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GCC economies adapt to life in a post-oil era

Fiscal and regulatory reforms are helping the region cope with the oil price slump.

The dramatic drop in oil prices delivered a crushing blow to GCC nations, which heavily rely on petrodollars to line their coffers, plunging their economies deep into the red. But the commodity slump also served as a wake-up call for governments to implement fiscal reforms to help their countries weather the storm.

Speaking at this year’s FundForum Middle East and Africa., Charles-Henry Monchau, managing director, CIO and head of Asset Management, Al Mal Capital, says the six oil-producing countries that make up the GCC have been transformed from having surplus economies to running a combined deficit of US$160 billion in 2015.

“Before the oil price shock, GCC economies’ national budget is 75 per cent dependent on oil and gas. , growth has slowed and budget deficit has gone up. But I think the governments are handling the situation well,” he says, adding that the region’s sovereign wealth funds (SWFs) have stepped to keep the economy afloat.

“Governments are addressing the issue in the short term by cutting expenses, widening the revenue base and implementing reforms. But perhaps more importantly, in the long term, they are focusing on diversifying their economies, developing human capital, and moving towards privatisation,” Monchau says.

In Saudi Arabia, for example, the government is carrying out the National Transformation Programme (NTP) as part of Saudi Vision 2030. Oman also unveiled last year its own economic diversification strategy called Tanfeedh, which aims to develop sectors with massive growth potential, including manufacturing, tourism, transport and logistics, mining and fisheries.

All these developments are creating massive investment potential, adds Monchau: “With every crisis comes an opportunity and this is a once-in-a-lifetime opportunity for GCC governments to transform their economies.”

SWFs bring cash piles home

Globally, SWFs hold more than US$8 trillion worth of assets, with the world’s largest – Norwegian Oil Fund – hitting the US$1-trillion mark recently. But according to Ehab El Sawy, head of Securities Services-MENA, Standard Chartered, around 44 per cent of global SWFs’ asset concentration come from the Middle East and North Africa region.

Traditionally, regional SWFs are outward looking in terms of investing, but the oil price slump has prompted them to change tack, says Racha Alkhawaja, group chief distribution and development officer, Equitativa.

“The largest SWFs in the region are from the UAE and Saudi Arabia and historically they have been fully invested abroad. But recently we're seeing a definite shift in their asset allocation by looking at investment opportunities locally,” she says. “We're starting to see this trend and since the lack of oil income, governments have implemented reforms making investing here more attractive for regional SWFs.”

Mandagolathur Raghu, investment strategist at Kuwait Financial Center (Markaz), agrees, saying that such reforms have been in the way of cutting petrol and utility subsidies, which represent the bulk of public expenditure.

GCC governments are also in the process of rolling out a region-wide value-added tax (VAT) starting 1 January 2018, which, according to International Monetary Fund estimates, could add two per cent to regional GDP.

In Saudi Arabia, the government has started implementing a so-called ‘white-land tax’, a 2.5 per cent levy imposed on undeveloped commercial and residential land in urban areas. In 2015, the kingdom also opened Tadawul, its stock market, to international institutional investors. Most recently, Saudi lifted the ban on female drivers.

Reforms making region competitive

All these reforms are geared towards not only boosting government revenues, but also making the region more competitive and opening doors for capital inflows, says Raghu.

“The new normal is that oil prices will never be above US$100 per barrel and so governments have to plan their strategy to bridge the deficit,” he says. “Another interesting point is that breakeven oil prices are coming down for many oil-producing economies in the region. For example, Kuwait used to have a breakeven oil price of US$52 per barrel, now it’s US$42.”

Fitch Ratings says Qatar’s breakeven oil price stands at US$51 per barrel, while Abu Dhabi’s US$60.

Fahmi Hamid, business development director, FIM Partners, points out that certain sectors are benefitting as well, such as insurance and healthcare.

“What we're seeing in the region is that a lot of economies are going the privatisation route. In Saudi, for example, the Ministry of Health has mandated the privatisation of primary healthcare centres. Demand for hospital beds in Saudi is also very high compared with the rest of the region.

“Also tied to that is insurance, as some countries have launched mandatory health insurance scheme,” Hamid says, adding that the lifting of female driving ban in Saudi would increase demand for auto insurance.

Raghu sees opportunities in education, tourism and transportation. For Monchau, the capital market is attractive.

“Fixed income and the equity side is very interesting. Last year, the GCC accounted for 20 per cent of new bond issues from emerging markets. FTSE is also looking to upgrade GCC bourses  into emerging market status.

“GCC is mainly viewed as a source of capital because they have oil, but now this view is shifting and the region can also be a destination of capital,” says Monchau.

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