Research and analysis

GCC And Iraq Economic Summary: February - March 2014

Published 17 April 2014

1. Macroeconomics

1.1 Fitch Upgrades Saudi Sovereign Credit Rating to AA

Fitch has upgraded its long-term foreign and local currency Issuer Default Ratings (IDR) for Saudi Arabia to AA from AA-, with stable outlooks. Underpinning Fitch’s decision were the Kingdom’s strong state finances. At the end of 2013, net external assets were around 100% of GDP, government deposits in the domestic banking sector were 58.7% of GDP, whilst government debt was just 0.6% of GDP. The domestic banking sector too was in good shape with only 1.4% of loans classed as non-performing, and capital adequacy at 17.9%. Saudi Arabia is currently ranked as A on Fitch’s matrix of Banking System Risk, the highest in the GCC and bettered only by Australia, Canada and Singapore. Whilst Fitch doesn’t expect to revise its credit ratings for Saudi Arabia in the short term, it said supply side reforms around infrastructure, labour markets and regulations that improve the business environment could lead to an AA+ rating, whilst an erosion of fiscal buffers (caused by greater state spending or reduced oil revenue) could return the ratings to AA-. Standard and Poor’s rate Saudi Arabia more conservatively than Fitch (AA- but with a positive outlook), whilst Moody’s are a little more conservative still (Aa3, which is equivalent to AA-, but with a stable outlook).

1.2 Foreign Investment in Bahrain Grows

The Bahraini Economic Development Board (EDB) has released figures showing that foreign direct investment in the island economy grew 14% during 2013, reaching $114 million by year’s end. The EDB attributed much of the growth to the decision of 35 companies (mainly North American, European and Asian covering sectors as diverse as construction, healthcare and banking) to set-up in Bahrain during 2013. Many foreign investors see Bahrain as an extremely well regulated economy, and an excellent entrepot for the wider region. The EDB estimates that the $114 million invested in the Bahraini economy in 2013 will create 800 jobs, and the substantial upward swing in foreign direct investment, combined with the fact that government bonds remain significantly over-subscribed, suggests that investors retain confidence in Bahrain.

1.3 Dubai Refinances Sovereign Debt

Government officials have confirmed Dubai will roll over a $10bn debt facility provided by the UAE Central Bank (which had been due to mature at the end of March), and US$10bn worth of 5-year bonds and sukuks (due to mature in November, and which two Abu Dhabi-based banks had agreed to buy from Dubai). Under the terms of the deal, the bonds have been refinanced over five years, at a fixed rate of 1%, well below the 4% coupon that was paid on the maturing debt and the 2013 average inflation of 1.1%.

Although this development implies that Dubai has managed to refinance successfully two thirds of its public sector debt, the generous terms of this deal illustrate the close relationship between the two emirates. It could impact positively on Dubai’s credit rating, thereby reducing the future costs of funding as Dubai taps debt markets in the run up to Expo 2020.

2. Energy

2.1 Saudi’s Shale Expansion

Saudi media has recently reported that Saudi Aramco plans to increase its unconventional gas production to 200 million cubic feet per day (mcfd). The Kingdom produced around 9,800mcfd in 2012 (though the vast majority of it from conventional geological formations associated with oil production), and the Ministry of Oil recently increased its estimate of the country’s reserves from 290 trillion cubic feet (tcf) to 600tcf.

Increased Saudi gas production would likely have a greater impact on global oil and petrochemical markets than gas markets. This is because the primary customers for additional Saudi natural gas would be the Kingdom’s growing petrochemical industry, and domestic electricity generators. Substituting oil for gas in electricity production (and the 54GW of renewable energy planned by 2032) would buy the economy more time to diversify away from oil, and allow it to export more.

2.2 Gas Reserves and Production in a Regional and Global Context

Data from the US Government’s Energy Information Agency (EIA) shows that even after Saudi Arabia’s recent estimate is taken into account, Qatar retains the GCC (and Arab world’s) title for having the largest gas reserves. The UAE is in third place whilst Iraq is fourth (though increased exploration in recent years means this may change). In terms of production, the top spot was again taken by Qatar which produced approximately 11,500 million cubic feet per day (mcfd) in 2012. Saudi Arabia was in second place with around 9,820mcfd (all of which was consumed domestically), whilst the UAE was in third with around 5,080mcfd.

