By Edward Attwood
Barring fast-growing Qatar, the GCC states are set for a slow-burning year in 2012
In what has become something of an end-of-year tradition, Danish investment house Saxo Bank issued its top 10 ‘outrageous predictions’ for the new year. While the bank reminded its customers that the probability of their ‘predictions’ actually coming true were unlikely, they were a good way of encouraging people to “think outside the box and prepare for world-altering events”. Included in the list was an independent candidate claiming the White House in the US presidential election in November, Apple stock plummeting by half, wheat prices doubling, and all European exchanges and banks closing for a week or more after a precipitous collapse on local stock markets.
None of the Gulf countries were mentioned in any of the predictions, but there is little doubt that after a tempestuous 2011, any further sea-changes in the global economy will certainly affect the region. Evidence of that was on offer last month, when some of the UAE’s top officials warned that the worsening debt crisis in Europe and ongoing concerns about the health of the US economy could put the brakes on local growth.
"It is a source of concern for everybody in the world so it is a source of concern to us as well because Europe is a very important trade and business partner for the UAE and worsening conditions economic and financial will reflect on everybody," UAE central bank governor Sultan Nasser Al Suweidi said.
Economy minister Sultan Al Mansoori echoed Al Suweidi’s words when he predicted that growth figures in the UAE would “hover” around three percent, if the “up and down” situation in Europe and the US continued. If issues elsewhere corrected themselves, he said, then the UAE could see growth of around four percent. That level of growth is still healthy in comparison to recent growth figures posted by the UAE (-1.6 percent in 2009 and 1.4 percent in 2010) and the sclerotic growth being witnessed by Western economies still struggling to extract themselves from the recession. However, external observers believe that the UAE will have to work hard to hit that three percent growth figure next year.
As such, 2012 looks like another year of consolidation for the UAE. According to a report issued by ratings agency Moody’s in December, debt associated with the Dubai government and state-owned non-financial corporates still amounted to $101.5bn. Although Moody’s indicated that Dubai had been able to deal with debt obligations thus far, it also expressed concern that “there have so far been few signs of material voluntary deleveraging and migration to more sustainable capital structures among corporates with currently weak credit profiles”.
Nevertheless, JP Morgan argued in a note issued in October that Dubai would be able to manage the estimated $14bn worth of debt that will mature in 2012. In Abu Dhabi, a recalculation of the emirate’s priorities seem to indicate that the UAE capital will spend much of next year reconsolidating its financial position. While key infrastructural developments – such as work being carried out on Abu Dhabi International Airport and construction on vital energy projects – are still underway, less immediately important strategic targets have been somewhat pushed back.
For stock markets in the UAE, it has been something of a dismal year – in line with bourses the world over. What has particularly characterised the tail-end of 2011 has been exceptionally low volumes being traded in both Abu Dhabi and Dubai, exacerbated by the Arab spring. The gloom has been matched by a decision by MSCI, firstly to delay the entry of the UAE and Qatar into its emerging market index (up from its frontier ranking) earlier this year, and then to put the decision off until 2012 in December. Entry to the emerging markets index would put the UAE in line to receive significant liquidity from international institutional investors.
Across the border in Saudi Arabia, and the basic economic fundamentals look extremely promising. The kingdom has benefited from the still-high oil price, and social spending packages and infrastructure development plans have meant that GDP growth is forecast at just under seven percent in 2011, according to Samba. However, that fast pace of growth will slip down to a more manageable 3.8 percent next year, the bank claims.
“Next year’s slowdown is largely explained by lower oil production, as Saudi Arabia makes way for returning Libyan output,” Samba says. “Government spending will also be somewhat lower in 2012, but this reflects the huge stimulus of 2011, with spending up by an estimated 23 percent. Spending in 2012 will still be some 17 percent higher than in 2010, for example. This and the continuation of high oil prices will help underpin confidence in the private economy, and consumption growth should remain strong, albeit somewhat lower than in 2011.”
Other than external volatility, little went wrong for the Saudi economy last year. While inflation was expected to rise significantly this year - on the back of around six percent average growth through 2010 – it has still stayed below last year’s level despite two-month salary disbursements to all public sector and most private sector employees. Despite the rise in food prices elsewhere, this portion of the inflation basket (the largest) has stayed low, leading to speculation that the government is forcibly keeping prices flat. If that is the case, then continued mild inflationary trends can be expected next year.
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Samba predicts that it will hold around the five percent mark. Another major trend last year was Saudi Arabia’s surge in foreign assets. In July, the value of the kingdom’s external reserves crossed the $500bn threshold for the first time, buoyed by a combination of the high oil price and increased oil production to make up for the shortfall in Libya. Foreign assets stand at well over 100 percent of GDP – a statistic that is the envy of most Western nations. In effect, this cushion ensures that the kingdom will easily be able to afford its budget for next year, even presuming oil prices fall below the budget breakeven point, which has been estimated by Jadwa Investment to be at around $79 per barrel in 2012.
