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The near-term outlook for the GCC
Gulf countries are diversifying and opening their economies with a strong focus on foreign direct investment, tourism, technology and the financial services sector although they are still heavily reliant on oil revenue
GCC countries are restructuring and opening their economies, rethinking the role of foreign investors as well as SMEs as part of their broader strategy to ease fiscal burdens and do away with heavy reliance on oil revenues. There is a flurry of structural reforms across the region to modernise the legislation and enhance the business environment.
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The twin shocks of the COVID-19 pandemic and low oil prices tossed the world economy into the greatest recession since World War II. However, a senior official of the International Monetary Fund (IMF) said that oil-rich Gulf countries are projected to generate an additional $350 billion in foreign reserves in the next three years amid a rally in oil prices.
Oil prices have soared almost 60% to above $82 a barrel this year as the economic recovery from the pandemic and the global rollout of coronavirus vaccines has boosted mobility and stoked energy demand.
“Despite recent turbulence and uncertainty, there is no doubt that the global economy has strongly grown this year, even if the pace is now slowing. 2021 will go down in the economic annals as one of exceptional growth,” said Rasha Badawi, Head of Barclays Private Bank in the UAE.
Though most Arabian Gulf countries including Kuwait, Qatar, Saudi Arabia and Oman are still reliant on oil and gas—which accounts for 70% of their total goods exports and total revenues— the governments are diversifying and opening their economies with a strong focus on foreign direct investment, tourism, technology, and the financial services sectors.
Fiscally fit
Saudi Arabia, which revised its forecast for this year’s budget deficit to 2.7% of GDP from 4.9% in its preliminary 2022 budget statement, is projecting revenues from its exports of as much as $241 billion in 2022—a 4.5% increase compared to last year’s projections.
To plug its budget deficit, the Gulf state tapped international debt markets with a $5 billion dual-tranche dollardenominated bond in January 2021, a $1.8 billion euro-denominated bond in February and raised $3.25 billion by issuing dual-tranche bonds last month.
Moody’s Investors Service upgraded Saudi Arabia’s outlook to stable from negative in November 2021, citing the country’s ability to reverse most of its 2020 debt increase while preserving fiscal buffers. The rating agency said that it “expected fiscal improvement over the next several years will be facilitated by higher oil prices, although the stable outlook also takes into account the expectation that oil prices will remain volatile.”
The UAE’s cabinet approved its 2022 to 2026 federal budget of $78.96 billion in October 2021 and focused most of next year’s budget of $16 billion on spending on social benefits and development. The Gulf state said that 16% of the budget
will go towards higher education, 6% to social affairs, 8.4% to the health sector and 3.8% to infrastructure and economic resources.
The federal government, which had not issued bonds before, raised $4 billion from its debt capital markets debut after orders for its three-tranche bond deal reached $22.5 billion. UAE’s debt is rated Aa2 by Moody’s Investors Service, the third-highest investment grade and one step lower than the Fitch Ratings level of AA-. Bahrain also unveiled its new economic growth plan targeting $30 billion of investments late in October while hiking VAT to 10% from 5% as part of the Gulf state’s broader strategy to shore up its economy after the devastating impact of coronavirus and balance its budget by 2024. Meanwhile, Qatar recorded a budget surplus of $247 million in Q3 2021, boosting the nine-month surplus this year to $1.3 billion on higher energy prices.
Financial sector
Digital banking
GCC banks are pro-innovation and industry experts expect digitalisation to remain a dominate priority across financial services industry as the sector goes more digital. Though digitisation was already apparent across the Gulf region financial services industry, the outbreak of the pandemic accelerated the rate of digital transformation to levels not seen before.
“Digital transformation is no longer a luxury, but a necessity. Banks that are agile, flexible, and willing to transform their business models will be the ones that succeed, and secure their financial strength for future growth,” said KPMG.
UAE’s Mashreq Bank and Emirates NBD launched digital-exclusive banks for SMEs, NeoBiz and E20 respectively, in September 2019 to support one of the UAE’s important sectors. The unveiling of digital banks for SMEs came exactly two years after both Mashreq Bank and Emirates NBD had launched Mashreq Neo and Liv., lifestyle digital-only banks that seek to meet the banking needs of millennials.
