes the Countries of North Africa and Middle East that the IMF classifies in the strict sense as MENA Area and, additionally, Israel and Turkey. According to a largely shared criterion, from an economic viewpoint the Countries of this region that overall have a weight equal to 8.1% of global GDP are divided in two sub-groups. The first sub-group of the net exporting Countries of hydrocarbons- includes some Countries of North Africa (Algeria and Libya) and of the Persian Gulf (Gulf Cooperation Council Countries GCC, Iran and Iraq). The second sub-group of net importing Countries of hydrocarbons - includes some Countries of North Africa (Morocco, Tunisia and Egypt) and Middle East (Jordan, Lebanon and Syria), other than Israel and Turkey. However, Israel could soon turn into an exporter of hydrocarbons thanks to the exploitation of gas reserves in the Mediterranean. The GCC Countries have a very high average pro-capita income (usually more than 60,000 dollars). With the exception of Saudi Arabia, they are scarcely populated and immigrants account for a high share of the population (50% on average, with peaks close to 90%). In the special ranking of the United Nations, they have achieved a high human development level (each one of them is considered to have a very high development). The producer Countries of the GCC Group, well-aware of the risks related to the dependence on hydrocarbons cycles, during the last decade have started, to varying degrees, a diversification process of the economy, thanks to the growth of industrial sectors (typically the energy intensive ones, such as petrochemical, metalworking and water treatment), of services (commercial, tourism and real estate, financing) and the development of infrastructures. Some Countries, the UAE in particular, became a crucial crossing point (for goods and passengers) between Asia, Europe and Africa, hosting important service hubs. Indicators of income, human development and competitiveness (2015 data) Income GDP Total Non-native HDI* GCI** Doing per capita PPP USD USD Bn population population business*** S. Arabia UAE Qatar Kuwait Oman Bahrain Algeria NA Libya NA Na 188 Iran NA Iraq NA NA 161 Egypt NA Jordan NA Lebanon NA Morocco NA Syria^ Tunisia NA Israel NA Turkey NA Emerging Advanced Human Development Index, human development ranging from 0 (minimum) to 1 (maximum). ** Global competitiveness index, ranging from 1 (minimum) to 7 (maximum). *** Doing Business 2015 ranking of the World Bank.^ The data for Syria refers to Source: EIU, WEF, World Bank, United Nations In competitiveness conditions, the GCC Countries are in the higher part of the ranking by the World Economic Forum (WEF) according to several indicators (infrastructures, innovation, education, institutions, development of financial markets, efficiency of the labour market and technological development level), while, with the exception of the UAE, their scores are not Intesa Sanpaolo Research Department 3

4 particularly high in the World Bank ranking on the ease of doing business (Doing Business Index). In detail, these Countries are lacking in administration efficiency, legal system and business protection (contracts, protection of minority shareholders, procedures concerning failures). Additionally, many economic sectors, being de facto state-owned and highly concentrated, do not favour the growth of private initiatives. The labour market is very segmented. Natives cover more than 70% of jobs in the public sector, attracted by the generous remunerations, while foreign workers contribute with over 80% to the employment of the private sector (almost 90% for low-tier jobs). Outside of the GCC Area, the other oil Countries have a much lower pro-capita income at PPP (hovering around 15,000 dollars). They are relatively more populated, with a modest weight of immigrants on the population, and their human development level is rated as average. Moreover, competitiveness conditions and ease at doing business are less favourable in comparison with the ones of the GCC. In this second group, however, Iran shows a relatively diversified economy, with a qualified human capital. Algeria s structure is still very focused on the energy sector and shows an evident lack of infrastructures. In the past, some political and administrative issues have hindered the use of the oil wealth accumulated for the diversification of the economy. Libya, before the civil war and the current phase of political tensions, had an economic structure and issues similar to the ones of Algeria. The net importing Countries of hydrocarbons have an articulated