GCC Geo-Eco-Pol & Outlook: Transitions & Transformations

Presentation at the Chalhoub Group Annual Group Seminar

Dr. Nasser Saidi

18 February 2018

Agenda ü  Changing Global Economic Landscape

ü  GCC Geo-Eco-Pol Overview

ü  What are the drivers?

ü  What are the risks?

ü  What are the opportunities?

ü  Key Takeaways

World’s Big Economies Growing post-GFC Twin Engine Global Economy growing at 3.8%

GCC +2.2%

Egypt +4.1%

+2.9%

+1.5%

+1.8%

+2.1%

+3.5%

+1.6%

India +7.4%

+5.3%

+3.0%

+1.2%

+1.9%

Economic growth in 2018

Global Economic Geography is shifting East: demographics, technology & economic integration

51.1

5.7

30.1

9.0

12.0

8.9

2.4 G7

Advanced economies exclu. G7 & euro area European Union

CIS

Emerging & developing Asia

LatAm & the Caribbean

MENA

Sub-Saharan Africa

GDP based on purchasing-power-parity (PPP) % share of world total 1980

Source: IMF World Economic Outlook Database

30.6

6.5

16.5

4.5

32.5

7.7

7.6 3.0 2017

Young, growing population in Asia, Africa => emerging middle class, higher spending

Arab Countries Population Age Distribution

Source: World Population Prospects, the 2017 Revision

Population by region: est. 1950-2015, and medium-variant projection, 2015-2100 (mns)

0

1000

2000

3000

4000

5000

6000

Africa

Asia

0 100 200 300 400 500 600 700 800 900

1950

19

55

1960

19

65

1970

19

75

1980

19

85

1990

19

95

2000

20

05

2010

20

15

2020

20

25

2030

20

35

2040

20

45

2050

20

55

2060

20

65

2070

20

75

2080

20

85

2090

20

95

2100

Middle East GCC Europe Latin America & the Carribean Northern America Oceania

Global Risks Landscape 2018: Climate Change, Cyber & Financial Markets

LIKELIHOOD

IMPA

CT

Risks to the Global Economy

Financial Market Correction • Buildup of financial vulnerabilities • Rapid tightening of global

financial conditions • EME debt vulnerability, currency

wars

Investment growth • Policy uncertainties: Brexit,

“New EU”? • Lower-than-expected impact

from US tax & regulatory policy changes

Inward looking policies •  Increased barriers to labour flows • Trade wars: US vs. NAFTA, ROW •  Increased investment and trade

barriers vis-a-vis China

Non-economic factors • Geopolitical tensions, conflicts &

population displacement • Political uncertainty • Extreme weather & climate events

8

Oil price outlook remains subdued despite global growth momentum and OPEC-led agreement to cut production

Source: IMF staff calculations. Note: REO = Regional Economic Outlook: Middle East and Central Asia; ¹APSP = Average Petroleum Spot Prices; Average of U.K. Brent, Dubai Fateh, and West Texas Intermediate crude oil prices.

Oil Price Assumptions (APSP¹, U.S. dollars a barrel)

Source: Data from Oil Market Report Feb 2018, IEA

Oil Production: OPEC vs. non-OPEC (mn barrels per day)

38 39.3

57.3 58.7

60.6

30

35

40

45

50

55

60

65

70

75

80 OPEC oil supply

Non-OPEC oil supply

New Oil Normal: downside risk for oil prices & resources

Demand side: positive cyclical; but, structural & tech factors imply downward trend in oil demand

relative to activity

Global growth recovery

OPEC production cut agreement

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 competitive: 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

9

∴ Global Decarbonisation implies growing risk of stranded fossil fuel assets

Trends affecting the consumer industry

•  Shift in the Global Economic Geography

•  Economic Interconnectedness / Global Value Chains

•  Technological Innovation: products and markets

•  Favourable Demographics & Urbanisation => Rising Middle Class

•  Changing Spending/ Consumption Patterns

Agenda ü  The Changing Global Economic Landscape

ü  GCC Geo-Eco-Pol Overview

ü  What are the drivers?

ü  What are the risks?

ü  What are the opportunities?

