Eurozone’s Economic Slowdown Impact on MENA Region

Crude Oil Price Outlook & its Global Implications

US LT Sovereign Rating Downgrade Impact

It is important to remember that US long-term rating is downgraded by S&P but still regard as an “Investment Grade” while two other CRA’s reaffirmed AAA rating.

After the lost of AAA rating, borrowing cost will increase for the US treasuries, which result in higher debt service cost and more burden on already high fiscal deficit.

Pressure will also mount on all those sovereign who have pegged their currencies with USD, including Hong Kong & Gulf countries (except Kuwait)

Does the investor have choices other than US Treasuries?

There is no doubt that US treasuries were and will remain the most liquid benchmark. There is a dearth of alternative AAA investments, as of now US treasuries stock are much bigger than the cumulative treasury stocks of those, considered to be the alternative to US treasuries. Even after adding all the outstanding treasury stocks of Germany, France & UK, its only 42% of US treasuries stock (excluding MBS)

US Treasuries (USD11, 150 bn) > Germany Treasuries (USD 1,720 bn) + France Treasuries (USD 1,700 bn) + UK Treasuries (USD 1,300 bn)

Global Manufacturing, KSA & UAE non-oil Producing Private Sector Growth Analysis

UAE - Non Oil Producing Sectors Growth Analysis

Bahrain - Political to Economic Risk

Unrest in Bahrain started since February is not any more political fiasco; it actually put a heavy toll on Bahrain's economic growth & its perception in the outer world. If the ongoing "National Dialogue" fails then Bahrain will be emerged as more unstable, for both domestic & international business communities. On the other hand, Dubai & Doha will gain the most in case Bahrain's National Dialogue fails & instability prevails in Bahrain.

The 'National Dialogue' initiative started in Bahrain. The main Shia opposition Al-Wefaq also decided to participate.

About 300 people have been invited to attend the forum, which will meet three times a week until the end of July. They include political parties, civil and non-governmental organizations, opinion leaders and prominent figures. Surprisingly, there is a relatively lesser shia opposition representation, only twelve percent in National Dialogue moot. Out of 300 invitees, 35 are identified with the Shia opposition bloc while the single largest party, Al-Wefaq before resignations had 18 representatives in the 40 member Bahraini parliament, have only five representative seats.

Chairman of the National Dialogue who is a Parliament Speaker as well, Khalifa bin Ahmed al-Dhahrani said ”Discussions at the forum will revolve around four main themes: politics, economy, social and legal issues. The participants’ recommendations will be forwarded to the king, who will then issue an order to the executive and legislative authorities to take the necessary action”

Al-Wefaq, which is focusing its demands on a fully elected government, says recommendations should be put to a referendum. “We are heading toward dialogue, but we will not give up our demand for a government that represents the will of the people and a fair system of election,” said Ali Salman, al- Wefaq’s secretary-general.

Considering not enough representation of shia opposition groups in National dialogue raises the question on the serious attempt to resolve the political deadlock. There are also news reports of opposition harassment & suppression.

UAE Visa Extension for Foreign Property Investors - An Insight

UAE government extends the visa duration from six months to three years for foreign investors who own properties worth equal to or greater than AED1.0 million; it would be a multiple entry visit-visa, however they have to exit the country every six months.

The timing of the decision is very significant amid unrest in the regional countries; visa extension will allure the regional affluent, especially. From outside region, real estate investor mainly from Pakistan, India & United Kingdom will likely to take the advantage of the visa extension rule.

According to Dubai’s Real Estate Regulatory Authority (RERA), the top three real estate investors are Indian, Pakistani and UK nationals in total 4Q2010 property transactions. During earlier Dubai real estate boom which busted in 3Q2008, main investors in the real estate of Dubai were from Pakistan, India, Iran & United Kingdom.

Crude Oil Market - Update

International Energy Agency (IEA) initiative to release the Crude oil stockpiles up to 2 million barrel per day for the next 30 days period of total 60 million barrels, starting from the end of current week, in an anticipation that crude oil demand will be surged because of refineries high demand in summer season. It is expected that North America will release 50 percent of the total, with European countries releasing some 30 percent and Asian countries providing the remaining 20 percent.

