GCC: Out Of The Dark Into Another Light

The macroeconomic picture is improving significantly across the GCC over the last 12 months, oil production cuts, the more benign fiscal environment translated into improved GDP growth as well as the Saudi Arabia and the UAE’s efforts to reduce the respective countries’ reliance on oil is set to improve GDP in 2019.

The increase in oil prices in the third quarter of 2018 and an improved GCC investment ecosystem saw the majority of the regional countries recording fiscal surpluses in 2018 financial.

In a report, Investment Outlook 2019, Hogan Lovells stated that Saudi Arabia and the UAE returned to fiscal surpluses in 2018, Oman’s deficit narrowed very sharply, and Bahrain pulled back from crisis, after receiving support from its GCC allies.

Additionally, the global and regional framework grows ever more challenging and harder to navigate due to geopolitical tensions, US-China trade—which analyst said may continue throughout 2109, flatulating oil prices among other challenges.

   Source:IMF WEO

The global law firm said that some challenges from 2018 will make the transition into 2019. According to Hogan Lovells, the low hanging fruit has gone, hindering the high growth rates investors have become used to in the GCC— however there are key opportunities for shaping Gulf economies this year.

Stock markets

Whatever happens at a macroeconomic level, 2019 is expected to be an active year for corporate transactions in the across the GCC. The Saudi Stock Market, Tadawul, recently partnered with MSCI Index to launch the tradeable MSCI Tadawul 30 Index ahead of the bourse’s inclusion into the MSCI Emerging Markets Index in May.

Sarah Al-Suhaimi, the Chairwoman of the Tadawul, said that she expects qualified foreign investors to increase before and after the inclusion in the MSCI index. Currently, the stock exchange has more than 320 foreign institutions registered and which qualify as foreign investors.

The inclusion into the MSCI Emerging Markets Index is expected to attract billions of dollars in foreign direct investment (funds). Similarly, the Nasdaq Dubai recently launched futures trading on the MSCI UAE equity index last month, in the latest expansion of the exchange’s futures market—a week after Nasdaq Dubai launched single stock futures trading on 12 Saudi Arabian companies.

Nasdaq Dubai also signed a licence agreement with FTSE Russell for the exchange to launch derivatives on FTSE Russell’s Saudi Arabia equity indices. The futures which are set to be launched in the next four months under the licence will be designed to attract global and regional market participants including the many funds that use FTSE Russell’s indices as benchmarks for investing in Saudi equities.

Additionally, index operator MSCI is considering promoting Boursa Kuwait from frontier to emerging market status, a move which will make the country even more suited for foreign investment.

In February, a consortium of companies led by Kuwait’s National Investment Company won the tender to acquire 44 per cent of the Kuwaiti stock exchange—the initial public offering (IPO) for the remaining 50 per cent of shares will take place in the fourth quarter of 2019 or the first quarter of 2020. The privatisation of Kuwait stock exchange creates an investment environment of international standards that will attract foreign as well as retain local investment.

Banks

The GCC is considered one of the most overbanked regions in the world and there has been an increase in banks consolidating as they seek to stay competitive. Saudi British Bank (SABB) and Alawwal entered into a binding merger agreement last month having started discussions on a potential merger in April 2017.

Alawwal Bank and SABB merger will create the Kingdom’s third-largest bank, a top-tier retail and corporate bank with SAR 271 billion in assets. Additionally, Saudi Arabia’s National Commercial Bank (NCB) and Riyad Bank have reached an advanced stage on the proposed merger that will create the Gulf’s third-largest lender with $182 billion in assets.

   Source:SAMA

Similarly, Kuwait Financial House (KFH) closed the Ahli United Bank (AUB) merger deal—a purchase which is expected to boost the lender’s consolidated profit by more than 90 per cent from the level in 2018. The duo agreed on a preliminary exchange ratio of one KFH share for every 2.326 AUB shares but they have not revealed the share prices for the exchange ratio.

In the UAE, Abu Dhabi Commercial Bank (ADCB) and United National Bank (UNB) agreed to merge and together acquire Al Hilal Bank. The tie-up will create the third largest bank in the UAE, with total assets of AED 420 billion and the third largest Islamic banking franchise in the country.

The trio confirmed that the new entity will carry the ADCB identity and Al Hilal Bank will retain its existing name, brand as well as operate as a separate Islamic banking entity within the group. Moreover, although a formal process has not started, Abu Dhabi Islamic Bank (ADIB) is weighing strategic options for its business, including a potential merger.

The lender is said to be planning to acquire another banking entity rather than being taken over.