economic structure. Israel is technologically advanced and with a very open market economy. In the last decade, Turkey reduced the technological level gap that still draws it apart from the advanced Countries. Other Countries of this group, while still far from the level reached by advanced Countries, have nonetheless achieved, thanks to the substantial foreign direct investment they benefitted from in the past, a good development level for services, infrastructures and manufacturing sector (Egypt, Morocco and Tunisia). Generally speaking, they are processing industries related to the primary sector and with labour-intensive, low-medium technological level productions such as the automobile. The economies of Jordan and Lebanon, instead, are mainly based on services, and their manufacturing sector is relatively less developed. With the exception of Turkey and Israel, the net importing Countries of hydrocarbons have a relatively low average pro-capita income, together with a human development level rated as average. Some Countries (specifically Egypt, Morocco) also have wide poverty and underdevelopment areas. Lastly, some Countries of this group (not just Turkey, but also Morocco and Tunisia) offer competitiveness and conducting business conditions of a level comparable to the ones found in many GCC Countries. Almost every MENA Country worsened its position compared to the previous year in the 2016 ranking of the World Bank for business conditions. The sole exception is Iran, which, while still in the lower part of the ranking (118 place on a total of 189 Countries) gained many positions. The same goes for the competitiveness conditions that the WEF has evaluated as less favourable in 2016 when compared to the ones of 2015 in every oil Country. Iran was the only Country in which they improved. Indicators of economic development (2015) (*) Technological Efficiency Financial market Infrastructures Development of markets Development Egypt Jordan Lebanon Morocco Syria NA NA NA NA Tunisia Israel Turkey * The indicators are in a scale ranging from 1 (minimum development) to 7 (maximum development). 1 The indicator of technological development considers several variables, including the usage and availability of internet, access to the most recent technologies, investment in technological innovation. Source: WEF Intesa Sanpaolo Research Department 4

5 1.2 Economy performance in the recent past In the past years, the MENA Area has been affected by political upheavals, by geopolitical tensions that in some Countries resulted in civil wars and, more recently, by the negative performance of the hydrocarbons market. These events, which are currently ongoing, had, and keep on having, relevant effects on the economies of the Countries of the Region. The political upheavals had a significant impact both among non-oil Countries (especially Egypt and Tunisia), causing a substantial setback for this group s growth in the five-year period (+3.1%) compared to the five-year period (+6.3%), and among oil, non-gcc Countries (especially Libya and Iraq), where the average growth went from 6.5% of the five-year period to 2.9% of the period. Many Countries of this second group have been either directly affected by regional tensions (Libya and Iraq) or penalized by international sanctions (Iran). GCC Countries, instead, after registering a temporary decline of economic activities in 2009 (-1.2%) due to the effects of the global financial crisis, both in the hydrocarbons and non- hydrocarbons part of the economy, in the following five-year period returned to grow at a sustained pace (+5.2% of average in the period), mainly driven by the nonhydrocarbons component (+6.1% of average), which benefitted from expansive fiscal policies, aimed in many cases toward limiting or preventing possible changing phases of the institutionalpolitic framework. In 2015, the Countries of the GCC group kept a pace similar to the one of 2014 (+3.4% vs. 3.3%), in spite of the slowdown of the non-hydrocarbons sector (+3.8% from +5.4%). The latter, in fact, started to suffer from the measures (cuts in subsidies and investment expenses deemed non-essential) aimed at compensating the fall of oil revenues caused by the decline of hydrocarbons prices, in spite of the increase of mining activities (+3.2% from +1.1%) a consequence of the policy pursued by OPEC Countries aimed at defending the market position, threatened by the entry of new producers (especially of shale oil in the USA). Still in 2015, the GDP dynamic sped up in non-oil Countries (from 2.5% of 2014 to +4%), supported by