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Richard Thompson, Editorial Director, MEED, [email protected] @MEEDEditor Middle East market 25 update October 2016 2016 in headlines Saudi Arabia releases payments to contractors – MEED Saudi Arabia concludes record bond sale - MEED Opec reaches deal to cut oil production - MEED Saudi Arabia acts on public sector wage bill - MEED Moody’s cuts debt rating of three GCC states – MEED Abu Dhabi's Adnoc cuts 5,000 jobs – MEED Saudi prince reveals economic vision – MEED GCC banks hike provisioning – MEED Iran sanctions lifted – MEED Riyadh breaks off diplomatic ties with Iran – MEED Rising risks • lower oil prices have increased business uncertainty • Government spending cut and regional liquidity reduced • Maintaining revenues and cash flows are biggest challenge • Increased bank caution on lending exacerbating cash crisis • Growing number of companies struggling to access working capital • Security and cybersecurity risk growing Oil prices have doubled in $51.78/barrel 2016 $50/barrel $26/barrel OIL PRICES UP Noises about Opec production cuts Worries about global supply outages Declining US production – 50% rig fall Wildfires in Alberta's oil sands region OIL PRICES DOWN Stockpile build up in US crude storage Resumption in Libya oil exports Ramp up in Nigerian crude production New Iranian capacity Higher prices bring back oil shale The new normal Source: ft.com $50/barrel • • • • Oil expected to remain stable at about $50 a barrel for the rest of year Oil prices set to stay low as global supply is outpacing demand growth Regional oil producers maintaining production to retain market share IMF forecast for Brent average $50.1 a barrel in 2017, rising gradually to $57.5 by 2021 The impact of low oil Mena exporters lost $360bn in oil revenue in 2015 down 23% in 2015, 16% in 2016 Fiscal breakeven point ($ a barrel) $50/barrel Bahrain Kuwait Oman Qatar Saudi Arabia UAE “[The recovery in oil prices] does not fundamentally change the outlook for oil prices or the implication for oil exporters in the region. Oil exporters will continue to face some difficult policy choices, both to balance their budgets and to diversify their economies to become less dependent on oil.” - Masood Ahmed, IMF Director of Middle East and Central Asia Rising deficits GCC Bahrain Kuwait Oman Qatar Saudi Arabia UAE • Oil price rises have eased fiscal pressure but reforms still needed to balance budgets • Combined fiscal deficit of GCC in 2016 is estimated at $160bn, or 12.8% of GDP • Between 2016 and 2019, Bahrain, Oman, Kuwait and Saudi Arabia expected to run average annual fiscal deficit of 10%, while Abu Dhabi and Qatar will see 4% • GCC needs to finance a combined budget deficit of $765bn between 2015 and 2021 Balancing the books The new policies that will drive the market Diversify non-oil revenue streams – taxation, fees Drive structural reform programmes – privatization, private sector Efficiency drive – restructuring, job cuts (Abu Dhabi), wage cuts (KSA) Energy reform – subsidy cuts, diversify energy, IPP/IWPP PPP for infrastructure – wastewater, power, housing Diversifying funding – borrowing, assets, IPO Localisation of employment Investment drive – markets, PPP, green cards GCC funding needs Source: Standard & Poor’s • GCC needs $560bn to finance government deficits to 2019 • 60 per cent of this will be in Saudi Arabia, which needs to find $389bn to finance government spending and investment to the end of 2021 • S&P expects the kingdom to borrow as much as $180bn by 2019 • Deficits financed by a mix of drawdowns on reserves, and debt • Fiscal balance after 2019 depends on the speed of implementation of government reforms such as subsidy cuts and value added tax, and oil prices. Deteriorating balance sheets Projected gross government debt (% of GDP) • • • • • • Kuwait, Abu Dhabi, Qatar and Saudi have large reserves but these are finite Liquidity is falling and uncertainty will push up the cost of GCC borrowing Saudi’s net asset position will decrease by 30% by 2019 and Kuwait’s by 20% Saudi used $170bn of FX reserves from Aug 2014 peak to $562bn by Aug 2016 GCC sovereigns will choose different mixes of asset and debt funding Qatar relying most on debt and Kuwait most on drawing down reserves Source: IMF GCC non-oil growth slows GCC economies still driven to a by government spending so the cutbacks in government spending hit non-oil growth Non-oil GDP growth in the GCC has fallen to from over 5 per cent in 2014 to average 1.8 per cent in 2016 Recover to 3.1 per cent in 2017 2017 rebound due to the slowing fiscal consolidation Source: IMF Outlook for regional growth GDP growth in the GCC: 2016 = 1.7% 2017 = 2.3% Mena GDP growth outside GCC: 2016 = 3.1% 2017 = 2.9% Source: IMF Average 20092013 2016 2017 Egypt 3.2 3.8 4.0 Iran 0.8 4.5 4.1 Iraq 7.8 10.3 0.5 Outlook for GCC growth, by market Average 2016 2017 20092013 Bahrain 3.6 2.1 1.8 Kuwait 1.9 2.5 2.6 Oman 4.8 1.8 2.6 Qatar 10.9 2.6 3.4 Saudi Arabia 4.1 1.2 2.0 UAE 2.6 2.3 2.5 Source: IMF Projects market slows Value of projects planned or underway in the Gulf ($bn) • Gulf down 0.7% YoY to $3.45tn • GCC up 0.8% to $2.82tn • Saudi Arabia down -1.1% to $1.18tn • UAE up 2.6% YoY to $867bn • Iran up 17.5% to $286bn • Qatar down -4.3% to $270bn • Kuwait up 1.0% to $247bn • Oman up 14.4% to $194bn Source: www.meed.com Key project trends • • • • • • • • • Oil prices hit government finances Investment plans under review Revised master planning New delivery models - PPP, TODs Efficiency focus Big Data/technology Security –physical, cyber Costs – subsidy cuts, fuel costs, tax Transport integration GCC projects outlook 2016 contract awards ($bn) 45,000 Project awards ($m) 40,000 35,000 Total GCC awards forecast at start 2016 = $140bn $41bn Total GCC awards forecast mid-2016 = $120bn $37bn 30,000 25,000 $24bn $22bn 20,000 $13bn 15,000 10,000 5,000 $2.8bn 0 Bahrain • • • • • Kuwait Oman Qatar Saudi Arabia UAE GCC awards forecast to be down about 16% in 2016 to just over $140bn This could fall to $120bn – 27% down on 2015 Worst affected will be Saudi Arabia Iran and Egypt offer strong potential, but depend on the political situation UAE, Kuwait, Qatar and Oman will be marginally down Source: MEED Projects GCC projects outlook pipeline By market Saudi Arabia has biggest pipeline of planned projects, about $800bn The UAE is second, with $600bn Qatar at $200bn of planned projects Kuwait at about $175bn By sector Construction sector – buildings, property and real estate – offers the biggest segment of future projects, with a pipeline of about $1tn GCC power and transport projects each have about $400bn-worth of schemes planned Source: MEED Projects Outlook for the UAE UAE is one of the best placed to rebalance its budget and adjust to low oil Economy diversified and supports large and experienced corporations active in regional and global markets $500bn-worth of public and private savings Banking system liquid and well-managed The economy will recover robustly in 2017 on rebound in the oil price and increased public and private sector activity This will be supported by preparations for Expo 2020 in Dubai and increasing trade with Iran Annual real GDP growth (%) UAE Average 20092013 2016 2017 2.6 2.3 2.5 Source: IMF Abu Dhabi Cut spending fast and hard Acted to end or reduce energy and other subsidies; and preparing for the introduction of value-added tax (VAT) and other forms of taxation for the first time to increase public sector revenue UAE as a whole will post deficits of just 3.9% of GDP in 2016 and 1.9% in 2017 The sharp cut in government spending will reduce non-oil GDP growth to just 1% in 2016 and 1.3% in 2017 This has been reflected in slowing projects and real estate markets A new CEO has been appointed at Abu Dhabi National Oil Company (Adnoc) and radical changes were announced in May Dubai More diversified than the rest of the GCC and less-reliant on oil revenue Expected to maintain GDP growth of 3.3% in 2016, rebounding slightly to 3.6% in 2017 It has kept government spending relatively high, partly due to the upcoming Expo 2020. By mid-2016, Dubai had awarded more than $16bn-worth of deals. Real estate remains the key driver of the emirate’s projects market, although the importance of transport growing in line with efforts to develop city rail networks and improve airport infrastructure. Power schemes have also become a focus of activity as Dubai looks to establish itself as a world leader in solar energy. UAE projects headlines $507bn Contracts awarded in the UAE between 2006 and 2015 $154bn Value of projects of under construction in the UAE $629bn Project pipeline in the UAE $22.6bn Value of projects awarded in the UAE in the first half of 2016 $16bn Value of projects awarded in Dubai in the first half of 2016 The largest sectors for future projects are construction, followed by transport. In addition to Abu Dhabi’s metro and light rail plans, there is the expansion of Dubai’s Al-Maktoum International airport and further phases of Etihad Rail’s federal railway to execute. Outlook for Saudi Arabia Private sector activity in the kingdom slowed sharply in 2016, following delayed payments on government contracts and reduced spending and confidence Non-oil GDP growth is projected to slow to 2.3% in 2016, then 1.1% in 2017 Saudi needs to follow through on plans to finance and reduce its budget deficit, following a successful $17.5bn international bond issuance last week This represents a GCC-wide move towards diversifying budget financing including drawing down on assets, domestic debt, and increasingly from international markets in order to reduce excessive reliance on the domestic market, which can aggravate low banking sector liquidity and crowd out the private sector Riyadh has sold local banks a total of $28bn-worth of bonds in the 12 months ending August. Their capacity to buy more is limited, but at least $10bn could be comfortably placed with domestic investors annually for the foreseeable future Saudi slowdown hits banks The slowing projects market and more difficult environment for the construction sector will lead to rising non-performing loans and higher provisioning costs, according to US-based Moody’s Investors Service last week Moody’s expects NPLs to rise to around 2.5 per cent of gross loans in 2017, from around 1.5 per cent estimated as of June 2016.” “The Saudi construction sector has been negatively affected over the last two years by slowing economic activity and fiscal consolidation measures, stemming from a lower oil prices