The future lives here: Middle East 2018
The future lives here: \Middle East 2018
Regional end of year wrap-up
A forward-looking Middle East
It has been an eventful – and exciting – year to date in the Middle East. The region’s economies continue to be in thrall to oil and politics, and 2019 promises to be no different.
This report features articles from across Bloomberg that paint a picture of the key opportunities, challenges and issues facing market participants in GCC economies for the remainder of 2018 and the year ahead.
Growth is resurgent following the end of OPEC’s production cuts and a rise in oil prices, but as the long-term outlook dims Gulf producers are diversifying into in-demand petrochemicals to squeeze more profit from each barrel.
In Saudi Arabia, government funds are pouring into education, healthcare and tourism as part of Vision 2030. Labour market reforms will be a key focus for 2019, with the government set to miss its short-term unemployment target.
In Turkey, the economy is rebalancing following a currency crisis many years in the making.
In the UAE, and across the region, interest in new transportation technologies such as electric vehicles (EVs) and autonomous vehicles (AVs) is accelerating. In fact, the UAE's investment in clean energy grew 23-fold to $2.2 billion in 2017, and looks set to continue growing in 2019.
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Faster growth, higher risks in 2018
By Bloomberg Economic Insights
Oil, rates, reforms and Turkey.
Published October 9, 2018 on The Terminal.
Higher oil prices are giving producers respite
The GCC economies still tell an oil story. When oil prices fell in 2014, government spending declined with it, taking growth down too. Conversely, with crude prices rising by nearly a quarter this year, non-oil growth is likely to pick up to 2.5-3.0% in 2018-19.
Government spending remains the main driver of
economic activity. The 2018 budgets in the GCC showed a switch from austerity to stimulus. This was supplemented by a further boost to public spending, such as the recent announcements by Saudi Arabia and Abu Dhabi.
While non-oil growth will probably increase from the 1.5-2% it registered in 2016-17, it’s unlikely to hit the 6-7% highs recorded in 2010-14.
With oil still below $100 a barrel, government spending remains constrained by fiscal limits. The private sector is unlikely to fill the gap.
Lower fuel subsidies mean consumers are more exposed to higher oil costs than they were while investment is weak because of worries about the region’s domestic and foreign policy.
Four forces are shaping the economies of the Gulf Cooperation Council (GCC) and Turkey.
- In the GCC, higher oil prices are likely to boost growth despite the drag from higher interest rates and a weakening resolve for reform.
- In Turkey, the economy is rebalancing, but things will get worse before they get better.
Rising interest rates are not disruptive
GCC countries have tied their currencies to the dollar. The Fed has raised rates eight times since December 2015 –- a total of 200 basis points -- and most GCC central banks have followed suit, with the exception of Kuwait which skipped a few hikes.
Higher rates are unlikely to completely offset the impact of the fiscal stimulus. This is in contrast with 2016, when higher rates coincided with declining oil prices and large fiscal deficits. This led to tighter liquidity in the banking system and contributed to the decline in non-oil growth.
Gulf labor market needs reforming
Rising oil prices are a boon for growth in GCC countries, but they’re also blunting incentives to reform. Stronger GCC nations bailing out weaker ones limits contagion risk, but it also creates perverse incentives.
Knowing they’ll be rescued by their neighbors, countries will tend to spend more and reform less.
Failing to reform is a mistake. GCC balance sheets are weaker today than in 2014 as they accumulated foreign debt and dipped into foreign reserves and other assets to finance deficits.
The labor market is particularly problematic.
When the World Economic Forum surveyed executives from the GCC about hurdles to doing business, three out of the top five most problematic factors related to the labor market.
Some policies have been implemented to address this, like
- Lifting the ban on women driving
- The announcement of long-term residency
- Removing restrictions on foreign ownership of companies
Other policies, such as imposing higher quotas to hire locals or charging levies on recruiting expatriates, will probably exacerbate the problems.
Turkey to get worse before it gets better
The lira has fallen by 28% so far this year on a real effective basis. We have yet to see the full impact of this depreciation on inflation, corporate debt, banks and growth. For these metrics, the worst is yet to come.
Turkey’s economic problems run deep, but it still resembles a textbook balance-of-payments crisis. There’s ample historical evidence showing how countries handled such crises and what policies they implemented in response.