This is the third time IEA – member country  stocks have been used, after 1990/1991 Iraq’s invasion of Kuwait & 2005’s Hurricane Katrina  

IEA’s initiative coincides with the Saudi Arabia’s announcement of incremental increase in oil production, however, Saudi Arabia’s increase in incremental production will take some time while IEA’s initiative will readily  available in the global crude oil market from the end of current week.

This initiative of IEA is sort of an intervention (by net consumers) while Saudi Arabia’s move will bring structural changes in the crude oil market (by net producer). By the time, Saudi Arabia’s incremental oil will be available in the market, IEA’s supply bridge the demand-supply gap in the mean time. 

Can Qatar lose the rights to host 2022 Football World Cup?

No, not before until The Sunday Times alleges that FIFA’s Executive Committee members Issa Hayatou & Jacques Anouma took bribes of $1.5m each to vote for Qatar. Although, Qatar's official denied such act.


In reaction, FIFA president Sepp Blatter, who is standing for re-election, has refused to rule out a re-run of the vote to host the 2022 World Cup, if allegations that Qatar paid millions of dollars in bribes to secure its win are proven. He also said, “We are anxiously waiting for these evidences or non-evidences in order that we can take the adequate steps.” 


There is a least possibility to snatch the world cup host-ship from Qatar now, even if bribery is proven it could stringent the rules of voting methodology & may add more transparency in awarding rights to host the World Cup for future.


We have seen that the decision to host the 2022 World Cup in Qatar was graded as having "high operational risk", generated criticism from media & some countries officials on the concern of Qatar’s suitability to host the biggest sporting event, with regards to hot weather, press control & human rights in Qatar, being an Islamic state, rule under Sharia laws.


Being an analyst, I cannot completely ignore the possibility of the other way around. If Qatar stripped of 2022 World Cup then it would be the biggest U-turn in the FIFA’s history & could be devastating for FIFA & Qatar’s reputation.

What Drives Gold Prices?

There are many factors contributes in Gold price movement. Apart of Demand/Supply fundamental factor, low interest rates in many developed countries (e.g. US, Japan, UK & ECB) which compels investors to own this precious metal which gives better risk – adjusted return, especially when two other important factors which are key to determining the direction of gold prices also favors.

One is Dollar index, which is plunging & the other is crude oil prices which is surging along other commodities.

On-going turmoil & uprising movements in MENA also makes investors jittery so they opt for safe haven. Another factor which pulls the demand is growing wealth in middle class population in many Asian countries especially in India & China.

What drives current Gold prices?

There could be countless factors, but I specially want to talk about two factors which I can quantify relatively easily.

1)      Gold prices have negative correlation with US dollar index (trade weighted dollar). As US Dollar index is declining, therefore gold is going in opposite direction                 

Correlation between Gold & US Dollar Index	-0.44
USD Dollar Index YTD** Performance	-5.30%
Gold YTD** Performance	5.20%
*3 year (2008-2010) correlation
** 1st Jan 2011 - 19 April 2011

Source: World Gold Council & Bloomberg

                                                       

Gold & US Dollar Index:                                                                                                                                                                                                                                                                                                   

                                                           

 2)      Gold prices have positive correlation with crude oil & other commodity Indices. As Crude oil prices along with commodities are increasing (upward pressure on inflation), therefore gold is surging too.

Correlation* between Gold & Brent Crude Oil	0.35
Brent Crude Oil YTD** Performance	28.80%
Gold YTD** Performance	5.20%

*3 year (2008-2010) correlation
** 1st Jan 2011 - 19 April 2011

Source: World Gold Council & Bloomberg

MENA - Economic Outlook

Despite all the whispering & uprising movements, which challenges Middle East & North Africa (MENA) region stability by large, the truth is its growing. Although, growth varies widely across the MENA region.

There are mainly two blocks within MENA region, one is oil importing countries & the other is oil exporting countries.

GDP Growth:

MENA has 5.0% share in World's total GDP, based on purchasing power parity (PPP).

In next couple of years, it is expected that MENA region will grow in tandem with World growth rate; better than advanced economies but significantly lower than emerging & developing economies.

