Dr. Nasser Saidi’s comment (posted below) on Egypt’s interest rate cut and growth prospects appeared in the article titled “Egypt central bank slashes key interest rates by 200 bps” on Reuters dated 29th August 2025.

In this TV interview with Al Arabiya aired on 27th May 2025, Dr. Nasser Saidi discussed whether the EUR & CNY could emerge as an alternative to the dollar in global trade. (Summary points are provided in English towards end of the page). 

Watch the TV interview via this link 

Summary points. 

Dr. Nasser Saidi was on Al Arabiya News Channel discussing the changing currency landscape USD and its increasing weaponisation. As of Apr 2025, the USD accounted for 49.68% of global payment transactions vs EUR’s 22% and CNY’s 3.5%. USD dominance in the trade finance market is even greater, with an 82% share, versus just 6.15% for the yuan and 6.21% percent for the euro. (Source: SWIFT, May 2025). Similarly, the USD makes up 58% of international reserves currently, the lowest in decades, but still well above the euro’s 20% share. However, the future belongs to the Yuan and to digital currencies.

China is already the dominates global trade in goods. As global supply chains are reconfigured as a result of US trade wars, they will continue to pivot towards Asia and China. Over time (i.e. decades) the yuan – and particularly the digital yuan – are likely to form the basis of a growing share of non-dollar trade financing. As an example, there was a China-UAE gas deal completed in CNY in 2023 & an eCNY-Digital Dirham cross-border CBDC payment (using mBridge) in Sep 2024.

The international payments infrastructure is also transforming. The China Cross-Border Interbank Payment System (CIPS) has functionality that goes beyond SWIFT since it is a real time payment system, not just messaging. It is faster, cheaper and more secure. But for the CNY to truly become a global reserve currency (apart from financing trade), China must accelerate the development of broad, deep and liquid domestic debt and financial markets and gradually allow full convertibility of the yuan.

Dr. Nasser Saidi’s interview with Yousef Gamal El-Din titled “Can Beirut’s New Reform Agenda Save the Pound?” was aired on the “You’re In Business” show. The episode is published on YouTube, Spotify and Apple Podcasts

The video is available below: 

In this TV interview with Al Arabiya aired on 30th April 2025, Dr. Nasser Saidi discussed Trump’s reciprocal tariffs and US expectations of an industrial resurgence. This provides a unique opportunity for Asia & GCC. 

Watch the TV interview via this link 

The opinion piece titled “Trumponomics, tariffs and the global flight from the US” was published in Arabian Gulf Business Insight (AGBI) on 28th April 2025.

Trumponomics, tariffs and the global flight from the US

GCC and Asian economies are moving to de-risk from American dominance. Economic policy must focus on reconfiguring the global trade, financial and technology landscape

The rise of “Trumponomics” has sharply heightened global trade tensions, economic uncertainty and market volatility.

It’s no overstatement to say that the US administration’s erratic tariffs and policies risk the dissolution of the “rules-based order” established by the US and the West after the second world war, severely eroding America’s global credibility and geopolitical hegemony.

The concept of Trumponomics extends well beyond tariffs and trade wars to include chip and technology battles, as well as broader protectionist policies – subordinating economic interests to national security imperatives rather than to financial rationale, comparative advantage, or the functioning of free markets.

President Donald Trump’s approach harks back to a bygone era when manufacturing was the foundation of financial power.

In contrast, today’s US economic strength is anchored in tech-based services, with the country running a substantial $293 billion surplus in trade in services and revenues from intellectual property rights.

In a globalised economy physical location matters less than participation in supply chains and the ability to navigate growing product complexity.

However, US efforts to decouple from China – combined with rising tariff and non-tariff barriers with the EU, Canada, Mexico and others – already signal a restructuring of global supply chains.

Tariffs, retaliation and trade policy uncertainty have prompted the IMF to downgrade its growth forecasts sharply, revising global growth down by 0.5 percentage points to 2.8 percent for this year.

In the Mena region growth is now projected at only 2.6 percent – a downward revision of 0.9 percentage points – with Saudi Arabia and the UAE expected to expand by 3 percent (down from 3.3 percent) and 4 percent, respectively.

While the direct impact of the US tariff hikes on Mena will be limited, $22 billion in non-oil exports is at risk. Bahrain, Egypt, Jordan, Lebanon, Morocco and Tunisia are expected to be significantly affected by the new tariff hikes.

The indirect impact stems from several factors: weaker oil demand and Opec+ production hikes, which could push prices lower and hurt oil-exporting nations; pressure from a weakening dollar; a pause in the IPO pipeline amid heightened market volatility and increased financing costs, with rising interest payments posing challenges for highly indebted countries such as Bahrain, Morocco, Jordan, Tunisia and Egypt.

These pressures are also likely to weigh on trade-dependent sectors such as transport and logistics.

Buffering strategies

For Asian and Arab economies – particularly those led by the GCC – economic policy must increasingly focus on reconfiguring the global trade, financial and technology landscape to reflect the priorities of a more multipolar, non-US-centric order.

The first critical building block of this new order is the development of deep, reciprocal regional and bilateral trade agreements that extend beyond goods to encompass broader policy areas.

For the GCC, immediate strategic priorities include securing a trade agreement with the Asean Free Trade Area and finalising a long-negotiated free trade agreement with China.

The second task at hand is the development, deepening and interlinking of financial markets. As of the end of 2024, the US accounted for almost half of global equity market capitalisation, with the size of its financial markets reaching nearly 200 percent of GDP – compared to just 50 percent for China.

The dominance of US markets means that financial shocks originating there – as witnessed during the global financial crisis – reverberate worldwide. This highlights the urgent need for regions like the GCC to reduce their exposure and de-risk from US financial markets.

The capital-exporting GCC financial markets should be integrated. Their larger size allows them to link to Singapore, Hong Kong and Shanghai efficiently. Linking with Asian markets would transform the GCC into a global player in financing the energy transition, AI, robotics, biotech and automation.

The third step entails de-risking regional payment systems from the US dollar and its increasing weaponisation.

As of January 2025, according to global finance network SWIFT, the dollar accounted for 50 percent of global payment transactions – compared to the euro’s 22 percent and the Chinese yuan’s 4 percent. Its dominance in the trade finance market is even greater, with an 83 percent share, versus just 6 percent for the yuan and 5 percent for the euro.

However, the future belongs to digital currencies. As global supply chains continue to pivot towards Asia and China, the yuan – and particularly the digital yuan – are likely to form the basis of a growing share of non-dollar trade financing.

Yet for the yuan to truly become a global reserve currency, China must accelerate the development of broad, deep and liquid domestic debt and financial markets.

Full convertibility of the yuan remains a critical milestone if it is to stand as a viable, long-term alternative to the US dollar.

Meanwhile the ongoing Trumponomics-driven trade and technology wars are accelerating a pivot towards the East – and prompting the GCC and its linked economies to intensify efforts to de-risk from overexposure to the US.

Dr Nasser Saidi is the president of Nasser Saidi and Associates. He was formerly chief economist and head of external relations at the DIFC Authority, Lebanon’s economy minister and a vice governor of the Central Bank of Lebanon

Dr. Nasser Saidi’s comments on the US reciprocal tariffs and the GCC trade ties appeared in an article titled “Why US Tariffs Will Not Change Gulf State Trade Ties” in Energy Intelligence, published on 10th April 2025 (paywall). The comments are posted below.

The impact on Gulf economies is also marginal because trading dynamics have changed drastically over the past three decades. For instance, the US is no longer the main trade partner of Gulf states. Asian countries, namely India, China, Japan and South Korea are the main trade partners, both in imports and exports, and increasingly as investment partners, Nasser Saidi, president of Nasser Saidi & Associates, a Dubai-based economic advisory and business consultancy, told Energy Intelligence.

While markets globally are likely to remain volatile as a result of the uncertainty on tariffs negotiations and investors and companies may adopt more of a wait and see approach, the effects are likely to be a temporary. “The fundamentals in the region are strong, and its diversified linkages, especially with Asia, will benefit the countries,” Saidi said. This is in addition to the large labor flows that create both remittance and investment links with the labor-exporting countries.

While markets globally are likely to remain volatile as a result of the uncertainty on tariffs negotiations and investors and companies may adopt more of a wait and see approach, the effects are likely to be a temporary. “The fundamentals in the region are strong, and its diversified linkages, especially with Asia, will benefit the countries,” Saidi said.

A sustained drop in oil prices will affect Gulf states that are less diversified and fiscally vulnerable due to high fiscal break-even oil prices, Saidi said, citing International Monetary Fund (IMF) data. The IMF sees fiscal break-even prices at $90.90/bbl in Saudi Arabia, $50 in the UAE, $124.90 in Bahrain, $81.80 in Kuwait, $57.30 in Oman and $44.70 in Qatar.

“Rising deficits could lead to a rein in of public spending and increased borrowing if project and social spending is to be maintained,” Saidi said.

Still, “These are still early days as the impact of greater US protectionism unfolds, but there will be an impact on global supply chains and related investment flows,” he added.

Recession fears could weaken the US dollar, which most Gulf currencies are pegged to, which would make their economies more competitive. Consequently, the optimal policy choice for Arab countries is to maintain a liberal and open trade and investment environment, Saidi said.

Gulf states are a gateway for Africa and Middle East countries as well as Southeast Asia, and they “could become even more attractive as an investment destination as countries, notably China and [others in Asia], diversify trade and investment away from the US,” Saidi said.

Trump has a “transactional” nature, and when he visits the region in May, he is likely to have tariffs, non-tariff trade and investment barriers in his negotiation’s toolbox, he added.

In this TV interview with Al Arabiya aired on 6th April 2025, Dr. Nasser Saidi discussed the global impact from Trump’s reciprocal tariffs. 

Watch the TV interview via this link 

Dr. Nasser Saidi appeared in an interview with Dubai TV, broadcast on 5th Apr 2025, discussing the impact from Trump’s

The video can be viewed below

In this TV interview with Al Arabiya aired on 13th March 2025, Dr. Nasser Saidi highlighted the following points on Trump trade wars: i) Trump will not back down, even at risk of recession: he is in his 2nd term with no possible 3rd term, effectively controls both Houses, dominates Republican party & nominees have majority in Supreme Court; ii) Rapidly rising Economic uncertainty with gold and VIX both up, volatile Equity & debt markets, Economic Policy Uncertainty Index is spiking https://policyuncertainty.com; iii) will lead to greater EU unification (higher defence, common debt), UK–EU rapprochement; iii) Germany will go for debt funded infrastructure & defence spending; iv) Canada, Mexico, China will diversify trade & investment away from US; v) Fed, ECB will delay rate cuts given growing uncertainty on real economy and inflation paths; vi) US will have the highest tariff wall since 1943. vii) GCC steel & aluminum exports to US negatively affected. 

Watch the TV interview via this link 

قال رئيس شركة ناصر السعيدي وشركاؤه، الدكتور ناصر السعيدي، إن العالم يشهد حربا تجارية واسعة بعد إعلان الاتحاد الأوروبي وكندا فرض رسوم جمركية مضادة على الواردات من الولايات المتحدة.

أضاف السعيدي، في مقابلة مع “العربية Business”، أن الحرب التجارية ستؤدي لتقلبات وإعادة هيكلة التجارة العالمية، خاصةً أن الرئيس الأميركي دونالد ترامب يرغب في إعادة النظر في النظام العالمي ككل وجزء منه التجارة العالمية.

وأوضح أن ترامب يسعى لفرض هيمنة أميركية جديدة على العالم والتجارة سوف تلعب دورًا بهذا المجال، خاصةً بعد الرد الأوروبي والكندي على الرسوم الأميركية.

وتوقع أن تؤدي الحرب التجارية إلى زيادة التقارب بين إنجلترا والاتحاد الأوروبي، بالإضافة إلى اتجاه كندا لتنويع تجارتها العالمية والبعد عن السوق الأميركية.

وقال السعيدي إن المؤشرات الاقتصادية تشير إلى تقلبات متوقعة بالاقتصاد الأميركي، حيث ارتفعت أسعار الذهب، كما ارتفع مؤشر عدم اليقين في السياسات الاقتصادية الأميركية، وتابع: “هذه هي الولاية الثانية والأخيرة لترامب وبالتالي سيسعى لاستكمال سياساته حتى لو أدى ذلك لركود اقتصادي”.

وأضاف أن الاتحاد الأوروبي يواجه ضغطًا كبيرًا بسبب الحرب التجارية، خاصةً مع تراجع معدلات النمو الاقتصادي في أوروبا وضعف الاقتصاد الألماني الذي يعتبر الأكبر في أوروبا، كما توجد توقعات بتوجه أوروبي نحو تعزيز التجارة مع جهات أخرى ومنها الصين.

Dr. Nasser Saidi participated in the presentation and discussion hosted by the Arab Gulf States Institute in Washington (AGSIW) ahead of the publication of an IMF report on Digitalisation in the GCC – held as a webinar on March 11th, 2025.

The Gulf Cooperation Council member countries have actively embraced digital transformation, making notable progress in the extensive development of digital infrastructure, the maturity of government digitalization, and a dynamic ecosystem for financial technology activities.

In a forthcoming paper, the International Monetary Fund highlights the positive relationship between progress in digitalization and more favorable macroeconomic and financial outcomes, including economic growth, government effectiveness, financial inclusion, and private sector resilience to shock.

New analysis by the Mohammed bin Rashid School of Government (along with Nasser Saidi & Associates and Developing Trade Consultants) also emphasizes the important and growing role of digitalization in supporting growth and economic diversification.

Within the context of these two papers, what additional efforts can be made toward improving digital skills, industry, and innovation? What are the challenges raised by the broad adoption of digital technologies and artificial intelligence, especially relating to cybersecurity and the potential effect on the labor market? Could comprehensive strategies help further accelerate the GCC countries’ already impressive progress on digitalization and support their broader economic transformation agendas?

Watch the discussion below:

The interview with Dr. Nasser Saidi titled “China’s Rapidly Rising Innovation Capacity – Interview with Nasser Al-Saidi” was published in The People’s Daily (China’s biggest daily newspaper) on 5th March 2025. The original article in Chinese can be accessed via this link & its English translation is posted below.

China’s Rapidly Rising Innovation Capacity – Interview with Nasser Saidi

Nasser Al-Saidi, an economist, is a regular presence at many of Dubai’s seminars on the topic of China. With his snow-white hair and tough frame, he speaks methodically.

The opinion piece titled “AI, geopolitics and the Mena opportunity” was published in Arabian Gulf Business Insight (AGBI) on 27th February 2025.

AI, geopolitics and the Mena opportunity

DeepSeek’s emergence has spotlighted the GCC’s role in hosting green AI infrastructure

The surprise arrival of Chinese LLM startup DeepSeek roiled global markets, wiping billions from US chipmaker Nvidia’s market cap and slashing global tech stocks.

DeepSeek’s breakthrough highlights China’s rapid innovation capabilities, as well as Washington’s struggle to contain Beijing’s rise, particularly in AI and quantum computing.

The Chinese tech firm’s emergence is attributable to its open source, cost-effective AI models, which operate with significantly lower costs and data requirements than existing models. Since DeepSeek entered into the market, global tech firms have announced even higher spending on AI infrastructure and accelerated deployment.

However, financial sustainability remains a question. There is also a long way to go to reach human-level intelligence levels or Artificial General Intelligence (AGI).

DeepSeek has challenged the belief that advanced chip hardware is necessary for better AI. This raises hope for less advanced countries to catch up in the AI race, particularly against the backdrop of greater geopolitical fragmentation and increased protectionism.

As it becomes easier and cheaper to adopt new technology this will increase the ubiquitousness of AI-based applications and services.

AI is a general-purpose technology that promises to be transformational. Its wide applicability will increase economic efficiency and reshape innovation and R&D processes, while complementing other innovations – such as in quantum computing, generative biology and robotics – leading to an upward shift in total factor productivity.

In the early 2020s, initial expectations assumed that AI tools would primarily benefit lower-skilled workers by enhancing efficiency (for example, assisting new customer support employees). However, research has since warned that AI could exacerbate socio-economic disparities.

The International Labour Organisation estimates that 75 million jobs worldwide (or 2.3 percent of global employment) are at risk of automation due to high exposure to generative AI (GenAI) technology, with the risk rising to 5.1 percent in high-income countries.

Nobel Laureates Daron Acemoglu and Simon Johnson caution that decisions regarding powerful automation tools should not be left solely to a small group of entrepreneurs and engineers, as this could deepen income and wealth inequality.

They advocate for AI policies that prioritise worker interests to prevent widespread job displacement and unemployment.

Where does the Middle East stand?

As GenAI technology becomes more mainstream, its growing adoption calls for more data centres, increased electricity consumption and higher carbon emissions.

AI is highly carbon-intensive, with ChatGPT alone generating over 260 tonnes of CO₂ emissions per month. This presents a significant sustainability challenge for tech firms and governments.

However, the GCC offers a solution: renewable energy powered data centres.

Moro Hub, a subsidiary of Digital Dewa, operates a data centre entirely powered by renewable energy (in partnership with Masdar and Acwa Power). With abundant and cost-effective renewable energy, the GCC has a strategic advantage in becoming a global hub for sustainable data centres.

Within the next five years, renewables could account for 30 percent of the region’s total energy capacity, supporting the expansion of “green” data centres.

The GCC had $3.1 billion worth of data centre projects in progress, as of November 2024, with the UAE and Saudi Arabia leading investments in this sector.

Recent partnerships with Europe, China, and the US to develop AI capacity have cemented the ambition of the region to become a prominent player in the sector.

For example the UAE plans to invest EUR 30-50 billion in building a mammoth AI data centre in France. The project is backed by a consortium of French and Emirati investors, including MGX, a major Abu Dhabi government-backed investor.

MGX is also a core stakeholder in OpenAI’s Stargate project, which aims to invest $500 billion in AI infrastructure over the next four years.

The successful adoption of AI and digital technologies requires both hard and soft infrastructure.

This includes electrification, digitalisation infrastructure, supportive policies, R&D investments, STEM education, workforce reskilling, an enabling regulatory environment, and adaptable legal frameworks.

There remains a wide technology divide between the GCC and other Mena countries, which face challenges such as a shortage of AI talent, digital illiteracy, underdeveloped infrastructure, and limited R&D investment.

While AI has the potential to be transformative, it also risks deepening inequalities due to the region’s disparities in digitalisation and AI preparedness.

As the GCC emerges as a leader in AI, it should prioritise technology sharing and capacity building across the region through investment, digital infrastructure integration, and inclusion in foreign aid programmes.

Dr Nasser Saidi is the president of Nasser Saidi and Associates. He was formerly chief economist and head of external relations at the DIFC Authority, Lebanon’s economy minister and a vice governor of the Central Bank of Lebanon

In this TV interview with Al Arabiya aired on 17th February 2025, Dr. Nasser Saidi highlighted the findings from the Global Economic Diversification Index that was released at the World Governments Summit 2025. 

Watch the TV interview via this link 

قال ناصر السعيدي رئيس شركة ناصر السعيدي وشركاه، إن التنويع الاقتصادي يعد من أهم العوامل التي تؤثر في استقرار الاقتصادات الخليجية على المدى الطويل.

وأضاف السعيدي في مقابلة مع “العربية Business”، أن مؤشر التنويع الاقتصادي الذي يشمل 115 دولة على مدار ربع قرن من عام 2000 إلى 2023 يعتمد على ثلاثة مكونات رئيسية: تنويع النشاط الاقتصادي، وتنويع التجارة الخارجية، وتنويع واردات الدولة.

وأوضح السعيدي أن تنويع النشاط الاقتصادي لا يعني فقط تقليل الاعتماد على النفط والغاز، بل يشمل تعزيز القطاعات الأخرى مثل السياحة والخدمات. أما تنويع التجارة الخارجية فيتعلق بتقليل الاعتماد على النفط والغاز كمصدر رئيسي للتجارة، حيث يمكن للتقلبات في أسعار النفط أن تؤثر بشكل كبير على الميزان التجاري وميزان المدفوعات.

وذكر أن تنويع واردات الدولة عبر تطبيق الضرائب على الشركات والخدمات أداة مهمة لتقليل المخاطر الاقتصادية.

وأشار السعيدي إلى أن الفترة بين 2020 و2024 شهدت تحسنًا ملحوظًا في بعض دول الخليج في مجال التنويع الاقتصادي، حيث أظهرت الإمارات والسعودية تحسنًا كبيرًا في هذا المجال.

وأوضح أن السعودية حققت زيادة قدرها 30 نقطة في هذا المؤشر من عام 2000 إلى 2023، بينما ارتفعت الإمارات 24 نقطة.

واعتبر السعيدي أن هذه التحسينات تؤثر بشكل إيجابي على استقرار الاقتصادين في البلدين وعلى المنطقة بشكل عام.

وأضاف أن جائحة كورونا أثرت بشكل كبير على القطاعات التي كانت تعتمد عليها دول الخليج مثل السياحة والتجارة، مما دفع الدول إلى تبني سياسات جديدة لتحفيز التنويع الاقتصادي.

وأفاد السعيد بأن التجارة الرقمية أصبحت جزءًا لا يتجزأ من مستقبل الاقتصاد الخليجي، وأن الاستمرار في تعزيز هذه المجالات سيسهم بشكل كبير في تحقيق التنويع الاقتصادي المطلوب.

“Global Economic Diversification Index 2025” was released by the Mohammed Bin Rashid School of Government (MBRSG) at the World Governments Summit held in Dubai on 12th Feb 2025. Dr. Nasser Saidi & Aathira Prasad were co-authors of the report, which  was developed in cooperation with Keertana Subramani, Salma Refass and Fadi Salem (MBRSG) and Ben Shepherd (Developing Trade Consultants). 

Access the latest and past reports as well as the underlying data on the website. 

Effective governance of economic diversification efforts is highly reliant on the availability of representative and robust data that informs evidence-based development and policy directions. The Global Economic Diversification Index (EDI) 2025 report provides valuable longitudinal datasets to inform policy, research and economic development efforts across the globe. It specifically highlights the importance of economic diversification for commodity-producing nations to mitigate the risks of growth, trade, and revenue volatility. The report underscores the vulnerability of countries dependent on   commodities to various shocks, such as price fluctuations, climate change, and global pandemics. Successful diversification can be accelerated through adopting new technologies and digitalisation, moving towards a services-based economy, focusing on value-added manufacturing, and investing in human capital and infrastructure.

The findings of this latest edition of the EDI emphasises the need for commodity-dependent nations, particularly those reliant on oil and gas, to adopt policies that prevent the natural resource curse and promote sustainable economic growth. Globally, there are numerous examples of successful transitions, including Norway’s diversification into high-tech sectors and Malaysia’s move towards greater industrialisation. However, the report highlights that there is no one-size-fits-all approach to diversification, as the urgency and pace of reform depend on multiple factors, including institutional effectiveness and governance, among others.

The Economic Diversification Index, first published in 2022, provides a comprehensive measure of economic diversification across countries. The EDI, derived by calculating the scores of three key sub-indices: government revenue, output, and trade, allows countries to assess the state and evolution of their economic diversification, as well as compare themselves with peers, and identify factors that can foster or impede diversification. The 2025 edition covers the performance of 115 countries, using publicly available quantitative indicators to ensure transparency and allowing reproducibility of the results. 

