Crude Awakening: Identifying Market Opportunities Amidst Oil

Chaos

Presentation at the Middle East Investors Summit Dubai, 15 November 2015

Dr. Nasser Saidi

Agenda

ü  Economics of the “New Oil Normal”

ü  Implications for the MENA/ GCC region

ü  New Energy Investment Opportunities

ü  Other Investment Themes

ü  Takeaways

2

Visa Confidential Source: IMF WEO, Oct 2015. GDP growth in yoy terms, shaded area denotes forecasts.

World US EU Emerging markets China Russia Japan

2015 3.1 2.6 1.5 4.0 6.8 -3.8 0.6 2016 3.6 2.8 1.6 4.5 6.3 -0.6 1.0

Global recovery remains fragile & uneven; Structural Change & New Economic Geography

-6

-4

-2

0

2

4

6

8

10

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Advanced economies EU Emerging markets MENA US

Global & EME/China slowdown is hurting commodity exporters

Commodity exporters: deterioration of terms of trade & currency depreciation

Impact on GDP when oil prices dropped by 50%: importers vs. exporters

Source: Oil Market Dynamics, UBS Asset Management, 2015

Lower Oil Prices: Winners & Losers Across Asset Classes

Source: Oil Market Dynamics, UBS Asset Management, 2015

China

“New Oil Normal”: demand dynamics dominated by EMEs; new sources of supply

Source: Energy Outlook 2035, BP (Feb 2015)

Growth in Energy Demand from Asia Change in energy demand in selected regions, 2014-2040

By 2040, India’s energy demand closes in on that of US, even though demand per capita remains 40% below the world average

Source: World Energy Outlook, Nov 2015

India takes over energy centre stage from China as the latter moves into services

Change in demand for selected fuels, 2014-2040

New infrastructure, an expanding middle class & 600 mn new electricity consumers => large rise in the energy required to fuel India’s development

Source: World Energy Outlook, Nov 2015

“New Oil Normal”: OPEC aims to drive out competition. Disruptive technology driving costs down for shale, RE

Source: Rystad Energy estimates, Jan 2015

Oil price weakness likely to persist: demand & supply factors weighing on market

Source: IMF MENAP Regional Economic Outlook, Oct 2015.

Both will battle renewables & new energies

Potential Impact on the Financial Sector

Source: Global Implications of Lower Oil Prices, IMF Staff Discussion Note, Jul 2015

Ø  Speed and magnitude of the oil price decline has potential to trigger financial strains, but effects have so far been contained.

Risks include:

Ø  Self-reinforcing cycle of rising credit risk & deteriorating refinancing conditions for countries, companies with substantial exposures to oil sector;

Ø  Decline in oil-related financial surplus recycling in global funding markets;

Ø  Strains in the ability of the financial market infrastructure to accommodate a prolonged period of heightened energy price volatility

Agenda

ü  Economics of the “New Oil Normal”

ü  Implications for the MENA/ GCC region

ü  New Energy Investment Opportunities

ü  Other Investment Themes

ü  Takeaways

15

Dramatic Implications of Falling Oil Prices for the MENA Region Oil Exporters: Ø  Decline in Oil Revenues by some $360 billion in 2015

Ø  Tighter fiscal constraints & budget deficits: GCC moves from fiscal surplus of 2.9% of GDP last year to deficit of 13.2% in 2015 (2016f: -12.6%)

Ø  Decline in Current Account Balances & Net Foreign Asset accumulation

Ø  Lower government spending & growth prospects

Oil Importers: Ø  Lower spending on oil imports improves trade balances

Ø  Lower remittances & FDI from oil exporters outweigh trade benefits

Ø  Foreign aid levels are likely to decline as well

∴ fall in oil prices could hurt oil importers as well as exporters

Visa Confidential

MENA Macroeconomic Outlook: conflicts & lower oil prices growth below potential

Source: IMF Regional Economic Outlook Oct 2015

Real GDP Budget balance

(% of GDP) Current Account

(% of GDP)

2014 2015f 2016f 2014 2015f 2016f 2014 2015f 2016f

Oil Exporters 2.6 1.8 3.8 -3.0 -11.0 -9.4 8.9 -3.4 -4.3

Saudi Arabia 3.5 3.4 2.2 -3.4 -21.6 -19.4 10.3 -3.5 -4.7

UAE 4.6 3.0 3.1 5.0 -5.5 -4.0 13.7 2.9 3.1

Iran 4.3 0.8 4.4 -1.1 -2.9 -1.6 3.8 0.4 1.3

Oil Importers 2.9 3.9 4.1 -7.9 -7.3 -5.8 -4.2 -4.2 -4.2

Egypt 2.2 4.2 4.3 -13.6 -11.7 -9.4 -0.8 -3.7 -4.5

Morocco 2.9 4.9 3.7 -4.9 -5.3 -4.2 -5.5 -2.3 -1.6

MENA 2.6 2.3 3.8 -2.8 -11.8 -10.1 6.1 -4.0 -4.7

Maghreb 0.7 2.5 3.6 -15.0 -25.7 -20.6 -8.1 -15.8 -13.8

Mashreq 2.2 3.9 4.1 -7.9 -15.1 -13.2 -4.6 -6.3 -6.6

Oil producers are facing external & domestic shocks from lower oil prices

Source: IMF MENAP Regional Economic Outlook, Oct 2015.

