Transcript the report here - AHIC Market Intelligence

Richard Thompson,
Editorial Director, MEED,
[email protected]
@MEEDEditor
Middle East market
25
update
October 2016
2016 in
headlines
Saudi Arabia releases payments to contractors – MEED
Saudi Arabia concludes record bond sale - MEED
Opec reaches deal to cut oil production - MEED
Saudi Arabia acts on public sector wage bill - MEED
Moody’s cuts debt rating of three GCC states – MEED
Abu Dhabi's Adnoc cuts 5,000 jobs – MEED
Saudi prince reveals economic vision – MEED
GCC banks hike provisioning – MEED
Iran sanctions lifted – MEED
Riyadh breaks off diplomatic ties with Iran – MEED
Rising risks
• lower oil prices have increased business uncertainty
• Government spending cut and regional liquidity reduced
• Maintaining revenues and cash flows are biggest challenge
• Increased bank caution on lending exacerbating cash crisis
• Growing number of companies struggling to access working capital
• Security and cybersecurity risk growing
Oil prices have doubled in
$51.78/barrel
2016
$50/barrel
$26/barrel
OIL PRICES UP
Noises about Opec production cuts
Worries about global supply outages
Declining US production – 50% rig fall
Wildfires in Alberta's oil sands region
OIL PRICES DOWN
Stockpile build up in US crude storage
Resumption in Libya oil exports
Ramp up in Nigerian crude production
New Iranian capacity
Higher prices bring back oil shale
The new normal
Source: ft.com
$50/barrel
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Oil expected to remain stable at about $50 a barrel for the rest of year
Oil prices set to stay low as global supply is outpacing demand growth
Regional oil producers maintaining production to retain market share
IMF forecast for Brent average $50.1 a barrel in 2017, rising gradually to $57.5 by 2021
The impact of low oil
Mena exporters lost $360bn in oil revenue in 2015 down 23% in 2015, 16% in 2016
Fiscal breakeven point ($ a barrel)
$50/barrel
Bahrain
Kuwait
Oman
Qatar
Saudi Arabia
UAE
“[The recovery in oil prices] does not fundamentally change the
outlook for oil prices or the implication for oil exporters in the region.
Oil exporters will continue to face some difficult policy choices, both
to balance their budgets and to diversify their economies to become
less dependent on oil.”
- Masood Ahmed, IMF Director of Middle East and Central Asia
Rising deficits
GCC
Bahrain
Kuwait
Oman
Qatar
Saudi Arabia
UAE
• Oil price rises have eased fiscal pressure but reforms still needed to balance budgets
• Combined fiscal deficit of GCC in 2016 is estimated at $160bn, or 12.8% of GDP
• Between 2016 and 2019, Bahrain, Oman, Kuwait and Saudi Arabia expected to run
average annual fiscal deficit of 10%, while Abu Dhabi and Qatar will see 4%
• GCC needs to finance a combined budget deficit of $765bn between 2015 and 2021
Balancing the books
The new policies that will drive the market
Diversify non-oil revenue streams – taxation, fees
Drive structural reform programmes – privatization, private sector
Efficiency drive – restructuring, job cuts (Abu Dhabi), wage cuts (KSA)
Energy reform – subsidy cuts, diversify energy, IPP/IWPP
PPP for infrastructure – wastewater, power, housing
Diversifying funding – borrowing, assets, IPO
Localisation of employment
Investment drive – markets, PPP, green cards
GCC funding needs
Source: Standard & Poor’s
• GCC needs $560bn to finance government deficits to 2019
• 60 per cent of this will be in Saudi Arabia, which needs to find $389bn to
finance government spending and investment to the end of 2021
• S&P expects the kingdom to borrow as much as $180bn by 2019
• Deficits financed by a mix of drawdowns on reserves, and debt
• Fiscal balance after 2019 depends on the speed of implementation of
government reforms such as subsidy cuts and value added tax, and oil prices.