The country’s first independent digital banking platform, YAP, started operations in August 2021 and it is backed by RAK Bank. Abu Dhabi sovereign wealth fund ADQ is also considering setting up a digital bank using a legacy banking license of First Abu Dhabi Bank. Zand, the UAE’s first Shari’ah-compliant neobank is expected to open its doors for business soon. It is will be the first fully independent digital bank in the UAE, with a remit to service both retail and corporate customers.
Bahrain’s Bank ABC launched ‘ila Bank’ in 2019 – an AI-powered and data analytics digital-exclusive bank, which started offering credit cards and loans to Bahraini customers in March 2021. They are expected to launch its services in Jordan this year before it expands into Egypt.
Saudi Arabia’s cabinet also gave the Gulf state’s finance ministry the green light to issue licenses for the country’s first digital banks in June 2021. stc pay (stc Bank) will be converted into a digital bank with a capital of $667 million, while the Abdul Rahman bin Saad Al-Rashed and Sons company-led consortium will set up another digital bank (Saudi Digital Bank) with a capital base of $400 million.
Badawi said that the rapid digitisation and ongoing investment in technology is expected to continue.
M&A
The GCC financial service sector has weathered several storms over recent years and regional banks have been merging to remain profitable and maintain a competitive edge.
In April 2021, Saudi Arabia completed the landmark merger between National Commercial Bank and Samba Financial Group into Saudi National Bank (SNB), a banking giant with around $223 billion in assets. SNB is expected to be on equal footing with regional rivals Qatar National Bank and First Abu Dhabi Bank.
The Saudi British Bank (SABB) also completed its takeover of Alawwal Bank in March 2021, creating the third-largest lender in the Gulf state with total assets of $73.7 billion after the two lenders legally merged in June 2019.
Qatari lender Masraf Al Rayan secured shareholders’ approval for its much-anticipated merger with Al Khalij Commercial Bank in October 2021. The tie-up is projected to create the Gulf state’s second-largest bank with an asset base of around $45 billion. It will also create one of the largest Shari’ahcompliant banks in the region.
However, COVID-19 stalled the negotiations on the region’s only cross-border tie-up between Kuwait
– Rasha Badawi, Head of Barclays Private Bank in the UAE
Finance House and Bahrain’s Ahli United Bank—which was announced in early 2019 but was shelved after the outbreak of the pandemic.
Following the call by Banque du Liban, Lebanon’s central bank, for local lenders to recapitalize by the first quarter of 2021, Bank Audi and Blom Bank put their Egyptian portfolios up for grabs. UAE’s First Abu Dhabi Bank, which acquired Bank Audi Egypt in April 2021, expects to finish merging its Egyptian operation with the newly acquired bank in 2022.
Similarly, Bahrain’s Bank ABC also agreed to acquire Blom Bank Egypt in a deal valued at $427 million and the takeover, which is subject to regulatory approvals in Bahrain, Egypt and Lebanon, is expected to close in Q1 2022.
The GCC regional banking system is reportedly highly fragmented making competition intense. As of 2019, the region had more than 160 banks serving a regional population of 58 million compared with a dozen commercial banks in the UK catering for a population of 66 million.
Diversification drive
UAE
Gulf countries are putting sustainability, which incorporates environmental, social and governance (ESG) concerns at the centre of their economic diversification strategies. In October, the UAE become the first of the oil-rich Gulf petrostates to commit to eliminating carbon emissions within its borders by 2050. The country also said that it would invest as much as $163 billion in renewable energy as part of its broader strategy to reduce planet-warming emissions and is set to host the COP28 international climate conference in 2023.
“In the wake of the UN’s COP26 climate change conference and ahead of the UN Climate Change Conference (COP28) to be hosted in the UAE in 2023, building portfolios that can capture potential green investment opportunities, while simultaneously guarding against climate risks, will matter for investors in the Middle East,” said Badawi.
The federal government recently introduced programs to shore up investment such as the ‘Make it in the Emirates’ and ‘Operation300bn’, initiatives that are aimed at supporting SMEs for the next 10-years to boost their contribution to the country’s economic output.
Under the ‘Operation300bn’, the government seeks to enhance the industrial sector’s contribution to the UAE’s economic output, from the current $36 billion (AED 133 billion) to $82 billion (AED 300 billion) over the next 10 years.
