Presents forecasts for GCC Economies, dated May 2009

1. GCC Economics
Subsequent to the Onset of the Global Credit Crisis
Usman Rauf
May 2009
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2. Growth Momentum to be Sustained for GCC Economies
GCC Economic Outlook 2007 2008e 2009e Real GDP Growth 2007 2008e 2009e
Oil Price - USD /barrel 72 99 55
Saudi Arabia 3.4% 4.1% 2.3%
Nominal GDP - USD Billion 821 1,065 906
UAE 6.1% 5.8% 3.1%
Real GDP growth - % 5.5 5.7 3.6
- Hydrocarbon 1.1 4.2 1.3 Kuwait
K it 4.8%
4 8% 4.5%
4 5% 2.4%
2 4%
- Non-hydrocarbon 7.9 6.1 4.4 Qatar 12.5% 13.5% 10.2%
Inflation - % 7.0 12.0 7.6
Oman 6.9% 6.9% 5.5%
Current Account - % GDP 25.1 29.3 4.6
Fiscal balance - % GDP 19.2 21.9 4.7 Bahrain 6.6% 5.3% 4.7%
The GCC region is expected to cross the USD1 trillion milestone for nominal GDP in the year 2008e,
primarily as a result of substantial increases in oil prices from USD72 /barrel in 2007 to USD99
/barrel in 2008
Owing to a 45% reduction in oil prices to USD55 /barrel – based on average futures prices for
2009, GCC real economic growth is expected to decline to 3.6% in 2009e versus 5.7% in 2008e;
the principal driver of the real growth in the economies will be the non-hydrocarbon economy
Qatar is expected to grow at a rapid 10.2% in real terms in 2009e, possibly topping world economic
expansion for the year 2
Source: The Institute of International Finance
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3. Growth Momentum to be Sustained for GCC Economies
2008e Share of GDP for GCC Countries
Nominal GDP - USD Billion 2007 2008e 2009e
Saudi Arabia 382 496 418
UAE 201 258 216 Saudi Arabia UAE
47% 24%
Kuwait
K it 112 153 129
Qatar 68 85 75
Oman 40 51 47 Kuwait
14%
Bahrain 18 22 21
Qatar
8%
Bahrain
2% Oman
5%
Saudi Arabia and the UAE remain the principal drivers of economic growth in the GCC, despite their
lower expected growth in nominal GDPs during 2009e
In terms of nominal GDP, all GCC economies are expected to register declines in 2009e due to the
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aforementioned reversal in trend for increase in oil prices
Qatar is an exception though, as it enhances its LNG production capacity, which is expected to
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positively impact its economic performance in the coming years
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3
Source: The Institute of International Finance
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4. Fiscal and Current Account Balances Remain Manageable
Breakeven Oil Prices for Fiscal Balances
Fiscal Balance - % of GDP 2007 2008e 2009e 80
Saudi Arabia 12.3% 22.1% 2.8%
70
UAE 26.7%
26 7% 28.1%
28 1% 11.7%
11 7%
Kuwait 39.3% 21.9% 4.1% 60
Qatar 11.2% 15.3% 4.0%
50
Oman 8.4% 15.3% -6.1%
Bahrain 3.2% 7.8% -6.7% 40
Current Account Balance - % 30
2007 2008e 2009e
of GDP
Saudi Arabia 25.1% 31.3% 0.5% 20
UAE 18.1% 20.4% 6.2%
10
K it
Kuwait 2 %
42.4% 3 %
43.4% 2 6%
21.6%
Qatar 32.2% 42.9% 12.0% 0
Bahrain Kuwait Oman Qatar Saudi Arabia UAE
Oman 4.8% 12.2% -12.1%
Breakeven Prices ‐ USD per Barrel
Bahrain 16.1% 20.5% 7.1%
Based on the break even oil prices for individual countries, the 4 largest GCC economies are
expected to run fiscal surpluses during 2009 under our base case crude oil price estimate of
USD55/barrel
UAE, Qatar and Kuwait are expected to exhibit greater resilience should crude oil register a lower
USD50/barrel average, with Saudi Arabia breaking even
The above numbers, are estimated assuming that the fiscal expenditure to non-oil GDP ratios for all
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countries are maintained at 2008 levels
4
Source: The Institute of International Finance
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5. Sensitivity to Oil Prices
Current Market Situation
2008 average crude oil price of USD99 /barrel
Average GCC country budget price of USD40-USD50 /barrel
2008e GCC fiscal surplus of 21.9% of GDP
2008e GCC current account surplus at 29.3% of GDP
Expectations for 2009
Bull Scenario Bear Scenario
Crude oil price of USD60 /barrel Crude oil price of USD50 /barrel
GCC fiscal surplus down to 6.9% of GDP GCC fiscal surplus down to 2% of GDP
2009e current account surplus at 6.9% of GDP 2009e current account surplus at 0.5% of GDP
Substantial increases in oil prices during the majority of the current decade led to substantial 2008e
fiscal & current account surpluses at 21.9% & 29.3%, respectively
GCC government p
g policies are likely to remain fiscal expansionary with primary focus on
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expenditures related to infrastructure with a view on long term development plans
Our price band of USD50-USD60 /barrel for crude oil suggests that fiscal and current account
balances for the GCC countries are expected to drop significantly, but are unlikely to turn into
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deficits
5
Source: The Institute of International Finance; My Estimates
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6. GCC Inflation Edging Downwards