GDP in the MENA region is projected to grow at 4.1% in 2011, edging up to about 4.2% in 2012. In the group of oil exporters, growth is expected to pick up to 4.9% in 2011 while in the group of oil importers, GDP will slowdown to 1.9% in 2011. In 2012, Oil importers economy will strongly bounce back to 4.5%, on the other hand oil exporters group’s economic growth will take a small dip to 4.1%.

                                                                                                                                                                                              

Real GDP Growth
(Annual percent change)	2010	2011F	2012F
World	5.0	4.4	4.5
Advanced Economies	3.0	2.4	2.6
Emerging & Developing Economies	7.2	7.3	6.5
Middle East & North Africa	3.8	4.1	4.2
Oil Exporters	3.5	4.9	4.1
Iran	1.0	0.0	3.0
Saudi Arabia	3.7	7.5	3.0
Algeria	3.3	3.6	3.2
United Arab Emirates	3.2	3.3	3.8
Qatar	16.3	20.0	7.1
Kuwait	2.0	5.3	5.1
Iraq	0.8	9.6	12.6
Oil Importers	4.5	1.9	4.5
Egypt	5.1	1.0	4.0
Morocco	3.2	3.9	4.6
Syrian	3.2	3.0	5.1
Tunisia	3.7	1.3	5.6
Lebanon	7.5	2.5	5.0
Jordan	3.1	3.3	3.9

Only major Oil exporting & importing countries mentioned

Source: IMF, April 2011

Amongst resource rich region; GCC, it is expected that Qatar’s economy will shine both in near term (2011-2012) & medium term (2011-2016) while UAE will lag in the GCC region.

Source: IMF, April 2011

                   

Dubai World Restructuring Positive for Dubai

Since, state-owned Dubai World signed a final  accord with creditors to restructure its debt, about USD25 billion on 23^rd March 2011, investors & market participants perceive that it would help in restoring the confidence in Dubai's ability to repay the debt.

·         Dubai dollar bond & extra yield shrinks
The yield on Dubai's debt maturing in November 2014 fell to a record low of 5.24 percent & the extra yield investors demand to own Dubai's 6.396 percent dollar bond dropped to 251 basis points, lowest ever.

HSBC/NASDAQ Dubai GCC US Dollar Sukuk Index shows that the extra yield investors demand to hold the region's sukuk over the London interbank  offered  rate narrowed by 68bps to 322bps, since Dubai World signed a final debt deal with its creditors

·         Increase fund flows to Dubai's high yield bonds
According to EPFR Global, Dubai benefited 64% jump in flows to higher-yielding bonds in 1Q2011

EM equity fund flows turn green

After nine consecutive weeks of redemptions from aggregate EM equity funds, this week (27^th March 2011) has seen a healthy USD2.6bn inflow (0.4% of AUM) into EM funds, the most since the week that ended 5^th January 2011, EPFR.

Last week there was a redemption of USD 2.6bn in EM equity funds.

By region:

All region-dedicated funds saw inflows -- except Latin America, reporting an outflow of USD81mn. Global emerging market and Asia-focused funds were the big winner, attracting USD1.5mn and USD411mn respectively, this week

CEEMEA saw inflows as a percentage of assets (1.5%), followed by Asia (0.2%); Latin America remained the loser (-0.1%).

By Type of fund:

EM Balanced funds were the main beneficiary with a reported inflow of USD1.6 bn.

BRIC  funds remain out of favor with reported redemptions of USD73mn.

Saudi budget: break even oil price will increase to USD 88/bbl in 2011, 29% Y-o-Y increase

MARCH 31, 2011, 8:01 PM ET

Saudi Arabia, due to higher government spending this year, will need its oil to sell for $88 a barrel in 2011 for its government to break even–up from $68 last year, according to Institution of International Finance

Only a decade ago, Saudi Arabia was able to balance its budget with oil prices averaging $20-$25 a barrel.

The kingdom, in response to the unrest spreading throughout the Middle East and North Africa, is boosting government spending to provide new social benefits for its people. The support for housing units, unemployment benefits and wage hikes for public workers (among a long list of measures) will contribute to a 31% increase in government spending in 2011 from a year earlier.