With or without an appropriate policy response, the economy will adjust its way out of the current crisis, the fall in the currency will see to that.
The sharp decline in the lira will help the economy rebalance and fix the current account deficit by making imports more expensive and exports more competitive.
Our calculations show that the move in the currency has been sufficient to eliminate the current account deficit given the relative openness of the Turkish economy.
The narrowing of the trade deficit in August and expectations the current account will swing into a surplus this week confirms this rebalancing is underway.
Mideast bets on $100 billion industry as oil-use outlook dims
By Mohammed Sergie, Bloomberg News
Published June 4, 2018 on The Terminal.
They are the building blocks of our daily stuff, from sports shoes to computer keyboards, created when oil and natural gas molecules are split, or cracked, to produce ethylene, propylene and other chemicals. The science may be esoteric, but petrochemicals are big business in the oil-rich Persian Gulf, and they’re poised for further growth.
Energy producers view these compounds increasingly as a key to unlocking more profit from each barrel of crude they pump. Crude producers can earn $15 a barrel by refining their output and an extra $30 on top of that by converting it into petrochemicals, with oil at $65 a barrel, according to Abdulwahab Al Sadoun, secretary-general of the Gulf Petrochemicals & Chemicals Association, or GPCA.
These economics make further expansion into the industry “highly likely by all the regional players.”
The International Energy Agency in May cut its 2018 forecast for global oil demand growth to 1.5%, saying the highest prices in three years are putting a brake on crude use.
Demand for petrochemicals is rising faster than the consumption of fuels burned by cars, ships and planes.
What’s more, the rising popularity of electric vehicles is pinching demand for gasoline. Exxon Mobil Corp. and Royal Dutch Shell Plc are among oil majors that are prioritizing petrochemicals as a high-growth business.
The industry already contributes about $100 billion a year in annual sales to the combined economies of the six-nation Gulf Cooperation Council, according to the GPCA. The Dubai-based trade group has more than 250 members that produce petrochemicals throughout the Persian Gulf.
Saudi Basic Industries Corp., or Sabic as the petrochemicals maker is known, is the Middle East’s most valuable publicly traded company.
The region’s 20 largest listed petrochemical companies account for almost a fifth of the total value of shares traded in Saudi Arabia, the United Arab Emirates, Oman, Qatar, Kuwait and Bahrain, the countries comprising the GCC.
Chemical businesses don’t generate the same profit margins as oil production in the GCC, and they’re competing in a crowded market. Even so, demand for petrochemicals is growing faster than for oil, and Gulf countries are seeking to diversify their economies beyond pumping raw crude. Both signal that the expansion will continue.
The following charts show the scale of the region’s petrochemical industries and highlight some of the biggest projects.
So far, the Middle East has played a relatively minor role in global petrochemicals production, accounting for 6 percent of world output in 2016, according to GPCA data. Producers in the region have the advantage of cheap feedstock from mostly government-run oil and gas refineries.
Kuwait blazed the trail for petrochemicals production among Gulf Arab nations, but Saudi Arabia quickly surpassed it. 8 of the 10 largest listed petrochemical companies in the GCC are
Saudi (the others are Qatari), and Sabic’s market value compares with the world’s biggest chemical makers DowDuPont Inc. and BASF SE.
Most GCC countries are looking at international expansion as a strategy to capture more of the global demand for petrochemicals.
Sabic has picked the U.S. as a focus of its growth plans, given the country’s plentiful shale gas, and has formed a joint venture with Exxon Mobil to build an ethylene plant near Corpus Christi, Texas.
700,000 reasons why jobs in Saudi Arabia will miss target
By Ziad Daoud, Bloomberg Economic Insights
Published July 31, 2018 on The Terminal.
The unemployment rate among Saudi citizens reached 12.9% in 1Q. The government’s National Transformation Program, a set of development objectives for 2020, aims to cut this to 9%.
Bloomberg economists estimate that requires the creation of at least 700,000 jobs in the next two years –- a target unlikely to be achieved.
In fact, even the government now thinks this is a tall order. In its 2018 budget statement, it projected that unemployment would fall to 10.6% by 2020, missing the NTP target. But even this forecast is optimistic: it requires the creation of around 600,000 jobs in two years. We don’t expect this goal to be met given the current economic conditions.