Egypt (where the economy benefitted from the subduing of political Tensions and by the investment in public works) and by Morocco, which benefitted from a particularly rich farming season. In 2015 the non-gcc oil Countries have registered a GDP decrease (-0.4% compared to +2% of 2014), due to the dysfunctions caused by the conflicts that are still involving both Iraq and Libya and the effects of the sanctions (most of them have been removed by now) on the economy in Iran. GCC: Oil and non-oil GDP dynamic (% var.) * Terms of trade profit/loss (2015) * ,7 1, E * For the years 2016 and 2017 IMF, IIF and Intesa Sanpaolo Research Department. Source: National Statistical Offices oil non oil IRQ QAT ARS UAE ALG IRN EGY TRK TUN * Variations of available income determined by variation of raw materials prices. Source: IMF, WEO, October 2016 Outside of the MENA Area in the strict sense, both Israel and Turkey kept on registering relatively steady average expansion rates. In the period, Israel (GDP +4.8% of average) benefitted from the strong drive of the global trade of high- tech products, and in the following one (GDP +4.1% in the five-year period ) by the investments for the exploitation of gas reserves and in real estate. The growth in Turkey was supported in both Intesa Sanpaolo Research Department 5

6 periods by reforms and the economy s openness, but the position of the Country was relatively more vulnerable compared to Israel, due to the persistent negative balances of trade and the greater fragility of the industrial structure. In 2015, the GDP growth in Israel, steady with the performances observed in the main advanced economies, slowed down to 2.5% from the 3.2% of 2014, the more limited growth rate of the economy since During the previous year, in Turkey, the GDP growth has instead accelerated to 4% from the 3% of The economy benefitted from better climate conditions, which have favoured the recovery of agricultural production and the profit of terms of trade determined by the decrease of imported oil prices. GDP dynamic E 2017E Weight%* Variation % in real terms S. Arabia UAE Qatar Kuwait Oman Bahrain GCC GCC PIL. non-oil GCC PIL. oil Algeria Iran Iraq Libya Other oil producers MENA oil producers Egypt Jordan Lebanon Morocco Tunisia MENA Non oil prod MENA Total Israel Turkey Emerging Avanced M.I. Oil Price^ Weight on PPP on world in ^ Brent-WTI average, USD per barrel. Source: IMF 1.3 Growth prospects in 2016 and 2017 In the MENA Area, the recent partial recovery of hydrocarbons prices had, so far, a limited effect on the economies of oil Countries. They (especially Saudi Arabia, the Emirates and Algeria) are suffering the full aftermath of both the restrictive fiscal measures undertaken in the last two years to favour the consolidation of public accounts, and the reduced liquidity in the system, caused by the withdrawal of funds deposited by the Governments in the banks, necessary to fund (at least partially) the balance accounts, which in the meantime registered a deficit. Other Countries (Iraq and Libya in particular) are still affected by internal tensions and conflicts and/or by unsafe security conditions. In the GCC Area, these developments are affecting negatively mainly the non- hydrocarbons component of the economy, expected to have a sensible setback in 2016 (+1.8%), which is then going to grow at a rather limited pace compared to the recent past in the forthcoming years (3.1% in 2017). As for the hydrocarbons component, the market conditions of surplus of Intesa Sanpaolo Research Department 6

7 mining capacity and the issuing of policies pursued by industrialized Countries lead to believe this sector is going to contribute quite modestly to the GDP, even in the medium term (almost completely dependent by processing related to hydrocarbons, such as petrochemical and gas liquefaction). Short-term perspectives are actually expecting a cut in oil mining in the next year, should the producer Countries reach an agreement on the policy of supporting the prices. Overall, the hydrocarbon component is expected to grow by about 1.5% in the medium/long term. The structural weakness of the hydrocarbons sector has a negative indirect impact on the other sectors, through lower demand of services and more limited exploration investments. Compared to the expected of the previous year, in 2016, the GCC Countries are going to be affected by a greater slowdown of the non-hydrocarbons component of the economy, since many Governments had to intervene more strictly to contain public deficit in order to limit the use of resources set aside in