ü  Key Takeaways

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

It'scomplicatedFriends Enemies

Region’s conflicts reflect many ‘fault lines’, governance, inequality, and confrontations over energy, religion, ideology, ethnicity

Transition: Move towards “Moderate Islam” “We are returning to what we were before — a country of moderate Islam that is open to all religions and to the world. We will not spend the next 30 years of our lives dealing with destructive ideas. We will destroy them today.” MBS Oct 2017

-  Launch of the Islamic Military Counter Terrorism Coalition – 41-country coalition focusing on counter-terrorism including Turkey-Egypt-Saudi-UAE-Iraq-Syria

-  4 key domains: ideology, communications, counter-terrorism financing & military

-  Restructuring of Mecca-based Muslim World League’s mission to promote tolerance & harmony

-  Efforts to combat and raise awareness against extremists: Hedayah and the Sawab Centre in the UAE, Al Sakinah Campaign in KSA…

=> Potentially deep cultural change in norms and social attitudes, affecting life styles

GCC Macroeconomic Overview

Source: IMF MENA Data Portal

GDP

($bn)Real GDP growth (%

change) Non-oil GDP growth (%

change) Inflation Fiscal balance (% GDP) Current account balance (% GDP)

2017 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018 2016 2017 2018

Bahrain 34 3.3 1.5 0.8 3.7 3.1 2.1 2.8 0.9 3.5 -17.8 -13.2 -11.9 -4.7 -4.6 -4.2

Kuwait 118 2.5 -2.1 4.1 3.2 3.5 3.5 3.5 2.5 2.7 0.3 1.5 1.5 -4.5 -0.6 -1.4

Oman 72 3.0 0.0 3.7 3.4 2.5 3.5 1.1 3.2 3.2 -21.6 -13.0 -11.4 -18.6 -14.3 -13.2

Qatar 166 2.2 2.5 3.1 5.6 4.6 4.7 2.7 0.9 4.8 -3.9 -1.0 0.5 -4.9 2.3 1.0

Saudi Arabia 679 1.7 0.1 1.1 0.2 1.7 1.3 3.5 -0.2 5.0 -17.2 -8.6 -7.2 -4.3 0.6 0.4

UAE 379 3.0 1.3 3.4 2.7 3.3 3.4 1.8 2.1 2.9 -4.1 -3.7 -2.2 2.4 2.1 2.1

GCC 1447.6 2.2 0.5 2.2 1.8 2.6 2.4 2.9 0.8 4.2 -11.9 -6.3 -5.0 -3.4 0.2 0.0

Lower Oil

prices

Fiscal Deficits

Current Account Deficits Lower international reserves

Reduced recycling of petrodollars

Impact on money and credit flows,

liquidity Economic Growth Slows

Spillovers into non-oil sector • Negative impact on services, trade, tourism

• Private sector activity slows

• Lowers business confidence & Investment

Lower government spending/subsidies

Transition: Impact of “New Oil Normal”

Fiscal break-even oil price still high for most oil exporters

0.0

20.0

40.0

60.0

80.0

100.0

120.0

Bahrain Iran Iraq Kuwait Oman Qatar Saudi Arabia

UAE

2015 2016 2017 2018

External break-even oil prices relatively lower

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

Bahrain Kuwait Oman Qatar Saudi Arabia

UAE

2015 2016 2017 2018

Source: IMF MENA Regional Economic Outlook Nov 2017

“New Oil Normal” has dampened growth: Requires structural reforms & diversification policies

GCC Macro Overview: Transition is happening, but at different paces across countries •  GCC growth bottoms out at

0.5% in 2017 (non-oil: 2.6%); 2018: 2.2% (2.4%)

•  Fiscal adjustment & dollar peg dampening growth & diversification

•  Debt Issuance remains main source of deficit financing

•  Other means: –  Borrowing & draw down of

assets –  Lower, greater efficiency in

government spending –  Subsidy cuts –  Use of SOEs

•  Fiscal Reform: revenue diversification via increase in fees, taxes (VAT, excises)

•  Gradual external deficit decline: CAB surplus in 2019

•  Trade integration & adoption of financial technology = growth opportunities

•  Structural reforms should be accelerated & institutional frameworks enhanced

•  Strong and resilient financial sectors are needed to support growth and diversification