environment. We expect the pressures to continue as the Saudi government aims to reduce its large fiscal deficit” - Olivier Panis, senior credit officer at Moody’s Saudi Vision 2030 On 25 April, Deputy Crown Prince Mohammed bin Salman al- Saud unveiled much-anticipated Vision 2030 plan, which outlines economic reforms that will wean the country’s oil-dependent economy off hydrocarbons • • • • • • • • • • • • Grow private sector to 65% of GDP from 40% Implement transparency reforms Structural reforms of mining sector Privatise government services Government becomes regulator Private investment in healthcare, municipal services, housing, finance and energy sectors About 146 state assets that could be privatised or sold to the public Less than 5% of Saudi Aramco to be sold in IPO Transfer Aramco to PIF PIF assets rising from SR600bn to more than SR7tn Localisation of oil & gas sector from 40% to 75% Launch the King Salman Renewable Energy Initiative National Transformation Programme (NTP) National Transformation Plan is hitting all areas of public spending • Min of Electricity & Water split between two Ministries • Replacing multiple key ministers • New heads of Aramco, the Saudi Arabian Monetary Agency, the Saudi Railway Company and the National Water Company • Restructuring General Authority for Civil Aviation (GACA) Many plans postponed and new consultants being hired to set new strategies and to advise on new privatisations Confusion for developers, contractors and banks Project pipeline will return with emphasis on private investment. Contract awards in Saudi fell 60% between H1 2015 and 2016 National Transformation Programme (NTP) The National Transformation Plan (NTP) aims to reduce Saudi Arabia’s public sector wage bill from 45% of government spending to 40% by 2020 • 27 Sept: Cabinet issues decree cutting ministers’ pay by 20% and suspending public sector bonuses or pay rises • Stipends paid to the Shura Council members were cut 15 per cent. • The decree also freezes public sector hiring, and indicates that foreigners in non-essential positions should be terminated • Existing public sector employees should be recycled to fill key vacancies. • Benefits such as allowances, phones and cars have also been cut, as well as allowances to students studying abroad, diplomats and health workers. • Saudi Aramco is also asking foreign firms to hire more Saudi Nationals NTP:PPP Ministry of Economy seeking advisor to develop pipeline of public private partnership (PPP) projects National Transformation Plan (NTP) aims to carry out five PPP projects by 2020, without specifying sectors or projects. The PPP model is also expected to be applied in transport, health and education. Taif airport PPP has been put on hold, due to a concerns over revenue streams Saudi Arabia is expected to go ahead with PPP projects without a dedicated legal framework, using existing commercial law NTP: Aramco IPO • Sale of up to 5% of Aramco shares worth est. $100bn. Even 1% would be biggest IPO • Aramco working on IPO options, including dual listing could also consider listing on the Tokyo Stock Exchange – 5 Sept • Final proposal to be presented to the country’s Supreme Council. Could see listing in 2017 • Transfer remaining ownership to Public Investment Fund which will inflate to $2 trillion and help it invest at home and abroad • Tokyo has no plans to be a strategic investor in Saudi Aramco but may invest in industrial ventures in kingdom - Yasutoshi Nishimura, 18 Sept Saudi’s $1tn project pipeline Source: MEED Projects Conclusions 2016 is a tough year for GCC projects with delays and late payments squeezing cash flow, and banks tightening lending in preparation for rise in non performing loans 2017 will be another challenging year but project spending will resume in albeit at lower levels than before and using new models. 2018 will be stronger recovery The most important task for the GCC in 2017 is implementing change programmes Implementation of spending cuts and revenue measures will get progressively harder as the GCC moves from `low-hanging fruit’ such as cutting capital spending to more politically charged cuts to public sector wages. Breaking the social contract Delivery and assertive programme management is key Financing will be a primary challenge as market conditions harden Contradiction between cutting spending, which drives private sector activity, and encouraging the private sector to hire to reduce unemployment Premium project market reports Premium project market reports MEED’s powerful premium intelligence reports (PIR) provide a competitive advantage in the Middle East’s constantly changing and difficult to understand markets: • • • • • • • • • Comprehensive suite of Middle East market report Timely reports focused on large and high growth markets Forward looking analysis by leading Middle East experts Structured for fast and easy use Delivered electronically in pdf format Buy online http://buy.meed.com/ Additional post-purchase support available Access to regular briefing events Inform and support strategy development Special Subscriber Offer: MEED.com subscribers benefit from an exclusive $500 discount on each PIR report purchase Additional 10% discount available today! 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