Saudi Arabia, the world’s largest oil producer, gets more than four-fifths of its government revenue from the petroleum sector. Under an average price for Brent oil of $110 per barrel, equal to about $108 a barrel for Saudi crude, the Saudi government would still maintain a surplus of 6.7% in 2011.

Saudi output accounts for about 10% of global oil supply. With most of the world’s spare production capacity, it influences the price of oil more than any other producer — and has taken on greater importance amid unrest in Libya, Egypt and other oil-producing countries.

MENA Region - Extreme Water Security Risk

The MENA region has vast reserves of petroleum and natural gas but they don't have water.

According to the Oil and Gas Journal (January, 2009), the MENA region has 60% of the world's oil reserves (811 billion barrels) and 45% of the world's natural gas reserves (2,869 Trillion cubic feet).

The scarcity of water supplies in the MENA region is very alarming & will heap on the risk of yet-more political tensions and put pressure on food & oil prices.

Maplecroft’s “Water Security Risk Index”,  rates 18 countries at 'extreme risk', with 12 located in the MENA region

Extreme Risky Countries in terms of Water Security Risk
Rank	Country	Region	Risk Level
1	Mauritania	EMEA	Extreme
2	Kuwait	MENA	Extreme
3	Jordan	MENA	Extreme
4	Egypt	MENA	Extreme
5	Israel	MENA	Extreme
6	Niger	EMEA	Extreme
7	Iraq	MENA	Extreme
8	Oman	MENA	Extreme
9	United Arab Emirates	MENA	Extreme
10	Syria	MENA	Extreme
11	Saudi Arabia	MENA	Extreme
12	Uzbekistan	EMEA	Extreme
13	Moldova	EMEA	Extreme
14	Libya	MENA	Extreme
15	Turkmenistan	EMEA	Extreme
16	Djibouti	EMEA	Extreme
17	Tunisia	MENA	Extreme
18	Algeria	MENA	Extreme
Note: MENA = Middle East & North Africa; EMEA= Europe, Middle East & Africa
Source: Maplecroft, March 2011

Water availability per person in the Middle East is about 1,200 cubic meters, less than 20 percent of the world average [World Bank]

The scarcity of water is problematic for political and humanitarian reasons as well as for the oil industry because:

·         Eight of the twelve OPEC nations are within the MENA region

·         Out of the 12 OPEC member countries, six countries -- Algeria, Iraq, Kuwait, Libya, Saudi Arabia and the UAE -- are in the ‘Extreme risk’ category, while a further two --- Iran and Qatar - are rated 'high risk.' Collectively, these countries produced approximately 30% of global oil production in 2009, whilst the countries at extreme and high risk collectively produced 45% of global oil in 2009.

·         Large quantities of water is used in the production of Oil. ‘Lift Water’ process is an example

United Nations project that some 30 nations around the world will be "water scarce" by 2025. Eighteen of those are in the MENA.

As water becomes scarcer in the MENA region, each country will be encouraged to safeguard its supplies by taking measures the other may see as provocative, potentially exacerbating or sparking conflict situations.

Technological innovations, including the desalination of salt water, may however alleviate some of these risks.  

According to UAE govt., UAE spends nearly Dh11.8 billion per year on the production of desalinated water to ensure its fast growing needs of drinking water and offset its dwindling reserves. The investments cover nearly 70 sea desalination plants, accounting for around 14% of the world’s total output of desalinated water

The annual volume of desalinated water in Saudi Arabia is planned to double from 1.05bn m3 to 2.07m3 between 2010 and 2015 under a 5 year infrastructure spending plan

 Gulf accounts for nearly 41 percent of the world’s total desalinated water output 

BRICS

South Africa and India have the highest water security risk amongst BRICS countries

BRICS in terms of Water Security
Rank	Country	Region	Risk Level
26	South Africa	EMEA	High
28	India	Asia	High
82	China	Asia	Medium
148	Brazil	Latin America	Low
159	Russia	EMEA	Low

Source: Maplecroft, March 2011

Next 11 - N11

Of the N11 countries, six are at high or extreme risk. These are Egypt (4), Pakistan (23), Bangladesh (29), Iran (39), Mexico (44) and Vietnam (45)

Europe

Of the EU27 countries, there are no countries at extreme water security risk

The scarcity of water could result in higher food & oil prices in the medium to long term.