Monday,24 September, 2018
Current issue | Issue 1130, 10 - 16 January 2013
Monday,24 September, 2018
Issue 1130, 10 - 16 January 2013

Ahram Weekly

Weathering new realities

With the economic scene overshadowed by political instability in Egypt and lower oil revenues in the GCC, 2013 is expected to be difficult for the MENA region, Sherine Abdel-Razek reports

Al-Ahram Weekly

Although Egypt and the states of the Gulf Cooperation Council (GCC) have totally different economic situations, all the countries of the region are facing major changes and challenges.

Egypt starts the year with its economy at a critical juncture, in dire need for foreign assistance with dwindling reserves and a pound losing five per cent of its value in less than a month. The political tension raises fears of the expected social reaction to soon to be implemented austerity measures.

On the other hand, most members of the GCC are adjusting to lower levels of oil production and slower increases in public expenditure to support overall growth.

Oil production increases will be limited due to the strong recovery in the Libyan supply, contained shortfall from sanctions on Iran, and relatively weak global demand.

These new norms, together with an evaluation of how appealing the different listed shares in each market are with regards to their pricing and returns, were reflected in Beltone Financial report “Navigating the new norms”. The report offers an assessment of different stock markets across the region categorising four of the markets — Egypt, Saudi Arabia, Qatar and the UAE — according to their potential. The recommendations to investors came neutral to both Egypt and UAE which means that the risks equal the expected gains in the two markets. Meanwhile, it granted both Qatar and Saudi Arabia an overweight recommendation advising investors to invest more in them due to their strong economies. 

The political uncertainty in Egypt blurs the economic scene, and undermines the fact that the market is trading at attractive multiples compared to emerging markets, being cheaper on price multiples, while offering higher earnings growth, higher return on earnings, and higher dividend yield.

Moving to the UAE where there are two stock exchanges, those of Abu Dhabi and Dubai, we also find fairly priced shares but the economy has its problems.

Beltone expects the UAE to be able to compensate the decline in oil revenues by depending largely on both private investment and consumption, estimated to contribute to the growth rate by 20 per cent and 55 per cent respectively. Abu Dhabi’s fiscal spending and Dubai’s modest recovery, mainly in tourism and hospitality, as well as the real estate sectors will help the economy to grow, according to the report.

Analysts polled by Reuters in September forecast on average that economic growth in the UAE would slow to 3.2 per cent in 2012 from 4.2 per cent on the previous year, and rebound slightly to 3.5 per cent in 2013.

However, the fiscal space for the UAE will be relatively narrow in light of maturing government and government related entities debt. The gross debt stands currently at $237 billion, of which 54 per cent is owed by Dubai.

While the external debt in the UAE remains high, at $254 billion or 70 per cent of GDP, the UAE’s solvency is not in question, with external assets of around $820 billion accumulated with sovereign wealth funds.

Both Qatar and Saudi Arabia are seen in a better position with strong fiscal positions and increasing capital spending.

Qatar is forecast to grow faster than the rest of MENA over the medium term, 5.5 per cent on average (2013-2017) with the non-oil sector taking the lead.

The main engine of Qatari growth will be the robust government capital expenditures. The increase in expenditures between 2011/2012 and 2013/2014 stands at 8.1 per cent. 

In terms of the debt to GDP, Qatar is the largest indebted country in the Gulf. Standing at around 35 per cent of GDP, the figure has been fed by efforts to develop a domestic bond market and manage banking sector liquidity, with no new sovereign issuances, following the completion of Qatar’s LNG expansion programme in 2011.

The risk to lower oil prices is limited in the case of Qatar since the bulk of its export revenue, around 45 per cent, is derived from Liquefied Natural Gas (LNG) sold under long-term contracts. Beltone expect Qatari fiscal and current account surpluses of 8.2 per cent and 22.2 per cent of GDP in 2013.

Saudi Arabia appears to be the largest as well as the strongest economy in the MENA region with real GDP growing faster than the regional trend average 2013-17, according to Beltone.

Like Qatar, the kingdom will depend on capital expenditures to drive growth to compensate decline in oil revenues.  2011 witnessed large capital expenditures after large increases in wages and social benefits in 2011. 

Capital expenditure in Saudi Arabia, estimated at $75 billion or 12 per cent of GDP in 2012, is one of the largest in the MENA region.

Saudi crude production will decline only modestly to 9.6 million barrel per day (mbpd) in 2013 from 9.8 mbpd in 2012 to adjust for the recovery in Libyan supply and weaker global demand, given the reduction in Iran’s oil exports due to sanctions.

One shortcoming is that Saudi Arabia has the highest unemployment rate across MENA. The government will have to seek ways to generate employment opportunities for Saudi nationals in the private sector.

Looking at individual sectors in the region Beltone said the banking sector looks attractive across markets in focus, with the exception of the UAE, where only selected banks are good investment opportunities. 

As for the consumer goods and services sectors, they are supported by the large population in the region with high spending patterns, although the profits would be pressured by the increase in raw material prices.

The construction and building materials sector looks promising as well with a stable outlook for companies, backed by governments’ increased spending plans. Some regional real estate players stand out among their peers, including Talaat Mustafa Group in Egypt, Dar Al-Arkan in Saudi Arabia, and Emaar in the UAE.

The telecommunications sector is cheaply priced and offers high dividend yields. However, a few names fall short including Vodafone Qatar and Zain Saudi.

What are the main risks to Beltone’s assessment for economies in the region? Mostly external. The risks are related to slowing global demand and a prolonged decline in oil prices.

On the political front, said Beltone, “the possibility of a conflict between Israel and Iran and an escalation of the unrest in Syria could have serious negative consequences for the region as a whole.”

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