Sovereign Funds; the dynamic of the hydrocarbons component, instead, is proving to be more healthy than expected. However, overall, the GDP growth expected for this year is still 1 point lower than the one expected previously. As for the non-gcc oil Countries, in 2016, Iraq and Iran are benefitting from the recovery of the mining activity. The non-hydrocarbon component, though, is particularly weak in Iraq, held back by the precarious security conditions, while it keeps a sustained dynamic in Algeria, which has delayed the deficit containment measures, financing it by drawing from the resources set aside in the reserve fund and in the Sovereign Fund. Iran, instead, is cashing in the dividends of the nuclear agreements, albeit slowly, also due to the internal constraints constituted by the lack of infrastructures and services and the sluggishness of the reforms of the economic system. In perspective, the minor contribution of the hydrocarbons sector is going to affect also these Countries and, for Algeria, so will the measures undertaken recently for containing the budget deficit. Libya, instead, is still characterized by the extreme volatility of forecasts, due to the uncertainty surrounding the progress of the stabilization process of its internal political framework. The non-gcc oil Countries are expected to grow, overall, by 3.7% in 2016 and 4.7% in 2017, in this case slightly more than what was previously expected thanks to the greater contribution of the hydrocarbons component. The resuming of the reform process of the economy favoured by the improvement of the internal political climate (Egypt and Tunisia), the investment plans (Egypt, Morocco and Tunisia) and reception services (Jordan and Lebanon) of the numerous refugees (mostly funded by aids coming from friendly Countries and by loans of international organizations) and the profit in terms of trade determined by the decrease of hydrocarbons prices, are supporting the GDP in the net exporting Countries of hydrocarbons. However, in these Countries, the growth is still fragile due to security conditions - which discourage the FDI private flows and tourism - internal social tensions, lack of infrastructures and excessive dependency many economies have (Morocco, above all) toward agriculture and the ensuing climate variables. In perspective, though, these Countries are going to benefit from the gradual reduction of the restrictive effects of the recent fiscal policies. For non-oil Countries, the expected growth is 3.7% in 2016 (weaker than what initially expected due to the negative impact, in several cases, of the geopolitical tensions on foreign financial flows and on tourism) and 4.7% in In Israel, the economy is expected to speed up again to 2.8% in 2016 and 3% in 2017 (from 2.5% of 2015), supported both by consumption which benefits from limited inflation, tax cuts, wage increases and low unemployment (the unemployment rate went down to 4.7% in July, the lowest level in many years) and fixed investment. After two years of stagnation, the latter are now expected to increase greatly, driven by the cuts announced on corporate income tax, the development of high-tech sectors, the incentives on mortgages for purchasing real estate and the possible resuming of the exploration of gas reserves in the Mediterranean through the sale of new permits (for the first time since 2012). Intesa Sanpaolo Research Department 7

8 In Turkey, in the two-year period of , the expected average growth is slightly less than 3% (decreasing compared to 4% of 2015), mainly supported by the internal demand for consumption. The investments (together with inbound capital flows), instead, are expected to slow down due to geopolitical factors, in particular the deterioration of internal and external security conditions, and the greater costs of funding of external deficit (the Country registers a structural current account deficit). Interbank rate 3M 2,5 Arabia Kuwait 2 UAE 1,5 US 1 0,5 0 nov-13 nov-14 nov-15 nov-16 Source: Thomson Reuters MENA non-oil: GDP (% var. Y/y) JO 3,0 TU 0,4 2,5 2H15 1H16 1,2 MC 4,6 1,1 3,4 EGY 4,3 TK 4,8 2,3 3,9 IS 2,4 0,0 2,0 4,0 6,0 Source: Thomson Reuters 2. Dependence on hydrocarbons After the diversification efforts of the last ten years, especially by the GCC Countries, and the recent negative economic situation of the market of fossil fuels, the weight of the hydrocarbons sectors in the net exporting Countries of gas and oil decreased significantly, reaching, in 2015, 41% of real GDP and 30% of nominal one for GCC Countries, 10% of real GDP and 15% of nominal one in Iran