Deteriorating balance sheets
Projected gross government debt (% of GDP)
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Kuwait, Abu Dhabi, Qatar and Saudi have large reserves but these are finite
Liquidity is falling and uncertainty will push up the cost of GCC borrowing
Saudi’s net asset position will decrease by 30% by 2019 and Kuwait’s by 20%
Saudi used $170bn of FX reserves from Aug 2014 peak to $562bn by Aug 2016
GCC sovereigns will choose different mixes of asset and debt funding
Qatar relying most on debt and Kuwait most on drawing down reserves
Source: IMF
GCC non-oil growth slows
GCC economies still driven to a
by government spending so the
cutbacks in government
spending hit non-oil growth
Non-oil GDP growth in the GCC
has fallen to from over 5 per
cent in 2014 to average 1.8 per
cent in 2016
Recover to 3.1 per cent in 2017
2017 rebound due to the
slowing fiscal consolidation
Source: IMF
Outlook for regional growth
GDP growth in the GCC:
2016 = 1.7%
2017 = 2.3%
Mena GDP growth outside GCC:
2016 = 3.1%
2017 = 2.9%
Source: IMF
Average
20092013
2016
2017
Egypt
3.2
3.8
4.0
Iran
0.8
4.5
4.1
Iraq
7.8
10.3
0.5
Outlook for GCC growth, by
market
Average 2016
2017
20092013
Bahrain
3.6
2.1
1.8
Kuwait
1.9
2.5
2.6
Oman
4.8
1.8
2.6
Qatar
10.9
2.6
3.4
Saudi
Arabia
4.1
1.2
2.0
UAE
2.6
2.3
2.5
Source: IMF
Projects market slows
Value of projects planned or underway in the Gulf ($bn)
• Gulf down 0.7% YoY to $3.45tn
• GCC up 0.8% to $2.82tn
• Saudi Arabia down -1.1% to $1.18tn
• UAE up 2.6% YoY to $867bn
• Iran up 17.5% to $286bn
• Qatar down -4.3% to $270bn
• Kuwait up 1.0% to $247bn
• Oman up 14.4% to $194bn
Source: www.meed.com
Key project trends
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Oil prices hit government finances
Investment plans under review
Revised master planning
New delivery models - PPP, TODs
Efficiency focus
Big Data/technology
Security –physical, cyber
Costs – subsidy cuts, fuel costs, tax
Transport integration
GCC projects outlook 2016 contract awards
($bn)
45,000
Project awards ($m)
40,000
35,000
Total GCC awards forecast at start 2016 = $140bn
$41bn
Total GCC awards forecast mid-2016 = $120bn
$37bn
30,000
25,000
$24bn
$22bn
20,000
$13bn
15,000
10,000
5,000
$2.8bn
0
Bahrain
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Kuwait
Oman
Qatar
Saudi Arabia
UAE
GCC awards forecast to be down about 16% in 2016 to just over $140bn
This could fall to $120bn – 27% down on 2015
Worst affected will be Saudi Arabia
Iran and Egypt offer strong potential, but depend on the political situation
UAE, Kuwait, Qatar and Oman will be marginally down
Source: MEED Projects
GCC projects outlook pipeline
By market
Saudi Arabia has biggest pipeline of
planned projects, about $800bn
The UAE is second, with $600bn
Qatar at $200bn of planned projects
Kuwait at about $175bn
By sector
Construction sector – buildings,
property and real estate – offers the
biggest segment of future projects,
with a pipeline of about $1tn
GCC power and transport projects
each have about $400bn-worth of
schemes planned
Source: MEED Projects
Outlook for the UAE
UAE is one of the best placed to rebalance its
budget and adjust to low oil
Economy diversified and supports large and
experienced corporations active in regional
and global markets
$500bn-worth of public and private savings
Banking system liquid and well-managed
The economy will recover robustly in 2017 on
rebound in the oil price and increased public
and private sector activity
This will be supported by preparations for
Expo 2020 in Dubai and increasing trade with
Iran
Annual real GDP growth (%)
UAE
Average
20092013
2016
2017
2.6
2.3
2.5
Source: IMF
Abu Dhabi
Cut spending fast and hard
Acted to end or reduce energy and other
subsidies; and preparing for the
introduction of value-added tax (VAT)
and other forms of taxation for the first
time to increase public sector revenue
UAE as a whole will post deficits of just
3.9% of GDP in 2016 and 1.9% in 2017
The sharp cut in government spending
will reduce non-oil GDP growth to just
1% in 2016 and 1.3% in 2017
This has been reflected in slowing
projects and real estate markets
A new CEO has been appointed at Abu
Dhabi National Oil Company (Adnoc) and
radical changes were announced in May
Dubai
More diversified than the rest of the GCC
and less-reliant on oil revenue
Expected to maintain GDP growth of 3.3%
in 2016, rebounding slightly to 3.6% in
2017
It has kept government spending relatively
high, partly due to the upcoming Expo
2020. By mid-2016, Dubai had awarded
more than $16bn-worth of deals.
Real estate remains the key driver of the
emirate’s projects market, although the
importance of transport growing in line
with efforts to develop city rail networks
and improve airport infrastructure. Power
schemes have also become a focus of
activity as Dubai looks to establish itself as
a world leader in solar energy.
UAE projects headlines
$507bn Contracts awarded in the UAE between 2006 and 2015
$154bn Value of projects of under construction in the UAE
$629bn Project pipeline in the UAE
$22.6bn Value of projects awarded in the UAE in the first half of 2016
$16bn Value of projects awarded in Dubai in the first half of 2016
The largest sectors for future projects are construction, followed by
transport.
In addition to Abu Dhabi’s metro and light rail plans, there is the expansion
of Dubai’s Al-Maktoum International airport and further phases of Etihad
Rail’s federal railway to execute.