The top-ranked EDI nations in the current EDI edition continue to include the United States, China, and Germany. In 2023, twenty-five of the top 30 nations were high-income countries, alongside only four upper-middle-income nations (China, Mexico, Thailand, and Turkey) and a single lower-middle-income nation (India, at rank 20 globally). Only three of the eight regional groupings show an increase in EDI compared to pre-pandemic readings (Western Europe, East Asia Pacific and South Asia). It is, however, important to highlight that while EDI and GDP per capita are generally positively correlated, high-income countries, particularly oil dependent economies, do not always have high economic diversification scores.

In 2024, the Global EDI report introduced new digital trade augmented index (the ‘EDI+’). In the post-pandemic years, digitalisation continues to play an important role in increasing economic diversification while also enabling emerging and developing nations to catch up. The inclusion of digital indicators in the EDI shows that many developing nations are diversifying into the digital space and catching up with more advanced economies. this progress is dependent on factors such as infrastructure availability, regulatory support and the presence of a skilled workforce among others. The 2025 edition confirms that multiple countries in the top quintile of the EDI rise even higher with the inclusion of the digital indicators within the trade sub-index (i.e. trade+ sub-index). Over two-thirds of the nations’ show greater improvements in the trade+ sub-index (comparing 2023 versus 2010) than in the overall EDI+ scores. On the other hand, the lower income groups have yet to recover to pre-pandemic levels, in either EDI or EDI+ scores. This underscores the challenge of achieving recovery without substantial investment in digital infrastructure and relevant enablers.  The performance of EDI+ is in line with other digital indices, with the scores showing a positive correlation.

Insights from the latest EDI scores point to a few policy directions. Commodity producing nations need to consider three key factors while deciding on economic policy: (a) the implications of climate change will have an impact on commodities production and extraction; (b) how energy transition is affecting the demand for commodities, including fuel and metals; (c) the continued risks from geopolitical tensions and trade fragmentation, particularly for low-income and emerging market countries that depend on commodities, which may potentially leading to long-term output losses.

In this EDI edition, 40 countries in the index, nearly 35 percent of the countries covered, are commodity exporters, and within that subset, close to 50 percent of the commodity dependent nations are reliant on fuels. While the more diversified Mexico and Malaysia retain top rankings, given the dynamic nature of diversification, other countries are also undertaking transformational policies: notable cases in 2023 compared to 2000 include Saudi Arabia (up more than 30 ranks), UAE (+24 ranks), Kazakhstan (+17 ranks), Qatar (+12 ranks) and Oman (+10 ranks).Low to middle-income nations such as Angola, Congo and Nigeria remain consistently within the lowest quartile (with common characteristics such as poor governance scores and/ or being politically unstable) along with upper middle-income Azerbaijan. Among the Gulf Cooperation Council (GCC) countries, Bahrain and the UAE have both scored highly in the output sub-index in recent years, while the UAE outperformed in the trade sub-index. Kuwait lags its peers in all sub-indices, making it the lowest scoring among the GCC countries. 

Today, the world faces heightening environmental concerns exacerbating social inequalities and economic instability. The World Economic Forum’s Global Risks Report 2025 underscores the urgent need to address these environmental concerns, with “biodiversity loss and ecosystem collapse” ranked by respondents as the second-most concerning risk over the next decade. Climate change is forcing nations to hasten low-carbon energy transition plans and policies and consumers to make gradual behavioural shifts away from fossil fuels. Geopolitical forces also reconfiguring the global energy map. Even as the GCC countries emerge as “Middle Powers” in a globally fragmented world, its member states are stand out as energy powerhouses in both fossil fuels and renewable energy amidst global fragmentation.

Dr. Nasser Saidi participated as a panelist in the discussion titled “Shaping the Future – GCC Economies in Transition” at the Investment Conference 2025 by Kamco Invest, held in Kuwait on 10th February 2025. 

The session covered the broad headings of cyclical growth vs. structural transformation, fiscal policy and government spending, monetary policy, capital markets, productivity challenges & overall resilience.

View the session below (original link)

In this TV interview with Al Arabiya aired on 15th January 2025, Dr. Nasser Saidi highlights the historic opportunity for Lebanon following the selection of Joseph Aoun as President & Nawaf Salam as Prime Minister. 

Watch the TV interview via this link 

قال رئيس شركة ناصر السعيدي وشركاؤه، الدكتور ناصر السعيدي، إن لبنان أمام فرصة تاريخية بعد انتخاب الرئيس جوزيف عون وتسمية نواف سلام رئيسا للحكومة، وهو ما يمثل انطلاقة جديدة للبنان، مشيراً إلى أهمية اتفاق الطائف التي أوقف سنوات من الحروب في لبنان.

وأضاف السعيدي، أن الظروف الإقليمية تغيرت وتسمح لتغير وتحول كبير في لبنان، مع العمل على إعادة بناء المؤسسات والدولة وإعادة القانون، ما سيمثل انطلاقة كبيرة تعطي ثقة للمجتمع الدولي مع تدخل ودعم من دول الخليج لا سيما من السعودية وهو ما يعطي تفاؤلا لعودة المستثمرين إلى لبنان.

In this TV interview with Al Arabiya aired on 23rd Dec 2024, Dr. Nasser Saidi discusses a potential looming debt crisis in 2025. Dr. Saidi believes that interest rates are likely to remain high while global public debt is high and rising towards $100trn. About 3.3bn people live in countries spending more on interest payments than education or health. 

Watch the TV interview via this link 

“ناصر السعيدي”: بقاء أسعار الفائدة مرتفعة يؤثر سلبا على عدد من بلدان المنطقة مثل مصر

قال ناصر السعيدي رئيس شركة ناصر السعيدي وشركاه، إن ارتفاع الديون العالمية قد يؤدي إلى أزمة مالية بحلول عام 2025، خاصة في الدول النامية التي تعاني من ارتفاع تكاليف الفائدة.

وأضاف في مقابلة مع “العربية Business”، أن هناك 45 دولة نامية تمثل الفوائد فيها أكثر من 10% من إيرادات الدولة، بينما هناك مجموعة الفوائد التي تدفعها 48 دولة هي أعلى من نفقاتها على الصحة والتعليم.

وأشار إلى ذلك يؤدي إلى مخاطر اجتماعية واقتصادية بهذه الدول، موضحا أن بقاء الفوائد مرتفعة قد يؤثر سلبا على بعض بلدان المنطقة منها مثل مصر التي تحاول التعافي تدريجيا.

In this TV interview with CGTN Europe’s The World Today program, aired on 27th Nov 2024, Dr. Nasser Saidi spoke about the ceasefire in Lebanon. While there is a lot of euphoria at the announcement, more importantly, the 60 day ceasefire period is fraught with security and political risks and uncertainties. Focus has to turn to attracting aid commitments & start reconstruction. For that, need to urgently elect a new president & form a credible national emergency government able to garner regional and international support and confidence and undertake long-delayed structural reforms.

Dr. Nasser Saidi, in his role as the Chairman of the Clean Energy Business Council, provided introductory remarks at the Annual Summit held in Dubai on 26th Nov 2024.

Titled “Decarbonizing MENA: Levers for Action“, the presentation covered the discussions around the key outcomes of COP29, whether the rising renewables capacity is sufficient in the backdrop of NZE commitments in addition to how disparities related to climate threats and financing are widening. Furthermore, the discussion also highlighted how GCC are in a unique situation of becoming global hubs for “old” and “new energy”.

The opinion piece titled “Trump must focus on rebuilding a war-torn Middle East” was published in Arabian Gulf Business Insight (AGBI) on 20th Nov 2024.

Trump must focus on rebuilding a war-torn Middle East

It is imperative that the US addresses reconstruction in the region

US President-elect Donald Trump has become the first Republican candidate in 20 years to win the popular vote.

His historic win hands him control of the Senate, Congress and the Republican party, along with a strongly conservative-leaning Supreme Court. How will this power be deployed?

If we take Trump’s election rhetoric literally, his “Maganomics” agenda will be top priority. Domestic policy will centre around protectionism, deregulation, deportation of irregular immigrants, tax cuts, a roll back of climate-related commitments, and a move to oil and gas enabled “energy dominance”.

Trump has said he will impose tariffs of 20 percent across the board and 60 percent on China, along with trade restrictions. Should these tariffs be realised, GCC oil and gas, aluminium and steel exports would suffer.

Maganomics policies are also likely to stoke inflation, suppressing the Fed’s ability to lower interest rates aggressively in 2025. Higher rates will negatively constrain new borrowing and financing plans for both households and businesses.

In a context of absent social safety nets or tax credits, higher inflation will disproportionately impact low-income households, further raising inequality.

Investors should also be concerned about fiscal costs. US public debt already exceeds 120 percent of GDP, and the Penn Wharton Budget Model estimates that Trump’s plans will raise US deficits by $5.8 trillion over the next decade – equivalent to wartime deficits in a full employment scenario. Beware, the US is overheating!

Trump has a unique opportunity to work towards ending the Israel-Gaza and Lebanon conflicts

The bottom line is that Trump’s America First policies set the stage for global supply-chain disruptions and trade tensions with China, Mexico, Canada, and the EU.

These policies will also put pressure on Nato members to boost defence spending. Without a shift away from these stances, the global economy is vulnerable to further geo-economic fragmentation.

A Trump Ukraine plan?

Three major geo-economic-strategic issues face the Trump administration post-election: the Russia-Ukraine and Israel-Palestine-Lebanon wars, as well as growing tensions with China.

Trump’s geostrategic “peace through strength” stance and unwillingness to engage the US in wars, implies striking a deal with Russia and a rapid end to the costly military confrontation through a neutral, non-Nato, Ukraine.

The next step is reconstruction. Post-war restoration will require massive funding, likely to be well in excess of $600 billion. How can this be financed?

In one scenario, a “Trump Ukraine plan” could be jointly EU-US financed, focused on rebuilding infrastructure and renewed integration of Ukraine’s export-oriented manufacturing and agriculture sectors into Europe. Such a strategy, supported by foreign aid, would act as a driver of economic growth.

New institutions for stability

With increased influence, Trump has a unique opportunity to work towards ending the Israel-Gaza and Lebanon conflicts as part of a broader Middle East peace agreement. This approach could champion the potential economic benefits that peace and stability would bring to the MENA region and the global economy.

The starting point would be the reconstruction and re-development of Gaza. The UN estimated in early-2024 that it would take Gaza 15 years just to remove war rubble and 70 years to restore the country to 2022 GDP levels.

The UN estimates the region will also require the largest post-war reconstruction effort since 1945, with rebuilding cost estimates ranging up to $80 billion.

In Lebanon, escalating destruction and displacement are pushing the country toward a Gaza-like crisis, worsening severe economic, banking and financial instability.

The 2006 war dealt Lebanon a heavy blow, with reconstruction costs surpassing $10 billion. This time, however, costs could exceed $25 billion, with GDP potentially shrinking by 20 to 25 percent.

Funding for reconstruction and redevelopment in Gaza and Lebanon will need to come from multilateral aid and grants.

Once a sustainable peace settlement is achieved, GCC countries can play a major role in redevelopment, not only in terms of state reconstruction funding but in the mobilisation of its private sectors to help rebuild war-torn nations.

It’s essential to learn from past reconstruction failures, like those of Iraq and Afghanistan, and apply lessons from previous post-war efforts. Transparency, accountability, anti-corruption measures, and the understanding that nation-building is a long-term commitment are all critical for success.

If Trump is to bring stability to the region, it is imperative that he address the rebuilding of nations that have been ravaged by war. The road ahead will not be easy.

Post the Lebanese civil war, it took 20 years for real GDP to recover to pre-war levels. It took Kuwait seven long years to recover following the Gulf War.

We need new institutions to address nation building. A Trump administration, in partnership with the GCC and multilateral banks, would do well to set up a Middle East development bank.

Such an institution can focus on financing post-conflict reconstruction, regional infrastructure projects, and promote the development and integration of economic and financial sectors across the region.

Dr. Nasser Saidi’s comments on the PetroYuan appeared in an article  titled “Oil Dollar Pricing Seen Staying, But New Payment Modes Emerging” in Energy Intelligence, published on 8th November 2024. The comments are posted below.

Nasser Saidi, president of Nasser Saidi & Associates, an economic advisory and business consultancy and founder of the Clean Energy Business Council Mena, believes alternatives are no longer pipedreams.

“As geo-eco-political tensions increase and global economic and trade fragmentation increases as a result of Cold War II, we will witness the growth of the PetroYuan for financing China’s O&G with its major oil exporters, Saudi Arabia, the UAE and other GCC countries,” he told Energy Intelligence.

He cited reports of Indian oil refiners making payments in rupees for purchase of crude oil from the UAE under the ‘local currency settlement’ system agreed upon by the two countries. More importantly than India, which is the world’s third-largest oil importer, are oil exporters, including Russia, Iraq and Indonesia that have accepted the yuan as payment for crude oil shipments, Saidi said. In 2023, there were 12 major commodity contracts that were settled in non-US dollar currencies.

Saidi doesn’t believe pricing oil in other currencies will be an immediate move and he foresees the emergence of an Asian yuan zone as China increasingly integrates Asian countries into its supply chain. However, as trade and investment sanctions are ratcheted up and the dollar is increasingly weaponized, for example by freezing of Russian US dollar and euro dominated assets, “countries will be encouraged to develop new payment mechanisms that could challenge the dominance of the dollar,” he said.

This could be in the form of adopting the yuan for trade, with the PetroYuan being used both for energy and non-oil trade payments, and settlement, he added. Other options include the extension of the Cross-Border Interbank Payment System (Cips), an alternative to Swift, and arranging central bank digital currency (Cbdc) transfers that facilitate cross-border flows such as the successful collaborative effort mBridge. While the Brics bloc announced plans for Brics Bridge, a digital currency cross-border payment solution, as an alternative to the dollar, Saidi said “there is a long while before it becomes operational and/or widely used.”

In a separate article titled “Decarbonization Still in Focus Despite Mideast Geopolitics“, dated 13th Nov 2024, comments on GCC’s energy transition efforts were mentioned. Comments are posted below.

To date, Mideast countries don’t appear to have wavered from their commitments towards the energy transition, said Nasser Saidi, president of Nasser Saidi & Associates, an economic advisory and business consultancy, and founder of the Clean Energy Business Council Mena. “For now, regional geopolitics has had a limited impact on various commitments to energy transition,” Saidi told Energy Intelligence. “However, should funds need to be diverted to increased security and military spending, there would be a delaying impact.”

 The implementation of decarbonization and energy transition strategies are inevitable for countries of the region and will buttress their diversification efforts, Saidi said. It will also help them create new export industries and products like hydrogen, attract foreign investment, and create jobs associated with the green economy and climate risk mitigation and adaptation technologies, he added.

In this TV interview with Al Arabiya aired on 6th Nov 2024, Dr. Nasser Saidi discusses Trump’s election victory, potential domestic policies (leading to wider deficits) and impact on GCC & wider Middle East. 

Watch the TV interview via this link 

هل يتمكن ترامب من تخفيض العجز؟

قال رئيس شركة ناصر السعيدي وشركاه الدكتور ناصر السعيدي، إن انتصار دونالد ترامب في انتخابات الرئاسة الأميركية “تاريخي”، كونه أول رئيس يسيطر على مجلس النواب ومجلس الشيوخ والمحكمة العليا وامتلاكه كل الإمكانيات لتحقيق كل سياساته.

وأضاف السعيدي في مقابلة مع “العربية Business”، أن تخفيض العجز تحت إدارة ترامب سيكون صعبا.

Dr. Nasser Saidi participated in the panel discussion during the launch of the IMF Regional Economic Outlook (REO) report held in Dubai on Oct 31st, 2024.

Amid high uncertainty and the threat of intensifying conflicts, how can the countries of the Middle East and North Africa safeguard macroeconomic stability? What risks and vulnerabilities lie ahead? Which policies can help countries navigate this uncertain economic landscape while strengthening medium-term growth prospects?

The insightful discussion titled “Growth Challenges and Opportunities in the MENA Region Amid Uncertainty” delves into these critical issues highlighted in the IMF’s Regional Economic Outlook: Middle East and Central Asia issued in Oct 2024.

Watch the discussion – the video titled Press Briefing: Middle East & Central Asia, October 2024 (Dubai) – via: https://www.imf.org/en/Videos/view?vid=6364122084112

Comments from the discussion appeared in an article on AGBI titled “Middle East, not the West, should lead rebuilding, say experts“: Dr. Saidi’s comments are highlighted below. 

Economist Nasser Saidi, founder of Nasser Saidi and Associates and AGBI columnist, said the cost to rebuild countries in the region impacted by conflict in recent years – including Iraq, Syria, Lebanon, Jordan, Egypt, Sudan, Libya and others – could be as much as $2.5 trillion.

“The private sector will not invest until they see stability and a political strategy,” he said.

He suggested forming an organisation called the Arab Bank for Reconstruction and Development to unite the countries in the region in helping rebuilding efforts.

In this interview with Al Arabiya aired on 5th September 2024, Dr. Nasser Saidi discusses Bahrain’s plan to introduce the global minimum tax from Jan 2025.

Watch the TV interview at this link and the related news article is posted below: 

توقع مضي دول مجلس التعاون الخليجي في نفس الاتجاه

قال رئيس شركة ناصر السعيدي وشركاه، د. ناصر السعيدي، قرار البحرين فرض ضريبة على الشركات الكبيرة متعددة الجنسيات العاملة في البلاد اعتبارا من الأول من يناير المقبل خطوة جيدة وإصلاح ضريبي مهم.

وتوقع في مقابلة مع “العربيةBusiness ” أن تمضي دول مجلس التعاون الخليجي في نفس المسار، والإمارات ستطبق ضريبة بواقع 9% على أرباح الشركات ستطبق بنهاية العام وباقي الدول متوقع أن تمضي في نفس الاتجاه.

أشار إلى أن البحرين تؤسس لنظام ضريبي جديد يحسن استدامة الموارد على فترة وينوع الإيرادات ويشجع الاستثمار في البحرين نظرا توفير بيئة اقتصادية مالية حاضنة شفافة وهو أمر مهم للشركات الكبرى.

وحددت البحرين الضريبة بحد أدنى 15% على أرباح الشركات المتعددة الجنسيات التي تتجاوز إيراداتها العالمية 750 مليون يورو.

وذكر الجهاز الوطني للإيرادات أن هذه الخطوة تأتي تماشياً مع انضمام مملكة البحرين في العام 2018 إلى الإطار الشامل لمنظمة التعاون الاقتصادي والتنمية، وذلك دعمًا لمشروع الإصلاح الضريبي إلى جانب أكثر من 140 دولة، بما في ذلك دول مجلس التعاون.

وقال إن البحرين حددت مستوى عادلا من الضريبة للشركات يجنبها الهروب من الضرائب أيضا.

The below opinion piece titled “Home is where the heart is for GCC wealth funds” was published in the Arabian Gulf Business Insight (AGBI) on 5th September 2024.

An extended version of the published article is posted below. 

Home is where the heart is for GCC wealth funds

The Gulf’s SWFs are stepping up domestic investment

Globally, state-owned investors (SWFs, public pension funds and central banks) are a massive player in financial markets, managing USD 49.7trn in 2023, with SWFs posting a record high USD 11.2trn. GCC SWFs assets touched a peak of USD 4.1trn in 2023. Five GCC SWFs are among the top 10 most active dealmakers globally (Saudi PIF, Abu Dhabi’s ADIA, Mubadala and ADQ, and Qatar’s QIA), supported by the recovery of markets and higher oil prices post-Covid. They were active as well, representing 40% of all investments deployed by sovereign investors last year. But the asset allocation of portfolios is shifting. While GCC SWFs invested in overseas markets (e.g. PIF and ADQ preferred investments in emerging markets; ADIA had three-quarters of its investment value in North America and Europe), they are increasingly shifting to support domestic economic diversification, becoming more active in local and regional opportunities.  

Why are GCC SWF strategies changing?

They are three major drivers.

Firstly, Cold War II is unfolding with growing economic, trade and investment fragmentation and dislocation, threatening deglobalisation and the tectonic shift in global economic geography towards Emerging Asia over the past two decades. Global geo-economic-political risks are growing with historically high debt levels of USD 313trn in 2023, regional wars (Europe, Near East) along with volatile interest rates. Sovereigns also face the risk of the growing weaponisation of the US dollar along with potential sanctions, a freezing and confiscation of assets, (witness Russia) that undermine the rule of law, the operation and architecture of global financial markets. The GCC have to derisk Western financial markets and assets to protect their wealth. Given SWIFT payment system risks, expect the BRICS+ and GCC to develop an alternative multilateral payment system, use national currencies for bilateral payments and the PetroYuan for energy.  The era of free flowing GCC petrodollars is ending.

Secondly, national security considerations increasingly dominate economic policy making globally and regionally. It is imperative for the GCC to shift focus to domestic economic objectives and address domestic and regional opportunities and challenges (economic diversification, food security, AI and related tech, clean energy transition, climate risk mitigation and adaptation). Witness PIF’s investments in Saudi airlines and giga projects, ADQ’s investing $35 bn in Egypt’s Ras El-Hekma this year.  

PIF’s Annual Report 2023 highlights the realities of the changing investment objectives. While AUMs have grown massively (from SAR 563bn in 2015 to SAR 2.9trn in 2023,), the share of international investments share is down (from 29% in 2021 to 20% in 2023), a smaller share of a growing pie. The PIF’s domestic economic objectives are increasingly aligned with Saudi Arabia’s Vision 2030 and the broad goal of economic diversification, transformation and modernisation, necessitating an inward-focused agenda. Accordingly, the PIF aims to increase AUM to approximately SAR 4trn by 2025, raising the non-oil GDP and job creation contribution of PIF & subsidiaries to a cumulative SAR 1.2trn and to SAR 7.5trn by 2030.

 To support Saudi’s maturing economy, PIF has launched 95 companies since 2017, spanning 13 strategic sectors ranging from EVs to sports and tourism, injecting about SAR 150bn into the local economy annually. Complementing Saudi Arabia’s pro-private sector policies, the PIF has been supporting SMEs and innovative, growth companies in new and emerging sectors. PIF has also been instrumental in attracting firms in innovative sectors to locate in the Kingdom – for example Lucid’s advanced manufacturing plant in Saudi to produce EVs, a SAR 1bn tech fund to attract chip-design companies and Alat’s deals in semiconductors & next generation infrastructure among other.  

Thirdly, Saudi remains a developing economy and a vast country with massive investment opportunities for foreign investment and technologies. PIF’s engagement in supporting capital market development (e.g. listing of Saudi ETFs in Shanghai and Shenzhen, launch of a Riyadh-based multi-asset investment management platform with BlackRock), developing Saudi’s vast unexplored and unexploited mineral wealth (through PIF-backed Manara Minerals), supporting Saudi Industrial Policy (e.g. localising renewable energy components in collaboration with Envision Energy, support from Alat to manufacture robotic systems & heavy machinery) aim to attract FDI and PPP. The PIF is also supporting Saudi’s regional economic expansion and integration strategy, including involvement in developing the Red Sea Council and Western Saudi areas as a stepping stone into the African Continental Free Trade Area, along with the establishment of five companies for investment in Bahrain, Iraq, Jordan, Oman and Sudan.