and 26% of real GDP and 19% of nominal one in Algeria. Nevertheless, the sector is still of key importance for these Countries, since the biggest shares of tax revenues and export revenues keep on coming from it, with percentages in 2015 ranging from, for tax revenues, 90% of Bahrain and 36% of Iran and, for export, 96% of Algeria and 20% of the Emirates (this percentage rises to 40% when excluding the re-export related to the hub activities). Almost all industrial activities whether they be manufacturing, such as metal processing and petrochemical, or public utility services, such as electric energy supply and water purification (desalination) are energy intensive. Furthermore, the mining activities involve several services and the income flows coming from the sale of hydrocarbons supports the real estate development. % weight hydrocarbons on GDP Export and tax revenues from hydrocarbons 2015 (% share of the total) Nominal Real Tax revenues Export revenues S. Arabia S. Arabia UAE UAE Qatar Qatar Kuwait Kuwait Oman Oman Bahrain Bahrain Algeria Algeria Iran Iran Iraq 46 Na Iraq Libya * Na 49 Libya * * Libya s data refers to the year source: National Statistical Offices * Libya s data refers to the year Table 5 - source: IIF Intesa Sanpaolo Research Department 8

9 2.1 Mining and consumption of hydrocarbons According to the 2016 Report of the British Petroleum (BP) on the sources of energy in the world, the oil wells located in the MENA Area provide 35.6% of the oil and over 20% of the gas mined in the world. Additionally, the region houses over 50% of global reserves of oil and over 45% of gas ones. Within the MENA, Saudi Arabia, Iran, Kuwait and United Arab Emirates and Iraq hold the most relevant shares of the reserves and production of oil; Iran, Qatar, Saudi Arabia and Algeria hold the gas ones. The easy and cheap access to hydrocarbons led the producer Countries of the region to rely almost exclusively on fossil fuels for the primary consumption of energy. The Gulf Countries are confirmed to be the main consumers of hydrocarbons in the world in comparison to GDP: in the last ten years, the relative consumption of oil and gas has increased considerably. Currently, the MENA Countries use up 11.4% of oil and 16.6% of gas on a global scale. According to the data of the Bookings Institutions, the energy intensity for GDP unit of Saudi Arabia, equal to 4.1, is four times the one of England and Germany. MENA: mining and reserves of hydrocarbons 2015 Oil Gas Production* Reserves Production Reserves MM barrel/d Bn barrels Bn m3 Bn m3 S. Arabia UAE Qatar Kuwait Oman Bahrain NA NA Algeria Libya Iran Iraq Egypt Other MENA 0.2 MENA Israel World % MENA** * Including crude oil from wells, sandy sediments and LNG (the liquid part of natural gas). ** Calculated on the global total. Source: BP Intesa Sanpaolo Research Department 9

10 MENA: consumption of gas and oil Oil (MM barrel/d) Gas (Bn m3) S. Arabia UAE Qatar Kuwait Oman NA NA NA NA Bahrain NA NA NA NA Algeria Libya NA NA NA NA Iran Iraq NA NA NA NA Egypt Other MENA MENA Israel Turkey World % MENA Source: IIF 2.2 Oil and Sovereign Funds In the decade, thanks to the massive revenues coming from oil, the oil Countries of the MENA have registered an estimated balance surplus of 1,600 billion dollar. Most of this sum has been set aside in Sovereign Funds, which in September 2016 had an overall capitalization of 3,161 billion dollar (slightly more than 40% of the global total of the category). Starting from the previous year, following the oil revenues decline, the budget balance of the same Countries registered a deficit, which the IMF (World Economic Outlook of October 2016, WEO) estimated to be equal to 148 billion dollar in 2015 and 152 billion in In order to cover the deficit the Governments have initially used their own funds deposited in the banks, and later they have issued bonds on the internal and international market, also considering to sell minority shares of strategic companies on the market, such as, in the case of Saudi Arabia, the oil company Aramco. Qatar and Oman gathered respectively 9 billion and 2.5 billion with a bond in dollars on the international markets. Moreover, Qatar issued 2.5 billion dollar of securities in local currency and recently authorized a new issuing in dollars for 5 billion. Bahrain (despite being the first Gulf Country to lose, last February, the investment grade title of S&P) issued in turn 1.6 billion of conventional securities in dollars and one billion dollar in sukuk securities. Lastly, Saudi Arabia has recently allocated 17.5 billion dollar of