Sovereign wealth funds

According to the Sovereign Wealth Fund Institute, the funds of Saudi Arabia, the UAE and Kuwait have more than $2.8 trillion in assets under management. GCC Sovereign Wealth Funds (SWFs) are investing into global ventures—with the UAE holding a strong position as a gateway for investment into Africa, the US and Europe.

The UAE’s investment vehicle, Mubadala Investment Company has interest in the healthcare, information and communication technologies as well as aerospace, petroleum and petrochemicals, and renewables.

Recently, Mubadala’s Healthcare unit acquired Amana Healthcare, a provider of long-term care, specialised rehabilitation and home healthcare services in the UAE. Mubadala also holds shares in United National Bank, Abu Dhabi Commercial Bank and Al Hilal Bank—which are going through a merger and the consolidation is expected to create the third largest bank in the UAE, with total assets of AED 420 billion and the third largest Islamic banking franchise in the country.

Similarly, Saudi Arabia’s Public Investment Fund (PIF) is spearheading the Kingdom’s economic diversification programme. The PIF’s is the pockets behind the Crown Prince Mohammed bin Salman’s futuristic NEOM city in collaboration with other international investors.

The Kingdom’s sovereign wealth fund boasts of swaths of investment in major technology companies and funds across the globe including Japan-based SoftBank, Uber Technologies as well as Elon Musk’ Tesla.

In addition to its headline-grabbing investments around the globe, the PIF holds about $133 billion of assets in some of Saudi’s publicly traded companies, including stakes in SABIC, Saudi Telecom Company and National Commercial Bank (NBC).

Bahrain’s Mumtalakat’s capital expenditure rose to $1.6 billion from $657 million in 2018. The sovereign wealth fund of GCC’s oldest crude producer has committed $88 million to the local economy to support projects such as the Bahrain International Circuit, Bahrain Real Estate Investment and the Arab Shipbuilding & Repair Yard.

Mumtalakat’s assets jumped 46 per cent to $15.4 billion in 2017 after the consolidation of McLaren Group as well as profit rose at the state-controlled Aluminium Bahrain.

Open for business

GCC governments continue to attract foreign direct investment (FDI) by offering far-reaching reforms, unlocking stateowned assets and loosening restrictions, added Hogan Lovells. New regulations such as the public-private partnerships (PPP) law in Saudi Arabia, the foreign direct investment (FDI) law and debt law in the UAE and possibly Oman are encouraging investors to take a real look at the GCC.

The UAE recently issued new investment laws to boost and retain foreign investment for the country to remain competitive and attract FDI as well as expat talent within the region. Imtiaz Shah, Partner at Hogan Lovells, said, “If the UAE introduced a strong foreign investment law and the right to stay, that would dramatically change the game.”

The UAE’s new Foreign Direct Investment Law, the new Debt Law and 10-year visa regulation reflects the government’s commitment to diversify the economy and reduce the GDP from reliance on oil. The UAE has already started implementing these new change—recently the Emirates Development Bank issued international bond under the new debt law.

Similarly, Saudi Arabia is also opening its once closed economy to the world. According to Hogan Lovells, Saudi Arabia is the clear focus of investor attention in the region, due to a combination of underdeveloped markets, far-reaching reforms, renewed government spending and a determination to have the private sector play a key role in infrastructure development.

The Kingdom approved its privatisation plan for 2018-20 in April, with a view to unlock state-owned assets for investment and 14 public-private partnership (PPP) projects are on the way despite some delays, a pipeline of IPOs is yet to come.

Saudi Arabia’s PPP law seeks unlock billions of dollars in FDI for public-private projects, improving transparency and boosting its construction sector while easing pressure on government finances.

The NEOM city and the recent MoU between Saudi Jordanian Investment Fund and the Aqaba Special Economic Zone Authority to establish, develop and manage a railway connecting Aqaba, on the Red Sea, to a future dry port in the Ma’an governorate are some construction projects aiming to achieve the PPP dream.

The economic outlook for the GCC region in 2019 is promising the growth of the respective governments’ nonoil activities. International lenders are expecting more opportunities in the region—Saudi Arabia’s economic transformation that includes raising debt through bond sales, creating the world’s largest sovereign wealth fund and selling stakes in government assets has attracted the attention of Japanese, European and US lenders.

Similarly, in the UAE, international banks are increasing their presence ahead of Expo 2020 next year— recently Citigroup and Lombard Odier announced plans to launch branches and representative offices in Abu Dhabi. The UAE’s new FDI and debt laws, Saudi’s PPP project as well as Bahrain’s promotion of fintech and the investment activities of the region’s sovereign funds promises a positive outlook in 2019.