GCC expected loss in export revenue of $277bn in 2015; government revenue losses amounted to $232bn

Most MENA Oil Exporters will exhaust their financial buffers in less than 5 years! Financing needs reach $1 trillion over 5 years with current policies

Source: IMF MENAP Regional Economic Outlook, Oct 2015.

Fiscal Breakeven Prices

Adjusting to New Oil Normal requires radical government policy reforms 1.  GCC need both economic & revenue diversification; focus on

increasing private sector participation, PPP & privatisation

2.  GCC economies require new tax regime for economic policy management, including broad-based (e.g. VAT) & selective taxation (e.g. excise taxes).

3.  Implement: expenditure reducing policies (e.g. remove subsidies) and expenditure switching policies to build social capital (health, education) and increase productivity growth

4.  Efficient, equitable pricing of public services & utilities

5.  Use financial markets for development & infrastructure finance

Visa Confidential

Risks facing MENA economies

Asset market volatility/ EME

slowdown

US monetary policy

normalisation

Greece/ Eurozone Market Liquidity

Weaker Economic Prospects

Lower oil/ energy prices

Geopolitical tensions

Near-term Medium-term

Regional conflicts

Spillover effects:

refugees, FDI, aid,

remittances

Political & social tensions

Peg to the

dollar

Agenda

ü  Economics of the “New Oil Normal”

ü  Implications for the MENA/ GCC region

ü  New Energy Investment Opportunities

ü  Other Investment Opportunities

ü  Takeaways

22

Moving to De-Carbonisation: many factors at play

‘Kaya  iden*ty”  

Pollution, Climate Change driving Rise of Renewables and Clean Energy…

Rising demand $48 trillion of investment in energy infrastructure is needed in the next 20 years: the bulk of it in non-OECD countries

MENA energy demand is expected to grow by 8.3% per year between 2013-2019: more than x3 the global average

Over 170 GW of additional capacity will be required in the GCC region alone by 2020

Rising investment levels More than 50% of investment in new generation capacity worldwide is in renewables

$260bn a year has been invested in renewable energy technologies worldwide for the past five years

Green bond issues to pay for low carbon energy projects reached $36.6bn in 2014, more than triple the previous year

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…aided by falling costs & technological improvements

The falling cost of solar PV Prices for solar PV modules have fallen over 80 per cent since 2008

Solar PV will be at grid parity in 80 per cent of countries in the next 2 years

Solar PV is already cheaper than grid electricity in 42 of the 50 largest US cities

Technologies with proven track record Industrial applications of energy efficiency can deliver 100 per cent payback in five years

Modern wind turbines produce x15 more electricity than the typical wind turbine in 1990

The cost of energy storage is expected to drop to US$100 per kWh in the next five years, against US$250 now

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Global new investment in renewable energy by asset class

Source: Global trends in renewable energy investment 2015; figures in USDbn

Global new investment in RE: increasingly in developing countries

Source: Global trends in renewable energy investment 2015; in USD bn

New Investment in Clean Energy by Sector Q1 2004- Q3 2015 ($BN)

Global Gross Power Generation Capacity Additions 2010-2030 (Gw)

Renewables share to double to 46% of world electricity output by 2040; Wind & Solar accounting for 30% of generation, up from 5%

Global installed capacity in 2014 and 2040 and projected capacity additions, by technology (GW)

2014 Annual capacity additions, 2015-40 (GW) 2040

21%

600 400

6% 14%

36%

5% 5,584GW

2%

200

14%

14,214GW

6% 65% 0 2015 2020 2025 2030 2035 2040

Fossil Fuels Nuclear Solar Wind Other renewables Flexible capacity

4%

26%

Solar will boom worldwide, accounting for 35% (3,429GW) of capacity additions and nearly a third ($3.7 trillion) of global investment, split evenly between small- and utility-scale installations. Source: Bloomberg New Energy Finance

Renewable Energy is developing into a new asset class

•  Between now to 2040, developing countries will build ~three times as much new capacity as developed nations: of which around half will be renewables

•  MENA energy demand is expected to grow by 8.3% p.a. between 2013-2019: more than x3 the global average under current policies & subsidies

•  Economics – rather than policy – will increasingly drive the uptake of renewable technologies

•  Filling the demand-supply gap requires investment in significant levels of new generation capacity, as well as improved energy efficiency to mitigate demand

•  GCC financing of renewable energy projects has been primarily bank-based; likely to shift to longer-term debt & Sukuk

•  Innovative financial structures: solar securitisations, YieldCos, Green Sukuk

•  Invest in innovative technologies that provide grid resiliency & facilitate increasing levels of reliable clean energy deployment, as well as platforms that can promote smarter, more efficient energy management & consumption

Agenda

ü  Economics of the “New Oil Normal”