sovereign bonds and Kuwait is considering a massive issuing of securities. When considering that - according to the recent forecasts of the IMF (WEO of October 2016) - the oil Countries should register an overall cumulative budget deficit of over 500 billion dollar in the next five-year period, the mere collection on the market could not be enough, in perspective, to fund the imbalance: the Countries shall probably resort to Sovereign Funds to face the balance needs. The Sovereign Funds of the GCC Countries are probably facing a new consolidation phase, where growth is going to have to rely more on profitability of the portfolio rather than the contribution of new capital. Furthermore, a reduction process of wealth accrued is not out of the picture, with ensuing disinvestment on international equity and bond markets. The near totality of Sovereign Funds in the GCC Countries does not provide precise statistics of the composition of their portfolio: indications on the investment policy they pursue can only be obtained by studies carried out by specialized companies. From these studies (for example: Intesa Sanpaolo Research Department 10

11 Mobilizing the potential of GCC SWF for Mediterranean Partner Countries of the Boston Consulting Group) one can observe that the Sovereign Funds have favoured, for foreign investment, mature Countries and very few emerging markets, for a greater stability of the cashflow and less risks of political and regulatory nature (uncertainty related to the legal validity of potentially owned property rights). The Governments of the GCC Countries have often encouraged, however, the Sovereign Funds intervention also in friendly Arab Countries (especially Egypt, Morocco and Tunisia). More recently, the Sovereign Funds have expanded their intervention in the origin Countries themselves, both by participating in local companies and contributing to the funding of infrastructure development plans. Saudi Arabia, Abu Dhabi and Dubai have established Funds with this specific purpose. MENA oil: capitalization Sovereign Funds, billion USD Fund (Country) sept-16 sept-15 SAMA (S. Arabia) Public I. (S. Arabia) ADIA (UAE) Abu Dhabi I. C. (UAE) I.C. Dubai (UAE) I.P.C. (UAE) Mubadala (UAE) Emirates I. A. (UAE) RAK (UAE) 1,2 1,5 KIA (Kuwait) QIA (Qatar) General reserve fund (Oman) Investment Fund (Oman) 6 6 Mumtalakat (Bahrain) National Development Fund (Iran) Revenue regulation (Algeria) LIA (Libya) Development Fund (Iraq) 1 18 GCC Total 2.982, ,5 World Total 7.396, ,0 Source: SWF Institute MENA oil: budget balances, billion USD E 2020E Source: IMF, WEO October Oil and fiscal and external status The decrease of oil revenues caused a worsening of the fiscal and external status of oil Countries. In recent years, the same Countries, in fact, went through a significant increase of the oil price necessary to guarantee the balance of public budget and current account of the balance of payments. The price increase of the fiscal and external breakeven prices mirrors, on the one hand, the increase of public spending of some Countries aimed at handling the consensus of a phase of political turbulence started by the end of 2010; on the other hand, the increased import determined by the rise of internal demand both of durable and semi-durable consumer goods and capital goods, supported by the income increases and the strengthening plans for infrastructures and economy diversification. Due to the limited offer of domestic productions, this demand oriented itself toward import, with a negative impact on the current account balance. Intesa Sanpaolo Research Department 11

12 Fiscal breakeven oil price (USD/brl) Public spending/gdp (USD/brl) E Iran S. Arabia Bahrain UAE Lebanon Jordan Qatar Tunisia Kuwait UAE Oman Egypt Bahrain Qatar Algeria S. Arabia Oman Iran Algeria Iraq Kuwait Libya Iraq Brent/WTI Average Source: IMF, WEO October 2016 Source: IMF, WEO October 2016 The exporting Countries reacted to the decrease of oil revenues with modest current expenditure cuts, especially related to subsidies, and non-essential investments. Every oil Country of the Gulf either reduced subsidies or increased fuel and public utility services prices (water and electricity). Moreover, some limited increases of taxes and duties and expenditure interventions on the wages of the public sector have been implemented (Saudi Arabia froze the bonuses for public employees). In general, the answer, on the public finances side, has been quite timid so far, and in 2016 and 2017 every exporting Country of hydrocarbons is expected to register, in various degrees, severe