Regional Outlook Richard Thompson Editorial Director MEED Four Seasons Hotel, Manama, 30 Mar 2017
2016: A challenging year Crude hit 30-year low before recovering Surplus becomes deficit Capital spending under review Restructuring in government and business Liquidity squeezed by fall in govt deposits and debt Banks increase provisioning for non-performing loans Economy hit as rents, spending and travel falls Payment delays created cash flow crisis Aleppo, Yemen and Syrian refugee crisis Rise of nationalist focus in US and Europe
GCC growth hit 7-year low in 2016 Real GDP growth (%) 9 8 7 6 5 4 3 June 2014 Oil prices crash from $114/barrel peak Jan 2016 Oil prices hit 30-year low of $26/barrel Oil price ($/barrel) 120 100 80 60 40 2 1 0 2015: Governments use reserves to maintain spending 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 MENA GCC Ave oil price ($/barrel) 2016: Growth slides as governments cut spending 20 0 Source: IMF, World Bank, BP, MEED
Saudi growth slumps GDP ($bn) 900 800 700 600 500 400 300 2009-13 Real GDP growth Ave 4.1% 2016 1.3% 2017 2% 4 3.5 3 2.5 2 1.5 GDP growth (%) 200 1 100 0.5 0 2013 2014 2015 2016 2017 2018 2019 2020 Nominal GDP ($bn) Real GDP growth (annual change, %) 0 Source: IMF; World Bank
GCC project activity slumps $61bn fall in value of project activity as completions outpaced awards $166bn of contracts completed in 2016 while only $105bn awarded 38% fall in value of GCC contract awards to $107bn from $172bn 60% fall in awards in Saudi Arabia to about $27bn ; MEED Projects
Turnaround 2017 Bahrain plans multibillion dollar coast strip 27 Mar Aramco awards $5bn in offshore deals 26 Mar Saudi receives bids for Taif airport PPP 26 Mar Saudi Aramco eyes $2bn sukuk sale 22 Mar GCC construction shows signs of recovery 16 Mar Developers await SEC s 5,400MW IPP 15 Mar New package on Aramco gas megaproject 8 Mar Mecca Metro to be developed as PPP 7 Mar Bahrain light rail tender expected in H1-27 Feb Riyadh commits to 1.5m housing units 21 Feb US firm wins Saudi management deal 20 Feb
The new normal Source: ft.com $50/barrel Oil expected to remain in $50-$60 range for medium term IMF forecasting Brent average of $50.1/barrel in 2017 Rising gradually to $57.5 by 2021
The impact of low oil Fiscal breakeven point ($ a barrel) $50/barrel Bahrain Kuwait Oman Qatar Saudi Arabia UAE
The growing fiscal black hole GCC fiscal deficit in 2016 was about 12.8% of GDP GCC Bahrain Kuwait Oman Qatar Saudi Arabia UAE 2016-2019, Bahrain, Oman, Kuwait and Saudi Arabia average annual fiscal deficit of 10% GCC must finance a total budget deficit of $765bn between 2015-21 Riyadh needs to raise an estimated $389bn by the end of 2021 Source: S&P; MEED
Balancing the books Fiscal consolidation cut spending, restructuring, job cuts, efficiency Diversify non-oil revenues taxation, fees, private sector Structural reforms privatisation, SMEs Energy reform subsidy cuts, diversify, IPP/IWPP PPP Energy, water, housing, transport Diversifying funding new sources, ECAs, IPO
Saudi budget 2017 Revenues Revenues up 31% to SR692bn on oil at $50-$62/barrel. Non-oil up 6.5% Expenditure 6% YoY increase in 2016 budget spending, 8% up on actual spend Reality is a 4.3% contraction as some 2016 spending from 2015 39% increase in infrastructure and transport spending Increase in municipal services and military spending Deficit Revenue rise and spending dip could see deficit half to 7.7% GDP Aim to balance budget by 2020
Saudi Vision 2030 Grow private sector to 65% of GDP from 40% Privatise government services. Up to 146 assets Government becomes regulator Private investment in healthcare, services, housing and energy Up to 5% of Saudi Aramco floated in 2018 could raise $100bn PPP for projects and services Localisation of oil & gas sector from 40% to 75% Launch the King Salman Renewable Energy Initiative
2017: The year of privatisation National Centre for Privatisation Set policy and programmes for privatisation projects, PPP and capacity building Public utilities, sports, healthcare, education, transport and municipal services 85 opportunities and projects for public/private cooperation in budget Airport Privatisation Gaca aims to privatise all airports in the kingdom by 2020. Three-step process: 1. Transforming the airports into an airport company. 2. Privatise O&M, starting with Jeddah s King Abdulaziz International airport 3. Adopt a build, transfer and operate (BTO) strategy PPP momentum builds National Centre for Privatisation will lead PPP programme Ministry of Economy seeking advisor to develop pipeline of PPP projects NTP aims to carry out 5 PPP projects by 2020 Taif is 3rd airport PPP after Medina (2011) and Yanbu (March 2017) but Taif airport PPP was put on hold in 2016 due to concerns over revenues
The Saudi Aramco IPO Riyadh seeking to raise capital from sale of Aramco shares Plans to float of up to 5% of Aramco in 2018 Biggest share sale in history and could raise $100bn Market capitalisation estimates range from $1.5tn-2tn (Apple is $652bn) Dual listing on Tadawul and international exchange Moelis, JPMorgan and Michael Klein advising BUT Concerns about what offered and transparency Aramco is attractive but only small stake offered Riyadh this week cut tax bill to 50% from 85%
