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Last year was eventful on many levels. From a market perspective, the main factor that stands out is of course COVID-19 and how it caused a collapse in the demand for oil, and subsequently, oil prices. Regional policymakers did an admirable job in managing the virus from a public health perspective and were quick to lock down and implement world-class safety protocols. In the Gulf Cooperation Council (GCC) region, lockdown stringency was fairly brief, easing considerably since April 2020. We see little likelihood of renewed lockdowns at this stage, due to proactive management.
While the GCC region was able to reopen its economy earlier than some others, it did suffer a contraction in gross domestic product (GDP) of between 4-8% across countries. Lower oil prices were a challenge for GCC economies, which required an ambitious production cut and coordination with G20 members before rebounding toward year-end.1
That said, we remain optimistic that a recovery could gather pace throughout 2021. Clear policymaking, ongoing fiscal consolidation and structural reforms are also encouraging signs the cost to recovery will likely be relatively modest, compared with some other major economies.
Unprecedented Double Blow Accelerates Green Energy Timeline
The economic impact from COVID-19 hit oil-exporting countries hard as demand for oil fell and oil producers struggled to store surpluses. Oil prices rebounded at the beginning of this year after mass coordination efforts between major oil producers to limit supply, but at the cost of altering capital expenditure plans. Many countries in the GCC have successfully lowered their “breakeven” oil prices, and are now using roughly US$45 for their 2021 budgets. In our view, oil demand should recover strongly but still remain lower than it was at pre-COVID-19 levels, and likely restrain prices somewhat.
At a time of oversupply and modest oil prices, we think it could be an opportunity for economies to accelerate timelines to invest further in renewable and cleaner energy such as solar, nuclear and green hydrogen.
Some GCC economies have already pledged to go down this route. Saudi Arabia announced that renewable energy will account for half of its power generation capacity by 2030, while the United Arab Emirates (UAE) has committed to generate 50% of its power from clean energy by 2050. As more economies transition to low-carbon energy, we think it’s an encouraging sign that neighboring economies will ramp up efforts to increase renewable energy capacity. Even though we saw a prolonged disruption to the capital expenditure cycle given low oil prices, we think the shift to clean energy could lift investor sentiment towards GCC economies.
GCC Debt Issuance Likely to Continue Growing
On the back of improving fundamentals as economies continue to recover, we think GCC debt issuance should continue to be substantial. In 2020, GCC sovereign bond issuance made up 36% of emerging market external sovereign issuance, and we expect it to be north of 30% in 2021.2 Net financing across emerging markets is expected to decline 50% from record 2020 levels, signaling more favorable conditions for expected issuances, in our view.
We also believe GCC bond markets remain underrepresented in investor portfolios, and continued reforms could lead to more investor interest going forward.
Continued Strength and Sweeping Reforms Underpin GCC Opportunity
The foundation for any economic recovery lies with the banks, as they provide credit and are the anchor to fixed income markets. Despite some recent challenges and the deterioration in credit fundamentals, the GCC continues to have sizable financial buffers and modest levels of debt. Sovereign wealth fund assets combined with reserves stood at US$3.1 trillion as of October 2020, representing 223% of the GCC region’s GDP.3 Gross government debt averaged 41% of GCC GDP.4
In our view, the most important aspect to the fixed income story is really the capital market development story. Our on-the-ground presence in the region means we can see the full effects of the development of these bond markets and the ongoing structural reform agenda in the region’s economies. Numerous social, market and political reforms seem to have had a material impact on the overall sentiment toward regional economies. In terms of capital market reforms, Saudi Arabia has relaxed foreign ownership limits and attracted more investment dollars. And, foreign investors can now directly invest in its debt markets. Kuwait has introduced swaps, exchange-traded funds and other instruments, and has reformed its market mechanics and settlement cycle. In the UAE, we’ve seen a strengthening of the corporate governance framework, and 100% foreign ownership allowed in 13 sectors.
Liquidity Support Helps Business Navigate Shock
MENA countries were quick to respond to the pandemic fallout with large liquidity support for banks, drawing on the experience from the 2008-2009 global financial crisis. We saw interest rate cuts implemented in the GCC, which largely mimicked that of the Federal Reserve in the United States.
Fiscal response was directed toward fragile sectors and vulnerable income groups. This came in the form of selective utility subsidies for industries and residents, deferment of some taxes and duties, wage support, and access to cheap financing.
We expect monetary and fiscal stimulus measures to continue being accommodative well into 2021. The commitment from central banks is strong, and we believe that interest rates will remain lower for longer.
Internet Penetration Lays Strong Foundation for Consumer Spending
Some longer-term secular trends continue to support growth in the region. MENA economies possess one of the youngest demographics globally. The median age is below 40 across countries in the MENA region—and a significant percentage of populations are below the age of 30—which stands out not only compared with developed markets but also some other emerging markets facing aging populations.5 Specific to this region, the six GCC countries in particular have a strong active base of young and tech-savvy consumers. This, coupled with the acceleration of digital transformation from the global pandemic, has altered the way in which businesses operated and has created exciting new areas of growth in e-commerce, digital payment systems and logistics. The GCC region enjoys one of the highest rates of smartphone, internet and social media penetration. And, the levels of per-capita income in the region are on par with advanced economies, providing significant firepower for consumer spending coming out of the pandemic.
Surprisingly though, e-commerce penetration in the region is below 5% and well below global averages. However, this market has been growing quite fast, a trend we think should continue—along with new technology listings on the market. We’re particularly interested in companies that have embraced the demand for services such as digital payment services, e-commerce platforms, gaming apps and food delivery businesses that have surged amid COVID-19 lockdowns.
We continue to favor resilient businesses that have the balance sheets and flexibility to adapt to the new world post-COVID-19. Despite current bouts of market volatility, we believe the broad-based economic rebound will continue to develop in the MENA region as the year progresses, with the help of vaccine rollouts.
MENA markets will likely recover in 2021 after a challenging year. Overall normalization is expected to be underpinned by the ongoing inoculation programs and the easing of restrictions. Higher oil prices and a highly accommodative monetary environment will continue to support overall liquidity, in our view.
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1. The G20 group includes: Argentina, Australia, Brazil, Canada, China, France, Germany, Japan, India, Indonesia, Italy, Mexico, Russia, South Africa, Saudi Arabia, South Korea, Turkey, the United Kingdom, the United States, and the European Union.
2. There is no assurance that any estimate, forecast or projection will be realized.
3. International Monetary Fund, World Economic Outlook, SWF Institute, World Bank, October 2020.
5. Source: United Nations World Population Prospects 2019; MENA population is about 226 million.