Regionally, Iran remains the biggest gas player, even though international sanctions have limited investment in its exploration, production and export capacities. At the end of 2013, the EIA estimated it to hold 1,187 trillion cubic feet (tcf) worth of reserves.

On a global level, improvements in unconventional production techniques mean the US assumed the top spot for production in 2012, with 69,337mcfd. Whilst US gas reserves at the end of 2013 remained small by Gulf (and Russian standards), further improvements in technology mean we are likely to see these grow too.

2.3 Kuwait Approves Bids to Upgrade its Refining Capacity

Kuwait has approved bids from Japan’s JGC Group, Britain’s Petrofac, and the US’s Fluor Group to upgrade two of its refineries over the course of the next four years. The bids formed part of the Kuwait National Petroleum Company’s Clean Fuels project, which is managed by UK-based company Foster Wheeler. In addition to increasing Kuwait’s total refining capacity by 264,000 barrels per day (bpd), the Clean Fuels project is designed to reduce the sulphur content of the resulting products. The total value of the recently approved bids was $12.01bn, of which $4.82bn was awarded to JGC Group, $3.79bn was awarded to Petrofac, and $3.4bn went to Fluor Group.

At present, Kuwait operates four refineries, with a capacity of 936,000 bpd (the second largest in the GCC after Saudi Arabia, and third largest in the Middle East once you include Iran). Through a process of upgrading existing facilities, and replacing its relatively small Shuaiba refinery with an enormous new refinery at al-Zour, Kuwait aims to eventually increase its total capacity to 1,415,000 bpd. This forms a key part of Kuwait’s National Development Plan, which is designed to diversify the productive base of the economy away from the export of crude oil.

3. Economic diversification and modernisation

3.1 Corruption Trials in Oman…

Omani courts have handed down a string of sentences as part of a very public crack down on corruption. On 16 February, 24 officials from the Ministries of Housing, Regional Municipalities and Interior were convicted for misappropriation of government land. Among them were a former Undersecretary at the Housing Ministry, the Secretary General of the Supreme Committee for Town Planning (now superseded), and a Wali (sub-regional governor). The former Undersecretary and Secretary General were sentenced to 3 years each while the rest of the defendants, including the Wali, received one year.

On 27 February the CEO of the State-run Oman Oil Company (OOC) Ahmed al-Wahaibi was sentenced to 23 years and a fine of $13 million. A second defendant in the case, a former adviser to the Ministry of National Economy, received 10 years and a $10.4 million fine, and a third defendant, the CEO of South Korea’s LG1 Corporation, got 10 years, another $10.4 million fine and deportation to follow his jail term. The court also ordered $8m in frozen assets to be recovered. The three have been convicted for bribes paid in relation to the construction of a petrochemical plant in the northern Omani city of Sohar. The Korean, charged with giving an $8m bribe to al-Wahaibi plans to appeal, claiming the money was a consulting fee. The sentences given to the three reflect the tougher penalties available to the Felonies Court in which the case was heard.

3.2 …Whilst Efforts to Spur Private Sector Growth Continue

In late February, the Omani Ministry of Finance announced that it would sell 19% of the government stake in Omantel, the national telecommunications provider, to institutional investors willing to buy a minimum of $5.2 million worth of shares. The planned sale was highlighted in the 2014 state budget, and would reduce the government share to 51%. A recent announcement suggests the shares were almost 100% over-subscribed.

3.3 Etihad in talks to take over Alitalia stake

Press reports suggest that Etihad, Abu Dhabi’s government-owned airline, is in final talks to purchase a stake in Alitalia. Alitalia has been for sale since 2007 and was near-bankrupt (again) last year. Reports indicate that Etihad is planning on investing between $487m and $557m, which would equate to a shareholding of between 40% and 49% of the Italian airline. At present, Etihad holds seven minority shares in airlines around the globe, including a 29% stake in Air Berlin of Germany, 20% of Virgin Australia and 24% of Jet Airways of India. They have been a significant driver of Etihad’s growth, contributing a fifth of its 2013 revenues ($6.1 billion). A stake in Alitalia would fit well with Etihad’s strategy of expanding further into European and trans-Atlantic routes.

3.4 Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.