Whither Saudi Arabia & the GCC?

Challenges & Opportunities

Presentation at the Bonds, Loans & Sukuk Saudi Arabia

Dr. Nasser Saidi

19 November 2019

Agenda

Global macroeconomic & financial

developments

New Oil Normal

MENA Outlook & Risks

Growth, & Structural change in Saudi Arabia

Key Takeaways

2

Global Economy is in a synchronized slowdown. EM

continue outperforming: China + Emerging Asia share of

Global GDP is now larger than G7

Advanced

Economies

Emerging Market

Economies

GCC

Source: IMF World Economic Outlook database, Oct 2019

MENA

Global Growth forecast @ 3% in 2019 and 3.4% in 2020

Economic Policy Uncertainty driven by

trade tensions, Brexit, politics & geopolitics

Source: Economic Policy Uncertainty Index,

http://www.policyuncertainty.com/index.html

China-US Total Economic War: Trade,

Tech, Yuan, FDI. Moving to Financial War

US Financial War: restrictions on financial investment & potential delisting of

Chinese companies, with companies now ‘repatriating’ to HK-Shanghai

News-Based Index of Aggregate Trade Policy

Uncertainty

Source: “The Economic Effects of Trade Policy Uncertainty”, Federal

Reserve Board, Nov 2019

Trade Policy Uncertainty hits Firms’ Earnings

Calls

Trade Disruptions & Monetary Policy stance easing

(lower rates & QE resumption) were key Drivers Of

Asset Prices

Source: BIS quarterly review, Sep 2019

Debt Bubble: Growing Financial Risks, with stretched

asset valuations, growing negative yields. “WeWork Risk”

Big jump in global debt as financial

conditions ease; to surpass $255trn in 2019EM debt $71.4 tn, abt 25% of total bond

universe,(11% in 2009); 220% of GDP

Source: IIF Global Debt Monitor, Nov 2019

Growing downside risks to the Global Economy:

Economic Wars => Lower Trade, Investment &GDP

Growth: Financial Fragility/Crisis; lower oil prices

Financial Market Correction

• Trade & Monetary Policy key drivers of asset prices

• Asset overvaluation

• High global debt levels

• EME debt vulnerability

Subdued Investment growth

• Economic Policy Uncertainties continue to rise: US-China “wars”, Brexit, EU fragmentation?

• High US budget & trade deficits

• Technology disruption: AI, DLT, Big Data and FinTech

Trade & Protectionist policies

• US Trade wars: China, EU, RoW• Forward-looking trade indicators

have turned negative • Growing investment and trade

barriers vis-a-vis China• Increased barriers to migration

Non-Economic factors

• Growing Climate Risks will translate into financial stability risks

• Geopolitical tensions, conflicts & population displacement

• Nationalism & Populism

• Cyber crime

Agenda

Global macroeconomic & financial developments

New Oil Normal

MENA Outlook & Risks

Growth, & Structural change in Saudi Arabia

Key Takeaways

9

Changing Geography of Oil Market is

Transforming Global Oil Trade Pattern & Trend

Oil demand moving East Oil production moving West

Energy Market Outlook: “New Oil Normal” is here

• Asia a/c’s for rising share of global

imports; gross oil exports from US

overtakes Saudi Arabia by the mid-

2020s

• Largest increases in production

between 2018 and 2040 from US, Iraq

and Brazil.

• OPEC+ share falls to 47% for much of

the 2020s, a level not seen since 1980s

• Cost reductions in renewables +

advances in digital technologies

enabling energy transformation

• Wind & solar PV provide >50% of

additional electricity generation to 2040

• Shale oil is now marginal producer,

threatening OPEC+; while US sanctions

are favouring US producers

Agenda

Global macroeconomic & financial developments

New Oil Normal

MENA Outlook & Risks

Growth, & Structural change in Saudi Arabia

Key Takeaways

12

Multiple and intertwined risks challenge

MENA region

New Oil

Normal

Financial

conditions

Economic

wars

Reform

&

policy

agenda

Geopolitical

risks

MENA: Many countries in Transition, Tension or Turmoil. 47.6% of

world’s proven oil reserves; 60% of refugees & displaced; youth

unemployment is 27%; wide inequality in wealth & income

distribution. Arab Firestorm 2.0?