Ahead of 2030 and as it builds capacity, reallocates its assets and investments, the PIF will increasingly become like Temasek, Singapore’s Public Wealth Fund, taking responsibility to improve the management, performance and productivity of Saudi’s vast public assets (e.g. public infrastructure and commercial assets). Saudi adoption and implementation of a robust Public Investment Management frameworks and moves towards a centralised model of the ownership and governance of public commercial assets held by various ministries/agencies– would not only increase financial returns and maximise the value of the public assets, but it would also increase productivity growth and support fiscal sustainability. Accountability is the other building bloc. PIF has taken a lead in promoting transparency: it is currently placed joint second globally and first in the Middle East for Governance, Sustainability & Transparency in a ranking of the top 100 SWFs by Global SWF.

The bottom line is that GCC SWFs (along with the BRICS+) are gradually redrawing the global financial architecture and landscape and supportive payment system, to becoming more regional and serving domestic economic objectives. This has also supported the creation and growth of an asset management industry in the financial centres of the region (working for the region) versus the prior experience of recycling petrodollars through global financial centres abroad.

The below opinion piece titled “Trump redux could bring in the law of unintended consequences” was published in the Arabian Gulf Business Insight (AGBI) on 5th August 2024.

An Arabic version of this article was published by the Middle East Council: click to access the article.

Trump redux could bring in the law of unintended consequences

Gulf states need to expect the unexpected as an ‘America First’ agenda could fragment global trade

One hundred days ahead of elections in November, former US president Donald Trump is polling strongly despite the emergence of Kamala Harris as the Democrat candidate. What would the implications be for us in the Gulf and around the world of a Trump presidency redux?

From public statements and his record in the previous 2017 to 2021 term, we can identify the basic tenets of such a presidency as nationalism, isolationism, protectionism, populism, and a clampdown on migration. In other words: “Maganomics” (after Trump’s slogan, Make America Great Again).

Whether fully or partially adopted, Project 2025, a 900-page blueprint for office by a conservative think tank, offers further clues on the direction of a radical new Trump government.

The policies of such an administration would have an impact around the world, with direct and spillover effects on the Middle East.

In the first place, the trade, fiscal, energy and deregulation policies advocated by Trump, along with a crackdown on immigration, are inflationary in nature.

These could increase US nominal GDP but imply even higher US budget deficits – currently running at 6.7 percent of GDP – and Federal debt, which already exceeds 100 percent of GDP.

A resurgence of inflation would force the US Federal Reserve to keep interest rates higher for longer, delaying any monetary easing. This would boost the dollar at a time when other G7 central banks, including the ECB and the Bank of England, are easing rates.

Higher, longer lasting interest rates and a strong US dollar would affect emerging markets negatively via higher inflation and bigger budget and trade deficits.

Mena countries such as Egypt and Tunisia with high external debt to GDP could be particularly impacted. Higher US interest rates would exacerbate the growing crisis in which global public debt already exceeds $100 trillion, and implies higher servicing burdens.

Macroeconomic risks – sovereign defaults, market failure, unexpected shocks – would grow.

Secondly, Maganomics focuses on protectionism. An “America First” agenda means higher US tariffs. Trump has spoken of imposing higher import tariffs of 10 percent across the board and 60 percent on China, leading to greater fragmentation in global trade and investment.

Anti-dumping measures could affect GCC industrial exports to the US, including steel, aluminium and petrochemicals. 

Conflict with China over trade and tech and de-coupling measures – to say nothing of Taiwan – could slow growth in the former and lower oil and gas imports in the world’s second largest economy.

All these have negative implications for GCC exports and growth. This could be mitigated by China’s growing non-oil linkages with the GCC, which span clean energy, financial integration, tourism and tech.

A ramping up of US-China economic warfare could turn out to be a net positive for the GCC. In an illustration of the “law of unintended consequences”, China could divert trade and investment to the GCC and the Middle East.

Thirdly, energy is a major plank of Maganomics. Short of repealing the Inflation Reduction Act or the Infrastructure Investment and Jobs Act, a Trump administration would pursue aggressive federal deregulation. Its policies would ramp up investment in energy infrastructure and resources. It would also likely remove drilling restrictions in Alaska and the Gulf of Mexico and cut clean energy subsidies.

The objective would be to galvanise the US as a major oil and gas exporter, while Russia is sanctioned and displaced from EU markets. US crude oil exports reached a record in 2023, averaging 4.1 million barrels per day. The US was also the top exporter of LNG globally in 2023, averaging 11.9 billion cubic feet per day.

Deregulation of the oil and gas industry could boost US exports and lower oil prices, providing competition for Opec+ and the GCC.

Fourthly, a new Trump administration might reverse climate commitments – the US is the world’s second-top emitter of greenhouse gases – and reduce spending on climate risk mitigation and adaptation, and climate tech. This implies that temperatures would increase globally beyond 1.5C.

This year saw cities scorched by some of the hottest summers on record. The coming decade is likely to be even hotter. This could however offer an opportunity for GCC to increase its renewable, clean energy and climate tech exports.

The bottom line is that Maganomics means headwinds for the GCC. Regional geopolitical risks would grow, coupled with uncertainty on likely impacts.

To counter, the GCC states individually and collectively should maintain their strategic course. They should increase openness through trade and investment agreements, focus on greater economic diversification and regional integration, pursue green industrial policies and invest in renewable energies and climate tech.

Dr. Nasser Saidi’s comments appeared in an article in The National titled “GCC and Turkey’s trade agreement could create $2.4tn opportunity” published on 30th July 2024.

The comments are posted below.

“By liberalising trade in goods and services and investment, a GCC-Turkey FTA would potentially create one of the world’s largest FTAs of $2.4 trillion if fully implemented,” Nasser Saidi, a former economy minister and vice-governor of Lebanon’s central bank, told The National.

“This would require agreement on domestic content, GCC co-ordination with Turkey on trade facilitation to avoid long waiting times at borders, inappropriate fees, cumbersome customs formalities, and inadequate or unclear rules and regulations.”

“The GCC are now negotiating as a trading bloc, strengthening their negotiating power as compared to negotiating individually,” Mr Saidi said.

“Greater regional economic and financial integration implies greater economic diversification gains and generate higher economic growth.”

He said that the GCC and Turkey are to benefit from the deal as global trade is disrupted by sanctions and tariffs at a time when the US and China are at odds.

The deal will also have “positive spillover effects for other countries, such as Iraq and Syria, that can benefit as GCC-Turkey trade and investment links grow”, Mr Saidi said.

A GCC-Turkey free-trade agreement could also facilitate Brics membership and “add an important economic and geostrategic member”, to the 10-member bloc, Mr Saidi said.

The opinion piece titled “A GCC spaceport could bring galactic gains” was published in the Arabian Gulf Business Insight (AGBI) on 4th Jul 2024.

A slightly longer version of the article is posted below.

A GCC spaceport could bring galactic gains

It would support the development of the space economy in its multiple dimensions

The global commercial space economy is expected to grow, conservatively, to over $1.8 trillion by 2035 (from $630 bn in 2023) and become ubiquitous. As space technology costs rapidly decline, countries are developing space programs, investing in next generation launch vehicles (to land on the Moon and/ or Mars) and space exploration. Space transport and logistics systems, space-based production is becoming economical, and tourism more accessible [1]. Beyond spacecraft manufacturing (including launch vehicles), commercial space transportation and enabled industries [2], space technologies are integrated with day-to-day life. Such space-enabled activities are derived from three primary areas: Positioning, Navigation & Timing (PNT), Earth Observation (EO), and Satellite Communication & Connectivity (SatCom). In addition, worldwide government expenditures in space defence and security reached a historic high of over USD 58bn in 2023 and is accelerating in response to geopolitical fragmentation and Cold War II.

Space technologies support a growing proportion of earth-based activities ranging from day-to-day telecommunications or satellite-based internet connectivity in remote locations, GPS [3] for navigation (in cars or phones) to broadcasting (TV and radio via communications satellites). There are currently around 9,900 active satellites in various Earth orbits [4] – of these, 84% are located closer to earth (and are small satellites) and a large proportion are used to enable SatCom and EO.

The bottom line is that we are now increasingly space and satellite dependent. In 2001, only 14 nations operated satellites, but more than 90 now, driven by the reduction in the cost, size, weight, and power of satellites, with a larger number of smaller, distributed low-earth orbit satellites are being launched [5]. As the IoT becomes a reality, core earth-based infrastructure networks and systems – utilities, transportation, water, electricity, energy sources- will be increasing monitored, managed, integrated with and vulnerable to disruption from space (space wars are on the horizon!). Transport & logistics systems will become four-dimensional: land, water, air and space, and increasingly integrated.  For the GCC space transportation – the movement of objects, such as satellites and vehicles carrying cargo, scientific payloads, or passengers, to, from, or in space – will complement their massive investments in air and sea transport and logistics infrastructure.

The GCC Space Race: why the GCC should develop a Spaceport

While the first Arab satellite (Arabsat) was launched in 1985, the UAE is rapidly developing its space activities. UAE is one of the original eight signatories of the Artemis Accords (a set of principles for exploration and conduct in space; Saudi and Bahrain signed these in 2022), it launched the Hope probe in 2020, sent the Rashid Rover to the Moon in 2022, with the next big project being a mission to the main asteroid belt between Mars and Jupiter.

The GCC are increasing their investments in the satellite industry (UAE’s Yahsat [6] , Qatar’s Es’hailSat satellite company) and developing and implementing space policies. Kuwait and Bahrain launched their first satellites in 2021, while Oman hosts a satellite monitoring station. Bahrain, Qatar, Saudi Arabia and the UAE have focused National Space Agencies.  Oman announced its 10-year Policy and Executive Program in 2023 and a national space program. 

Given the growing strategic importance of the space economy, the GCC should build a GCC-Spaceport from which satellites and spacecraft can be launched as part of their space strategies. Indeed, Oman recently announced plans to develop such a spaceport to be operational by 2030 [7].

Developing the space economy should be part of GCC economic diversification strategies and investment in new technologies. A WEF-McKinsey report [8] revealed that investments touched all-times highs of more than USD 70bn in 2021 and 2022. The report forecasts five sectors will generate 60% of the global space economy by 2035: (a) supply chain and transport with increased efficiency and cost-effectiveness via fleet management and supply-chain visibility; (b) food and beverage: supported by efficient last-mile delivery; (c) state-sponsored defence for surveillance; (d) retail, consumer and lifestyle, for online e-commerce services; and (e) digital communications for better connectivity.

Space exploration, space-based production and supply chains are rapidly growing. From a sustainability and climate monitoring standpoint, space-derived data is increasingly used in environmental monitoring (tracking biodiversity, managing natural resources, assessing the impact of disasters) and mitigating climate change risks (e.g. monitoring crop development, map deforestation due to mining projects). As climate change accelerates space-based applications include climate modelling (using AI), storm forecasting, precision farming, autonomous driving, the ability to identify and quantify emissions sources as well as space-based solar power plants. In financial services space uses range from risk modelling to inform insurance policies, to using geolocation to track harvests, flows of goods and impact trading markets. Satellite data can also be used to monitor compliance with the growing ESG market and “green finance” investments.

The GCC’s geographic proximity to the equator provides a comparative advantage for locating a spaceport, providing low escape velocity from Earth. The GCC are also a geopolitically neutral location/hub, providing a reliable partner for the global space industry and countries wanting to access space, amid growing geopolitical tensions.

The GCC Space Port would support the development of the space economy in its multiple dimensions in the GCC, support commercial launch and space located activities, complement their land-sea-air transport infrastructure networks, as well as protect their space related assets. The focus on commercial space activities would also be complemented by commercial space economy financing: providing finance for satellites, space launches and space related activities.

Satellites and networks are increasingly becoming geostrategic assets, with infrastructure (both earth-based, sub-space and space based) becoming vulnerable to disruption or attack. A GCC Spaceport is integral to national security, providing the infrastructure for the launch of satellites, space vehicles as well as missiles.  

Footnotes:

[1] Virgin Galactic, Blue Origin, and SpaceX’s Crew Dragon spacecraft completed their first missions in 2021. Virgin Galactic and Blue Origin successfully completed seven revenue generating commercial flights (VG in early-Jun 2024). Tourism flights from SpaceX and Space Adventures, when launched, are expected to cost a fraction of the current amounts (a seat on a Virgin Galactic spacecraft is currently priced at about USD 450,000).

[2] Commercial space transportation and enabled industries include launch vehicle manufacturing and services industry, satellite manufacturing, ground equipment manufacturing, satellite services, satellite remote sensing, and distribution industries.

[3] GPS, or the Global Positioning Systems, were first designed by the US government as tools of war to guide missiles. Now, its public use is all around – we use it when exploring a new city or taking a car ride.

[4] https://orbit.ing-now.com

[5] On the downside, the large increase in space objects could become a risk to Earth’s orbit: in this regard, the Space Sustainability Rating initiative was launched to foster voluntary action by satellite operators to reduce the risk of space debris, on-orbit collisions, and unsustainable space operations.

[6] Recently signing an agreement for geostationary satellites with Musk’s SpaceX: https://www.agbi.com/tech/2024/07/yahsat-taps-musks-spacex-for-next-satellite-launches/

[7] https://www.thenationalnews.com/gulf-news/oman/2023/01/18/oman-is-building-the-middle-easts-first-spaceport/

[8] https://www.weforum.org/publications/space-the-1-8-trillion-opportunity-for-global-economic-growth/

In this interview with Al Arabiya aired on 9th June 2024, Dr. Nasser Saidi discusses his view that at a time of global fragmentation, decoupling from China and a New Cold War, the GCC countries can emerge as Middle Powers.

Watch the TV interview via this link.

The opinion piece titled “The GCC will benefit from a US-China chill” was published in the Arabian Gulf Business Insight (AGBI) on 4th Jun 2024.

A slightly longer version of the article is posted below.

The GCC will benefit from a US-China chill

The Gulf’s expanding strategic links with Asia mean higher growth at home

The US-China tech and trade war has ramped up with President Biden imposing new tariffs on Chinese goods and quadrupling of tariffs on EVs from 25% to a staggering 100 percent! The economic war will intensify in this US election year. Spillover into Europe and Chinese retaliation mean greater global trade and investment fragmentation and dislocation. Trade restrictions have surged, tripling since 2019 to more than three thousand last year, depressing trade growth. Growing protectionism and economic policies increasingly dominated by national security considerations are also negatively affecting capital flows and FDI. The growth of FDI is no longer aligned with growth in trade and GDP. FDI growth has stagnated to near zero since 2010, versus trade and GDP growing annually by an average 4.2% and 3.4% respectively.[1]

In sharp contrast to the gloomy global landscape, President Sheikh Mohamed Bin Zayed is visiting Korea and China to deepen economic, tech, trade, and strategic ties. The growing strategic links of the GCC with Asia & China reinforce three external sector growth drivers acting in conjunction with domestic growth drivers: foreign direct investment (FDI), trade policy reforms and liberalisation, and attraction of human capital. These support non-oil diversification and growth including tech, digital economy & innovation, green economy, and services.

Data from fDi Intelligence shows that greenfield FDI in the Middle East & Africa region, measured by number of projects, bucked the global trend, and grew by 19% yoy to 2658 in 2023 (roughly 16% of global FDI projects). While capital investment fell by 6% to USD 249.8bn in 2023 (due to the spike in green hydrogen projects in 2022), the number of projects and investment were up by 46% and 111% respectively compared to pre-pandemic 2019. Two major takeaways from the data are the growing investments into the Middle East & Africa region from China and the increasing focus on investments into clean energy and renewables.

As the US & EU’s economic war with China widens, the GCC and its Middle East hinterland is becoming an increasingly strategic partner for China. Not only have state-owned investors in the GCC invested more than USD 2.3 billion into China in 2023 (versus USD 100 million in 2022), but recent official trips to China by both Saudi Arabia and the UAE herald further deepening existing economic ties.

China was the top source of FDI from outside the region: at USD 42.1 billion, the country’s share was around 16% of total inflows. The pattern is also changing: Saudi Arabia was the largest recipient of Chinese FDI in 2023 (USD 16.8 billion), with a 10% share of the country’s total outbound capital investment. FDI into Saudi Arabia surged by 111% yoy to USD 28.8 billion; one-fifth going to the EV sector. Such investments not only support asset prices in both regions, but also facilitate adoption of innovative technologies and knowledge transfer into the non-oil sectors.

Investments into renewable energy accounted for just over 40% of total FDI capital investment in the region. China-based Human Horizons EV research, development, manufacturing, and sales joint venture facility in Saudi Arabia is one of the examples, a USD 5.6 billion deal aimed at boosting EV production in the region.

Not only has the region been attracting investments, but more interestingly, firms from the region are growing their global FDI footprint in line with its “Middle Powers” status. UAE’s Dubai World was among the top ten foreign investors in 2023 by project, while Mubadala Investment Group was the top-ranked foreign investor in 2023 by capex and Saudi Aramco was fourth in this list.

Ranging from investments into infrastructure projects (e.g., BRI projects, Etihad Rail in the UAE) and energy transition (e.g., in UAE’s power plants, EVs factories in Saudi Arabia) to Asian investment and asset managers/ family offices setting up operations in the region’s financial centres, economic and financial ties are deepening and widening. In the near-term, cooperation could range from industrial policy partnerships (given institutional and governance similarities in the role of SEZs and SOEs) to linking Saudi & UAE financial markets to Shanghai and Hong Kong, facilitating financial flows. The latter can fund the expansion of partnership in BRI projects, energy, clean tech, and climate tech (given China’s global dominance in green tech), sustainable funding for long-term projects and PPPs. From a medium to longer-term perspective, linkages could involve the adoption of the yuan for trade (the PetroYuan can be used both for energy and non-oil trade, payments and settlement), in addition the extension of the Cross-Border Interbank Payment System (CIPS, an alternative to SWIFT) and arranging central bank digital currency  transfers (facilitating cross-border flows). Considering the ambitions of the GCC and China, the setup of a GCC space port, exploration of space including commercial space travel would be another major potential avenue for cooperation.

GCC will benefit from global fragmentation and China disconnect and decoupling. GCC’s investment deals with China (and more broadly Asia), especially inward FDI, will support a higher growth path in the region (including in the non-oil sector) supported by trade liberalisation.

[1] UNCTAD research.

The opinion piece titled “The Gulf superstorm is a climate change omen” appeared in the Arabian Gulf Business Insight (AGBI) on 6th May 2024.

The article is posted below.

The Gulf superstorm is a climate change omen

As GCC nations diversify their economies, it is critical that new policies are green by design

Climate change is increasing the frequency of extreme weather events. That much is clear as superstorms wash over Oman, Saudi Arabia and the UAE, unleashing unprecedented levels of rainfall and high winds.

Dubai received more than 250mm of rain in one day last month, compared to its standard 140mm per year. The resulting floods overwhelmed infrastructure – roads, shopping malls and public spaces – severely disrupting local life and economic activity.

The floods also disrupted flights at Dubai International Airport, which fortunately proved resilient and was functioning two days after the rains. The government’s disaster recovery response, including Dubai Municipality deploying 2,500 workers to address emergencies, allowed the city to return to normality a few days later. Since then, the UAE has set AED 2 billion ($545 million) aside to pay for and rebuild flood-damaged homes, in addition to announcing an AED 80 billion drainage system as part of Dubai Economic Agenda D33.

So, what lessons can be learned from the storm?

The growing costs and risks of climate change require urgent action from both the public and private sectors.

In the Mena region, all countries aside from Libya and Yemen (given political issues) have submitted their nationally determined contributions reports, while only Kuwait and Palestine have submitted national adaptation plans to the UN’s Framework Convention on Climate Change.

Developing national frameworks means that both climate adaptation and climate risk mitigation policies must be implemented, along with supporting investments.

Extreme weather events and higher reinsurance costs lead to increased insurance premiums for consumers. Insured global losses from natural disasters totalled $95 billion in 2023. National adaptation plans lower the cost of insurance by increasing public awareness and providing accurate data on climate-related events and vulnerabilities.

In the Middle East and Central Asia region, the International Monetary Fund believes that climate adaptation and strengthening infrastructure resilience will require an annual investment of around 1.6 percent of GDP (roughly $80 billion in 2021).

Furthermore, the agency estimates the cost of enhancing private asset resilience at around 0.5 percent of GDP. These expenses are over and above the estimated annual $250 billion to $310 billion needed to mitigate climate change.

To add to these concerns, those nations with greater financing needs are also the ones least prepared, either due to fiscal limitations, high debt burdens or weak financial development.

Climate change requires businesses to redesign their risk management plans and tools. Are business continuity and business disaster recovery plans climate resilient? Extreme climate events can lead to a reduction in revenue or potential bankruptcy.

BloombergNEF, a research organisation, found that 65 percent of more than 2,000 companies failed to identify assets and operations that may be vulnerable to physical risks. Even fewer companies conduct financial assessments of climate-related risks.

Businesses are also vulnerable to climate-related legal risks. Currently more than 2,500 climate lawsuits are recorded globally. About 55 percent of the 549 lawsuits outside the US have had a climate-positive ruling, according to the London School of Economics.

Climate risk, which encompasses physical and energy transition risks linked to climate change, should be measured and priced. The physical risks are growing and could result in loan and balance sheet losses for banks. Often, the damage is under-reported.

The Task Force on Climate-Related Financial Disclosures is pushing corporations to increase exposure reporting. Climate risk pricing should be required by central banks and financial regulators and translated into risk-based financing and loans.

The GCC countries are currently deploying industrial policies to support economic diversification. It is critical that these policies are green by design and imbued with climate adaptation and mitigation measures.

Climate risk mitigation includes energy transition investment and fossil fuel asset de-risking, focused on clean energy, electric mobility, carbon capture and storage and clean tech. These innovations can be private sector-driven.

There are many ways to build climate-resilient infrastructure: through public investment, public-private partnerships, or market-based private sector incentives (such as carbon pricing).

Examples include green hydrogen, solar-powered desalination and district cooling. The GCC already has a comparative advantage in these exportable technologies.

The Gulf states are also applying artificial intelligence to climate action. Abu Dhabi’s G42 developed Jais Climate, the world’s first bilingual large language model dedicated to climate and sustainability, “to inform, inspire and drive awareness about climate change and sustainability”.

AI and machine learning enable complex and multi-dimensional data to be handled more adeptly, which lends itself to climate economy modelling and the forecasting of effective action to help combat climate change.

Climate adaptation, energy transition and green economy policies will drive growth in renewable energy and clean technologies and trade. They can play a critical role in transforming the oil-producing economies and output structures.

Dr Nasser Saidi is the president of Nasser Saidi and Associates. He was formerly chief economist and head of external relations at the DIFC Authority, Lebanon’s economy minister and a vice-governor of the Central Bank of Lebanon

In this interview with Al Arabiya aired on 17th April 2024, Dr. Nasser Saidi discusses the Global Economic Diversification Index and Saudi’s rankings in the backdrop of recent economic and structural reforms aimed at increasing non-oil economic activity.

Watch the TV interview below:

📌 في إطار سعي الحكومات لتنويع اقتصاداتها بعيداً عن #النفط.. #السعودية الأسرع نمواً على مؤشر التنوع الاقتصادي

◀ حوار @Lara_bn ورئيس شركة ناصر السعيدي وشركاؤه ناصر السعيدي حول معايير المؤشر ومتصدري القائمة في الخليج #العربية_Business pic.twitter.com/Pl8nuVlCm9

— العربية Business – السعودية (@AlArabiyaBN_KSA) April 17, 2024

The opinion piece titled “Economic diversification is the GCC’s top priority” appeared in the Arabian Gulf Business Insight (AGBI) on 3rd April 2024.