budget deficits. These deficits are going to translate in an acceleration of the growth process of the public debt/gdp ratio started in 2014 and in an increase of foreign debt, considering in perspective the lower funding ability on the internal market. However, in relation to some budget items, the low hydrocarbons prices support fiscal consolidation policies pursued by the near totality of import Countries. The decline of oil price, in fact, is having a positive impact on the expenditure for energy subsidies, which constitutes a significant item of the public budgets of these Countries. Jordan, Morocco, Tunisia and Egypt as part of the reparatory measures requested by the IMF in return of financial support, in order to contain a too high public deficit in comparison with the GDP have initiated some policies in cuts of subsidies, starting from The decline of energy prices allowed to limit the inflation impact and the slowdown on internal demand of this manoeuvre, also containing the risk of social tensions that the decrease of subsidies traditionally involves in low-income Countries. Public debt/gdp (USD/brl) E 2017E S. Arabia UAE Qatar Kuwait Oman Bahrain Algeria Iran Iraq Libya Egypt Jordan Lebanon Morocco Tunisia Israel Turkey Source: IMF, WEO October 2016 State balance/gdp (USD/brl) E 2017E S. Arabia UAE Qatar Kuwait Oman Bahrain Algeria Iran Iraq Libya Egypt Jordan Lebanon Morocco Tunisia Israel Turkey Source: IMF, WEO October 2016 Intesa Sanpaolo Research Department 12

13 As for external accounts, the decrease of the value of exported hydrocarbons (only partially balanced by the slowdown of import determined by the halt of internal demand) caused, in 2015, a significant worsening of the current balance of payments of the oil Countries. Only the Countries with a relatively limited share of hydrocarbons export (UAE and Iran) or a low current breakeven price (Kuwait and Qatar) closed with a surplus. At the same time, the lower cost of imported hydrocarbons had positive effects on the external balance and the spending power of families and enterprises of the importing Countries of hydrocarbons. Current breakeven oil price (USD/brl) E S. Arabia UAE Qatar Kuwait Oman Bahrain Algeria Iran Iraq Libya n.d Brent/WTI Average Source: IMF, WEO October 2016 Current balance/gdp E 2017E S. Arabia UAE Qatar Kuwait Oman Bahrain Algeria Iran Iraq Libya Egypt Jordan Lebanon Morocco Tunisia Israel Turkey Source: IMF, WEO October 2016 In perspective, the additional frailty of internal demand and, therefore, of import, is going to support the current position of oil Countries, although it will do so in a scenario with still low hydrocarbons prices in a historic comparison. In the importing Countries of hydrocarbons, the increase of the energy bill due to the expected rise of hydrocarbons price (although in this case the price framework is more limited than in the past) and a more sustained internal demand are expected to determine a new expansion of trade deficits, only partially compensated by other items of the balance, such as transferrals (donations of friendly Countries and remittances by73 Emigrated workers) and services (tourism incomes, which are even decreasing in some Countries due to regional tensions), with an ensuing worsening of the current balance. Tourism and remittances (billion USD) Tourism Remittances Egypt Jordan Lebanon Morocco Tunisia Source: National central banks Trade balances (billion USD) E 2017E Egypt Jordan Lebanon Morocco Tunisia Turkey Israel Source: FMI Intesa Sanpaolo Research Department 13

14 3. Evaluations of rating agencies In , the perspective of an unstable growth, regional and internal political tensions and the worsening of budget and external balances have caused new rating cuts of sovereign debt in the MENA Area, which have affected both the importing and exporting Countries of hydrocarbons. Rating S&P Moody's S&P action 2016 S. Arabia A-/S A1/S Cut to A+(Feb ) UAE AA/S Aa2/N Confirmed Qatar AA/S Aa2/N Confirmed Kuwait AA/S Aa2/N Confirmed Oman BBB-/S Baa1/S Cut to BBB+(Feb ) Bahrain BB/S Ba2/N Cut to BBB (Feb ) Algeria NA NA Iran B-/S NA Confirmed (Aug) Iraq NA NA Libya B-/N B3/S Outlook cut (Mar) Egypt BB-/N B1/S Outlook cut (Apr) Jordan B-/S B2/N Outlook raised (Sept) Lebanon BBB-/S Ba1/S Confirmed (Oct) Morocco BB-/N Ba3/S Confirmed Tunisia BB/N Ba1/S Cut to BB+ (Jul) Stock market MENA Countries 2016 (*) 2015 Egypt Morocco MSCI EM Turkey Tunisia Dubai Qatar Lebanon Kuwait Bahrain Jordan Israel S. Arabia * January Mid October Source: Thomson Reuters Source: Thomson Reuters In the region, only