Monday , November 20 2017

GCC economies adjust to low oil prices

Kuwait Finance and Investment Company (KFIC) clarified in its financial annual report that the International markets closed the year 2016 in bullish territory after enduring a difficult start to the year, with positive economic data coming from Advanced Economies and Emerging Markets. Geopolitical events continued to impact economies on a global standpoint, with the ongoing war in Syria, Yemen, Iraq and numerous terrorist attacks in Turkey creating major security uncertainty around the Middle-East and Europe.

In the United States, the US Federal Reserve was expected to raise interest rates in June 2016, but due to the surprise decision of Brexit, the Fed decided to delay raising interest rates until December 2016, and markets reacted positively towards this news. Donald trump shocked the world as he won the presidential race to the white house, against all expectations, and US equities also rallied due to the fresh fiscal policies which he would introduce such as ease banking regulation, reducing taxes, and spending heavily on rebuilding infrastructure. A trend toward stronger US economic growth and inflation could be accelerated by President-elect Trump’s fiscal plans. Despite the disruption of Brexit, Europe has continued to progress towards a path of slow but steady growth as the ECB has continued to add more stimulus and has continued to boost the quantitative easing measures. Emerging Markets have also performed positively, with the exception of China’s economy which has gone through a rebalancing phase and has slowed down due to the fall in commodity prices (further weakened by oil’s collapse beginning in 2014).

GCC nations have endured a difficult time economically as the slump in oil prices has forced governments to adjust to the new era of lower oil prices. Countries have been encouraged by agencies such as the IMF to accelerate structural reforms to diversify their economies away from Petrochemicals, boost the functional role of the private sector, and create jobs for their swiftly growing labor forces. Another strategy implemented by GCC governments was to issue international bonds to ease the burden on fiscal reserves and improve overall market liquidity. Saudi Arabia made headlines when it issued international bonds at a grand scale believed to be worth USD 17.5b, which was the biggest bond sale from an emerging market nation.

Qatar also raised USD 9bn in sovereign bonds, Abu Dhabi sold USD 5bn worth of sovereign bonds, and Kuwait’s planned bond issue worth USD 9.9bn has been delayed until 2017.

In Saudi Arabia, strict austerity measures were implemented which included reducing minister’s salaries, decreasing capital expenditures, and delaying paying contractors for construction projects. The Saudi budget for 2017 indicates that austerity measures will continue to take place as subsidies on utilities such as water and electricity will be partially reduced and fuel prices are expected to rise by  +40%.

Major spending increases were set aside for Healthcare which increased by +15% and Education & Training by +5% from 2016. The 2017 budget is expected to see costly subsidies on utilities such as water and electricity cut, while fuel prices are expected to rise a further +40%. In Kuwait, plans were made to introduce income tax, spending cuts and privatization on many public services to attract more foreign investment and boost the economy. However, the parliament was dissolved with cabinet members disagreeing over austerity measures due to fiscal budget constraints and this has delayed the release of the 2017 budget details. In the UAE, the cabinet approved the AED 48.7bn budget allocated for 2017 which was up by +2.6% compared to the previous 2016 budget.  The main focus on the budget was to boost infrastructure spending by +27.0% as compared to the prior year.

Oman’s 2017 budget assumed an average oil price of USD 45.0/bbl. The ministry has vowed to focus on issuing international bonds as a method of boosting funds. Oman also has plans to sell major stakes in a string of state companies over the next several years such as Muscat Electricity Distribution Co, which will be completed in the first half of 2017. Qatar’s 2017 budget intends to reduce the government’s deficit and support growth measures through higher capital spending.

Capital project spending will be targeted at transportation and infrastructure +21.2% of total spending, health +12.3% and Education +10.4%. The government also reiterated that it will continue to finance the fiscal deficit through domestic and external debt instruments and not draw down on accumulated reserves.  Meanwhile, Bahrain has scaled back 22 municipal projects due to be completed within 2017-2018 as a result of budget cuts. This all comes at a time where Bahrain was stripped of its investment grade credit rating by S&P to “BB” with a stable outlook, from “BBB-“ with a negative outlook, which in essence sets it to junk category.