The article is posted below.

Economic diversification is the GCC’s top priority

Saudi Arabia has taken great steps to diversify its economy – Kuwait must follow suit

It is a paradoxical truth that nations highly dependent on natural resources tend to be poor economic performers.

Such countries are exposed to ongoing adverse shocks, including price jolts, volatile demand and supply, and natural disasters. These factors can stir up macroeconomic instability and higher economic risks – otherwise known as the “natural resource curse”.

The demand and supply shocks that occurred during the Covid-19 pandemic, as well as those caused by ongoing wars and the planned energy transition, increased the urgency for fossil fuel exporters to diversify their economies and mitigate risks.

Such strategies also avert the crisis of being left with lower-valued or stranded assets.

Robust and extensive economic diversification is a must-have policy for the commodity-producing nations of the GCC. It is essential for the region’s macroeconomic stability and job creation.

The Global Economic Diversification Index (EDI) measures diversification across three dimensions including output, trade and government revenue for 112 nations, over the period 2000 to 2022. Its underlying 25+ indicators are all quantitative (i.e., no survey or perception indicators) and publicly available, resulting in a quantitative benchmark that can be replicated.

The latest issue of the EDI, released at the World Governments Summit in February, finds that the top-ranked nations – the US, China and Germany – are well-diversified and tend to be resilient, even amid unexpected shocks like the Covid-19 pandemic.

The high commodity or natural resource-dependent nations, where the diversification process has been slow and stagnant, languish at the other end of the spectrum. Four nations – three from Sub-Saharan Africa and Kuwait from the Mena region – remain in the bottom 20 ranks of the EDI over the period 2000-2022.

However, the emergence of other countries from the bottom quartiles to become more diversified, such as Saudi Arabia, underscores the rewards of reforming.

Though commodity-dependent nations have made gains in output and trade diversification sub-indices over time, reforming, introducing broad-based taxation or instituting new tax regimes for fiscal sustainability is more problematic, and is holding back oil exporters from making gains in government revenue diversification.

For example, tax revenue as a percentage of GDP in Norway, which is highly ranked in the revenue sub-index, stands at around 30-plus percent versus single digit readings in Bahrain and Kuwait.

The effort necessary for lower ranked nations to catch up in the post-Covid era will be tougher, given not only the long-term scarring effects and output loss induced by the pandemic but also due to limited fiscal space and high debt burdens.

However, a pandemic silver lining effect can be seen in the accelerated adoption of digital technologies, resulting in societal gains such as higher labour force participation rates and productivity gains – especially in nations with existing basic IT infrastructure.

The EDI 2024 edition includes three digital-specific indicators in the trade sub-index, capturing growth of the digital economy.

One main finding is that if digital adoption is delayed existing divides can widen, leading to deteriorating outcomes and prospects in the absence of an acceleration of reforms.

Another is that digital economy investments tend to improve trade diversification, notably through the ability to export services.

It is noteworthy that the UAE and Saudi Arabia were the 8th and 24th largest exporters in world trade of commercial services (excluding intra-EU trade) in 2022, according to the World Trade Organisation.

The GCC region has achieved significant progress in economic diversification over the past two decades. The UAE and Bahrain have higher EDI scores compared to their peers, while Saudi Arabia and Oman have both substantially improved their scores relative to 2000.

The implementation of reforms at a much more aggressive pace after the pandemic has helped to improve GCC rankings across the board. Such initiatives include incentives to invest in new tech sectors, broadening tax bases, trade liberalisation through free trade agreements and improvements to regulatory and business environments, while facilitating rights of establishment and labour mobility. Gulf governments have also been diversifying their “national asset” portfolios, by investing in economic institutions. These reforms improve diversification across all three pillars (output, trade, government revenue) and will strengthen long-term economic resilience.

As countries adapt to and mitigate climate change risks, energy transition and green investments such as renewable energy can play a key role in transforming economies and output structures.

Fossil fuels are likely to remain in the global energy mix for decades, but a potential sustained decline in demand necessitates the roll-out of diversification policies at the earliest.

With many oil-exporting nations in the Middle East already diversifying energy sources, potential exports of clean energy – such as hydrogen – from these nations can widen their export base (both of products and trade partners).

Regional integration would support diversification efforts, as would increasing intra-regional trade in the Mena region.

Gulf-wide trade agreements would lower costs, thereby generating demand for specific goods and services outside traditional commodity exports.

The prospect of regional integration creates a massive opportunity to link domestic, regional and global value chains, supporting diversification efforts.

To paraphrase the late great author Lewis Carroll, in a resource-rich country “you have to run twice as fast to get anywhere”.

Dr Nasser Saidi is the president of Nasser Saidi & Associates. He was formerly chief economist and head of external relations at the DIFC Authority, Lebanon’s economy minister and a vice governor of the Central Bank of Lebanon

With additional contributions from Aathira Prasad, director, macroeconomics at Nasser Saidi & Associates

Dr. Nasser Saidi’s comments appeared in an Arab News article titled “Diversification strategies paying off for GCC economies” published on 9th March 2024.

The comments are posted below.

Speaking before the latest PMI report, Nasser Saidi, former Lebanese economy and trade minister and founder of Nasser Saidi & Associates told Arab News: “The Gulf is benefiting from investments that have been made over time.”

He said: “I think one of the critical sectors is transport and logistics,” further stating how “many countries don’t have the airports, transport and facilities that the Gulf has developed, particularly the UAE, Qatar, and increasingly now Saudi Arabia and to a lesser extent Oman.”

Saidi continued: “As a result of it, tourism has developed very rapidly, and when you also open up the economy to tourist visas, facilities to establish businesses, and particularly you deal with COVID-19 very effectively, and you open up when the rest of the world was closed — the combination of these factors delivers the growth that we are witnessing now.”

The economist believes that one of the undervalued aspects that contributed to non-oil growth is the fact that GCC health systems performed very well during COVID-19.

Saidi believes that the other big story for non-oil sector growth is the investment in renewable energy in the region.

“Despite the odds, these are the countries that are investing the most and the fastest in renewable energy because they have the advantage of solar power,” he told Arab News, adding: “They’re looking at this as a new opportunity of being able to go green and particularly (with) renewable energy, things like district cooling, things like a whole number of climate tech industries.”

The economist said: “Desalination is a perfect one. The combination of these factors in addition to the further opening of the economies with free trade agreements are fostering growth.”

Dr. Nasser Saidi’s joined as a keynote speaker presenting on “Regionalised Globalisation & Building Markets to Overcome Disruptions“ at the DIFC’s “The Pursuit of Alpha” event held on 21st of February 2024.

Dr. Nasser Saidi participated in the panel discussion hosted by the Arab Gulf States Institute in Washington (AGSIW) related to the launch of the IMF report titled “Economic Prospects and Policy Challenges for the GCC Countries” held as a webinar on Jan 17th, 2024.

After exceptionally strong economic expansion in 2022, growth in the Gulf Cooperation Council countries slowed in 2023 largely as a result of cuts in oil production. Nonhydrocarbon growth remained robust driven by higher domestic demand, increased capital inflows, and ongoing reforms. Unemployment rates continued to decline, while inflation remained well contained.  

The challenging global and regional situation creates an uncertain outlook for the GCC countries in 2024. The commitment to economic and financial reforms bodes well for continued expansion of the nonhydrocarbon sector, but uncertainty in the global oil market, the ongoing conflict in Gaza, and the trajectory of U.S. monetary policy all present risks to the outlook. 

AGSIW was pleased to host a discussion of the International Monetary Fund’s report on Economic Prospects and Policy Priorities for the GCC Countries. The discussion focused on the economic outlook in the region and the policies that need to be implemented to navigate the challenges posed by current global and regional uncertainties and the longer-term need to diversify economies and reduce reliance on fossil fuel revenue.

Watch the discussion below:

The opinion piece titled “GCC can emerge as ‘Middle Powers’ in second Cold War” appeared in the Arabian Gulf Business Insight (AGBI) on 9th January 2024.

The article is published below.

GCC can emerge as ‘Middle Powers’ in second Cold War

Three factors will enable the GCC to benefit from the fragmentation

We are living in a second Cold War. A multipolar world is evolving as governments adopt policies that are leading to increased economic and financial fragmentation.

Trade, foreign direct investment and financial flows are increasingly encumbered by regulatory and legal restrictions.

The number of global trade restrictions introduced each year has nearly tripled since the pre-pandemic period, reaching almost 3,000 last year, according to the International Monetary Fund.

The result is a restructuring of global supply chain networks. Political decisions dubbed “friend-shoring”, “near-shoring” or “on-shoring” imply increased geo-political fragmentation and de-globalisation.

While the speed of globalisation slowed after the 2008 financial crisis, a major trigger of de-globalisation was the Trump administration’s policy of “China decoupling”.

This was subsequently relabelled “China de-risking” and described in Washington as a policy that aimed to prevent Beijing from emerging as a global tech power.

This tech war, which started with restrictions on access to high-performance chips, has expanded. Now barriers have been imposed on trade, foreign direct investment and financial flows.

The Russia-Ukraine war, the conflict in Gaza and the spillover effects have widened the geo-economic-political fragmentation, resulting in the second Cold War.

Two blocs, but allies don’t always agree

Two major blocs are emerging: the US and its allies, and China-Russia and their allies. Other countries fall into a multi-faceted, multi-interest grouping.

Even within the blocs, there is increased political fragmentation and divergence of interests – notably between the US and the European Union. The upshot of geo-strategic confrontation is a ratcheting up of military spending, at the cost of addressing economic development and investment.

Strategic mistakes, miscalculation and events may lead to the Cold War becoming hot.

National security narratives are increasingly dominating economic policy decisions. Trade is weaponised, while investment (inward and outward), finance and payment systems are affected. National security interests imply a re-engineering and redesigning of food, energy and tech supply chains towards greater self-reliance.

National security logic has also led to the weaponisation of the US dollar, imposing restrictions on its use in international payments and the freezing of “unfriendly” or “enemy” foreign assets.

This threatens dollar-based international payments and the financial architecture built over the past decades of global financial liberalisation.

The same logic is leading to the weaponisation of access to and diffusion of modern tech and AI, widening the global tech divide and reducing productivity and general growth.

The new Cold War could result in a massive 7 percent loss of global GDP according to the IMF, as a result of global supply chains becoming less efficient, inward-looking self-sufficiency policies being disguised as re-shoring, and restrictions on access to tech and critical resources such as rare earths.

The GCC as emerging ‘Middle Powers’

For the GCC countries, this ominous scenario has a silver lining. It offers a geo-strategic opportunity, allowing them to emerge as Middle Powers between the two global blocs.

The GCC has built its soft power through successfully hosting international events and diplomatic mediation. Next up is the building of economic and financial power.

Three strategic factors represent the building blocks that will enable the Gulf states to benefit from the fragmentation.

First is the GCC’s geography between Africa and Asia and the nations’ promising demographics.

Second, the member states are unique in being old and new energy powerhouses.

Third, the economic diversification of the GCC – combined with investments in trade facilitating logistics, transport, and infrastructure – means the six countries are integrated in global supply chains.

The GCC nations need to enhance and develop economic and financial tools to enable them to become effective Middle Powers. A priority is to accelerate their economic and financial integration, starting with core infrastructure to achieve economies of scale and greater efficiency.

GCC economic and financial integration is a building block for overhauling and implementing the GCC common market, allowing the Gulf countries to negotiate as an empowered economic bloc.

Already, GCC members are participating in international blocs – Brics+ and the India-Middle East-Europe Economic Corridor – along with trade deals that include a likely GCC-China agreement in 2024 and various comprehensive economic partnership agreements.

Cop28 has highlighted that climate change will pose geo-strategic challenges in the coming decades.  The GCC states possess the technologies and financial resources to make regional and global investments in climate adaptation, and building and retrofitting infrastructure to make it climate resilient.

These tools underpin the evolving “regional globalisation” policies of the GCC, which will lead to the growing economic integration of the Mena region and African countries. This regional globalisation will reduce the risks of the new Cold War.

In this interview with Al Arabiya aired on 3rd December 2023, Dr. Nasser Saidi discusses the topic of rising renewable energy investments and the potential role for GCC nations in the backdrop of COP28.

Watch the TV interview at this link as part of the related news article:

The opinion piece titled “The Middle East needs a bank for climate adaptation” appeared in the Arabian Gulf Business Insight (AGBI) on 22nd November 2023.

The article is published below.

The Middle East needs a bank for climate adaptation

Given Mena’s high climate risk exposure, the GCC should seize the initiative

Our planet is sitting on a time bomb. Global heating is pushing the world closer to climate tipping points where change is irreversible.

Current climate action plans fall way short of engineering the 43 percent reduction in emissions required by 2030 to limit temperature increase to 1.5C.

It is unlikely that countries will meet their net-zero emission commitments and deploy sufficient resources to prevent, let alone reverse, climate change.

The Mena region has already crossed the 1.5C threshold, with visible and growing climate-induced stresses: heightened desertification, lower agricultural productivity, persistently higher temperatures, water stress, rising sea levels, and an increasing frequency and strength of Mediterranean hurricanes, so-called “Medicanes”.

All these grim factors are stoking migration, producing socioeconomic pressures and increased inequality across the region, with poorer countries unable to combat climate change.

Addressing adaptation

To address the challenges, we need to shift to climate adaptation. This means moving beyond policies and investment which focus on the “energy transition”, such as clean energy, electric vehicles, and energy efficiency.

Legacy infrastructure, such as power systems, ports, airports and transport systems, water and waste management, and housing have not been designed to deal with climate change and related extreme weather.

This is why when dams collapsed in Libya more than 11,000 died; this is why floods displaced 30 million in Pakistan.

New infrastructure must be planned, designed, built and maintained to be climate resilient and deliver climate resilient services.

In addition, existing infrastructure – including buildings and housing stock – must be urgently retrofitted for the better protection of life, habitats and assets.

Every $1 invested in climate adaptation can yield up to $10 in net economic benefits – as countries become resilient against natural disasters and benefit from new climate adaptation technologies that lift productivity and produce environmental benefits.

The four-pillar action plan from the UAE’s Cop28 president Sultan Al Jaber includes fast-tracking the energy transition by slashing emissions before 2030, transforming climate finance to make funding more affordable and accessible, and protecting nature, lives, and livelihoods with a focus on inclusivity.

It calls on donors to double adaptation finance by 2025, and emphasises the urgency of donor countries honouring their commitments by making good on the $100 billion pledge this year.

Climate risk mitigation and adaptation investments complement each other, but climate adaptation requires even higher investment levels, over longer horizons, with large upfront capital expenditure, and the retrofit of existing infrastructure.

Current proposals, which have featured an acrimonious debate around a blueprint for a “loss and damage” fund for climate justice, pale in comparison to what is needed.

The bottom line is that developing countries, excluding China, require some $2 trillion per year by 2030 in climate funding. Where will the finance come from?

Finding the finance

Given existing high levels of debt and interest rates, many governments do not have the fiscal and debt space to finance adaptation.

Relying on public spending to fund de-carbonisation and adaptation investment on this scale would cause a substantial run-up in debts, possibly to the tune of 45-50 percent of GDP for a large, high-emitting emerging market. This is an unsustainable option.

Poor and developing countries face a daunting challenge. They are unable to adapt, which leads to further climate disasters and a growing divide with advanced countries.

The scale and urgency of climate action requires new institutional arrangements and increased reliance on the private sector as a source of finance and technology.

A dedicated, independent and global climate bank is needed. Given the high climate risk exposure of the Mena region, and the GCC at its core, the GCC should seize the initiative.

It should set up an International Climate Bank to provide finance (including grants and concessional finance) for climate resilient infrastructure and climate tech, providing project finance and funding for public private partnerships.

The founders of the climate bank would include the GCC and partner countries, sovereign wealth funds, and development funds, along with multilateral partners (Asian Infrastructure Investment Bank, Islamic Development Bank and other development banks) and private stakeholders.

A major focus should be on the private sector.

This should be served by an International Climate Finance Corporation, which aims to increase research and development and funding of climate tech, to de-risk climate finance, and scale up by using innovative financial instruments such as green insurance and fintech.

The International Climate Bank could set up specialised funds and tap international capital markets through climate bonds and sukuk.

The new body could become a global financial powerhouse funding a new growth and development paradigm, based on investment and job creation in green and climate tech boosted by AI, aiming to be inclusive in addressing the needs of developing economies.

Dr. Nasser Saidi joined a panel discussion titled “Future Prospects for Korea and the Middle East”, after presenting on the topic “The Middle East in a fragmented multi-polar world” at the 19th Korea Middle East Cooperation Forum held in Doha on 6 November 2023.

Dr. Saidi’s presentation can be viewed in the below video from 1:09:50 to 1:29:50, and the panel discussion continues till 2:25:00

Dr. Nasser Saidi was invited as a keynote speaker at a meeting of the International Jurists held in Dubai on 20th October 2023.

Dr. Saidi’s presentation, titled “State and Future of the GCC Economies: A Story of Transformation“, focused on regional macroeconomic and geo-political developments, with a special focus on the Gulf Falcons. The talk also highlighted the GCC’s economic transformation and concluded with how the Gulf Falcons would drive regional structural transformation.

The opinion piece titled “The Gulf is on track to lead global climate tech” appeared in theArabian Gulf Business Insight (AGBI) on 3rd October 2023.

An extended  version of the article is published below.

The Gulf is on track to lead global climate tech

We need to focus on mitigating the risks and adapting

The catastrophe in Libya’s Derna valley basin is a deadly reminder of how climate change is increasing the frequency and strength of Mediterranean hurricanes. 

Pakistan’s floods were the worst disaster in a decade, uprooting 33 million people. Both events overwhelmed ill-designed, badly maintained legacy infrastructure. Everywhere on the globe faces similar threats.

The Middle East and North Africa (MENA) is one of the regions most severely affected by what the UN recently called climate breakdown.

This will involve battling extreme weather events, rising temperatures, increased water stress, rising sea levels, falling rainfall, dwindling agricultural output and growing desertification.

MENA is already the ‘most water-stressed region in the world’, where 83% of the population is exposed to “extremely high” water stress [1], with an increasing frequency of climate disasters (such as droughts and floods) destroying habitats. The IMF estimates that a 1° Celsius increase in temperature in five of the region’s hottest countries [2] would lead to a massive decline in per capita economic growth of around 2 percentage points.  High population growth rates and rapid urbanization levels escalate the risks and challenges of climate change faced by the governments and populations of the region.

Despite global and regional energy transition commitments, it is delusional to believe that the human species will overcome divisive geopolitics and contradictory interests and undertake the radical strategies to limit warming to 1.5C by 2030, or 2.5C by 2050. 

We need to focus on mitigating the risks and adapting. This means moving beyond renewable energy, mobility and energy storage to massive, sustained investment in climate-resilient infrastructure and related technologies.

The global urban infrastructure investment gap alone is estimated to be over US$4.5 trillion per year, with a premium of 9-27% required to make infrastructure low carbon and climate resilient, according to the World Bank. Climate resilient infrastructure has to be planned, designed, built, operated, and maintained in a way that anticipates and adapts to changing climate conditions to provide cities and communities with climate resilient services.

Water management

Global water demand is projected to increase by 20-25 percent by 2050, and it is likely that 100 percent of the MENA region’s population will live with “extremely high” water stress by 2050. If not countered, this could lead to growing political instability and potential water wars.

The impact of water stress needs to be addressed through regional co-operation and management for common water resources, such as the Nile and Euphrates.

At the national level, policy tools are required. Rational, economic pricing of scarce water resources will underpin more efficient management of everyday use. The deployment of climate tech investments to increase scarce resources is imperative.

Desalination exports

Desalination is the main answer to avoid depleting non-renewable aquifer resources. The GCC has a comparative advantage: it accounts for more than 50 percent of global water desalination capacity. In addition, the GCC Secretariat anticipates that the Gulf will boost such capacity by 37 percent over the next five years, by investing $100 billion. 

Desalination is increasingly powered by solar energy, helping both energy and water security.

Saudi Arabia’s giga-project Neom is developing a reverse osmosis desalination facility entirely powered by renewables, while there are other solar-powered desalination plants in the UAE and Oman. 

Tried and tested in the GCC, this exportable technology can address the growing global water availability gap and water stress.

Increasing temperatures

Rising temperatures drive up demand for air conditioning, with cooling representing up to 70 percent of peak energy consumption. As a result, ownership will increase from 37 percent of the global population today to more than 45 percent in 2030. But this is a legacy technology.

District cooling (equivalent to district heating) delivers chilled water to buildings and provides sustainable cooling powered by renewable energies. It is up to 10  times more energy-efficient and cost-effective than traditional air conditioners.

The GCC states have pioneered and implemented district cooling as an integral part of their public utilities’ infrastructure, real estate and urban developments. The model and technology could be exported to the rest of Mena and to rapidly growing and urbanising Africa, South Asia and elsewhere. 

District cooling can be deployed in new urban developments and existing buildings can be retrofitted and connected to necessary plants. Increased global adoption could save $1 trillion in energy costs by 2035.

Furthermore, it is incorporating new technologies, including digitalisation and AI, along with integrating renewable energy sources into existing models, supporting the energy transition.

Tackling food security

The MENA region’s southern and eastern Mediterranean region has witnessed a decline in total precipitation, by around 8.3% per decade in the period 1980-2022, directly threatening agriculture-based communities and food security. The rest of the region is facing the existential threat of increased desertification.

To partially adapt and address food security issues, the highly food-importing dependent GCC nations have been massively investing in desert agriculture technologies and Agritech [3] to increase domestic production, with hydroponics and seawater farming rapidly expanding. Shifting to a climate-smart approach to agriculture will be key for the region, to achieve food security and adapt to warming climate conditions. Again, the GCC has developed the ability to export desertic agriculture and Agritech to the wider region.

Financial resources

All this will require substantial, sustained financing. The GCC sovereign wealth funds are among the largest global investors in renewable energy.

The region’s international financial centres are gradually developing instruments that can facilitate access to finance for indigenous climate tech companies.    

These vibrant, innovative private businesses should also be incentivised by reducing barriers to entry, streamlining and reducing regulations. They also need access to climate data.

With financial firepower exceeding $4 trillion, the Gulf can potentially become the location for global climate finance and tech, as well as the latter’s main exporter. To increase their “soft power” and as major capital exporters and aid providers, the GCC should integrate climate tech and finance into their foreign trade, aid and cooperation programmes.

As the UAE prepares to host COP28, it is anticipated that the GCC’s wealth funds, financial markets and active private sector will increasingly diversify their investments into resilient infrastructure and climate tech. 

Adapting in these ways to the risks the region faces is not only the right response; it will increase mobility and clean energy adoption within MENA and around the world.

Footnotes:

[1] According to the World Resources Institute, globally the five most water-stressed countries are Bahrain, Cyprus, Kuwait, Lebanon, Oman and Qatar.

[2] Bahrain, Djibouti, Mauritania, Qatar, and the UAE.

[3] According to a joint report by the Sharjah Research Technology and Innovation Park and Deep Knowledge Analytics (Nov 2022), UAE’s Agritech sector comprises 36% indoor farming, 15.9% precision agriculture, and 15% agri inputs. Around 65% of Agritech firms in the UAE are micro-sized (with less than 50 employees).