How did we calculate these numbers? We assume that the Saudi labor force will increase in line with historical trends, which implies the addition of about 250,000 people a year.
"This means 500,000 jobs are needed by 2020 just to absorb the flow of new workers and prevent the number of unemployed people from rising in Saudi Arabia."
Ziad Daoud, Chief Middle East Economist, Bloomberg L.P.
Reducing the jobless rate to 10.6% would take a further 100,000 jobs followed by another 100,000 to reach 9%. These numbers are, if anything, conservative.
If lifting the ban on women driving prompts more people to seek work, even more job creation will be needed to reach the NTP’s objective.
Growth won't generate enough jobs
The government has two available strategies to meet its target, expand the economy or replace expatriates with Saudi citizens. Neither option will realistically generate enough jobs to meet the unemployment goal.
Take the growth option. The last time Saudi Arabia managed to create more than 700,000 jobs was between 1H12 and 1H14. Back then, oil prices were above $100 and non-oil growth was running at 5.5-6.5%. Things are very different today. Non-oil growth was 1.6% in 2Q18. The government forecasts this will pick up to 3.1-3.7% over the next two years. Yet despite this optimistic outlook, growth will be nowhere near enough to meet the unemployment target.
"It would take a huge fiscal expansion, which the Saudi government can ill-afford, to achieve the required growth rates and add 700,000 jobs."
Ziad Daoud, Chief Middle East Economist, Bloomberg L.P.
Replacing expats with locals is tricky
How about the second option, replacing expatriates with Saudi citizens?
There are about 7.8 million expats employed in the economy. If only 10% of them are replaced by Saudi nationals, the government will be able to meet its aim. Two problems will undermine this strategy:
- A mismatch of skills.
- High wage gaps between locals and foreigners.
Expatriates and Saudis have very different skill levels, which makes the switch difficult. About 56% of expatriates are low-skilled with an education level below secondary school. Around 2.4 million expatriates, about a third, are domestic workers and no Saudis are employed in this type of work.
In contrast, around 89% of unemployed Saudis have a secondary school certificate, a diploma or a bachelor degree. There are only 3.3 million expatriates in that education bracket -- this is the pool of foreigners with which Saudis could compete.
But achieving the NTP target could mean displacing 20% of that workforce in two years -- a daunting task.
2. Wage gaps make replacing expats a challenge
There is a good reason to think that displacement won’t happen, Saudi pay expectations.
Saudis are paid 1.5 to 3 times more than expatriates with the same education level. Will unemployed Saudis accept lower wages just to start working? That’s unlikely,
29.2% of them cite low wages as the reason why they left their previous jobs.
"In short, barring a fiscally expensive hiring spree to bring unemployed Saudis into the public sector, the government is set to miss its short-term unemployment target."
Ziad Daoud, Chief Middle East Economist, Bloomberg L.P.
The government tried to close this gap by imposing an expat levy, a 400 riyal monthly payment companies make on every foreign worker. It also offered to subsidize Saudi salaries.
But these measures are too small to narrow the large wage gap between locals and foreigners. This doesn’t bode well for the success of its long-term Vision 2030. Policymakers would do well to remember the first rule of hitting targets: choose achievable objectives.
How the Lira crisis unfolded in seven charts
By Ziad Daoud, Bloomberg Economic Insights
Published May 25, 2018 on the Terminal, charts updated October .
Turkey’s currency crisis may have come to a head this summer, but its origins are many years old. The seven charts that follow show how structural problems and policy mistakes have brought the lira to its knees.
1. National saving
The root of the problem lies in low domestic savings. Turkey doesn’t save enough to finance its investment spending, which means it has to fill the gap with borrowing from abroad.
2. Current account deficits
Another way to view this is that domestic consumption is so high that it drives up imports. This has resulted in large and persistent current account deficits. Borrowing from abroad to finance domestic investment and current account deficits has resulted in the buildup of large external debt, reaching 53.4% of GDP last year.
A significant amount of external debt (around $118 billion or 14% of GDP) is short term, maturing within less than a year. Turkey needs to secure the equivalent of a fifth of its annual GDP to pay back short-term debt and finance the current account deficit this year. This will be harder when the currency is in freefall.
One solution to this problem is to raise interest rates. This will increase domestic savings and also slow growth and therefore demand for imports -- improving the current account deficit. That didn’t happen.The authorities have let the economy run hot: Turkey was among the fastest growing emerging markets in 2017.