Privatisation, PPP •  Privatisation of Aramco

& other GCC SOEs •  Strategic “vision” plans:

KSA Vision 2030, UAE Vision 2021

•  Increasing role of the private sector through PPPs

•  SMEs promotion for job-creation

But Structural Reforms Need to be Accelerated

•  Ownership rights: allow full ownership in non-strategic sectors

•  Facilitate Foreign Direct Investment

•  Enhance Labour Market Mobility

•  Long-term residency for skilled human capital, entrepreneurs, investors

•  Legal & regulatory reforms: digital economy, ease of doing business, insolvency, etc.

•  New Economic Geography dictates liberalisation of Trade & Investment policies for greater regional & international economic integration

2017 International Tourism: highest in 7 years

World’s Top Tourism Spenders

Purpose of Visit

Source: World Tourism Organisation, UN, Jan 2018

GCC Tourism to contribute $83.9bn by 2027; Dubai attracted a record 15.79mn tourists in 2017

Source: World Travel & Tourism Council, 2017

GCC’s International tourist arrivals

mn $bn

Performance of Top 10 Source Markets: Dubai

Source: DTCM; ‘000 visitors, Jan-Dec 2017

Saudi: ‘Mother of all transformations’ •  Great expectations: Vision 2030, NTP, NEOM ($500bn

in investment), opening up of Tadawul, Aramco IPO (role of KSA in OPEC post-IPO?), potential privatizations in 16 sectors

•  Opening up new sectors: entertainment (cinema), multi-cultural tourism (tourist visa, religious tourism etc.)

•  Largest-ever budgeted expenditure for 2018; non-oil revenue from VAT/taxes/fees, energy price reform

•  Expansionary measures: SAR 72bn private sector stimulus package (SAR 24bn in 2018)+ Citizens Account + cost of living allowances (SAR1k monthly)

•  Challenges: growing costs of doing business & investing; Saudization; VAT/excises; prioritization, sequencing & coordination of reforms essential

Real GDP growth 2011-16 (% yoy)

Source: IMF Article IV, Oct 2017, ENBD Research Feb 2018

Saudi PMI: new orders & new export orders

UAE: Technology boost amid Expo build-up

•  Supportive government policies: bankruptcy law, blockchain implementation, AI strategy, e-government

•  Fiscal consolidation; VAT to raise revenues (1% of GDP)

•  Supporting entrepreneurs: Innovation Fund, worth AED 2b

•  Megaprojects leading up to the Expo –  Value of all projects related to Expo

2020 Dubai: AED 122bn –  Committed to supporting SMEs –  Transport projects: Metro Red Line –  What about site post-event?

Dubai Economy Tracker: Wholesale & retail trade sector

UAE PMI: VAT drives input and output costs higher

Source: EmiratesNBD, Feb 2018

Visa Confidential

MENA/ GCC Risk Landscape

Political shocks

Energy price shocks

Trumponomics & US energy

policy China

rebalancing

Change in US Fiscal,

Monetary & Regulatory

Policies US$ volatility

Global Financial Market

Volatility

Economic non-diversification

Lower oil/ energy prices

Geopolitical tensions;

Escalation of conflicts

Near-term Medium-term

Daeshism

Military arms Buildup &

Regional Conflicts

Spillover: refugees, FDI, aid,

remittances

Political & social tensions

US$ Peg

Youth

Unemployment

Slow implementation of structural reforms

Agenda ü  The Changing Global Economic Landscape

ü  GCC Geo-Eco-Pol Overview

ü  What are the drivers?

ü  What are the risks?

ü  What are the opportunities?

ü  Key Takeaways 25

Arab Millennials & Changing Lifestyles •  Young, fast-growing, urbanised population: by 2050, 90% of the GCC population will

be urbanised - that's 20m more than today

•  Middle East has highest proportion of Millennial entrepreneurs globally: 63% aged 35 or under and youngest average age for entrepreneurs: 26 years old

•  Hard working! Avg. workday is 12.5 hours, 2.5 hours+ above global avg. for Millennials

•  Millennials in the Middle East demonstrate more brand loyalty than their peers in US, UK, Japan or Australia

•  53% of Millennials in the region believe it’s more important to have stability than democracy and 67% think that Arab leaders must work harder to improve citizens’ human and privacy rights in Arab countries, as well as women’s rights

•  Less religious than preceding generations: 52% state that they believe religion plays too central a role in the Middle East.