Dr. Nasser Saidi was invited to join as a guest speaker at the Abu Dhabi Business Events Forum held in Abu Dhabi on 26th September 2023.

Dr. Saidi’s presentation, titled “Global Macroeconomic Developments: Impact on Travel & Tourism / MICE“, focused on the global and regional macroeconomic developments, with a special focus on the drivers and major headwinds. The talk also centred on the GCC’s economic transformation and the role played by tourism/ MICE before concluding with slides on the opportunities and risks for the sector in the Middle East.

What Huawei’s latest fall line means for the tech giant?

Dr. Nasser Saidi was interviewed on CNN’s Connect the World with Becky Anderson on the 25th of Sep 2023 where he shared his views on Huawei’s latest technology, US-China tech (& trade) war and China’s increasing linkages with the Middle East.

Part of the interview was published on the CNN website: https://edition.cnn.com/videos/world/2023/09/25/exp-huawei-becky-anderson-nasser-saidi-live-09259aseg1-cnni-world.cnn

The GCC must take leadership at a time of global fragmentation and successfully lead the MENA region into becoming an inter-linked trade and investment hub. This, while unfolding the GCC strategy of pursuing globalization as a regional group through new trade and investment agreements, foreign aid, and direct and portfolio investment. We envisage two complementary ways to move forward, away from political differences & correcting failures of past implementation: one, implement the GCC Common Market & two, GCC should develop new deep trade agreements – both much more extensive in scope than just trade & investment. 

Our article titled “A Mercantile Middle East” was published in the IMF’s Finance and Development’s Sep 2023 issue. 

A Mercantile Middle East

By Nasser Saidi and Aathira Prasad

The world has witnessed a tectonic shift in global economic geography and trade toward emerging Asia in the past two decades. However, the Middle East and North Africa (MENA) region has remained one of the least dominant, accounting for just 7.4 percent of total trade in 2022. The region’s trade is characterized by a relatively high concentration of exports in a narrow range of products or trading partners, limited economic complexity, and low participation in global value chains.

Even so, commodity-dependent nations in the MENA region have made substantial gains over time, specifically in trade diversification, as shown by the Global Economic Diversification Index, which tracks the extent of economic diversification from multiple dimensions, including economic activity, international trade, and government revenues.

The MENA region’s total trade in goods as a percent of GDP (an indicator of openness) was 65.5 percent in 2021, indicating a relatively open regional economy. Yet, as shown in Chart 1, intraregional trade is low, representing only 17.8 percent of total trade and 18.5 percent of total exports, despite a common language and culture as well as geographic proximity. The six oil-exporting Gulf Cooperation Council (GCC) nations—Saudi Arabia, Bahrain, Oman, Qatar, Kuwait, and the United Arab Emirates—account for the bulk of intraregional trade.

Their dominance of intraregional trade suggests that the Gulf nations could become a catalyst for regional trade integration, helping lower barriers to trade, improving trade infrastructure, and diversifying the region’s economies.Greater integration of non-GCC Middle East nations with the GCC will lead to more intraregional trade and greater global integration (via the GCC’s existing global linkages and participation in global value chains). With the growing global economic integration of the GCC nations and their concerted effort in supporting the region’s other nations (via increased trade and investment deals with Egypt and Iraq, for example), they can be a conduit for greater integration of the rest of the region into world trade.

Region’s laggards

Why have non-GCC countries lagged when it comes to intraregional trade? In part it is a failure of the MENA region’s multiple regional trade (and investment) agreements. The share of intragroup exports in the Arab region, excluding the GCC, has remained below 2 percent of their trade flows, partially a reflection of regional fragmentation, violence, and wars since the mid-1990s and following the Arab Spring in 2011. The region comprises a group of nations characterized by significant political differences, and this is reflected in trade patterns as well. For example, the orientation of the Maghreb nations of North Africa has been toward Europe, with the regional Euro-Med program and agreements supporting such linkages.

A contributing factor to the stagnation of intraregional trade is the lack of growth of trade in services. MENA services trade has ranged between 4 and 6 percent of global services trade in the past two decades. This pales in comparison with the Organisation for Economic Co-operation and Development countries, which account for more than two-thirds of global services trade. Within the MENA region, the GCC accounts for the bulk of services trade, with the largest shares in relatively low-value-added sectors like travel (and tourism) and transportation. The services trade is held back by restrictive policies that limit entry in sectors dominated by state-owned enterprises, such as telecommunications, or that impose high fees and license requirements, especially in professional and transportation services.

Such restrictive policies, along with structural deficiencies, encumber MENA nations’ trade both within the region and globally.

MENA nations apply more, and more restrictive, nontariff measures than in any other region. These almost doubled between 2000 and 2020. Lack of uniform standards and harmonization, pervasive red tape, and corruption compound the effects of these barriers. Business and investment barriers include cumbersome licensing processes, complex regulations, and opaque bidding and procurement procedures.

MENA as a region underperforms on trade facilitation measures to ease the movement of goods at the border and reduce overall trade costs, though there are wide disparities across the region. The quality of trade- and transportation-related infrastructure is significantly lower in the non-GCC MENA nations. Furthermore, delays at the port result in excessive “dwell times” (delays of more than 12 days) for imported goods in some MENA countries. Algeria and Tunisia delays average about 20 days versus less than five days in the United Arab Emirates (among the top three globally).

Knocking down barriers

Overcoming these impediments to wider trade for the region requires removing barriers to trade and investment, diversifying the region’s economies, and improving infrastructure.

A new generation of trade agreements, including more knowledge-intensive services, would not only support export diversification policies but would also help bridge gender gaps, improve women’s economic empowerment, and subsequently result in more inclusive economic growth and integration.

The pandemic has underscored the need for trade diversification (both of products and partners) and development of new supply chains. Although the GCC’s oil trade remains dominant, its members have embarked on various policies and structural reforms, such as increasing labor mobility and opening capital markets across borders, to diversify away from overdependence on fossil fuels and associated revenues. This has resulted in diversification of both the output mix (for example, increased focus on manufacturing) and the export product mix (for example, more services exports) alongside an evident shift in trade patterns toward Asia and away from the United States and Europe. More recently, the war in Ukraine further highlighted the plight of food-importing nations in the Middle East in the context of food security. (Ukraine and Russia accounted for a third of global wheat exports; Lebanon and Tunisia were importing close to 50 percent of their wheat from Ukraine.)

The Global Economic Diversification Index trade subindex shows that the commodity-dependent nations with the most improved scores over time have either reduced dependence on fuel exports, reduced export concentration, or witnessed a massive change in the composition of exports. An example of the latter is Saudi Arabia’s increased focus on medium- and high-tech exports, which rose as a share of overall manufacturing exports, to almost 60 percent right before COVID from less than 20 percent in 2000. The MENA region as a whole has already made some headway toward diversification, as shown in Chart 2.

The GCC nations have benefited from the recent rise in commodity prices, but the pandemic reinforced strategies, including the development of free zones and special economic zones, to diversify into new sectors. These policies range from attracting investment (including foreign direct investment) to higher-value-added, higher-tech manufacturing; investing in new sectors (renewable energy, fintech, artificial intelligence); and opening markets to new investors and investments (as is evident in the recent spate of initial public offerings in both the oil and non-oil sectors). These reforms help expand markets (within the MENA region and toward Africa, Europe, and South Asia), while up-and-coming sectors like renewable energy and agritech offer sustainable ways of expanding the extensive and intensive margins of trade and generating new job opportunities.

Engine for regional integration

Full achievement of the benefits of regional trade integration requires a reform of trade policies to break down barriers, including restrictive nontariff measures, complex regulation, corruption, and logistical roadblocks.

Integrating the MENA region’s trade infrastructure (ports, airports, logistics) with that of the GCC would lower costs and facilitate intraregional trade, leading to greater regional integration and generating gains from trade for all parties. The GCC can lead the economic integration and transformation of the region via investments in hard infrastructure and trade-related infrastructure and logistics, in addition to developing an integrated GCC power grid. A GCC renewable-energy-powered, integrated electricity grid could extend all the way to Europe, Pakistan, and India.

The GCC nations have an opportunity to benefit from global decoupling and fragmentation with their unfolding strategy of pursuing globalization as a regional group through new trade and investment agreements, foreign aid, and direct and portfolio investment. The ongoing disengagement from long-standing regional conflicts, in Israel, the West Bank and Gaza, Yemen, the Islamic Republic of Iran, Libya, and elsewhere, and the forging of new links (diplomatic opening such as the Abraham Accords) reduce the geopolitical risks of promoting regional trade and investment. The GCC can use this as an opportunity to shape the MENA region into an interlinked trade and investment hub. The GCC’s accelerated new free trade negotiations with key partners in the MENA region, including Egypt and Jordan, and in Asia, including China and South Korea, could become the cornerstone of this transformation. The United Arab Emirates have already signed comprehensive economic partnership agreements with India, Indonesia, and Türkiye covering services, investment, and regulatory aspects of trade.

There are two complementary ways to move forward. One is to implement the GCC Common Market, invest in digital trade, lower tariff and nontariff barriers, and reduce restrictions on trade in services, along with reforms to facilitate greater mobility of labor and enhance financial and capital market linkages. Second, the GCC should develop new deep trade agreements with the other MENA countries, going beyond international trade to encompass agreement on nontariff measures, direct investment, e-commerce and services, labor standards, taxation, competition, intellectual property rights, climate, the environment, and public procurement (including mega projects). The GCC nations, which have historically used foreign aid and humanitarian aid to support MENA nations, should opt for an “aid for trade” policy to support their partners in implementing trade-boosting reforms that lower business and investment barriers, improve logistics infrastructure, and facilitate the movement of goods.

The opinion piece titled “GCC can take centre stage in global energy transition” appeared in theArabian Gulf Business Insight (AGBI) on 26th July 2023.

An extended version of the article is posted below.

GCC will be at the Centre of a Transformed Global Energy Map

Nasser Saidi and Aathira Prasad

As nations navigate a post-Covid recovery path amid Russia-Ukraine war disruptions and sanctions, a New Global Energy map is emerging.

On the demand side, climate change and global warming -witness extreme temperatures- is forcing nations to accelerate their low-carbon energy transition plans, resulting in policy and consumer behavioural shifts away from fossil fuels. Global investment in low-carbon energy transition topped USD 1trn for the first time in 2022, up 31% year-on-year, and on par with fossil fuels investments^[1]. The investments also spanned a vast spectrum: from renewable energy, the largest sector by investment (+17% yoy to USD 495bn) to hydrogen which received the least investment but was the fastest growing (USD 1.1bn, more than triple vs 2021). On the supply side, rapid technical change and innovation has resulted in a massive decline in the costs and thereby increasing the competitiveness of Renewable Energy, with the costs of solar, wind and battery declining by 90% over the past decade. Already, solar power is the cheapest form of electricity production.

Geopolitics is also driving a transformation of the global energy map. The Russia-Ukraine war along with US and the EU policies to decouple or “de-risk” from China are leading to energy supply chain disruptions and market fragmentation. Sanctions on Russia have heightened national energy security concerns, resulting in a restructuring of energy trade patterns: India and China accounted for almost 80% of Russian crude oil exports in May 2023, while nations shifting away from Russian Oil & Gas were looking towards alternative sources, including from the GCC.

Global energy consumption remains skewed towards fossil fuels, but with a rapidly rising share of renewables. The new economic and geopolitical energy market realities are accelerating the quest for long-term competitive, sustainable, clean, and secure energy. While dependence on oil and gas will persist into 2050, the GCC has a comparative advantage to reap the benefits of the paradigm shift to renewable energy.

Faced with the challenges of the global energy transition, the GCC are committing to massively increase the share of renewables in their energy supplies, the KSA to 50% by 2030 and Net Zero by 2060, the UAE to 30% by 2031 and Net Zero by 2050. The GCC is leading the Middle East’s massive investments in renewable energy which recorded its largest-ever increase in renewable energy capacity in 2022, commissioning 3.2 gigawatts of new capacity (+12.8% yoy)^[2]. The UAE’s planned investments to the tune of US$165bn in clean and renewable energy initiatives over the next 30 years as part of its NZE goal underscores its commitment to furthering its clean energy agenda.

With these renewable energy investments and use of modern technologies, the GCC are achieving the lowest global cost of solar power. Masdar submitted (June 2023) the lowest bid for the 1,800MW Phase 6 of the Mohammed bin Rashid Al Maktoum Solar Park in Dubai: USD1.62154 cents per kilowatt hour (kWh) for the solar PV power project. Similarly, Hydrogen which could potentially reduce global emissions by 20% by 2050, at a price between $0.70 – $1.60 per kg- a price competitive with natural gas, has led to new alliances forming to develop megawatt projects, with some 31 projects in the region, including the world’s largest in NEOM Green Hydrogen Project and the DEWA & Siemens’ Green Hydrogen project using solar power.

The GCC, given its location at the heart of the global sunbelt, will become the lowest cost producer of solar power. Solar based, Green electric power can be exported from the GCC and North Africa to the rest of the Middle East, into Europe, East Africa, India, and Pakistan, through integrated power grids. This requires the development of an integrated electricity market allowing trading in energy.

The GCC’s experience with developing and using climate tech -including desalination, district cooling and desert agriculture- can result in these being export technologies. Take the example of desalination, where the GCC has 45% of global desalination capacity, with Saudi Arabia’s Saline Water Conversion Corp being the world’s largest producer of desalinated water.  Renewable energy powered desalination plants can be used as a solution to global water supply problems, where the UN estimates that about 1 in 10 persons lack access to clean water and 1 in 4 do not have access to safe drinking water. Similarly, district cooling is 5-10 times more energy efficient than conventional cooling, with the GCC being a pioneer in the development and deployment of district cooling, addressing the fastest growing source of demand for power from accelerating global urbanisation.

Being at the centre of the global energy map, with 30.5% of global oil reserves and 29.5% of exports (20.7% and 25.2% respectively for gas), the GCC have a long experience with energy finance. The GCC can become hubs for climate and renewable energy finance. The region’s financial centres -DIFC, ADGM, KAFD, QFC- have the resources and expertise to become the regional/ global centres for climate, green & blue finance, accelerate issuance of green & blue bonds and Sukuk, attract VC investment into climate tech in the region and support listings of clean energy firms. Already, the GCC are using their massive financial firepower to serve their climate agendas. GCC sovereign wealth funds are among the largest investors in renewable energy – Mubadala last year invested USD 20.2bn (about 27% of total investment globally) via its subsidiary Masdar (which has a mandate to double renewable capacity in 2-3 years) while ADIA and QIA invested USD 2.2bn and USD 1bn respectively. Clean energy finance is not only integral to fuel climate change policies, but also has the added advantage of generating jobs and attracting FDI into the renewable energy and climate tech sectors, thereby accelerating the region’s energy transition and economic diversification plans.

The four building blocks of massive investment in renewable energy, comparative advantage in producing and exporting hydrogen and solar power through integrated grids, experience in using climate tech, supported by vast financial resources being used for climate & renewable energy finance, result in the GCC being able to provide highly diversified energy supply ranging from solar power to hydrogen complementing its oil and gas to climate tech. The GCC will be at the centre of the emerging New Global Energy Map.

[1] https://about.bnef.com/energy-transition-investment/

[2] IRENA.

The opinion piece titled “The GCC should leverage its power to trade as a bloc” appeared in theArabian Gulf Business Insight (AGBI) on 28th Jun 2023 and is posted below.

The GCC should leverage its power to trade as a bloc

Nasser Saidi

The GCC faces multiple headwinds as it seeks to achieve growth at a time of increasing global fragmentation, the West’s decoupling from China, climate change risks and the ongoing energy transition away from fossil fuels. 

New policy tools are required to address these challenges and generate economic diversification. In particular, dynamic trade strategies will play a central role in realising regional success.

Total trade in goods as a percentage of GDP in the wider Mena region was 65.5 percent in 2021 (compared with 92.8 percent for the EU), indicating a relatively open regional economy.

Nonetheless, that number, ostensibly for the entire Mena area, is largely made up of the trade openness of the GCC bloc, high dependence on the trade of fossil fuels, and very low intra-regional commerce.  

To date, the GCC and wider Middle East have missed a trick by failing to leverage the full potential of free trade agreements (FTAs) – international economic policy instruments that facilitate lowering tariffs, remove non-tariff barriers, liberalise access to markets and ease investment flows.

The Middle East and the GCC respectively have 38 and five regional trade agreements in force. This compares with 161 for Europe and 102 for East Asia. 

More promisingly, earlier in June the UAE signed a bilateral comprehensive economic partnership agreement (Cepa) with Cambodia. This is its fifth Cepa, following those with India, Indonesia, Israel and Turkey. Another 10 or more are reportedly in the pipeline. 

Focus on FTAs

The GCC needs FTAs to promote economic liberalisation, diversify output and lower its high dependence on fossil fuel exports, as well as to attract foreign direct investment and new technologies. 

The capital-exporting GCC can use FTAs to protect its foreign investments and help forge new banking and financial links, notably with Asian markets.

In today’s turbulent geopolitical climate, diversifying investments and markets have become a strategic priority for the GCC, which holds more than $4 trillion in financial assets.

FTAs can provide a legal and regulatory framework as the GCC seeks to develop its international capital markets linkages, notably by facilitating the listing of foreign securities. 

Against the backdrop of the global energy transition, the UAE and Saudi Arabia can carve a path towards becoming a global hub for renewable and climate financing, complementing their traditional role in oil and gas trade and investment.

To do this, the GCC needs to move towards reducing the existing hurdles for services. This means lowering barriers to entry and easing restrictions on operations.

Services are a strong driver of economic diversification and an accelerated strategy will increase domestic firms’ ability to participate in global value chain-based production. 

In this regard, logistics are an important factor. The Mena region ranks just behind North America, Europe and Central Asia in the latest World Bank Logistics Performance Index, largely due to the high scores of the GCC region – the UAE is ranked 7th globally while Libya is 139th out of a total 150 nations. 

A breakdown by country and sub-indices, however, shows that nine out of the 16 Mena nations achieve low scores in the timeliness sub-index.  

To compete internationally, Mena countries must invest in facilitating trade, move towards digital trade facilitation – think e-commerce – and implement a cross-border paperless trading system.

This will result in more efficient supply chains, support regional trade integration, and increase participation in global value chains.

It will also require the dissemination of regular, timely, comparable and high-quality trade statistics to support evidence-based trade policy making.

Bloc power 

The GCC should negotiate as a bloc to maximise its potential. As a first step, the customs union should be revived, leading to the re-development of the GCC Common Market. 

Also, the bloc ought to move beyond goods trade agreements to negotiate comprehensive, wide-ranging, deep FTAs. It should modernise the old generation of double taxation agreements to take account of the importance of special economic zones and free zones. 

Given the shift of the global economy towards Asia, the GCC should pivot away from historical trade patterns based mainly on energy, to deepen trade and investment relations with major new trade and investment partners, such as India, China, Japan and South Korea. It would also do well to explore links with emerging markets in Africa. 

It is high time for the Gulf to negotiate FTAs with China, the African Continental Free Trade Area and the Association of Southeast Asian Nations.

Politically and strategically, a new generation of FTAs could signal a decision to engage on a wider diplomatic front, solidifying the region’s international standing and reputation. 

The GCC countries are looking to seal international trade and investment deals with a view to “regionalised globalisation”, at a time when the rest of the global economy is fragmenting and much of the West is decoupling from China. 

Such a strategy on the part of the GCC represents a building block to achieving greater geopolitical stability.

Dr Nasser Saidi is the president of Nasser Saidi and Associates. He was formerly chief economist and head of external relations at the DIFC Authority, Lebanon’s economy minister and a vice governor of the Central Bank of Lebanon    

Dr. Nasser Saidi’s comments appeared in an Arab News article titled “Electrical transmission line connecting Afar in Saudi Arabia to Yusufiya in Iraq inaugurated” published on 24th June 2023.

The comments are posted below.

Crucially, the agreement underscores part of what Nasser Saidi, Lebanon’s former economy and trade minister and founder of Nasser Saidi & Associates, calls “the regionalized globalization by the GCC.

“Integrated electricity grids, such as between Saudi and Iraq, result in greater power efficiency, improved management of electricity grids and network economies, lowering costs for all the countries involved,” he told Arab News.

“It allows the creation of a GCC-augmented electricity market and electricity trading across borders. In parallel, Saudi, the UAE and other GCC countries are heavily investing in renewable energy (mainly solar) for their power generation,” he said.

“Eventually, the GCC can export solar-based electricity green energy to not only neighboring countries (Iraq, Jordan, Egypt and Yemen) but also to India and across North Africa into Europe. Already, a GCC-India undersea electricity connector is planned. A new energy infrastructure map is emerging.” 

There also, said Saidi, wider possibilities and vision for the agreement that have the potential as stated by Prince Saud and Al-Mitiwiti to garner greater energy security and economic benefits for the region.

“The integration of basic infrastructure — water, electricity, transport and logistics (ports and airports) — is a major building block of greater economic integration between the GCC and its regional partners, enabling the deepening of regional trade and investment links,” Saidi explained. 

He added: “Infrastructure integration fosters economic development. It creates jobs in countries such as Iraq, Jordan, Egypt, Lebanon and Syria that have traditionally been reliant on exporting labor, helping them combat the present brain drain.”

Moreover, as Saidi stressed, the greater integration of these countries with the GCC enables partners to participate in global value chains through the region, generating higher value exports (rather than low-value commodity exports such as phosphates) and diversify their economies.

All of this is taking place during a time of great change for world energy markets.

“The GCC countries are now pursuing an active international trade and investment strategy leading to ‘regionalized globalization’, at a time when the rest of the global economy is fragmenting and there is attempted US, EU and allies decoupling from China,” he added. “Strategically, regionalized globalization can lead to greater geopolitical stability.”

The article titled “China-GCC FTA will be a game changer” appeared in theArabian Gulf Business Insight (AGBI) on 25th May 2023 and is posted below.

China-GCC FTA will be a game changer

Nasser Saidi & Aathira Prasad

Chinese President Xi Jinping’s historic visit to Saudi Arabia in December 2022 marked a transformation of the thus-far transactional relationship between the regions – leading to the long-awaited revival of negotiations of the China-GCC free trade agreement.

The meeting also spurred the signing of a comprehensive strategic partnership agreement and 34 investment agreements.

The visit birthed an active diplomatic role for China in the region, resulting in the reopening of relations between Saudi and Iran, while Saudi and the UAE assume observer status in the Shanghai Cooperation Organisation.

These developments herald détente and stabilisation in the Middle East, thereby favouring trade, investment and growth, and facilitating the potential reconstruction of countries destroyed by war and violence – starting with Yemen.

Economic diversification

China already accounts for one-fifth of the GCC’s total trade, a larger share than trade with the EU or US. China is the largest export market for the GCC – with energy at its core – as well as a major source of investment.

In 2022 the GCC accounted for around 8 percent of China’s total imports, according to the PRC General Administration of Customs. Oil accounted for 90 percent of the GCC’s exports to China last year. China is also the largest non-oil trading partner and second-largest trading partner of the Mena region.

A China-GCC FTA, potentially by 2024, is a game changer that would galvanise Middle Eastern economic transformation. An FTA that removes trade barriers – with tariffs expected to decline by 90 percent – would boost trade and investment linkages.