Outlook for Saudi Arabia
Private sector activity in the kingdom slowed sharply in 2016, following
delayed payments on government contracts and reduced spending and
confidence
Non-oil GDP growth is projected to slow to 2.3% in 2016, then 1.1% in 2017
Saudi needs to follow through on plans to finance and reduce its budget
deficit, following a successful $17.5bn international bond issuance last week
This represents a GCC-wide move towards diversifying budget financing
including drawing down on assets, domestic debt, and increasingly from
international markets in order to reduce excessive reliance on the domestic
market, which can aggravate low banking sector liquidity and crowd out the
private sector
Riyadh has sold local banks a total of $28bn-worth of bonds in the 12 months
ending August. Their capacity to buy more is limited, but at least $10bn could
be comfortably placed with domestic investors annually for the foreseeable
future
Saudi slowdown hits banks
The slowing projects market and more difficult environment for the
construction sector will lead to rising non-performing loans and higher
provisioning costs, according to US-based Moody’s Investors Service last
week
Moody’s expects NPLs to rise to around 2.5 per cent of gross loans in 2017,
from around 1.5 per cent estimated as of June 2016.”
“The Saudi construction sector has been negatively affected over the
last two years by slowing economic activity and fiscal consolidation
measures, stemming from a lower oil prices environment. We expect the
pressures to continue as the Saudi government aims to reduce its large
fiscal deficit”
- Olivier Panis, senior credit officer at Moody’s
Saudi Vision 2030
On 25 April, Deputy Crown Prince Mohammed bin
Salman al- Saud unveiled much-anticipated Vision 2030
plan, which outlines economic reforms that will wean
the country’s oil-dependent economy off hydrocarbons
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Grow private sector to 65% of GDP from 40%
Implement transparency reforms
Structural reforms of mining sector
Privatise government services
Government becomes regulator
Private investment in healthcare, municipal services, housing, finance and
energy sectors
About 146 state assets that could be privatised or sold to the public
Less than 5% of Saudi Aramco to be sold in IPO
Transfer Aramco to PIF
PIF assets rising from SR600bn to more than SR7tn
Localisation of oil & gas sector from 40% to 75%
Launch the King Salman Renewable Energy Initiative
National Transformation Programme (NTP)
National Transformation Plan is hitting all areas of public spending
• Min of Electricity & Water split between two Ministries
• Replacing multiple key ministers
• New heads of Aramco, the Saudi Arabian Monetary Agency, the Saudi
Railway Company and the National Water Company
• Restructuring General Authority for Civil Aviation (GACA)
Many plans postponed and new consultants being hired to set new
strategies and to advise on new privatisations
Confusion for developers, contractors and banks
Project pipeline will return with emphasis on private investment.
Contract awards in Saudi fell 60% between H1 2015 and 2016
National Transformation Programme (NTP)
The National Transformation Plan (NTP) aims to reduce Saudi Arabia’s public
sector wage bill from 45% of government spending to 40% by 2020
• 27 Sept: Cabinet issues decree cutting ministers’ pay by 20% and suspending
public sector bonuses or pay rises
• Stipends paid to the Shura Council members were cut 15 per cent.
• The decree also freezes public sector hiring, and indicates that foreigners in
non-essential positions should be terminated
• Existing public sector employees should be recycled to fill key vacancies.
• Benefits such as allowances, phones and cars have also been cut, as well as
allowances to students studying abroad, diplomats and health workers.
• Saudi Aramco is also asking foreign firms to hire more Saudi Nationals
NTP:PPP
Ministry of Economy seeking advisor to develop pipeline of public
private partnership (PPP) projects
National Transformation Plan (NTP) aims to carry out five PPP
projects by 2020, without specifying sectors or projects.
The PPP model is also expected to be applied in transport, health
and education.
Taif airport PPP has been put on hold, due to a concerns over
revenue streams
Saudi Arabia is expected to go ahead with PPP projects without a
dedicated legal framework, using existing commercial law
NTP: Aramco IPO
• Sale of up to 5% of Aramco shares worth est. $100bn. Even 1%
would be biggest IPO
• Aramco working on IPO options, including dual listing could
also consider listing on the Tokyo Stock Exchange – 5 Sept
• Final proposal to be presented to the country’s Supreme
Council. Could see listing in 2017
• Transfer remaining ownership to Public Investment Fund which
will inflate to $2 trillion and help it invest at home and abroad
• Tokyo has no plans to be a strategic investor in Saudi Aramco
but may invest in industrial ventures in kingdom
- Yasutoshi Nishimura, 18 Sept
Saudi’s $1tn project pipeline
Source: MEED Projects
Conclusions
2016 is a tough year for GCC projects with delays and late payments squeezing cash
flow, and banks tightening lending in preparation for rise in non performing loans
2017 will be another challenging year but project spending will resume in albeit at
lower levels than before and using new models. 2018 will be stronger recovery
The most important task for the GCC in 2017 is implementing change programmes
Implementation of spending cuts and revenue measures will get progressively harder
as the GCC moves from `low-hanging fruit’ such as cutting capital spending to more
politically charged cuts to public sector wages. Breaking the social contract
Delivery and assertive programme management is key
Financing will be a primary challenge as market conditions harden
Contradiction between cutting spending, which drives private sector activity, and
encouraging the private sector to hire to reduce unemployment
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