There are a couple of further developments that are expected to take place in 2012 that could provide a boost to the Saudi economy. The Tadawul All Share Index (TASI) – by far the biggest of the Gulf bourses – has seen relatively lacklustre trading this year. However, various sources have suggested that the barriers to foreign investment in the Tadawul may finally end next year.
In December, two industry sources told Reuters that the Capital Markets Authority (CMA) had released details to market participants of a new framework for foreign investment. Reuters suggested that non-Gulf Arab foreigners and expatriates in Saudi Arabia would be allowed to invest in local listed firms, as long as the total sum of foreign investment did not exceed 49 percent. It’s early days yet, but the move to open up the Tadawul could eventually result in the bourse being admitted to the MSCI index, and by dint of its size, being immediately promoted to emerging markets status.
In addition, the passing of the long-awaited mortgage law could revamp the country’s housing market, which is undergoing a construction boom under the express instructions of King Abdullah. The ability of medium-income Saudis (a significant portion in a population of just over 27m) to get on the property ladder has been hindered in the past due to limited financing opportunities. Mortgage law reform would therefore push more local nationals towards home ownership. The legislation was approved by the Shoura Council – the kingdom’s highest consultative body – earlier this year, and awaits only a signature by King Abdullah.
Qatar, which has one of the fastest-growing economies in the world, also looks set for a strong year. Helped by massive build-out of its energy infrastructure, and – in particular – the liquefied natural gas trains that ship the country’s natural resources around the world – Qatar’s economy doubled between 2006-2010. QNB Capital predicts that real GDP growth will slip from 21 percent to a more manageable 10 percent growth in 2012, while there will be around $225bn worth of investment in line with the Qatar National Vision for 2030 and the World Cup soccer tournament in 2022.
The Gulf state has also had by far the best-performing stock market in the Gulf. In the year-to-date, the Qatar Exchange is one of a handful of global bourses that have actually stayed in the black. However, like the UAE bourses, low volumes (particularly in comparison to 2008), and further assessment of the delivery versus payment scheme meant that the country again missed out on the all-important MSCI upgrade. Should the volumes seep back, and should global markets retain some sort of stability, then Qatar may well get the upgrade it needs when MSCI come to review the decision again in June next year.
It is also likely that the Qatar banking sector will again outperform its regional peers next year. Banks in the UAE are still in the process of provisioning against loans issued during the boom period to government-related entities. However, Qatari banks have extremely high asset quality, and in terms of total assets, the sector grew by 22 percent in 2010 – faster than any of the others in the GCC. In the first half, Qatar National Bank, the country’s largest, reported the highest profits in the MENA region, with $966m.
Elsewhere in the country, inflation remained low as rents from the deflated real estate sector continue to drop. However, massive pay rises for public sector workers announced at the end of 2011, coupled with rapid credit growth, could see upwards inflationary pressure again during 2012. Finally, Samba predicts that GDP per capita – a statistic in which Qatar leads the world – will top $100,000 by next year.
There appears to be less good news for Bahrain. The island state has made itself a hub for finance, and in the process its economy was badly hit due to the volatility around the globe and the unrest that began in the first quarter of the year.
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“While the widespread protests which erupted earlier this year have been brought to an end, many issues remain unresolved and this is dampening investor confidence,” the Samba report says.
“The key financial and tourism sectors have suffered as a result and real GDP growth is expected to dip to under two percent in 2011. Hydrocarbons activity and aluminium production continue to contribute to growth, and increase government spending and cash hand outs have supported consumption. However, it seems unlikely that the economy will perform much better in 2012 as global conditions deteriorate.”
According to the country’s Economic Development Board, GDP growth is expected to be between two and three percent this year, rising to a possible five percent in 2012. And the news is not universally bad.
“Public spending, which is particularly focused on the development of infrastructure, will likely boost the economy,” says a December report from Oxford Business Group. “Major projects include a 40-km causeway to Qatar and road improvements to ease Manama’s chronic traffic problems. Some BD14m ($37m) in infrastructure projects were awarded in July and August alone. International press reports suggest that business activity is picking up in the fourth quarter as stimulus measures feed through to private sector demand.”
There is better news in Kuwait, where Samba predicts that real GDP growth is expected to touch 4.5 percent on the back of increased OPEC quotas. The country is also predicted to spend heavily on infrastructure build-out, especially with regard to energy projects. QNB Capital says that around $110bn is earmarked for project spending until 2014, with around half of that sum to be financed by the private sector. However, as in previous years, much will depend on whether the factions in a divided parliament can agree to back the government’s plans and make full use of Kuwait’s significant oil wealth.
And in Oman, despite a series of protests earlier this year, economic growth hit four percent thus year, and is likely to increase by around 3.5 percent in 2012 on a poorer global outlook.
Overall, GCC growth is expected to grow by seven percent on average through next year, helped by increased levels of government spending and a continued high oil price. Even with the higher spending, every Gulf state (bar Bahrain) will run healthy budgetary surpluses next year. While external influences such as the Eurozone debt crisis will continue to cast a shadow over the region – and especially its stock markets – the outlook for 2012 is looking remarkably stable.