Lebanon, this year, was subject of a more positive rating due to the hold of capital flows from abroad (especially non-resident deposits, the near entirety of the Lebanese diaspora), in spite of the persistent internal political issues (it is only by the end of October that the Lebanese Parliament, after 41 ballots in two years, was able to elect the new President of the Republic, the General Michel Aoun) and of the conflicts in the nearby Countries. Equity investors, instead, have rewarded the markets of the importing Countries of hydrocarbons which, after the difficulties of the recent past, are now showing better economy recovery outlooks, progresses on the fiscal consolidation process and stabilisation of the institutional political framework, as in the case of Egypt and Tunisia. Intesa Sanpaolo Research Department 14

15 4. Exchange-rate regimes and exchange rates The GCC Countries have a fixed exchange-rate regime with the dollar, with the exception of Kuwait that abandoned it in May 2007 for a controlled fluctuation regime with a reference basket where the dollar still has a relevant weight. The Libyan dinar has a fixed rate with special drawing rights (SDR), while the Iraqi dinar has a fixed rate with the dollar. Among the oil producer Countries, Algeria s currency follows a controlled fluctuation regime with the dollar in a market where there is a rigid control of capital movements. The restrictions of currency purchases, moreover, favour the existence of a parallel market, where the dollar is exchanged with a considerable bonus. Iran has a dual regime, one with a fixed rate with the dollar (which was still lowered several times during the last years) for the purchase of basic necessities and a parallel one for other transactions. Even in this case, the dollar is exchanged with a bonus on the parallel market, which was however significantly reduced after the removal of the sanctions. Among the importing Countries of hydrocarbons, the currencies of Jordan and Lebanon have a fixed rate with the dollar, while the Moroccan dirham is pegged to a basket where the euro weighs by 80% and the dollar by 20%. Egypt, in the last years, after following a regime the IFM defined of stabilisation, characterised by a limited currency offer through auctions, restrictions toward capital movements, and periodic reviews (depreciation) of the exchange rate with the dollar, announced on the 3 rd of November the liberalisation of currency transactions. The need to defend the competitiveness of exported goods (the main market, by far, is the Euro area) and to contain the inflation drives from imported goods have caused the Tunisian dirham to follow a controlled fluctuation with the euro. Outside of the MENA Area, the currencies of Israel and Turkey follow a free-floating regime. The strengthening of the US dollar in the last years caused a significant appreciation of the effective exchange rate of the MENA Countries with pegged currencies, bringing them toward an overvaluation status. The recent decrease of hydrocarbons price determined a decrease of terms of trade for exporting Countries, increasing the pressure on the external position, while it improved the terms of trade of the importing Countries. The important stabilisation function of the relatively less-developed internal financial markets by the fixed exchange rate regime and the strong unbalance of export toward the hydrocarbons (quoted in dollars), which implies limited advantages from the competitiveness gain deriving from depreciation, lead us to believe that the oil Countries shall keep on defending the fixed parity with the USA currency, despite the exchange rate pressures by the dollar appreciation and the change in the American monetary policy. There are risks coming from a prolonged phase of low prices for hydrocarbons, which could make the fiscal position unsustainable and lead to reviews of the parity with the dollar aimed at increasing the revenues in local currency. As for the currencies of net importing Countries of hydrocarbons with a controlled fluctuation exchange rate regime, the competitiveness gain from the depreciation of the nominal exchange rate has been often more than countered by the high inflation. In almost each one of the Countries, the real effective exchange rate is, as such, currently overvalued, according to IMF standards. The controls on currency movements and the limits on currency purchases have, so far, fuelled, in some Countries like Egypt, an unofficial market where the dollar is exchanged with a significant bonus. Intesa Sanpaolo Research Department 15