2008e Inflation of 12% 2009e Inflation at 7.6%
Reuters Commodity Index, CRB-Reuters, peaked CRB-Reuters declined to 314.7 at the end of
at 481 in July 2008 2008
Excessive leverage in the foreign and domestic Deleveraging process expected to reduce
markets velocity of money
Speculative inflows driven by expectations for Withdrawal of hot money out of the banking
revaluations of GCC currency pegs system has tightened regional liquidity
Credit driven growth in real estate and other Reduced lending capacity of domestic banks due
asset markets to a drying up of foreign credit markets
Credit Growth and Inflation
High commodity prices and excessive rents 60
complemented by speculative inflows, in
anticipation of FCY revaluations, and 50
aggressive domestic credit induced growth
perpetuated inflation to levels as high as 40
12%
30
Lower rental yields a reversal in CRB
yields, CRB- 20
Reuters, foreign direct withdrawals, tighter
regional liquidity and central bank 10
directives to reign in lending as concerns
grow over asset quality is expected to 0
0
reduce inflation to 7.6% in 2009e Saudi Arabia UAE Kuwait Qatar Oman Bahrain
Jun‐08 Credit Growth ‐ % Change YOY Jun‐08 Inflation ‐ % Change YOY 6
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7. Currency Exchange Rate Peg Fuelled Real Estate Asset Price
Bubble?
2007
Price appreciations continued
Demand strong from both local and international markets
Limited scope for supply exceeding demand
Property prices increased through local & international investor demand which was fuelled by global economic growth
First Three Quarters of 2008
Price appreciations gathered pace
Currency revaluation speculation as dollar declined and GCC countries faced increased inflation levels due to a relaxed
monetary policy stance, encouraged by declines in US interest rates
Speculative investments in property also encouraged by depreciating US Dollar, in addition to high loan-to-value ratios,
and declining global prospects for investments
Asset price inflation was further fuelled through currency pegs, which resulted in importing inflation
Last Quarter of 2008
Reuters conducted an analyst poll suggesting that supply could exceed demand by 2H FY09
Banking and financial sector liquidity issues surfaced, which are attributed to mismatches in assets and liabilities
financed through foreign long term debt that was available at exorbitant rates
Mortgage providers presented greater risk since mortgages represent long term assets which were not financed
through domestic long-term liabilities, since the long term bond market does not exist
Decreasing liquidity for mortgage providers necessitated tighter loan-to-value ratios, initially amongst mortgage
providers and later on, the banking sector also lowered loan-to-value ratios
Investor demand in property nosedived, starting from international investor demand, due to lack of liquidity and
erosion in wealth, followed by local investors who faced lower loan-to-value ratios, and later on declining values on
investments in stock markets 7
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8. Reliance on Long Term Foreign Debt Led to the Infusion of
the Global Credit Crunch?
Debt Contribution to GDP - 2006
133.9%
Global
142.3%
39.8%
Emerging
90.7%
5.4%
Middle East
76.6%
49.2%
49 2%
Asia
134.8%
Debt Securities to GDP - % Bank Assets to GDP - %
Middle East has historically been averse to the development of the debt capital markets in the
region, primarily due to the non-Shariah nature of interest based debt securities
Of late however, sukuk – asset backed securitization – structures have injected g
, j growth in local debt
securities markets, and we expect a continuation of these growth trends in the coming years as the
local banking sector reduces its reliance on long term foreign lending
Asset liability mismatches in the balance sheets for banking and non-banking institutions in the
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financial sector, which were financed through long term foreign funding, was the principal
contributor to liquidity issues that surfaced in GCC countries 8
Source: International Monetary Fund
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9. Underdeveloped Debt Capital Markets Poised to Grow
Substantially in the GCC Economies
Phase I Phase II Phase III`
III
Saudi Arabia & United Pakistan, United Arab Japan, Malaysia & South
Countries
Arab Emirates Emirates & Qatar Korea
Regulatory Lack of Legal Identification of
Enforcement of Laws
Framework Framework Loopholes & Revisions
Limited Foreign Bond Growing Number of Transactions by
Cross
Issuances by Cross Border Domestic & Foreign
Border
Government Transactions Investors are Active
Benchmark Yield Curve High Yield Bonds &
Secondary Limited Transaction
with Active Transactions Structured Products
Market Volume
of Government Bonds Actively Traded
Common Corporate
Primary Government & Limited Structured Products
Bonds & Price
Market Corporate Transactions Actively Issued
Information Available
Phase (Increasing Maturity)
9
Source: Nomura Research Institute Ltd.