This has created domestic as well as external imbalances. Inflation has been above target for at least six years and counting.
6. Consumer price inflation
And the currency has depreciated this year, as sentiment has turned sour. Investors are turned off by the large pile of external debt in Turkey, made worse by currency depreciation.
Higher oil prices didn’t help sentiment as they’re expected to widen Turkey’s current account deficit.
7. Sentiment has turned sour
Sentiment has turned sour, driving most of the currency depreciation. Investors are turned off by the large pile of external debt in Turkey, made worse by currency depreciation. Higher oil prices didn’t help sentiment as they’re expected to widen Turkey’s current account deficit.
Innovation shapes the future \of transportation technologies
By Dr Ali Izadi, Head of Intelligent Mobility, BloombergNEF
New transportation technologies, such as electric vehicles (EVs) and autonomous vehicles (AVs), can help resolve key issues in cities such as poor air quality, congestion, noise pollution and road accidents.
The integration of these vehicles will require improvements in their costs, innovative business models and new forms of city infrastructure, but the result will be to redefine public transportation in cities.
EVs, AVs & batteries
The last few years have seen increasing levels of passenger EV model releases, from almost no models in 2008 to 150 model offerings today.
This coincides with sharp falls in the price of batteries, which represent 40% of the total vehicle cost, from $1,000 per kWh in 2010 to $209 in 2017. Projections suggest this figure will fall to $70 by 2030.
Cheaper batteries have also benefited electric buses, which in China now account for 9% of the public bus fleet.
There has been continued interest and progress from automotive manufacturers in developing autonomous vehicles – the general consensus being that vehicles with highly or fully autonomous capabilities will appear on the road in the early 2020s.
BNEF believes that future AVs are likely to be EVs because of lower operating costs and easier integration with electronic control systems.
EVs are still only 1-2% of sales in most markets, but the next 20 years will bring major changes.
We expect them to hit 11% of global sales in 2025, 28% in 2030 and 55% in 2040.
New business models, such as ride hailing and car sharing, are likely to accelerate deployment of EVs and AVs due to higher vehicle mileage.
These services require a high density of drivers and users and therefore are predominantly a city phenomenon. Digital hailing services in mid-2017 had 4.7 million vehicles and 600 million users. Bike sharing schemes have been rolling out across Asia, Europe and the US: customers of these programs will complete 27 million rides this year in the US alone, compared to almost none in 2010.
New software and communications technologies will gather and act on data collected from public and private journeys, using it in smart traffic controls that optimize transit routes and reduce congestion.
Software innovations can also support city-wide payment systems that enable multi-modal trips
and facilitate seamless movement between public and private transport.
And smart roads can collect and disseminate data to drivers on traffic, enable wireless charging of EVs, and help control AVs.
Cities will play a vital role. Given their high density and increasing requirements for effective public transit, cities can be innovation test beds for the most cutting-edge smart transit projects.
They can implement electric buses and promote regulations and infrastructure that support autonomous vehicles, public ride hailing, car sharing, vehicle-to-city communication, smart traffic control and city-wide digital payment systems.
These would improve the quality of life for individuals, ease congestion, raise social mobility, and foster innovation.
The success of these technologies depends on city governments engaging proactively with the opportunities presented to them. This will require holistic thinking about the suite of technologies and how they suit a particular city’s attributed.
The UAE, through various projects in Abu Dhabi and Dubai, is already pioneering many new technologies.
Through the Dubai Future Foundation Accelerator program new start-ups are encouraged to test their products in city trials. Dubai, which last year launched its autonomous transport strategy, is also building semi-autonomous taxi schemes, while Abu Dhabi’s Masdar City was an early adopter of AVs, with an autonomous shuttle scheme providing last-mile services.
In fact, the UAE’s investment in clean energy grew 23-fold in 2017, up to $2.2 billion.
A white paper launched during Abu Dhabi Sustainability Week, as a collaboration between Masdar and BloombergNEF, provides recommendations about the new technologies which should be deployed in specific types of cities, and the mechanisms to finance them.
There are, of course, barriers to implementing new models of transportation, not least consumer uptake, city finances, cybersecurity, and the speed of technology growth. However, modern cities can now reap significant benefits if they choose to embrace such developments to improve the design of transport and transit.