In a major policy shift, the UAE also said that it would offer Emirati citizenship and passports to a set group of foreigners, including investors, professionals, and special talents. KPMG said that given the economic impact of COVID-19, the move to allow foreign entrepreneurs and investors to fully establish and own companies is a welcome move for new and existing investors and reinforces the country’s appeal as a regional investment hub.
Saudi Arabia
Saudi Arabia, the world’s top oil exporter, also announced in October that it aims to reach zero-net emissions by 2060 through a circular carbon economy approach—a move that aligns the kingdom with most major economies and the that changes scientists say are essential if the world is to avoid the worst effects of global warming.
Under Crown Prince Mohammed bin Salman’s Vision 2030, Saudi Arabia has unveiled several initiatives, including the SAR 5 trillion ($1.34 trillion) Shareek Programme, the national transport and logistics strategy, and the kingdom’s privatization programme, which is expected to attract as much as $55 billion investment in the next four years. Last month, the Gulf state said it has granted citizenship to a group of expatriates including doctors, clerics and academics, becoming the second Gulf Arab state to introduce a formal naturalization programme for foreigners.
Oman
Oman has also made significant strides in implementing structural reforms to boost the non-oil economy, drive diversification and spur longterm sustainable growth. Under Sultan Haitham bin Tariq Al Said’s Vision 2040, the Sultanate restructured the government and state entities including the country’s wealth funds and introduced value-added tax (VAT) in April 2021.
Oman merged the State General Reserve Fund and the Oman Investment Fund in June 2020 into a new wealth fund Oman Investment Authority, a new entity with $17 billion assets under management. The Sultanate also established a new state-owned energy company, Energy Development Oman, as part of the government’s efforts to use its largest oil block to raise debt. The energy firm owns a 60% interest in Block 6, which is one of the biggest crude deposits in the region and has a production capacity of 650,000 barrels a day.
Oman also announced in June that it would start granting long-term residence visas to foreign investors as part of the country’s wide-ranging reforms to fix its finances.
The significant groundwork which is being laid down in markets and legislation across the Gulf region is expected to drive future growth. The IMF said that it has been monitoring the key changes that have been underway in the landscape for foreign investment and public-private partnerships (PPP) and there is a broad trend of reforms across the region to modernise the legislation and enhance the business environment.
A game of two halves
Michael Bolliger Head Emerging Markets at UBS Global Wealth Management surmises that the rising price of goods and services in 2021 will have lingering effects into 2022 and that we can expect opportunities in growing markets such as Greentech, sustainable solutions and enabling technologies
Michael Bolliger Head Emerging Markets at UBS Global Wealth Management
Describe 2021 from a regional banking and finance perspective, and what you feel was the markets’ most notable achievement.
Obviously, 2021 was an extraordinary year but allow me to point out one of the elements that will stay with us going forward. In 2021, the prices of goods and services rose more than they did in any year since 2008, leading to concerns about the potential impact on consumer
spending, rising interest rates and corporate margins. Much has been said about this but in our base case, we think inflation will fall from currently high levels over the course of 2022, reducing the pressure on consumers, interest rates, and corporations and thus supporting equities.
What is your prediction for the state of the overall regional economy by the end of next year?
We expect a year of two halves. Elevated growth and inflation in the first half will create opportunities in cyclical markets. But with lower growth and inflation to come in the second half, we also see healthcare, a relatively defensive sector, as well-positioned. Meanwhile, continued low interest rates across most fixed income markets mean many investors will need to re-think their strategy of how to find yield. The role of alternative assets and the role they can play in this regard is often underappreciated. Looking further ahead, the net zero carbon transition and surging technological disruption are proving to be the biggest investment trends of the decade. This brings opportunity in Greentech and sustainable solutions, and in enabling technologies such as artificial intelligence, big data and cybersecurity.
What makes you feel optimistic about 2022?
We expect commodity prices to stabilize in 2022. But many commodity-linked equities have yet to reflect an extended period of high prices. We estimate, for example, that energy stocks are still only factoring in a long-term Brent crude oil price of USD 60/bbl. That should turn out to be good news for those well-positioned Middle Eastern firms operating in that sector.
