MENA’s 4Ts: Transformation, Transition, Turmoil & Tribulations

SEB Annual Conference

Abu Dhabi, UAE

Dr. Nasser Saidi 13 March 2017

Agenda

ü  MENA macroeconomic, socio-economic and

geopolitical landscape

ü  Adjusting to the “New Oil Normal": economic policy

& structural reforms

ü  Opportunities and key risk factors

ü  Key Takeaways

2

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

3

38 $2381

Sudan

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

•  Jobs: need 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

4

Nightmare of Arab Youth Unemployment

Source: The Economist, http://www.economist.com/blogs/graphicdetail/2016/08/daily-chart-7

Gender Divide is stark & daunting

Source: Arab Human Development Report 2016

Food & Water Insecurity to become more intense going forward •  MENA: has some 6% of world’s population but only 1% of the world’s

renewable water resources + highest water stress levels

•  GCC’s growing water crisis: growing population, urbanisation, high incomes, subsidies; growing dependence on desalination

•  MENA is highly exposed to global food price volatility given its high dependency on food imports

•  Challenges to improving food security:

–  Introduction of sustainable water management systems

–  Reforming subsidies to targeted transfer systems

–  Innovate in agriculture technology & application

Deep reforms required to improve business climate & combat corruption

24

31

57

62

64

70

75

75

90

108

108

131

136

166

170

170

173

UAE

Qatar

Jordan

Saudi Arabia

Oman

Bahrain

Kuwait

Tunisia

Morocco

Algeria

Egypt

Iran

Lebanon

Iraq

Libya

Yemen

Syria

Corruption Perception Index 26

63

66

68

76

77

83

94

102

118

120

122

126

140

156

165

171

173

179

188

UAE Bahrain

Oman Morocco

Malta Tunisia

Qatar Saudi Arabia

Kuwait Jordan

Iran Egypt

Lebanon West Bank & Gaza

Algeria Iraq

Djibouti Syria

Yemen Libya

Doing Business Index

Visa Confidential

Arab Firestorm: transitions & fault lines

ü  Role of Islam in Politics; ‘Mosque or Secularism’?

ü  Role of Government; New Developmental model

ü  Governance & Institutions

ü  Role of Army/Security Forces in Politics

ü  Growing Sunni-Shia Schism: a “Thirty Years War?”

9

Region going through a historic transition period starting with fall of Ottomans & unraveling of Sykes-Picot (1916)

Long-term prosperity & stability depends on addressing the fault lines

ü  Gender Gap & Role of Women

Geo-Political Landscape: عدو عدوي هو صديقي أنا وأخي على ابن عمي وأنا وابن عمي على الغريب

Source: The Economist (http://www.economist.com/blogs/graphicdetail/2016/01/grid-grievances) 10

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

•  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 affects both demand and supply side: energy storage, e-cars, flexible capacity, 4th Industrial Revolution

∴ Decarbonisation implies growing risk of stranded fossil fuel assets

12

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)

13

Implications of the New Oil Normal & spillover to oil importers/labour exporters

14

Oil Exporters

Decline in oil revenues

Tighter fiscal constraints & budget deficits

Decline in current account balance

Drop in net foreign asset accumulation

Lower government spending

Lower growth prospects

Oil Importers

Lower spending on oil imports (+)

Lower remittances (-)

Drop in tourism (-)

Decline in FDI (-)

Drop in foreign aid levels (-)

MENA economies: Adapting to New Oil Normal; 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