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10. Fallout of the Global Credit Crunch on GCC Economies
GCC Gross External Debt GCC Foreign Assets
400 90.0% 1,600 35.0%
350 80.0% 1,400 30.0%
70.0%
300 1,200
25.0%
60.0%
250 1,000
50.0% 20.0%
200 800
40.0% 15.0%
150 600
30.0%
10.0%
100 400
20.0%
50 200 5.0%
10.0%
0 0.0% 0 0.0%
2005 2006 2007 Jun‐08 2005 2006 2007 Jun‐08
Gross External Debt ‐ USD Billion Growth ‐ % Foreign Assets ‐ USD Billion Growth ‐ %
GCC economies have been increasingly forced to resort to external sources of funding in order to
effect growth in their local economies in an environment where cash rich GCC investors and
governments have been actively investing abroad
GCC gross external debt increased more than 3-folds from USD110 billion in 2005 to USD358 billion
as of June 2008 with the share of banking institutions increasing relative to non-banking financial
institutions from 50% in 2005 to 58% in June 2008
Concurrently, the GCC economies have also accumulated substantial foreign assets which have
doubled from USD740 billion in 2005 to USD1,468 billion in June 2008 10
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11. Magnitude of the External Debt for GCC Economies
Composition of 2008e Foreign Assets 2008e External Debt Relative to Foreign Assets
100% 120%
9%
90%
36% 100%
80%
47%
70%
65% 80%
71%
60% 78% 82%
18%
50% 60%
16% 91%
40%
40%
30%
15% 23% 45%
20% 37% 20%
17%
10% 18%
15% 12%
5% 0%
0%
GCC Saudi Arabia UAE Kuwait Qatar Oman Bahrain GCC Saudi Arabia UAE Kuwait Qatar Oman Bahrain
Official Reserves Bank and Nonbank Financial Institutions Sovereign Wealth Funds Excluding Sovereign Wealth Funds Including Sovereign Wealth Funds
Benefiting from the commodity oil price boom, state wealth funds – SWF – have become substantial
contributors to foreign assets in most GCC countries at 47%, with UAEs Abu Dhabi Investment
Authority the largest in the region – estimated at USD500 billion
The rapid increase in GCC country external debt has coincided with substantial increases in official
reserve and banking & non-banking foreign assets, which alone can provide for the total debt
requirement for GCC countries, as evidenced by debt to asset contribution of c100% or less for all
GCC countries
Accounting for SWFs in debt to asset ratios, it becomes evident that all GCC countries have 11
sufficient capacity to service their debt obligations despite the onset of the global credit crunch
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12. Thoughts on Prospects for the United Arab Emirates
Currently, the global Purchasing Manager’s Index, based on data from Coutts, is 41.8 which is
consistent with negative growth since levels more than 50 have historically been achieved in
periods when the US and global economies have registered positive growth
The UAE economy, specifically the trade and tourism sectors, however, relies more on the
performance of the European economy which traditionally lags the US economic recovery
Slow economic performance in Europe, combined with the spillover effect of the threat of an
Sl i f i E bi d i h h ill ff f h h f
oversupply in the property on other, affiliate sectors could drive growth down below the 3.1% real
GDP growth estimate for UAE
Revaluation of currency pegs could possibly have d l
R l ti f ld ibl h delayed th onset of the bursting of the asset
d the t f th b ti f th t
price bubble but it was the reliance on external long term funding that proved to be the nemesis for
the Dubai market
Risk f d fl ti
Ri k of deflation through rentals which were the primary driver for inflation in the past could prove
th h t l hi h th i d i f i fl ti i th t ld
to be important since rents have also followed prices and are coming down substantially as
oversupply in the property markets remains a key concern
The
Th current possible b tt
t ibl bottoming out of commodity prices is an important positive development.
i t f dit i i i t t iti d l t
However, the threat of inflation in general is less likely for infrastructure based developing
economies as opposed to developed economies
Though, with an enormous appetite f i
Th h ith tit for increasing government expenditures, enhanced spending by
i t dit h d di b
governments is likely to avert risks associated with deflation
12
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