The engine of the Saudi economy Investment programme Aramco to invest about $334bn over next 10yrs to sustain oil and gas production 42% on drilling, 31% on surface facilities and 11% on infrastructure It says it will spend about $33bn a year in the Saudi economy It plans to tap the debt markets for $10bn to raise funds to finance its programme Long term agreements Over $5bn offshore oil & gas projects awarded on LTA since start 2016 Dynamic Industries, Larsen & Toubro/Emas, McDermott, Saipem, NPCC Over $800m tendered but not awarded Aramco seeking to add new companies $3bn-5bn Marjan field development and estimated $5bn Zuluf offshore field dev In-Kingdom Total Value-Add (IKTVA) programme Aramco to double energy-related goods procured in kingdom to 70% by 2021 Wants to export 30% of output over the same time Investing $4.4bn in industrial city at Abqaiq to develop energy-related industries $5bn investment in maritime complex at Ras al-khair Power Seeking developer interest for IPP at Satorp refinery in Jubail Could make first investment in renewables this year
Renewables programme National Renewable Energy Programme (NREP) launched in February 45GW planned by 2020 and 9.5GW by 2023 Renewable Energy Project Development Office (Repdo) is heading the programme Repdo reports to renewable energy steering committee, chaired by Energy Minister KA-Care will form the renewable energy monitoring agency (Remo) On 20 Feb, REPD issued prequalifications for first 700MW: 300MW photovoltaic solar project at Sakaka in the Al-Jouf province 400MW wind project at a site in Midyan in the Tabuk province Later rounds cover CSP and waste-to-energy schemes All projects developed under the independent power producer (IPP) model Sumitomo Mitsui Banking Corporation (SMBC) is financial adviser DLA Piper will provide legal advisory Fichtner provides technical advisory services 28 April 2015
Saudi construction outlook 750,000 families eligible for public housing NPMO Saudi construction expected to grow by 0.8% in 2017 after contracting -3.1% in 2016 Riyadh finalised land tax in May 2016 and white land fees expected to boost Housing Ministry plans to deliver 1.5m affordable houses over next 5 years, 400,000 by 2020 Studying types of partnerships with developers including $20bn agreement with a consortium led by South Korean Hanwha to build 100,000 homes over next 10 years SR3bn BOT/PPP programme to provide housing to widows and orphans in cooperation with the Ministry of Labour and Social Development NPMO Bechtel to run the National Project management Office to support government delivery of infrastructure projects and avoid cost overruns 28 April 2015
Outlook Weakest MENA growth since the 2009 due to tightening fiscal policy Kuwait growth will remain weak despite strong balance sheet Qatar will be sluggish as fiscal policy becomes more restrictive and credit growth eases Bahrain and Oman will underperform due to austerity Egypt will is expected to endure a painful 2017 following the effective devaluation of the pound Inflation is expected to rise, and monetary and fiscal policy will be tightened further. Real GDP growth (%) Average 2009-2013 2016 2017 GCC 1.7 2.3 MENA 3.1 2.9 Bahrain 3.6 2.1 1.8 Kuwait 1.9 2.5 2.6 Oman 4.8 1.8 2.6 Qatar 10.9 2.6 3.4 Saudi Arabia 4.1 1.3 0.4 UAE 2.6 2.3 2.5 Egypt 3.2 3.8 4.0 Iran 0.8 4.5 4.1 Iraq 7.8 10.3 0.5 Source: IMF
The GCC s funding challenge 2017 has already been a bonanza year for debt markets in the region Source: Standard & Poor s Deficits financed by a mix of drawdowns on reserves, and debt Saudi used $170bn of FX reserves from Aug 2014 to Aug 2016 Saudi s net asset position will decrease by 30% by 2019 S&P expects the kingdom to borrow as much as $180bn by 2019
Cash crunch eases for Saudi banks 2016: Liquidity crisis Severe liquidity crunch as Riyadh cut spending and delayed contractor payments Fall in deposits and rise in borrowing saw loan-to-deposits ratios rise to 86% Banks raised provisioning against non-performing loans Cost of debt spiked with Saibor spiking at 2.4% in Oct 2017: Liquidity pressure eases Trend reversed with large liquidity injections into banks following $17.5bn bond in October and the payment of $28bn of overdue bills to Saudi contractors in Q4 Increase in loan repayments saw loan-to-deposit ratio fall to 83% in Dec In January, three-month Saibor fell below the rate at which the central bank lends money to commercial banks to 2% Outlook Moody s expects liquidity pressures to be moderate over next 12-18 months Low credit growth forecast at around 3% Deposit growth will remain challenging, Moody s Risk of government borrowing absorbing liquidity
The Taxman cometh VAT GCC to introduce 5% value added tax (VAT) from the start 2018. Impact unclear until national legislation in place but operational challenges should be expected: Collecting and remitting VAT will have set-up and compliance costs Cash flow under pressure from paying VAT on purchases before reclaiming Pressure to absorb cost in highly competitive, low margin sectors Renegotiating contracts could pose additional challenges Risk of errors in tax collecting and accounting could see companies liable Costs of staff training update or replacement of IT infrastructure VAT and government cutbacks could reduce disposable incomes Companies involved in supplying goods and services between countries or free zones likely to face additional complexities as agreements vary Other new taxes Saudi Arabia planning new taxes on expatriate workers this year Foreign worker tax on companies from 1/1/18, phased over 3 years Monthly fees on expats sponsoring dependents rising over 3yrs from 1/7/17 Rising visa costs already implemented