GCC need major economic & structural reforms to adjust to New Oil Normal

16

New Economic

Development Model & Social

Contract Required

Economic, Trade & Revenue

Diversification

Expenditure rationalisation &

switching policies; Subsidy reform

New Tax Regimes for revenue &

economic policy management

Domestic Financial Markets

for deficit, infrastructure & development

finance

Countercyclical Monetary &

Fiscal Policies

GCC: substantial fiscal & forex buffers and low debt levels

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

Ongoing GCC Fiscal Consolidation & Adjustment to New Oil Normal

Reforms undertaken in the GCC in the New Oil normal era

Break-even Oil Prices in the MENA region

Source: IIF estimates, Feb 2017

Revenue side Subsidy reform

Fees Taxation Fuel Water Electricity

Bahrain ✓ ✓ ✓

Kuwait ✓ ✓ ✓ ✓

Oman ✓ ✓ ✓ ✓

Qatar ✓ ✓ ✓

Saudi Arabia

✓ ✓ ✓ ✓

UAE ✓ ✓ ✓ ✓ 0

20

40

60

80

100

120

Saudi Arabia

Iran Iraq Kuwait Qatar UAE Oman Bahrain

2015 2016 2017

UAE: Most diversified among GCC peers; Saudi Arabia to be supported by NTP

UAE •  Fiscal reforms: fuel price reforms,

phased removal of water, electricity subsidies; VAT introduction in ‘18

•  Key reforms: Bankruptcy Law; In the pipeline: Personal insolvency Law; FDI Law to relax constraints on foreign ownership

•  Dubai, more diversified & with low dependence on oil; affected by strong dollar, weak external demand

•  Investment to pick-up in the run-up to the Expo 2020

19

Saudi Arabia •  Vision 2030 & National

Transformation Plan: diversification

•  Privatization plan: Aramco; partial privatisation of Saudia, airports

•  $1tn Public Investment Fund •  Tapping international bond

markets to finance deficits

•  Capital market reforms; AIM •  Fiscal reforms: spending cuts,

energy price reforms, new non-oil revenue measures (VAT, excises)

•  Implementation Risk: Absorptive capacity of the economy; ability of government & agencies

Egypt: Awaiting Gains from Painful Reforms

•  Real GDP growth: 3.3% (2017); forex shortages hamper manufacturing, receipts from tourism decline

•  Sharp devaluation of the pound + hike in policy rates by 300bps (Nov 2016); other reforms: phased removal of subsidies, VAT

•  Inflation touching ~30% in Jan; lower real wages

•  Capital flows into Egypt rising given higher FDI + disbursement of loans

•  Closing financing gap via funding from UAE, G7, China + $4bn Eurobond sale

•  Rise in poverty and unemployment rates threaten political stability

Real Effective Exchange Rates Index, 2010=100

Fiscal deficit as % of GDP

Source: IIF MENA report, Feb 2017

Iran: Trumpism & elections to dictate outlook and growth prospects •  Iran is preparing for Presidential

elections in May

•  Undermining the nuclear deal will strengthen the position of hardliners

•  GDP growth to be driven by surge in exports + domestic consumption

•  Absence of recovery in FDI: energy sector alone requires at least $100bn in the next five years to make up for the past decade’s under-investment

•  Iran ranks 120/190 in WB’s Doing Business report

•  Business discrimination, legal uncertainty and widespread corruption hinder a strong recovery in investment

Twin Shocks of Sanctions and Low Oil Prices (USD bn)

FDI, Announced Projects ($bn)

Source: IMF Article IV on Iran, Feb 2017

Turkey: Growing Below Potential •  Real GDP growth: 2.9% (2017). Growth

remains consumption-driven; decline in tourism offsets savings from low energy prices

•  July 2016 failed coup attempt heightened political uncertainty, and increased domestic divisions

•  Fiscal policy turned expansionary in 2016: rise in minimum wage & related subsidies, hiring in education & health sectors + higher security outlays

•  Prolonged uncertainty: growing populism & Islamisation; political focus on transitioning to a presidential system; future of EU-Turkey relations; tense security situation in South-East; conflicts in neighboring countries

Source: IMF, International Crisis Group

External imbalances remain high

Turkey’s terror attacks & casualties

Agenda

ü  MENA macroeconomic, socio-economic and geopolitical

landscape

ü  Adjusting to the “New Oil Normal": economic policy &

structural reforms

ü  Opportunities and key risk factors

ü  Key Takeaways

23

Trumpism, Trumponomics & Potential Impact on Middle East Economies Deregulation & Oil

-  Voted in with promise of oil sector deregulation; many allies of the oil industry part of his cabinet

-  Moving forward on stalled Dakota Access and Keystone XL projects; vows to unlock a $US50 trillion shale oil & gas revolution

-  Signed legislation to repeal a regulation that would have required energy co’s to disclose payments to foreign governments

Impact on trade -  US gearing towards

more protectionist policies + “re-negotiating” trade deals

-  Missing a simple point: 21st-century globalization is knowledge-led, not trade-led

-  Trump’s oil policy would mean increased supply of crude=> potentially lower oil prices

Geo-politics

-  More military solutions

-  Proxy war with Iran

-  Backing off a 2-state Palestine peace solution

-  Syria civil war

-  “War” against ISIS

-  Policy towards Turkey (a NATO member), Egypt?