ü  Implications for the MENA/ GCC region

ü  New Energy Investment Opportunities

ü  Other Investment Themes

ü  Takeaways

32

MENA/GCC Investment Themes

•  Infrastructure & reconstruction

•  Water

•  Local financial market development

•  Detente with Iran

Infrastructure investment (non-GCC) shortfall: ~$72bn annual + Reconstruction of ~ $1.2 Tn

Five key infrastructure sectors Why invest in infrastructure? -  Job creation: each $10 BN creates

~2.5 mn direct, indirect & induced infrastructure-related jobs in MENA

-  Boost growth: by some 3%-pts among non-GCC oil exporters & ~1.5%-points among MENA oil importers in the short-term

-  Rapid population growth + urbanisation

-  Reconstruction of devastated countries: Iraq, Syria, Lebanon, Yemen, Libya, Sudan, Palestine

Source: “Capital project and infrastructure spending: Outlook to 2025”, PwC

Water, Energy & Food Security Nexus

MENA has highest Water Stress Levels

Source: World Resources Institute; dataset available at: http://www.wri.org/resources/data-sets/aqueduct-projected-water-stress-country-rankings

15 of the 25 most stressed countries by 2040 are from MENA

4.10 4.20 4.30 4.40 4.50 4.60 4.70 4.80 4.90 5.00 5.10

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Ranking the World’s Most Water-Stressed Countries in 2040

Saudi desert agriculture has depleted non-renewable aquifer water

GCC Water & Food In-Security

•  GCC has among lowest renewable water resources; bulk of region’s water mismanaged, directed to agriculture (~5% of GDP)

•  Challenges ahead: ‘Water Wars’; aquifer depletion; over-exploitation of freshwater resources; climate change, large carbon footprint

•  Growing reliance on desalinated water (expensive & energy-intensive); GCC: >40% of the world’s water desalination capacity

•  Reforms required: –  Invest in efficient & effective water management systems;

reform pricing –  Review food security policies; Reform agriculture support

policies; –  Improve water efficiency of agriculture & all other activities

Addressing the Water Gap: Investment Opportunities

Supply Side 1.  Desalination

2.  Wastewater reuse

3.  Infrastructure: water produced and lost in the region is 30-40% compared to international best practice of 10%

Demand Side 1.  Tariffs; cost recovery

schemes

2.  Agriculture + Irrigation inefficiency

3.  Efficient water management systems

Local Financial Market Development •  Liberalisation & opening up of markets can fuel growth •  MSCI Reclassification of Qatar, UAE can be transformational: attract

institutional investors, encourage IPOs & privatisation, improve governance & liquidity

•  Saudi liberalisation & opening up: Tadawul opened doors to foreign investors in June 2015. Reclassification in 2016?

•  Scope for additional reforms is large: Ø Consolidation of GCC stock markets Ø Creation of Government debt & Sukuk markets Ø  Improve corporate governance, transparency & disclosure Ø Build an institutional investor base: pension systems; insurance

Détente with Iran can be a game changer: Iran requires massive investments

…targeting oil and gas projects worth

$185 billion by 2020

…will buy up to 90 airplanes a year from Airbus and

Boeing

…offering to sell State assets to

foreigners

Iran is largest automotive market in the Middle East and roughly one-third the market size of Germany.

…expects to rejoin the SWIFT global electronic

payments system 3 months after sanctions removal

Infrastructure spending: power, transport, water, ports, airports, housing etc.

Consequences of Lifting Sanctions Benefits for Iran -  Access its foreign assets -  Restore oil & gas export

capacity -  Recovery in trade, FDI, equity

market, services, tourism, GDP

-  Massive infrastructure spending

-  Benefit from Iranian diaspora: human capital, business & financial resources

-  But, need domestic reforms!

Benefits for GCC/ wider region

-  Greater trade & investment benefits

-  High-return investment opportunity for GCC (SWFs & pvt investors)

-  Reconstruction of Iraq, Lebanon, Syria, Yemen => infrastructure investment to the tune of $1.8 trn

-  Global: lower oil prices, fight against extremism, “GCC 6+2” institutional cooperation framework

Agenda

ü  Economics of the “New Oil Normal”

ü  Implications for the MENA/ GCC region

ü  New Energy Investment Opportunities

ü  Other Investment Themes

ü  Takeaways

43

Investment themes: Now & to 2020

Ø  Energy Efficiency/CleanTech/ Renewable Energy

Ø  Urbanisation/Smart Cities/Infrastructure (hard & soft)

Ø  Health

Ø  Education

Ø  Water/ Food Security

Ø  Finance (including Islamic Finance) & Capital Markets

Key Takeaways •  New Oil Normal: structural change in oil market and its

dynamics. Depressed oil prices in the near/medium-term •  New Oil Normal requires radical changes in economic

policies for oil exporters: economic diversification, fiscal consolidation & reform

•  GCC economic reforms : Removal of Subsidies, Revenue Diversification: VAT/CIT/Excise taxes + Privatisation & PPP

•  New investment opportunities: renewable energy, energy efficiency, financial markets, water & sectors driven by demographics, infrastructure & reconstruction

Thank you Dr. Nasser Saidi www.nassersaidi.com @NSA_economics