A China-GCC FTA is likely to be a deep trade agreement, going beyond international trade to encompass agreement on non-tariff barriers, direct investment, tech, e-commerce and services, labour standards, taxation, competition, intellectual property rights, climate, the environment, and public procurement (including mega-projects).

Laws and regulations would be modernised to accommodate the provisions of the FTA, thereby accelerating domestic economic reforms in the GCC.

These gains from trade, investment and technology transfer would generate higher incomes and growth rates for the GCC and, through spillover effects, raise growth rates in the wider Mena region.

Energy is essential

What are the main building blocks of an FTA? Energy will remain at the centre of a China-GCC FTA. However, the energy sector itself is transforming, driven by the global energy transition, with decarbonisation policies and net-zero targets leading to an acceleration of renewable energy investments, including by the GCC.

The Russia-Ukraine war created an energy crisis and put security at the forefront of energy policies. This, along with sanctions on Russian oil and gas, has increased dependence on Middle East resources.

China, as a world leader in renewable energy tech, will become the strategic partner for the GCC as it diversifies its energy mix through investment in renewables and climate tech.

A China-GCC FTA would also be a major building block for the economic diversification 2.0 strategies of the GCC and expansion of the non-oil sector.

Given the size and diversification of China’s economy, an FTA would lead to a rapid expansion of trade and investment in digital trade and financial services, hi-tech, renewable energies and climate tech, AI, automation and robotics.

Tourism growth

Tourism would boom as Chinese outbound travelling recovers post-Covid, as other GCC countries join the UAE on China’s “approved list”.

The FTA would strengthen linkages and integration in infrastructure, transport, logistics and even space travel.

What’s more, the GCC, as major capital exporters, would benefit from linking financial markets to Shanghai and Hong Kong, greatly facilitating financial flows, thereby multiplying and diversifying investment opportunities.

These could include expansion of China’s Belt & Road construction projects in the GCC, participation in the financing of GCC privatisations, mega-projects, public-private partnerships, and the transfer of technology.

GCC investors would have privileged access to Chinese opportunities, free of exchange and capital controls. A natural outcome of the FTA and financial market linkages would be the linking of payment systems, including the development and use of the Petro-Yuan to finance China-GCC trade and eventually for financial transactions and investments.

A China-GCC FTA would also deepen the symbiotic relationship between Chinese and GCC sovereign wealth funds, the largest in the world, controlling assets worth more than $6 trillion, enhancing their global financial market power.

And finally, the China-GCC FTA would result in positive spillover effects through increased trade and investment for the Mena trade partners of the GCC, with trade creation effects outweighing any potential diversion.

The GCC would negotiate as a bloc and start exercising its considerable economic power in signing other FTAs, potentially with Asean, the EU and the United States-Mexico-Canada Agreement.

The China-GCC FTA deal is expected to potentially lead to a more than doubling of non-oil trade in three to five years from implementation, with greater global and regional integration of the GCC and the Mena region.

Dr Nasser Saidi is the president of Nasser Saidi and Associates. He was formerly chief economist and head of external relations at the DIFC Authority, Lebanon’s economy minister and a vice governor of the Central Bank of Lebanon. This article was co-authored by Aathira Prasad, director of macroeconomics at Nasser Saidi and Associates

Dr. Nasser Saidi joined Asharq Business (Bloomberg) on 11th April 2023, to speak about the reliance on the US dollar, the rise of the renminbi and whether the GCC’s economic relations with China could take a new turn (free trade agreement, trading oil in the yuan)

Watch the interview (in Arabic) at this link.

Dr. Nasser Saidi participated in the panel discussion hosted by the Arab Gulf States Institute in Washington (AGSIW) titled “China-GCC FTA Negotiations and Prospects for Broader Economic Collaboration” held as a webinar on Apr 5th, 2023.

The China-Gulf Cooperation Council summit in December 2022 renewed interest in concluding negotiations for a China-GCC free trade agreement. These trade negotiations began in 2004, but progress toward establishing an FTA has proceeded slowly. A finalized FTA with the GCC would be a prestigious accomplishment for Beijing, strengthening China’s economic linkages to the region and potentially boosting trade and investment flows. For their part, GCC governments hope to expand economic cooperation with Asian partners, such as China, to advance ambitious economic diversification agendas. 

What are the key Chinese and GCC interests behind completing an FTA, and what obstacles have posed the biggest challenges to finalizing negotiations? What do FTAs reveal about the nature of Chinese economic diplomacy in the Middle East? How would the establishment of a China-GCC FTA impact trade and investment ties over the short, medium, and long term? Looking beyond the potential FTA, what are the other trends and mechanisms facilitating deeper economic cooperation between China and GCC countries? 

Watch the discussion below:

Dr. Saidi participated as a keynote speaker in the UBS’s annual flagship event, the 23rd edition of which took place in January 2023 in Hong Kong with a theme of ‘The Way Ahead’.

In this podcast, recorded in Jan 2023, UBS APAC head of research Martin Yule asks Nasser Saidi, former chief economist of the Dubai International Financial Centre and the first governor of the Central Bank of Lebanon, to discuss the theme, ‘China and the Middle East: old friends in a new era’. The talk focuses on trade, oil, growth of Middle East capital markets, the potential free trade agreement as well as broader aspects of China-Middle East cooperation.

Listen to the podcast:

The article titled “Why nations must diversify their economies to avoid stagnation” appeared in the print edition of The National on 22nd February 2023 and is posted below.

Why nations must diversify their economies to avoid stagnation

Nasser Saidi & Aathira Prasad

The Global Economic Diversification Index tracks, measures and compares progress in diversification based on 25 indicators

Economic growth in nations with an abundance of natural resources tends to be lower and more volatile.

Diversifying activity from an over-dependence on natural resources — such as oil, minerals or commodities — allows countries to harness resource rents as an engine of growth, rather than a barrier to economic development, avoiding the “resource curse”.

For fossil fuel-dependent countries, ambitious global decarbonisation commitments (UN Cop climate summits, net zero emissions) and energy transition plans to address climate change have added to the urgency of economic diversification, given that oil and gas accounted for 31.89 per cent and 21.34 per cent of global greenhouse gas emissions in 2021.

With economic diversification a policy imperative in the Middle East, nations can turn to the Global Economic Diversification Index (EDI) to track their performance over time, undertake peer comparisons and measure the gap with higher-ranked nations.

The EDI identifies and examines 25 economic indicators, analysing and combining three main dimensions of diversification — output, trade and government revenue — across 105 nations for the period 2000-2021.

The top-ranked nations have maintained their standing over time, with the US, China and Germany ranking highest in 2021.

What are the major lessons and outcomes? First, there is a positive correlation between EDI and gross domestic product per capita (but being a high-income country does not imply a high economic diversification score) and, secondly, the higher the share of resource rents in GDP, the lower the EDI score.

Third, countries do not need to take a traditional industrialisation route: services and financial services led Singapore and Switzerland to rank highly alongside industrialised nations such as Germany and the UK.

Fourth, innovation and adoption of new technology is an essential ingredient for greater diversification, with many top performers also in World Intellectual Property Organisation’s [WIPO’s] Global Innovation Index, and, finally, size need not be an impediment to economic diversification (“small” Ireland, the Netherlands and Singapore rank high).

GCC economic diversification

While the non-oil sector has grown in the GCC, the oil sector continues to dominate, accounting for more than 40 per cent of GDP in most countries.

In the past decade, there has been a concerted effort to diversify revenue and support fiscal sustainability, with the introduction of VAT and excises taxes (with the UAE introducing corporate tax this year and Oman studying a proposal for income tax).

However, consumption taxes remain a small share of total revenue in comparison to oil and gas in the nations that have introduced VAT, while Qatar and Kuwait have yet to introduce consumption tax.

At present, trade is also heavily reliant on exports of oil and gas and their derivatives such as petrochemicals.

The coronavirus was a game-changer. To shift from over-dependence on commodities, the GCC (and others) have diversified into services-based sectors such as tourism, trade, logistics and transport. But these were affected in the initial Covid-19 year, leading to a reassessment of diversification strategies.

The pandemic has galvanised policymakers into action to support FDI flows, labour mobility liberalisation, privatisation and structural reforms.

Economic diversification 2.0

On the output side, there is greater opportunity in moving towards knowledge-based and innovation-led activities, creating space for private sector activity (especially in the tradables sector), and developing industrial policies and clusters, with local procurement strategies fostering job-creation at small and medium enterprises.

Incentivising policies supporting the diffusion of new technology (such as electric transport systems or robotics), alongside a push for investment into new sectors, including digital economy, clean energy and climate technology, and increasingly general purpose tech such as artificial intelligence, will also support diversification.

The continuing privatisation of state-owned assets and enterprises allows for the opportunity to “de-risk” fossil fuel assets, with the added advantage of raising revenue, developing and diversifying financial markets, and attracting both domestic and foreign investment and technology.

The pandemic underscored the need for trade diversification — both in terms of products and trade partners — and of supply chains.

The GCC will also benefit from the enactment of new “deep trade agreements”, including the broad category of services, such as digital services (e-services, e-commerce and digital finance), beyond the limited scope of trade in goods.

With the shift in global economic geography towards Asia, a China-GCC free-trade agreement (under negotiation since 2004) is a strategic priority, given that China is the main trade and economic partner of the region and would integrate the GCC into Asian supply chains.

Trade reforms, when complemented by structural reform, including in the labour market, will lead to greater skill diversity in the workforce, enabling mobility and lower transition costs, job creation and raising productivity growth.

Additionally, policy reforms will encourage private sector activity by lowering the costs of conducting business, thereby encouraging private and foreign investment, and promoting competitiveness and capital market development (including the development of a yield curve, a domestic corporate bond market), with a focus on climate finance and funding the green economy as part of energy transition policies.

Economic diversification leads to more balanced and stable economies, and is key to inclusive economic development and sustainable job creation.

The EDI is a tool that enables evidence-based policymaking and informs the design of strategy and policy measures, allows for the evaluation of policies’ impact and effectiveness, and enables monitoring of policy outcomes, as well as helps to identify problem areas. It enables policy research aimed at identifying strategies and policies that foster and those that hinder diversification.

Resting on current diversification achievements is insufficient. Commodity dependent nations need to sustain economic/structural reforms and innovate to catch-up faster with the frontrunners.

The Global Economic Diversification Index 2023 was released last week by the Mohammed Bin Rashid School of Government (MBRSG) at the World Government Summit. The report was developed in cooperation with Salma Refass and Fadi Salem (MBRSG) and Ben Shepherd (Developing Trade Consultants).

Dr. Nasser Saidi’s comments (posted below) on the potential for the GCC-China Free Trade Agreement and beyond, appeared in the article titled “Why a China-GCC free trade agreement might be a game changer” on The National dated 3rd February 2023.

Nasser Saidi, president of Nasser Saidi & Associates and former chief economist of the Dubai International Financial Centre, says an FTA could be signed as early as this year. 

“The China-GCC FTA negotiations have been ongoing since 2004. While it has taken a long time, agreements have been reached on most trade-related issues,” says Mr Saidi, who also previously served as Lebanon’s minister of economy and industry and deputy governor of the country’s central bank. 

“This is the last mile for negotiations, and considering [the] GCC’s plans to increase economic diversification, the agreement is likely to focus beyond just oil, [and] into trade [and] services (including digital), tech sectors and both portfolio and direct investments.”

Chinese President Xi Jingping’s historic visit to Saudi Arabia in December heralds a “major shift” in the strategic relationship between China and the GCC.

“President Xi’s visit will give a strong impetus and I anticipate an initial FTA could be signed in 2023,” says Mr Saidi.

Mr Saidi says trade between the GCC and China has been steadily rising and doubled between 2010 and 2021, with China accounting for about 16.7 per cent of the Gulf region’s total trade in 2021.

Mr Saidi says an FTA would open new sectors such as services, technology, artificial intelligence and robotics, and strengthen linkages in infrastructure, transport and logistics, leading to a “potential doubling of non-oil trade in three years”.

Opportunities also exist in construction, manufacturing, tourism and space exploration, as well as the linking of financial markets, he says.

While China is a big export market, Mr Saidi sees many opportunities beyond trade and investment. “First and foremost, there could be significant benefits from the adoption of the PetroYuan,” he says. “Oil could continue to be priced in USD, but payment and settlement would be in Yuan. The Yuan could be used for all bilateral trade with only the net balance settled in euro or USD.”

Deeper economic ties mean that China and the Gulf region can benefit from increased co-operation on numerous fronts such as the integration of banking and payment systems, the expansion of central bank swap agreements, collaboration between special economic zones and state-owned enterprises becoming an instrument of economic and industrial policy. “Sovereign wealth funds can also be used as an instrument for co-operation — for example GCC SWFs can focus more of their portfolios on Asian economies, especially China, and vice versa,” says Mr Saidi. “In parallel, China will emerge as a geostrategic partner of the GCC in defence and security, given alignment on most political issues.”

Aathira Prasad joined Yousef Gamal El-Din  on 28th of November, 2022 as part of the Bloomberg Daybreak: Middle East edition, touching upon oil prices and views in the backdrop of China’s Covid policy and the price cap on Russian oil. On the economic outlook for the GCC, we remain optimistic, especially given that recovery is being boosted by both oil and non-oil sectors and that the relatively better fiscal stance of the GCC (with more savings and monies set aside for domestic and regional investments).

Watch the interview below, which can also be accessed from the original link: https://www.bloomberg.com/news/videos/2022-11-28/-bloomberg-daybreak-middle-east-full-show-11-28-2022 (listen from 28:33 to 37:00)

The below article was published as a post in the OECD’s Development Matters blog on 1st July 2022. The original post can be accessed directly at: https://oecd-development-matters.org/2022/07/01/a-new-global-economic-diversification-index/

A new global economic diversification index

By Aathira Prasad, Director, Macroeconomics and Nasser Saidi, President, Nasser Saidi & Associates

“My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that.” 

Lewis Carroll, Alice in Wonderland

The well-known “natural resource curse” comes from the observation that economic growth in nations with an abundance of natural resources tends to be lower and more volatile. A number of empirical regularities characterise these countries: (a) resource-abundant countries tend to underperform their resource-poor counterparts, with evidence of a negative relationship between real GDP growth per capita and resource exports; (b) resource-based economies’ exposure to adverse external shocks leads to macroeconomic instability and higher economic risks; (c) non-resource based activities get crowded out; and (d) institutions tend to be weak and anarchic.

Economic diversification – a key to addressing economic risks, macroeconomic stability, volatile economic growth and sustainable development issues – has become an everyday term in the policy lexicon of natural resource dependent countries. Although many diversification policies have been implemented over the past several decades, there has been little effort to assess if they have been successful. The majority of existing research focuses on trade diversification.

The Global Economic Diversification Index (EDI) aims to fill this gap. The EDI examines economic diversification from a multi-dimensional angle, exploring activity, trade and government revenue diversification. Some of the main findings from the inaugural edition of the EDI are as follows.

• For the least diversified nations, overdependence on commodity production and exports has meant growth volatility and a long path to catch up with top performers.

• Seven nations have consistently ranked among the top ten countries in the EDI from 2000 to 2019, with China joining this cohort from 2008 onwards. Service-led nations stand out among the top-ranked (UK, Ireland, Singapore and Switzerland), highlighting the growing importance of the services sector (and adoption of new technologies) and its pivotal role in enabling a “catch-up” with highly industrialised nations.

• At the other extreme, seven nations have remained in the bottom ten, including four oil-producing nations (two from the Gulf Co-operation Council – GCC) and two low-income and agriculture-dependent countries.

• Between 2000 and 2019, the nations that have improved their EDI scores the most include China, the US, Saudi Arabia, Germany and Oman. The GCC nations (except Bahrain) are among the top 20 nations to have improved EDI scores over that period.

• Low and lower-middle income nations among the commodity producing nations have the lowest EDI scores overtime. Oman and Kuwait (part of the GCC) rank poorly, but the former has embarked on a diversification path, while the latter, due to ongoing political gridlock, has not undertaken economic reforms.

• In regional terms, North America is the best performer and the Sub-Saharan Africa region is the worst performer on a comparative basis (even though their average scores have improved over time) across overall EDI. The fastest pace of improvement in the EDI has been within the MENA region.

Figure 1. Regional disparities in EDI scores (2000 vs 2019)

• There is a positive correlation between the EDI and GDP per capita. UAE and Norway are examples of nations in the process of diversification that are inching closer to the mean EDI score in 2019. By 2019, almost all countries’ resource rents readings had declined (versus the level in 2000), and many had improved on their EDI scores. This only shows correlation and not causation.

Figures 2. EDI across commodity producers, by region

The MENA region has lagged behind its regional peers with respect to diversification yet it has caught up relatively fast. This has been supported by diversification strategies introduced by many oil-producing nations in recent years, including the introduction of non-oil taxes (excise, customs and value added taxes to name a few), alongside various liberalisation measures ranging from rights to establishment to trade facilitation measures, and improvements to hard and soft infrastructure.For resource-dependent countries, economic diversification (activity, trade and government revenue) is a strategic imperative given their demographics and job creation requirements, as well as their need to achieve sustainable development and to mitigate the macroeconomic risks of volatile commodity prices and markets. The Global EDI aims to provide guidance for countries, policy makers and analysts to design successful diversification strategies and policies, turning resource rents into an engine of growth rather than a barrier to economic development and thereby avoiding the “resource curse”.

Dr. Nasser Saidi joined a panel discussion online titled “Impact on Trade” within the wider context of “Middle East: A New Arena for Asian Competition?” which was the theme of the National University of Singapore’s Middle East Institute Annual Conference.

The session, held on 18th of May, discussed the background of trade, investment and labour flows, in addition to what the contrasts are for China and India’s policies in the Middle East.

Watch the session below

Dr. Nasser Saidi joined Asharq Business (Bloomberg) on 25th January 2022, following the release of the Jan 2022 update of the IMF’s World Economic Outlook, to touch upon the growth prospects in the GCC and wider Middle East and North Africa region.

Watch the interview (in Arabic) at this link.

Dr. Nasser Saidi, in his capacity as the Chairman of the Clean Energy Business Council (CEBC), gave an opening keynote titled “Landscape of Low-Carbon Hydrogen Market: a MENA perspective“, at the “Canada Advancing Clean Energy” event held in Abu Dhabi on the 19th of January 2022.

The presentation addresses the nascent state of the hydrogen market as well as exploring the current market for hydrogen projects in the Middle East & North Africa region before summing up with key takeaways (copied below):

• Global Hydrogen market is still in its infancy: need to build the foundations of a sustainable market
• Develop strategies & roadmaps on hydrogen’s role in energy systems
• Hydrogen can become an important component of the energy transition and decarbonisation policies, accounting for 22% of final energy use by 2050
• Hydrogen in MENA: 47 projects, total investment $55bn, 5.3 mn tons
• GCC can become major producers and exporters of hydrogen helping to de-risk their fossil fuel assets
• Renewable/Clean Energy producers should form an alliance/organisation to develop the industry and market

This article appeared in Gulf Business online on 1st Nov 2021, and can be accessed online.

How should GCC economies manage public finances

Governments can use sovereign asset liability management as a financial tool to manage public sector balance sheet risks

The Cop26 climate talks in November 2021 will confirm global commitments to counter climate change and move to a sustainable future.

At the core of the response is the energy transition away from hydrocarbons, the main source of wealth for GCC countries. While there is much focus on the energy system transition, part of the challenge for GCC countries is how they will manage their wealth and public sectors, assets and liabilities — much of which depend on hydrocarbons. That will require efficient public fiscal and financial management to ensure sustainability through a tool known as Sovereign Asset Liability Management (SALM).

At present, GCC governments run large non-hydrocarbon fiscal deficits despite major initiatives in recent decades to diversify their economies.

Governments have set up economic zones, infrastructure investments, state-owned enterprises (SOEs) and government-related entities (GREs). They have moved some public finances away from hydrocarbons through reforms to subsidies, public utilities pricing, and expenditures, along with the introduction of value-added tax. Despite these changes, the non-hydrocarbon primary balance as percent of non-oil GDP remains negative for all GCC countries.

Along with the fiscal dependence on hydrocarbons, GCC governments have future liabilities.

On the positive side of the ledger, decades of rapid economic growth have resulted in the accumulation of large international reserves and financial investments, a build-up of real assets and companies.

At the same time there has also been an increase in debt, contingent liabilities, and generous social programmes that governments have to finance. Adding to that burden is the size and extensive role of state-owned entities (SOEs) and government-related entities (GREs) in GCC economies.

In some cases, the liabilities of SOEs and GREs are estimated to constitute over 30 per cent of GDP, which has an effect the overall soundness of public sector balance sheets.

Financing these liabilities could be difficult during the energy transition as it implies lower prices in real terms for oil and gas.

GCC countries run the risk of an earlier than expected depletion of their net financial wealth. Their hydrocarbons and associated industries could become stranded assets.

These countries could also find it difficult to draw upon their sovereign wealth funds, which have stabilised government accounts during times of volatile commodity prices. Asset accumulation in these funds flattened following the drop in oil prices end of 2014, leading to a drawdown in reserves.

Over the long-term, as the IMF has warned, the net financial wealth of GCC countries could turn negative by 2034, turning the region into a net borrower.

To manage these financial risks, GCC governments should adopt SALM to handle the financial aspects of the energy transition. This system integrates multiple public assets, future revenues, and cash reserves, along with public debt and contingent liabilities into one sovereign balance sheet. That allows governments to manage liquidity, risks, savings, and commitments, to ensure macro-fiscal stability and long-term sustainable public finances.

They will be able to manage resources more adroitly, leading to a smoother transition away from hydrocarbons.

Denmark and New Zealand, for example, have implemented a comprehensive SALM framework successfully. They have improved their risk, fiscal and debt management significantly. They have also ensured intergenerational equity so that future generations do not pay for today’s spending. Their finances are now more resilient to shocks, and there is greater efficiency in the use of government assets, quality in the provision of government services, and wealth management.

To implement SALM, GCC governments will need an effective governance framework. They should institute clear mandates for the different public sector entities so that their data is transparent and should encourage cooperation, centralisation of risk management, and market-oriented valuations of assets and liabilities.

They should start their SALM journey by identifying the assets and liabilities of the public sector. That means creating a full register of public assets, followed by the collection of data and the construction of a comprehensive balance sheet. Then, they should develop dynamic tools that connect to each other, allowing a complete overview. That means policy making decisions that are evidence-based, impactful, equitable, and those that minimise risk.

The result will be an effective policy making and leadership decision engine.

In essence, the public sector would emulate the sound financial management tools used by modern private corporations in managing their balance sheets and risks.

As GCC countries move away from hydrocarbons, they will need SALM as a macro-economic and financial tool. SALM will allow them to manage risks in the public sector balance sheet and decide on policy tradeoffs during the move toward a sustainable future, ensuring that future generations inherit sound public finances.

The article is written by Nasser Saidi & Talal F Salman

Nasser Saidi is an economist and former minister and Central Bank vice governor in Lebanon, and Talal F. Salman is a principal with Strategy&

Weekly Insights 9 Sep 2021: Global inflation – transitory or persistent? How will MENA / GCC cope?

Inflation (both consumer and producer prices) has been picking up across the globe, though central banks are still calling it a “transitory” phase than a persistent one.