Population, millions (2018)

GDP per capita, USD (2018)

Countries in Transition/Tensions/Turmoil

Regime change

Source: IMF World Economic Outlook database, Oct 2019

Morocco 35.2

3,359.1

42.5

4237.5

Algeria

11.7

3,423.2

Tunisia

6.5

6,692.4

Libya

41.9

807.5

Sudan

96.9

2,573.3

Egypt

33.2

23,566.4Saudi Arabia

1.1

2,084.9Dijbouti

30.8

873.4

Yemen

4.2

19,302.2Oman

10.4

40,711.5UAE

4.6

1,142.5Mauritania

2.7

70,779.5Qatar

82.4

5,491.4Iran

1.4

25,850.5

Bahrain

4.5

30,839.2Kuwait

38.1

5,929.8

Iraq

n/a

n/a

Syria

6.1

9,257.3

Lebanon

9.9

4,278.3

Jordan

13.0

353.2

South Sudan

Geopolitical risks & Social Unrest have increased in MENA in 2018-2019

GCC & MENA Macroeconomic Overview:

Recovering in 2020? Risk of Lower Oil Prices,

Trade Wars, Global Financial Crisis

GDP

($bn)

Real GDP

growth (%)Inflation

Fiscal balance

(% GDP)

Current account

(% of GDP)

2019 2018 2019 2020 2018 2019 2020 2018 2019 2020 2018 2019 2020

Bahrain 38.2 1.4 2.6 2.4 2.1 1.4 2.8 -11.9 -8.0 -8.1 -5.9 -4.3 -4.4

Kuwait 137.6 1.2 0.6 3.1 0.6 1.5 2.2 8.7 6.7 3.8 14.4 8.2 6.8

Oman 76.6 1.8 0.0 3.7 0.9 0.8 1.8 -7.9 -6.7 -8.4 -5.5 -7.2 -8.0

Qatar 191.8 1.5 2.0 2.8 0.2 -0.4 2.2 5.3 7.0 6.9 8.7 6.0 4.1

KSA 779.3 2.4 0.2 2.2 2.5 -1.1 2.2 -5.9 -6.1 -6.6 9.2 4.4 1.5

UAE 405.8 1.7 1.6 2.5 3.1 -1.5 1.2 1.2 -1.6 -2.8 9.1 9.0 7.1

GCC 1,629.3 2.0 0.7 2.5 2.1 -0.7 2.0 -1.8 -2.4 -3.3 8.5 5.3 3.1

MENA 3155.3 1.1 0.1 2.7 10.1 8.1 8.6 -2.9 -4.4 -4.9 3.8 0.1 -1.3

Source: IMF Regional Economic Outlook Database, Oct 2019

GCC borrowing driven by budget deficits,

low rates & low credit spreads

GCC Sovereign Eurobond issuance

continues to dominate the bond market

Source: Capital Flows to MENA Region, IIF, Nov 2019

Sovereign foreign debt amortization profile

Rising Foreign Inflows to MENA Oil Exporters: $157bn (2019) vs $115bn

(2018)

Capital Flows to MENA supported by

portfolio inflows, thanks to MSCI inclusion

Non-resident capital inflows to MENA - 2018: $165bn 2019: $200bn 2020: $173bn

Nearly two-thirds of the additional $35bn inflows this year can be attributed to

portfolio equity inflows to Saudi Arabia

MENA experienced a clear downward trend

in FDI in last decade

Source: Capital Flows to MENA Region, IIF, Nov 2019

Portfolio flows are driving capital flows

to MENA oil exporters

Agenda

Global macroeconomic & financial developments

New Oil Normal

MENA Outlook & Risks

Growth, & Structural change in Saudi Arabia

Key Takeaways

18

Non-Oil Revenue Diversification, 2018

Bank credit is slowly picking up

Real GDP growth

% yoy

Current & Financial Account balance (% of GDP))