Sources: HSBC, Google Consumer Barometer, ASDA'A Burson-Marsteller Arab Youth Survey, 2016

Key forces shaping global luxury market 1.  Travel & Millennials: Chinese consumers are the travel

sector’s biggest spenders and they remain strategically important for luxury brands; there are >400mn millennials in China Almost half of luxury purchases in the ME region are made by consumers who are travelling, either in a foreign market (31%) or while at the airport (16%)

2.  Wealth: Growth in affluent residents & HNWIs 3.  Digital: need to have a focused & measurable digital

agenda; “connected” consumers => changes in customer behaviour

4.  Rise of e-commerce: e.g. Yoox Net-a-Porter’s ME deal to create a new online platform for online luxury retail

5.  Potential shift away from Western inspired luxury goods to more Asian and EME designed and produced, cultural-origin inspired good and services

Affordable segment & beauty products are driving online luxury sales, where affordable luxury sales are growing fastest online

All luxury shoppers are going digital — not just Millennials

Source: “The Age of Digital Darwinism”, McKinsey, Feb 2018

Opportunities: Economic Diversification & Reconstruction Economic diversification •  Opportunity in major projects:

Saudi NEOM, Expo 2020… •  Privatization Programs (KSA,

Kuwait, Oman)

•  Public Private Partnerships frameworks

•  Access to finance for entrepreneurs, growth companies, innovators

Reconstruction (Iraq, Syria, Libya, Yemen) •  Massive reconstruction needs:

Iraq, Syria, Yemen, Libya, Sudan > than $1trn?

•  Iraq reconstruction conference in Kuwait: allies promise $30bn vs. est. $90-100bn

•  Regional cooperation: Integrate infrastructure: economies of scale & scope; foundation for regional security

Opportunities: Access to Finance, FinTech & Digital retail services Access to Finance, Inclusion, FinTech •  Young, Unbanked populations: ü Only 14% of ME’s adults have bank a/c ü 85mn of world’s 2bn unbanked in ME ü High mobile penetration rates but

need shift from mobile payments ü Focus on SMEs, financial services for

women (entrepreneurs, wealth managers)

•  Social media presence •  FinTech = financial access & inclusion

+ cut across geographic fragmentation

Growing importance of e-commerce and services • E-commerce: 2015 est. market size of

$5.3bn (~0.4% of region’s GDP); market could almost quadruple to $20bn by 2020

• UAE+ Saudi = ~75% of region’s e-commerce transactions

• Online shopping popular among GCC Millennials

• Obstacles: consumer trust & awareness issues; shortcomings in payments, distribution, & logistics infra; embryonic govt policies

• Concerns about data security & fraud

Opportunities: Clean Energy, CleanTech & Asia/China

Clean energy & Clean Tech •  GCC will be investing in excess of

$700bn in RE over next 30 years •  KSA plans to install 3.5GW of

renewables by 2020 (Vision 2030); investment worth $30-50bn by 2030

•  UAE: raise target for power generation from clean energy to 30% by 2030

•  UAE set up a Ministry of Climate Change & Environment

•  UAE/ Dubai strategies for EVs, smart cities ahead of its counterparts

Growing importance of links with China •  Trade: Chinese imports to GCC expected

to double in value by 2020 ($135bn) •  Energy: More than half of China’s crude

imports is extracted in ME •  Potential investment in Aramco; signed

$70bn in new deals to strengthen economic ties with KSA (2017)

•  Belt Road initiative: support from GCC •  AIIB: UAE founding member in AIIB; now

account for 4.9% of total subscription; 5% of voting power

Agenda ü  The Changing Global Economic Landscape

ü  GCC Geo-Eco-Pol Overview

ü  What are the drivers?

ü  What are the risks?

ü  What are the opportunities?

ü  Key Takeaways

Thank you Dr. Nasser Saidi nsaidi@nassersaidi.com Twitter: @NSA_economics Website: http://www.nassersaidi.com