Both food and energy prices have been rising the past few months. The FAO food price index for Aug showed a 3.1% mom and 32.9% yoy increase, rebounding after 2 consecutive months of declines. Since prices had been subdued during the initial stages of the pandemic, the year-on-year surge can be associated with base effects, but the month-on-month prices have been creeping up as well. For countries highly dependent on food and other staple goods imports (especially the MENA region), the inflationary pressure will grow if this persists and also affect poorer countries disproportionately. It is worthwhile to remember that social unrest leading up to the Arab Spring a decade back came after months of rising food costs (food price inflation in Egypt had hit ~19%)!

A closer examination of prices shows that not just commodities, but also prices of durable goods and price of services (restaurants, hairdressers etc.) have been picking up, resulting in an uptick in core inflation. Why? There is a combination of factors: supply chain shocks, cyclical recovery of demand post-Covid fueled by fiscal and monetary stimulus, along with weather shocks.

• Increased demand as the pace of recovery gains speed with easing of pandemic-related restrictions: e.g. demand for meat from major food-importing nations, demand for fuel as “summer travel” resumes in the US and Europe, sustained demand for furniture and household appliances.
• Weather shocks: e.g. droughts and high temperatures (affecting wheat production in Canada and US), frost damage and dry weather (affecting prices of sugar in Brazil);
• Supply chain disruptions and logistical bottlenecks: e.g. quarantine and/or lockdown rules have disrupted manufacturing, closure of ports have led to delays in delivery, shortage of semi-conductor chips and impact on the auto industry. Supplier delivery times are lengthening further, purchasing costs are still rising, and strong demand is adding more pressure on shipping costs. For now, it looks like inflationary pressures are building up.

The recent uptick in inflation is a global phenomenon. In the developed countries, inflation is still around the 2%-mark (higher than readings in the recent past): extended QE and low-interest rate policy environment had kept price increases minimal. However, inflation is markedly higher for many emerging markets, including emerging Europe. In India, the latest reading stood at 6% (at the top end of the central bank’s target range) while in Brazil and Russia, it was 8.9% and 6.7% respectively (way higher than targets of 4.5% and 4% respectively).

South Korea, where inflation in Aug stood at 2.6% (the highest since Aug 2017, and higher than the 2% central bank target rate), became the first developed Asian nation to raise interest rates since the beginning of the pandemic. The rate was increased from a record low of 0.5% to 0.75% and the move is expected to curtail the surge in household debt and home prices. Russia, Brazil, Mexico, Peru and Hungary are a few central banks that have hiked rates in the past few months, with Russia’s central bank warning of a potential new global financial crisis if global inflation is not contained. Going forward, we expect many central banks to follow suit, abandoning their dovish policy stance and start tightening to contain inflation (including asset price inflation, including housing prices which have surged). It needs to be a delicate balance though, as higher interest rates would hurt economic recovery and growth, especially as many are facing new Covid19 outbreaks amid a low vaccination pace.

Many of these emerging market governments have borrowed extensively during the pandemic to spend on fiscal relief measures. Global government debt is now at the highest level since World War II. Public and external debt have risen significantly for the median emerging market economy, reaching 59 and 44% of GDP, respectively, in 2020, and gross financing needs are projected to stay above 10% of GDP in 2020–21, according to IMF projections. We expect debt to GDP levels to remain much higher than pre-Covid levels for many years ahead, increasing their vulnerability to tapering by the Fed and the ECB resulting in higher borrowing costs. For now, debt service costs are quite low (given low US interest rates) in foreign currency, but external borrowing costs are unlikely to stay low for longer. The Fed has already signaled that it might raise interest rates sooner than earlier expected. So, markets, including emerging markets, can no longer count on a steady injection of liquidity – be on the lookout for vulnerable corporates and countries with high debt exposure. Plus, as the US tightens monetary policy, emerging market currencies will come under pressure (more expensive to import goods, thereby increasing domestic prices further as well as aggravating current account deficits).

In the MENA region, almost half the nations have gross government debt above 70% of GDP and one in 4 had public gross financing needs above 15% of GDP by end-2019. The pandemic led to a significant loss in revenues (both oil and non-oil) and though international financial markets were tapped, domestic financing increased. According to the IMF, governments in Egypt, Jordan, and Tunisia covered more than 50% of their public gross financing needs with domestic bank financing in 2020. Such bank exposure to the public sector could also crowd out the private sector at a time when a private activity push is required for higher economic growth and job creation. A surge in inflation can lead to a reduction in the real value of domestic debt – Lebanon is a good example, but the sharp currency depreciation makes the debt burden unsustainable.

Inflation remains under control in the GCC for now and even though food prices are rising, the overall cost of living has been kept in check given relatively low housing/ utilities costs. For now, many businesses are absorbing the higher costs (as mentioned in the region’s PMI surveys) and narrowing profit margins to revive domestic demand. Since GCC nations’ inflation reading can be driven up by trading partners’ inflation, it is prudent to keep an eye out. Food imports as a share of overall imports was least in the UAE (6.7% in 2019) and most in Oman (16.3%). For the GCC currencies that are pegged to the dollar, higher food prices can quickly pass through to consumer prices, while central banks have little or no monetary policy independence to address inflation shocks.

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1. As cases continue to surge in India, pace of global recovery comes into question

• India reported the highest-ever single day cases on Wednesday, at 379,257 & continues to account for almost half the rise in global Covid19 cases. Concerns about the accuracy of these statistics notwithstanding, it is worrisome that more than 20% of tests are coming positive and that the crumbling healthcare infrastructure (in many states) is leading to around 3k deaths per day!
• Given India’s linkages with the global economy (trade, labour & investment flows), it is not surprising that emergency supplies are coming in from across the globe to contain the spread; US relaxed its previous ban on exports of raw materials for vaccines.
• Meanwhile, GCC nations (except the UAE) have seen a steady uptick in cases from the beginning of this year; UAE’s numbers though are still the highest among the lot. In terms of new cases per million, Bahrain stands the highest (611) and Saudi Arabia the least (29), with Kuwait (326), Qatar (284), Oman (241) and the UAE (196) in between.

 
2. India-UAE links: Trade & Investment

• UAE has developed strong links with Asia, and especially India, over time. A prolonged slowdown in the Indian economy is likely to spillover into UAE’s growth.
• First off, trade links: bilateral trade was around USD 60bn in 2019, though the Covid19 pandemic saw a decline in trade to USD 41.9bn (-30% yoy). Imports from India recovered much faster than exports into the country after the slump during lockdowns last year. India was the UAE’s second-largest trading partner (after China) during pre-Covid times.
• While oil is a key traded commodity – about 8% of India’s oil imports are from the UAE – exports of precious metals, stones and jewelry remain significant. Indian food imports also have a significant part to play in UAE’s food consumption.
• A slowdown in India would hence affect trade significantly: oil demand will decline with lower mobility; higher cases would lead to lower economic activity – i.e. negative impact on industrial production lowers exports of textiles, machinery products, lower levels of agricultural production implies less food imports from the country.
• Official figures for Indian investment in UAE are not available: the Indian Embassy estimates it at around USD 85bn.

 
3. India-UAE links: Tourism

• Prior to the Covid19 epidemic, India was the largest source market for visitors into Dubai, attracting 1.97mn visitors out of a total 16.73mn.
• Covid19 cut short most tourist travel for a significantly large part of the year, resulting in a 67% decline in tourists into Dubai. India was still the largest source market for Dubai in 2020 – attracting 865k persons (-56% yoy) and South Asia retained its top spot as the largest source of visitors (21% of total).
• Flights to the Indian sub-continent have been suspended since Apr 25 for 10 days, and given the exponential rise in cases in India, an extension seems likely – about 300 commercial flights operated weekly in what is one of the busiest international travel corridors. Newspaper reports suggest an uptick in enquiries for private jets to ferry stranded residents (similar to the lockdowns last year). Cargo operations are carrying on uninterrupted.

4. India-UAE links: Remittances

• The UAE-India migration corridor is one of the largest in Asia: it stood at close to 3.5mn migrants in 2019. (Source: UN World Migration Report 2020). Indians account for around one-third of UAE’s total population.
• In 2020, total remittances from the UAE touched a total of USD 43.2bn (-4% yoy). While Q1 saw a 7.8% uptick in remittances, Q2 saw the sharpest drop of 10.3%.
• Remittances to India accounted for 33.5% of its total remittances last year – maintaining its spot as the largest recipient of remittances from the UAE.
• As India goes into lockdown, it is possible that UAE will see an increase in remittances to the country as financial support for families in need. A weaker Indian rupee would further suport this pattern.

5. The economic case for vaccination

• The discovery of vaccines for Covid19 had brought a sense of consumer and business optimism. However, with vaccine distributions underway, its pace is less than heartening in many nations.
• Israel and UAE have topped the lists in terms of vaccination rates. There is confirming evidence from Israel of reduced transmissions as a result of the inoculations.
• As the chart on the right (focusing on MENA nations) shows, there is a negative correlation between vaccination and infection rates. Anecdotal evidence also suggests that an infection after the first dose of vaccine is much less likely to require hospitalization.
• Unfortunately for India, the pace of vaccination has been very slow. Less than 10% of the nation’s residents received the vaccine, in spite of it being home to the world’s largest vaccine manufacturer (the Serum Institute).
• The rapid pace of India’s infections also calls into question its vaccine production and distribution channels: the Serum Institute has not fulfilled its commitment to supply the AstraZeneca vaccine globally (to UK, EU and Covax), but is also planning to sell the vaccine to state governments and private hospitals in the country (at higher rates).
• In the MENA region, new deaths per million are low in the UAE (the leader in vaccine doses per 100 persons) while Iran has a long way to go. If Israel’s results are to be emulated, a coordinated effort should be underway to accelerate the pace of vaccination, resulting in faster return to higher economic activity.

 
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1. Oman: 4th GCC nation to implement VAT

• Oman introduced 5% VAT on most goods and services, starting Apr 16
• UAE and Saudi Arabia rolled out 5% VAT in 2018 & Bahrain in 2019
• According to Ministry of Finance estimates, Saudi increased non-oil tax revenues to 32% in 2018 (vs just 10% in 2010), 36% in 2019 and estimated to rise to 46% in 2020 (given tripling of VAT)
• UAE collected AED 27bn in VAT in 2018 (1st year) & AED 11.6bn in Jan-Aug 2020 (pandemic year); VAT revenues in Bahrain touched BHD 260mn in 2019 and BHD 220mn in 2020.
• Oman’s VAT is estimated to generate ~OMR 400mn (USD 1bn) in revenue annually, roughly ~1.5% of GDP (if effectively and efficiently implemented)
• As a result, the IMF projects fiscal deficit to decline to 4.5% of GDP in 2021 (2020: 17.5%) & non-oil revenue to rise to 17.2% of non-oil GDP in 2021 (2020: 11.4%)
• This move will lead to an improvement of Oman’s sovereign credit rating + lower the cost of credit + attract more FDI & portfolio investment as a result of the ensuing reduction in macroeconomic risks

 
 
2. GCC’s Diversification Efforts & Renewable Energy policies => Transition to a lower-oil dependent region

• Unsustainable path of dependence on oil: current oil demand vs supply, pressure on oil prices + current fiscal & social spending policies => fiscal unsustainability: GCC’s aggregate net financial wealth (est. at $2trn) could be depleted by 2034 (IMF)
• Oil market structure & dynamics are changing, given global energy transitions: pre-Covid19, shale & renewables were already displacing conventional oil
• Major challenges for the oil market (non-exhaustive list):

–Demand-side factors:

• • Gov’t plans for sustainable recovery, ambitious goals for net-zero emissions
  • Covid19-led collapse in demand: potential WFH policies & mobility, question marks over recovery of business/ leisure air travel
  • Energy efficiency improvements, EV penetration

–Supply-side factors:

• • Spending cuts and project delays could slow oil supply growth
  • Large cost reductions in renewables + advances in digital technologies
• Climate Change & Decarbonisation Risks are growing – could lead to sharp fall in fossil fuel asset prices => stranded assets risk

3. Energy Transitions & GCC’s ambitious targets

• The two-day virtual Leaders Summit on Climate (from today), hosted by the US President, brings the US back into play with respect to global action against climate change
• Latest news that banks & financial institutions with USD 70trn+ assets pledged to cut their greenhouse gas emissions & ensure their investment portfolios align with the science on the climate adds to the commitment

 
4. Are the GCC nations prepared for a low-carbon economy transition?

• The preparedness of countries for a low-carbon transition (LCT) is measured by exposure and resilience indexes: highlights turning the risks of an LCT into opportunities for robust growth.
• GCC nations are signifcantly exposed, especially given dependence on oil (resource rents, carbon intensity, GHG emissions): Qatar scores highest exposure & UAE the least
• However, the GCC are relatively well prepared for an LCT thanks to its resilience, particularly its relatively good macro stability and supportive business environment alongside high quality of infrastructure, human capital and institutions

 
5. WEF’s Energy Transition Index ranks UAE just behind Qatar wrt energy systems & pathways to clean energy

• UAE ranked 64th globally on WEF’s latest Energy Transition Index (2021) out of a total 115 nations, just behind Qatar at 53rd position. Lebanon ranked lowest in the Middle East region at 112th.
• Among the various components of the Index, MENAP’s average falls farthest from the world average in two: environmental sustainability (37.89 in MENAP vs 61.32 globally) and capital & investment (38.87 vs 55.17). Of the 11 categories, region is worse-off compared to 2012 (initial year of results) in 4: system performance, environmental sustainability, energy system structure and economic growth & development
• The chart on the right shows no MENAP countries in the top-right quadrant (high transition readiness & well-performing energy systems). 4 of 6 GCC nations are in the “leapfrog” quadrant (green dots, high readiness but system performance below the mean); two countries Algeria and Morocco fall among those with potential challenges (red dots, above-average system performance but readiness below the mean).

Source: Energy Transition Index 2021, World Economic Forum. https://www.weforum.org/reports/fostering-effective-energy-transition-2021#report-nav 
 
6. GCC risk for climate-driven hazards is much lower than regional counterparts

• The climate-driven INFORM Risk 2021 Index is derived from 3 dimensions: climate-driven hazard & exposure, vulnerability and lack of coping capacity.
• GCC nations fare relatively better, scoring between 1.3 to 2.6 out of a total 10 (riskiest). But, two scores are comparatively higher: Saudi Arabia’s hazard & exposure score (largely due to conflict risk) and Oman’s lack of coping capacity (institutional & governance indicators related to increasing the resilience of the society need improvement).

 
 
 
 
 
Source: INFORM Global Risk Index 2021. https://drmkc.jrc.ec.europa.eu/inform-index/INFORM-Risk
 
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The IMF issued its latest Regional Economic Outlook for the Middle East region this week. Real GDP for the Middle East and North Africa (MENA) region is forecast to grow by 4% this year (up 0.9 percentage points from the projection in Oct 2020) after having slumped by 3.4% in 2020 (vs an estimate of a 5% drop in the Oct 2020 edition). Growth outcomes and prospects will still be centred on how the pandemic progresses in the region amid the pace of vaccination rollouts.
The MENA region is now home to more than 7mn confirmed cases, with Iran the single largest contributor (share of close to 30%) and the GCC accounting for nearly 25%. Infections have been ticking up in the region since the start of this year. This has resulted in increased targeted restrictions and lockdowns in many a nation.
The chart compares the pace of vaccination and new cases. Vaccination pace is picking up in the region: the UAE leads the pack, having disbursed a total of 9.16mn doses as of Apr 13^th. With the supply of vaccines increasing (thanks to COVAX facility and donations from the UAE, Russia, China etc.), new vaccinations (black dots in the chart) have improved in most nations (compared to early Feb, marked in red). The production of vaccines domestically in the region will also boost supply later this year: UAE plans to manufacture Hayat-Vax, Egypt has an agreement with Sinovac Biotech, and Algeria will produce Sputnik-V from Sep onwards).
Meanwhile, reported cases are also higher compared to early Feb – many countries are now outside the small quadrant on the bottom-left of the chart. Depending on how fast vaccinations can lead to herd immunity will determine recovery paths – especially so in the more tourism-dependent nations (e.g. Egypt, Jordan, Lebanon).
However, policy measures introduced to support the economy during the pandemic is creating immense fiscal strain. Fiscal deficits widened to 10.1% of GDP in 2020 in the MENA region from 3.8% in 2019. It was severe in the GCC as well: fiscal deficit widened to 7.6% of GDP last year (2019: -1.6%), as the impact was from both lower oil and non-oil revenues. The fiscal breakeven price this year ranges from a high USD 88.2 in Bahrain to a low USD 43.1 in Qatar. While, it is expected to decline across the board next year, it still remains higher than the current oil price levels for most nations. Given new rounds of restrictions and with oil demand not yet at pre-pandemic levels, the OPEC+’s recent decision to roll back production cuts are likely to depress oil prices. As real oil prices trend downward, fiscal sustainability becomes increasingly vulnerable.
With business operations and revenues affected due to the pandemic alongside weakened domestic demand, non-oil revenues as a share of non-oil GDP declined in 2020: Saudi was the sole exception, given its VAT hike to 15% from Jul 2020. Oman is expected to witness a significant boost in non-oil revenues this year, with the introduction of VAT from Apr 16th. Oil exporters in the region are still highly dependent on oil revenues, as is evident from the large non-oil fiscal deficits in the GCC. In 2021, it is forecast at a high 72% in Kuwait and an average 30.9% and 29.9% in the GCC and MENA oil exporters respectively.

Higher deficits and negative economic growth resulted in governments resorting to multiple financing options: borrowing from commercial banks, tapping international and regional markets (bond issuances, commercial loans) as well as drawing down from international reserves at the central banks/ sovereign wealth funds. Government debt levels increased to 56.4% and 41% in the MENA and GCC regions last year. Though it is forecast to fall slightly this year, it still remains higher than the 2000-17 average of 36.2% and 24.6% respectively. The IMF estimates financing needs in the MENA to touch USD 919bn for this year and next. Public-financing requirements were likely to stay above 15% of GDP in most parts of the region through end-2022.
This could pose a significant risk in the coming years: (a) sectors affected by the pandemic are being supported by government policy stimulus. When this support is rolled back eventually, this could result in bankruptcies, defaults and job losses, further causing an increase in banks’ non-performing loans; (b) global financial conditions have been quite accommodative and so long as cost of capital remains low, there will be an appetite for borrowing and even refinancing maturing debt. However, a faster-than-expected global recovery could lead to interest rates hikes, push long-term rates and funding costs higher, increase sovereign spreads, thereby tightening financing conditions – affecting countries with large external financing needs (and their indebted corporates). Though GCC’s sovereign debt levels are relatively low, over USD 100bn is expected to mature in 2021-25.
 
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Chart 1. PMIs indicate rising manufacturing activity vs restrictions-hit services weakness

• Forward looking manufacturing PMIs are recovering, thanks to new orders
• But pain points include supply chain disruption, delivery delays & rising input prices
• Weakness in services PMI continues
• UK & Germany (among the most stringent nations currently, with scores at 86.11 & 83.33 respectively) show the divergence, though the former is starting to stabilise
• Declines during the current lockdown period is not as severe as in Apr 2020
• Vaccine roll-out will lead to greater confidence in the months ahead

 
Chart 2. Global trade recovers in Q4 2020; Q1 2021’s restrictions in likely to cause deceleration

• WTO estimates show a strong Q4 (index reading of 103.9). New Covid variants & lockdown restrictions is likely to have a negative impact on goods trade in Q1
• Container shipping costs have been surging, given the increase in demand alongside delays at ports and lack of ships/ containers
• The reduction in air freight capacity adds to the capacity conundrum. In 2020 overall, industry-wide cargo tonne-kilometres fell by 10.6% yoy – the largest decline on record (IATA)

 
Chart 3. Global food prices are rising: will MENA’s food importers be severely hit?

• The increase in freight prices have also spilled over into global food prices: pandemic-led supply chain issues aside, production shortfalls due to unfavourable weather conditions and high export tariffs have also contributed to the uptick.
• Over the past six months, the IMF’s food price index has seen a 6% spike, outpacing the all commodities price index which averaged a 1% increase!
• Food security is a major concern in the MENA region, given water-constraints. 12 of the 17 most water-stressed nations are in the Middle East (World Resources Institute) => high dependence on food imports & hence highly exposed to global food price volatility
• High income but resource-constrained nations like UAE are taking steps to counter this, including support for domestic production via technological innovations (AgriTech, hydroponics, vertical farming)

 
Chart 4. Will this lead to rising food inflation in the GCC?

• Food imports as a share of total imports ranged from UAE’s 7% to Oman’s 17% in 2019 (WTO)
• Further breakdowns reveal the extend of dependence: the FAO’s cereal import dependency ratio (3-year average) places UAE at 100% & Saudi Arabia at 92.5% (for the period 2015-2017); GCC imports almost 100% of its rice consumption and approximately 62% of meat and 56% of vegetables (PwC).
• Food inflation is still less than 5% in most GCC nations other than Saudi Arabia (affected by the VAT hike) and Kuwait (fruits, vegetables and meat/poultry have seen double-digit rises since last Jul).
• The higher share of disposable income spent on food by poorer segments of the population would imply that rising food prices would affect them more, thereby widening the inequality gap further (in addition to Covid19’s impact)
• Imported inflation in the backdrop of being pegged to the dollar implies that price controls might be need to contain food inflation if it continues to surge further. However, overall inflation remains low, with other major components like utilities & rent on a decline.

 
 
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1. Covid19 cases rise in the Middle East & so do Restrictions

• Covid19 cases in MENA crossed 5 million; the GCC is home to 24% of confirmed cases
• The uptick in cases has seen many countries re-introduce border controls (e.g. Oman, Lebanon), flight restrictions (e.g. Saudi Arabia) as well as capacity/ recreational activity restrictions (e.g. UAE/ Dubai)

Source: John Hopkins University (https://coronavirus.jhu.edu/map.html), Oxford COVID-19 Government Response Tracker from Blavatnik School of Government – Our World in Data (https://ourworldindata.org/grapher/covid-stringency-index); Charts created by Nasser Saidi & Associates.

2. Vaccination drives are picking up

• Focus has shifted to vaccination drives, with almost all GCC nations receiving a combination of supplies including Pfizer, Moderna, AstraZeneca, Sinopharm and Sputnik V vaccines
• UAE has administered a total 34.8 vaccination doses per 100 people, behind only Israel (58.8) globally
• In terms of the share of fully vaccinated population (i.e. both doses), Israel tops at 21.43% followed by UAE at 2.53% and US (1.81%)
• UAE’s hub status supports distribution: Dubai’s Vaccines Logistics Alliance & Abu Dhabi’s Hope Consortium to deliver vaccine doses across the globe
• A potential manufacturing hub? UAE is building up its capacity to manufacture the Covid19 vaccine in the future

3. Businesses ride the wave of vaccine optimism in Saudi Arabia & UAE

• Jan 2021 PMI data showed Saudi ticking up to a 15-month high while in the UAE, though the headline number remain unchanged, jobs moved into positive territory for the first time in over a year
• Lebanon’s numbers remain dismal with the complete lockdown adding to the existing socio, economic and political woes
  

Source: Refinitiv Datastream, Nasser Saidi & Associates.