J-curve recovery phase in Saudi Arabia

Saudi Arabia is largest market in the

region; support from MSCI inclusionRegional stock market performance, YTD(Jan 1, 2013=100)

Source: Eikon, Nasser Saidi & Associates. Data as of 14 Nov 2019Market capitalization, share (%)

Reform push is continuing via legal &

business environment initiatives

Saudi Arabia was among the top 10 economies improving the most, as per the

World Bank’s Doing Business 2020 report; went up 30 places to 62nd rank

Source: Doing Business 2020, World Bank, Oct 2019

Saudi Aramco IPO could be a game

changer

A highly profitable company… and, its valuation overwhelms its rivals: more

than Exxon, Shell, Chevron & BP combined

• Aramco IPO opens road to other privatisations of SOEs in Saudi & across the region =>

attract private capital, new tech & job creation => greater openness & diversification

4 important aspects of Aramco IPO:

• May encourage other GCC countries to follow course & IPO their oil companies

• Stranded assets: accelerate & increase privatisation of oil assets to address growing risks of

climate change

• ‘Democratisation’ of IPO: strong drive to encourage Saudi citizens to invest in Aramco shares, to

stave off criticism of selling the family jewels

• Tadawul listing avoids US litigation risks

Saudi Arabia: Medium & Long-Term Views

Business as usual Accelerating reforms

Fiscal Medium-term fiscal consolidation

path; budget balance by 2023;

Gradual removal of energy

subsidies

Tighter fiscal policy needed: spending to be

reduced (Esp. wage bills in the public

sector); gradual phasing out of subsidies

(electricity, water)

Monetary Credit growth picks up; lending

for construction + mortgage

lending

Demand for credit to increase with stronger

non-oil economy; Support SMEs &

innovative biz

Financial

market

Continued capital market reforms

+ Aramco IPO on Tadawul

Aramco lists on an international exchange;

SOE privatisations

Real

economy

Reforms to support non-oil sector

(remove foreign investment

restrictions; public procurement

laws..)

Mega projects: NEOM + PPP &

Privatization

Others NTP 2.0 gradual implementation “Green Saudi”: Greater support for clean

energy & clean technology

What are Best, Base, Worst-case GCC

scenarios?

Worst Case Base Case Best Case

Global • US war on Iran

• US “wars” with China

• Debt crisis leads to

global financial crisis

• Brexit drags on

unresolved after

elections & deadline

• Fed, ECB maintain or ease

monetary policy and rates

• EMEs grow faster vis-à-vis

developed nations

• US-China economic

negotiations

• Brexit extended

• Brexit resolved; new

referendum; Norway model

• Trade wars resolved

• Decline in Populism/

Nationalism trend

• Trade Policy Reforms

Regional

politics

• Qatar rift exacerbates

• Regional

confrontation with Iran

• Syria/ Yemen wars

amplify

• Rift with Qatar persists

• GCC only exists de jure; de

facto demise

• Growing Saudi-UAE

integration

• Stabilisation of Syria, Iraq,

Yemen, Sudan, Algeria

• Yemen war ends; Qatar

reintegrated in GCC

• Development of Red Sea

& links with East & Central

Africa

• GCC Security

Arrangement

Regional

macro

• Oil prices decline to

$40-50

• Worsening business &

consumer sentiment

• Private sector activity

continues to dip

• Saudi reforms implemented

• Oil prices $50-60

• Opportunity in major projects:

NEOM, Expo 2020

• PPP & Privatization (KSA,

UAE, Kuwait, Oman)

• Growth of Digital economy; e-

commerce

• Massive Reconstruction

projects of Iraq, Syria

and Yemen get underway

• Belt & Road initiative:

support & participation by

the GCC

• Oil market stabilizes $65-

70

Thank you

Dr. Nasser Saidi

Email: nsaidi@nassersaidi.com

Twitter: @ Nasser_Saidi, @NSA_economics

Website: https://nassersaidi.com