Global equity markets

The MSCI World index gained +5.3% as financial markets were supported by strong monetary easing policies, rising oil prices, and improving consumer confidence. In Europe, Germany’s DAX index closed the year +6.9% higher, France’s CAC 40 gained +4.9% and UK’s decision to vote for Brexit resulted in a YTD performance of +14.4% for the FTSE 100 as the pound sharply devalued against the USD. In the United States, the S&P 500 rallied by +9.5% as the Federal Reserve delayed raising interest rates until December 2016 and markets rallied after Donald Trump surprised the nation by winning the Presidential election.

In Emerging Markets, MSCI EM Index closed the year +8.6%. Brazil’s Ibovespa gained +39.0% however mostly due to the Brazilian Real currency depreciating by -39.0%. The new government under Michel Temer is under pressure to improve the country’s shrinking economy and get the budget deficit under control. China’s Shanghai’s Composite fell by -12.3% as investor confidence worsened due to China’s GDP slowing down to +4.0% from +6.0%, and the Yuan has significantly devalued against the dollar leading to many capital outflows and a blow to economic confidence.  In Japan, the Nikkei 225 closed flat at +0.4% as the Japanese economy slowed down which encouraged the government to increase expected stimulus measures.

Commodities rallied sharply as OPEC and Non-OPEC members both agreed to initially freeze output in February 2016 and then cut oil supply production in November 2016. Brent increased +23.4% to USD 56.8/bbl and WTI gained +20.5% to close at USD 53.7/bbl. Gold and Silver were robust safe-havens for currency devaluations as Gold gained +8.6% to close at USD 1,152 per ounce and Silver improved by +14.9% to close at USD 15.9 per ounce.

Regional Indices

The beginning of the year 2016 witnessed oil prices collapsing to their lowest point in January, along with increasing geopolitical tension in Syria, Iraq and Yemen, and finally investors reacting negatively towards strict austerity measures implemented by GCC governments to combat the rising budget deficits. Markets rallied sharply on the backbone that OPEC and Non-OPEC members first agreed to freeze oil supply in February 2016 and then formally agreed to cut oil supply production in November 2016. Liquidity deteriorated within the first half of the year but government intervention such as issuing bonds internationally helped improve overall market liquidity. UAE’s DFM index was the top performing index and Kuwait’s Weighted Index was the worst performing index in the region. Kuwait’s KSE Weighted Index finished the year -0.4%. Oil & Gas sustained a loss of -15.2% and Banks fell by -7.1%. Industrials reported a strong finish as it rose +17.9%, Consumer Goods increased +16.5%, and Telecom gained +11.3%.

Saudi Arabia’s Tadawul index closed the year +4.3% higher with Energy rising +40.1%, Petrochemicals jumping +25.0%, and Real-Estate gaining +21.5%. Hotels were hit heavily as the sector performance dropped -44.0% and Retail endured a difficult year as the sector fell -18.5%. UAE’s DFM index rallied by +12.1% with Telecom rising +21.6%, Investment and Financial Services +19.2%, and Real Estate jumping +17.1%. Abu Dhabi’s ADSM Index gained +5.6% mostly due to Real Estate rising +20.4% and Telecom gaining +16.8%. Negative performance was seen from Industrials -12.7% and Financial Services & Investment -11.4%. Qatar’s QE Index gained +3.3% with positive performance from Industrials +3.8%, Telecom +2.1% and negative performance from Real Estate -6.9%. Oman’s MSM 30 Index gained +6.9% mainly due to excellent performance from Banking +18.4% and Industrials gained +9.4%. Bahrain’s BSE Index remained flat at +0.4% with flat performance from Banking +0.8% and negative performance from Hotels & Tourism -14.3%.

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