mena: new oil normal & adapting to...
TRANSCRIPT
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
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 8
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
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 14
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
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 26
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
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 34
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