-  Refugee “ban” & growing immigration barriers?

Visa Confidential

MENA/ GCC Risk Landscape

Political shocks Energy price

shocks

Trumpism, Trumponomics &

US policies; China

rebalancing

Change in US Fiscal/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

25

Infrastructure, Logistics & Privatisation Infrastructure & Logistics investments are driven by demographics: Urbanisation, Smart cities, Health, Education, Retail, Hospitality

•  GCC have massive $2.5trn+ 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

•  Housing Finance and Mortgage Markets

Projects in the Middle East: dominated by Gulf countries

Source: Zawya Projects, Mar 2017

Education: Great Strides, but much remains to be done for E4E

•  MENA: quadrupled the average level of schooling since 1960, halved illiteracy since 1980 and achieved almost complete gender parity for primary education

•  Avg public investment in education across MENA is > 5.3% of GDP

•  Many challenges exist: educational quality, skills mismatch, youth bulge, Syrian crisis, nationalisation policies, preference for public sector jobs

•  Time to invest in education for employment; vocational & on-the-job training

Enrollment of Students in Primary, Secondary, and Tertiary Education in MENA

•  Major issue: Barriers to young women joining the workforce. Female youth unemployment is about double that of male counterparts in the region, even though more than half of university graduates are women!

15.2 10.1

64.7

48.4

101.5

85.0

37.6 38.3

81.8 76.9

107.4 103.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

School enrollment,

tertiary, male (% gross)

School enrollment,

tertiary, female (% gross)

School enrollment,

secondary, male (% gross)

School enrollment, secondary,

female (% gross)

School enrollment,

primary, male (% gross)

School enrollment,

primary, female (% gross)

1990 2000 2005 2010 2014

Harnessing FinTech for MENA financial access & inclusion – Empowering Youth

•  FinTech is key to Financial Inclusion in MENA; also enables the Human Capital Cloud & raise female LFPR

•  Merely setting up online & mobile banking services is not enough: banking sector needs to leverage FinTech to raise efficiency

Ø  FinTech can 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

•  Countries need to bridge their FinTech gap through PPP, massive investments & RegTech support & enabling environments

29

Embracing Renewable Energy in the Region: Momentum for Solar & Wind Recent developments supporting the renewable energy push:

•  Phasing out of fossil fuel subsidies

•  Focus on ↑ Energy Efficiency

•  Technological change has led to dramatic decline in RE costs

•  Rapid decline in energy storage costs

•  COP21 historic climate agreement

GCC will be investing in excess of $700bn in RE over next 30 years

UAE achieved lowest-ever prices for solar renewable power LT contracts

UAE as Global RE Finance Hub?

Renewable Energy Investments in MENA by Sector (USD mn)

Source: Bloomberg New Energy Finance

Key Takeaways •  MENA region rich in natural resources, promising demographics, strategic location

•  2017 will be characterised by growing political & economic policy uncertainty that will impact currencies, markets, trade & investment

•  Trumpism: Ô oil prices, ↑ conflicts; trade & economic disruption

•  ME region remains in the throes of the 4 T’s: Transformation, Transition, Turmoil & Tribulations

•  New Oil Normal requires new Economic Development Model, New Social Contract & deep Structural Reform agenda

•  Impact of New Oil Normal on GCC & adjustment has spillover effects on labour-exporting countries through remittances, trade, investment & FDI

•  GCC is focus of MENA economic growth + regional economic & financial integration

•  GCC countries are on reform path. KSA’s NTP is key indicator for the region

•  Opportunities: Infrastructure, health & education, FinTech, privatisation, renewable energy

MENA’s 4Ts: Transformation, Transition, Turmoil & Tribulations

Dr. Nasser Saidi www.nassersaidi.com nsaidi@nassersaidi.com