4. Indicators of economic activity in Saudi Arabia

• Proxy indicators for consumer spending – ATM withdrawals and PoS transactions – have shown a divergence during the pandemic year
• For the full year 2020, PoS transactions rose by 24% yoy while ATM cash withdrawals were negative, declining by 15% – pointing to the rise in digital/ contactless/ e-payments in a Covid19 backdrop
• Overall loans picked up in the country, with loans to the private sector for the full year rising at 12.8% versus a 17.8% uptick in loans to the public sector

Source: Saudi Central Bank (SAMA), Refinitiv Eikon, Nasser Saidi & Associates.

5. Indicators of economic activity in the UAE

• More than 2/3-rds of UAE banks’ loans went to the private sector (69.4% as of Nov 2020 vs. 76% in end-2018 & 72% in end-2019), while public sector & government together account for ~30% of all loans in Nov 2020 (vs. 25% a year ago)
• However, the overall pace of lending to GREs (+23.2% yoy during Apr-Nov 2020) and the government (+18.5%) outpaced the drop in lending to the private sector (-1.6%)
• Bank credit by business activity showed an interesting pattern: as of end-Sep 2020, loans towards agriculture surged by 18.6% qoq, following a 18% uptick in end-Jun, underscoring the recent focus on food security and evidence of investments into vertical farming and agritech companies (its share of total loans is just 0.13%). Loans to the transport & logistics have shown a strong upsurge, rising by 52.1% yoy as of end-Sep.
• Personal loans for consumption (accounting for 20.6% of total loans) rose by 1.3% yoy at end-Sep (Jun: 0.7%).

Source: UAE Central Bank, Refinitiv Eikon, Nasser Saidi & Associates.

 
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1. Global Recovery in 2021, albeit divergent & uncertain
The IMF, in its latest World Economic Outlook update, forecasts global recovery at 5.5% this year and 4.2% in 2022, from a contraction of 3.5% in 2020. There is a divergence in recovery: advanced nations, where growth plunged by 4.9% last year, will recover at a slower 4.3% while emerging markets recover at a faster 6.3% in 2021 (2020: -2.4%). Much of the emerging market recovery is thanks to the effective containment of Covid19 in China and many of the South-east Asian nations. The growth estimates are based on continuing policy support (and its effectiveness) and roll-out of vaccines (though its pace and logistics issues are identified as a concern) and “supportive financial conditions” (thanks to major central banks’ maintaining current policy rates through to 2022).
While over 150 economies are expected to have their per capita incomes below the 2019 levels in 2021, the projected cumulative output loss over 2020–2025 is forecast to be USD 22trn (relative to the pre-pandemic projections).
Fig 1. Global economic growth set to recover by 5.5% this year

Source: IMF World Economic Outlook, Jan 2021
The slowest pace of recovery among the regions is in the Middle East (+3% growth this year), a result of the shocks from both Covid19 and lower oil prices. The average price of oil last year was USD 41.29 (simple average of Brent, Dubai Fateh and WTI) and this is estimated to rebound by 21.2% yoy to USD 50.03 this year. As Covid19 cases surge globally, leading to newer restrictions/ lockdowns, the demand for oil is likely to stay subdued: consequently, OPEC+ monthly meetings are unlikely to result in production increases anytime soon. Even if vaccines are distributed quicker-than-expected, resulting in an increase in economic activity earlier than anticipated, there are multiple other factors that are likely to keep oil prices within the USD 50-55 mark (Figure 2).

In addition to lower demand due to Covid19 restrictions, growing awareness of climate change risks (& related policy changes) and energy efficiency policies will also affect the demand for oil. On the supply side, technological innovation and rapidly falling costs for solar and wind power has made renewables more competitive. Figure 3 shows the plunge in price of electricity from renewable sources: onshore wind fell by 70% to USD 41 last year from USD 135 in 2009; the dive in solar PV was more eye-popping – it fell by a massive 89% to USD 40 last year from USD 359 in 2009.
2. Services trade continues to drag

The WTO, in its latest report on services trade, highlights that the recovery has been slow: the decline in global services trade eased to a 24% yoy decline in Q3, from the 30% drop posted in Q2. This compares to the goods trade recovery which was down by just 5% yoy in Q3. Sector-wise, unsurprisingly, travel is the most affected, down by 68% yoy while among “other services”, computer, insurance and financial services increased in Q3 (+9%, 3% and 2% respectively). Global PMI indicators also suggest that economic recovery is driven by manufacturing vis-à-vis services: in Dec, output across manufacturing sector outperformed the services sector for the 6^th straight month. Within the services index, respondents expect growth in future activity though optimism levels waned towards the end of last year.
3. Labour market recovery in 2021?
A key sub-indicator within PMI is employment – one of the main components dragging down the headline index. According to the ILO, about 8.8% of global working hours were lost for the whole of last year (relative to Q4 2019), roughly equivalent to 255mn full-time jobs. To put this in perspective, this was four times more than what was lost in the 2009 financial crisis period. In turn, labour income witnessed a decline of 8.3% – equivalent to USD 3.7trn or 4.4% of GDP!
In the Arab states, total estimated decline in working hours was 9% versus the global loss of 8.8% (Figure 5 below). However, these are ILO’s own estimates, as no labour force surveys were available for any country in the region during this time. According to these estimates, Iraq and Saudi Arabia registered losses of 8.3% and 10.8% respectively.
Fig 5. Quarterly & annual estimates of working hour losses, world vs. Arab states

Source: ILO Monitor: COVID-19 and the world of work, seventh edition, Jan 2021
Recovery is expected in 2021 as mobility restrictions are lifted and vaccine roll-out leads to a slow return of business/economic activity. With young persons and women as well as the informal sector and low-skilled workers more affected than the rest during the Covid19 period, it is imperative to target the return of these groups into the labour market. Without this, the outlook will be more inequality and instability (remember that youth unemployment was one of the factors leading up to the Arab Spring 10 years ago) in the most affected nations. As it stands, the IMF estimates that close to 90mn persons are likely to fall below the extreme poverty threshold during 2020–21.
4. Employment in Saudi Arabia
Separate data releases from Saudi Arabia give us an insight into employment trends in the country, which can be explained by a combination of Covid19, travel restrictions and Saudization policies:

• Unemployment in Saudi Arabia dropped to 14.9% in Q3 from 15.4% the previous quarter, though higher than Q1’s 11.8%. The gap between male and female unemployment remained significant, with the former at 7.9% and latter at 30.2%.
• The most recent labour force survey shows that the number of expats working in the country fell by 257,170 (qoq) to 10.2mn in Q3 while citizens grew by 81.9k to 3.25mn. Expat males account for two-thirds of the workforce versus Saudi males and females at 15.6% and 8.6% respectively in Q3.
• There was a 58% yoy decline in work visas issued to expats to 611,185 in Jan-Sep 2020.

While on the one hand, the country has an aim to support female employment (an objective within the Vision 2030 document is to raise women’s participation to 30% by 2030), there seems to be a major disconnect: female employment in the private sector is less than 10% of total, and the additional hurdles – like costs of employing women (separate floors/ work areas from the male counterparts), social customs,  technical skills (focus on degrees in education, humanities) – may be putting off prospective employers.
Independently, the Public Investment Fund (PIF) disclosed that it had generated over 331k jobs in the past 4 years either directly or indirectly through its investment policies. The PIF’s recent commitment to not only invest USD 40bn every year for the next five years but also create close to 1.8mn jobs by end-2025 will support the economy going forward.
According to UNCTAD’s latest “Investment trends Monitor”, FDI into Saudi Arabia increased by 4% yoy to an estimated USD 4.7bn last year – this is in spite of the 42% drop in global FDI flows (with further weakness expected in 2021) and the 24% decline in flows to West Asia. With various ongoing projects related to Vision 2030 and megaprojects in NEOM, as well as the revamp of over 200 FDI regulations, the Kingdom’s ability to woo investors is explicable: Egypt, India and the UK were the most active investors in the country. Care must be taken to attract FDI into more job-creating sectors than the oil & gas sector (which is more capital intensive). Given the country’s commitment to support clean/renewable energy, it is pertinent to focus on the creation of green jobs, thereby leading to sustainable economic recovery. 
 
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1. Global Uncertainty Drops, but Economic Policy Uncertainty Remains High

• World continues in the throes of the Covid19 pandemic, even as vaccines offer a light at the end of the tunnel
• The rollout has been slow in many nations; approval of other vaccines will help alleviate production/ distribution hurdles
• Other policy concerns continue: fallouts from Covid19 across the globe, implementation of Brexit, US new administration’s policies (China, Iran,…)
• Political turmoil/ uncertainty: Italy, Israel, Malaysia…

2. Global Risks Shift Gear in 2021

• The World Economic Forum’s Global Risks Report 2021 perceives higher risks from environmental categories with extreme weather, climate action failure & human environmental damage taking the top 3 spots
• With spillover effects from the Covid19 outbreak likely to continue this year and possibly next, it is not surprising that infectious diseases top global risks by impact (& 4th on the “likelihood” list)
• Growing evidence that the Covid19 outbreak has widened existing disparities (poverty, gender, access to health facilities…); digital divide and adoption of technology further adds another layer to the inequalities (ability to work remotely, access online learning, e-commerce…)
  

 
 
 
 
 
3. Covid19 outbreak continues unabated in the Middle East

• The number of cases in the Middle East continue to rise with Iran the major hotspot accounting for 28% of cases in the region; the GCC nations combined are home to 24% of total cases
• Among the GCC nations, Saudi Arabia accounts for the largest share of cases, while UAE’s share of daily confirmed cases per mn persons is highest (the size of the bubble indicates the 7-day average of daily increase in cases). A concerted vaccination effort ongoing in most of the GCC nations offer a glimmer of optimism

 
4. Greater the restrictions, larger the drop in mobility; recovery in Saudi

• With cases rising at a faster rate in the recent weeks, some economies in the Middle East have enforced restrictions recently: Lebanon’s lockdown has resulted in an uptick in the Stringency Index while UAE remains one of the most open (least stringent) in the region
• Mobility (retail and recreation) has dropped in a highly restricted Lebanon (-40% compared to the 5-week period Jan 3- Feb 6, 2020). Egypt and UAE are still around 20% below the baseline, while in Saudi, mobility is picking up

 
5. Vaccination Drives Raise Hope for Recovery in 2021

• Israel, UAE and Bahrain top the list of cumulative vaccine doses administered per 100 persons (chart)
• Almost 1 in 5 persons in the UAE have received at least one dose of the vaccine, and 2.5% of the population are fully vaccinated (i.e. both doses received)
• The vaccination drives in both Israel and UAE have picked up pace recently, with the 7-day average of daily vaccine doses administered per 100 persons was at 1.46 and 1.11 respectively (as of Jan 20, 2021)

Benefits from the vaccination drive for UAE

• Race towards herd immunity
• Lower uncertainty, greater consumer & business confidence
• Ability to reopen the economy fully, resume economic activity at pre-Covid19 pace
• Travel corridors open up, supporting tourism & hospitality sectors
• Support for domestic sectors including trade & logistics as global demand picks up
• Stronger links with Asia, given the region’s faster paced recovery vis-à-vis US/ Europe
• Support regional economies with vaccination doses

 
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Dr. Nasser Saidi, a keynote speaker at the latest Bonds, Loans and Sukuk Middle East event, held virtually on 8-9 Dec 2020, presented a 30-min talk titled “A COVID-19-induced macroeconomic overview of the GCC”.
The presentation covered the macroeconomic impact of Covid19 pandemic on the global economy and the Middle East/ GCC region (economic growth, capital flows, trade, investment, labour movements, job losses). Also covered were the policy responses (monetary, fiscal, social and health policies) in addition to thoughts on the Biden Presidency and its regional consequences. The concluding remarks focused on GCC’s way forward post Covid19, looking at three pillars: geopolitics, the economy and new sectors of focus.
Download the presentation here.

Dr. Nasser Saidi’s article titled “The case for new green deals in the Gulf” appeared in Aspenia Issue No 89-90, issued in Oct 2020, and is posted below. A PDF file of the article can be downloaded here.
 
The case for new green deals in the Gulf
The world is in a “new oil normal”, with permanently lower prices. The oil rich countries of the Gulf need to diversify and focus on clean energy alternatives. Europe has a significant role to play here, too, as the EU and the GCC should develop a strategic techno-energy partnership.
 
The Gulf Cooperation Council (GCC) is weaving its way through two major shocks. Covid-19 and the Great Lockdown resulted in a collapse of oil prices, against a background of climate change and global energy transition. The imf projects an estimated 4.9% decline in global growth this year, with cumulative output losses to the tune of over 12 trillion dollars for the 2020-21 period. Within the GCC, growth is forecast to shrink by 7.1% in 2020, before, optimistically, rebounding by 2.1% next year.
One unintended consequence of the current health crisis has been a record decline in global oil demand, along with emissions reduction and cleaner air as lockdowns were imposed across the globe. I would venture that we are currently in a “new oil normal”, with permanently lower oil prices. It is imperative, therefore, that the GCC’s recovery model include a strong clean energy policy component and structural reforms, alongside a recasting of its economic diversification model and social contracts. The current GCC economic model – over-dependence on fossil fuels, pro-cyclical fiscal policies and generous government subsidies – are unsustainable in the medium to long term.
 
THE PATH LESS TRAVELLED. As countries enter the second phase of the Covid pandemic of easing restrictions along with social distancing norms, there are two divergent paths for economic activity. One track is that government stimuli, together with lower fossil fuel prices, result in diminished incentives to invest in clean energy and clean tech. This will lead to a business-as-usual mode, to a pre-Covid-19 path. Crises and disasters (sars, 9/11, the 2008 Great Financial Crisis) have been associated with temporary dips in carbon emissions, with a 1.5% decline in output associated with a 1.2% drop in co₂. Emissions pick up again, typically with a vengeance, once activity recovers. Recent history provides evidence: it is estimated that following the global financial crisis in 2008-09, carbon emissions increased by 5.9% as a result of policy stimuli.
The second path is a green one wherein countries implement cop21 commitments and energy transition policies, moving to “Green Deals”. This could take multiple forms: we could accelerate the decarbonization of power and road transport, place greater emphasis on energy efficiency investments, phase out subsidies, launch policy incentives to reduce carbon emissions and make a concerted effort to provide no bailouts for industries or business models that are not viable in a low-carbon world. Proactive fiscal policies can help nations become more climate-resilient through investment in climate resilient infrastructure and cities, along with instruments to transfer climate risks to markets (carbon taxes and carbon trading).
According to IRENA’s 2020 “Global Renewables Outlook: Energy Transformation 2050”, decarbonization of the global energy system – away from fossil fuels to renewables – could generate 98 trillion dollars in cumulative growth, adding an extra 2.4% to global gross domestic product. This is a conservative estimate that does not even take into account the negative growth effects of climate change and rising temperatures.[1]
 
CLEAN ENERGY AND CLEAN TECH INVESTMENTS. Governments in the GCC have been vocal supporters of renewable energy projects despite their vast fossil fuel reserves. The Covid-19 crisis has temporarily slowed deal-making in renewable energies in recent months, and this will likely affect investment levels in 2020. In comparison, renewable energy investments in the wider Middle East and Africa slipped 8% to $15.2 billion in 2019, from a record total of 16.5 billion in 2018.[2] The uae was the biggest investor in renewables in the region last year, with the massive 4.3bn Al Maktoum iv solar project, while Saudi Arabia is accelerating investments, with a total 502 million dollars invested (including a windfarm project). Record-breaking bids in renewable energy auctions in Saudi Arabia and the uae have made solar power cost-competitive with conventional energy technologies. The United Arab Emirates is already ahead of the curve in terms of deployed energy storage to support its grid during high demand hours with two NaS battery storage projects in Abu Dhabi and Dubai.
Figure 1 . Investment: Global vs. Middle East

During the pandemic, governments have reiterated their commitment to support renewable energy policies. Recent announcements – Oman’s financial closure of its Ibri ii plant, uae’s upcoming plans to develop the world’s largest solar power plant (2 gigawatt) in Abu Dhabi’s Al Dhafra region (at a historically low price of 1.35 us cents per kWh), came just hours after Dubai awarded a contract for a project (part of a solar park designed to produce 5 gigawatts by 2030) to generate power at a tariff of 1.7 us cents per kWh, confirm the region’s commitment to the sector.
New renewable energy projects in the region are becoming increasingly reliant on private funding (versus government support previously). Private power developers, who can borrow internationally at historically low interest rates, are helping to lower financing costs thereby leading to even cheaper power. The bottom line is that growing private sector participation in energy projects along with technological innovation that is rapidly lowering the cost of renewable energy production and storage, will accelerate the energy transition in the Arabian Peninsula.
Figure 2 . Electricity generation and capacity in the GCC

Source: IRENA Statistics.
NEW GROWTH MODELS. The new oil normal presages permanently lower real oil prices and the prospect that plentiful fossil fuel (including shale), with increasingly ubiquitous, cheap renewable energy, along with energy transition policy and regulatory measures, will lead to an increasing proportion of fossil fuel reserves becoming stranded assets. This poses an existential threat to the GCC countries, though they are among the world’s low-cost producers. The imf estimates that the GCC’s net financial wealth (estimated at 2 trillion dollars at present) could be depleted by 2034, with non-oil wealth depleting within another decade.[3] The policy imperative for the GCC goes beyond recasting economic diversification strategies that are vulnerable to pandemics, to new development and growth models, with a focus on developing “green deals” as well as “blue deals” (given the vulnerability of GCC coastal areas to climate change). All this, while supporting increased economic digitization too. The current combined crises are a wake-up call for GCC governments to design economic recovery programs to accelerate decarbonization and encourage investment in cost-competitive sustainable technologies. Pre-Covid, there were an estimated 6,722 active infrastructure projects with a combined value of more than 3.1 trillion dollars planned or under way in the GCC. These plans should be radically revised to invest in climate resilient infrastructure covering energy, water, transport and cities. Such a well-planned recovery would cut pollution, reduce the outsized carbon footprint of the GCC and also lead to job creation: each million dollars invested in renewables or energy flexibility is estimated to create at least 25 jobs, while each million invested in efficiency creates about 10 jobs.[4] The added macroeconomic benefit is that the GCC would release oil supply for export rather than subsidize wasteful domestic energy-intensive consumption and production activities.
Figure 3 . Energy transition in the Middle East OPEC nations, 2050

Source: IRENA, “Measuring the socioeconomics of transition: focus on jobs”, February 2020.
 
BUILDING BLOCKS OF A RECOVERY PROGRAM. I see four major steps to be taken in order to launch a successful recovery in the Middle East.

1. Structural reforms. The lowest hanging fruit is the phased elimination of fuel and utilities subsidies that are a drain on government finances. Removing subsidies frees up fiscal resources to provide financial incentives for the ubiquitous use of clean energy and clean technology within the broader framework of a “zero net emissions policy”. Regional cooperation is required to support renewable energy growth across the region through a GCC integrated grid, unification of environmental standards along with a removal of barriers to trade and investment, to benefit from large economies of scale and avoid costly and wasteful duplication. A regional GCC grid could change global power infrastructure by creating an energy corridor to East Africa, to Europe through Egypt and to India and Pakistan through a sea cable. Power exports would compensate the GCC for the gradual secular decline of fossil fuel exports through the export of higher value-added solar power.
2. De-risk fossil fuel assets. Across the GCC, state-owned enterprises (soes) and government-related enterprises (gres) are majority owners and operators of upstream and downstream oil & gas (the power sector), while also investing heavily in renewables (even increasing their market share of new capacity relative to private firms in recent years). Given the growing risk of oil & gas reserves becoming stranded assets, the GCC states need to repurpose their soes and gres to support and survive a low-carbon energy transition plan. Saudi Arabia has recently shown the way through the partial privatization of Aramco. The privatization of oil & gas assets should be part of an overall strategy of sharing the risk of potentially stranded assets with investors. Proceeds of the privatization of fossil fuel assets need to be invested in a transformation of the economies of the GCC, sustainable diversification based on partnership with the private sector, with a strategy focused on investing in human capital and sectors capable of competing in increasingly digitized economies.
3. Green financing is integral to fuel climate change policies, for a low-carbon transition. Introducing carbon taxes should be the main plank: such taxes would not only raise revenue and increase energy efficiency, they would provide part of the funding for decarbonization strategies. The imf finds that large emitting countries need to introduce a carbon tax that rises quickly to 75 dollars per ton by 2030, consistent with limiting global warming to 2°C or below. For a country like Saudi Arabia, revenues from a carbon tax (35 to 70 dollars per ton of emissions) could raise some 1.9% to 2.7% of gdp in revenue[5] in addition to reducing pollution, and being the most effective tool for meeting domestic emissions mitigation commitments. The other plank for the capital rich GCC is “green finance”. The financial centers of the region could become regional and global centers for new energy financing, for the issuance of “green bonds” and Sukuk, as well as for facilitating the listing of Clean Energy and Clean Tech companies and funds. Ideally, this should be complemented with the creation of Green Banks to finance the private sector. Such institutions would support energy efficiency policies, retrofit where necessary, make climate risk mitigation investments and so on. The imf has estimated an annual financing gap of 2.5 trillion dollars through 2030 to attain the global targets set through the Paris Agreement and the broader un sdgs. Climate finance reached record levels of $360bn in 2019 – but this remains a tiny fraction of the required amount.
4. The Covid pandemic has accelerated the digitization process as people, governments and businesses have shifted online. The digitization of the energy sector is next through investments in smart grids, smart city technologies and the deployment of new digital technologies, low-cost cloud computing, the IoT, big data analytics, artificial intelligence and blockchain. This is an unprecedented strategic opportunity for the GCC countries to participate in the Fourth Industrial Revolution through the digitization of their dominant energy sectors, with massive “soft” (including training and building digital human capital) and “hard” investments by industry, prosumers, and governments to increase transform their economies and increase overall productivity growth.

 
GEOECONOMIC CONSEQUENCES. The year 2020 will likely witness the largest decline in energy investment on record, mostly due to Covid. A reduction of one-fifth – or almost $400 billion – is expected in capital spending compared with 2019.[6] Fossil fuel supply investments (e.g. exploration) have been the hardest hit while utility-scale renewable power has been more resilient, but this crisis has touched every part of the energy sector. As the energy transition progresses in the European Union and the United States becomes a net energy exporter, it implies less energy dependence on GCC. This lessens the region’s geopolitical and geoeconomic importance. How should the GCC react? First of all, greater regional economic integration is required, with a focus on infrastructure and logistics: energy, water, transportation, digital highways. As noted above, a new energy infrastructure would enable the GCC to shift to selling renewable-energy-based electricity to Europe (via an interconnected power grid), to East Africa, but also to Pakistan, India and East Asia. Secondly, the GCC needs to formalize their shifting trade and investment patterns towards Asia and China through new trade and investment agreements with China, Japan, Korea, and the Asean countries. Thirdly, a new extended Gulf security arrangement needs to be negotiated to reduce arms expenditure and focus on economic development. Finally, the EU and the GCC should develop a strategic techno-energy partnership: the Gulf countries could supply solar-generated electricity, while Europe contributes as a renewable energy and climate change technology partner.
Figure 4 . China-GCC trade and investment

 
[1] Matthew Kahn et al, in their 2019 paper “Long-term macroeconomic effects of climate change: a cross-country analysis”, found that a persistent increase in average global temperature by 0.04 degrees Celsius per year, in the absence of mitigation policies, reduces world real gdp per capita by more than 7% by 2100; abiding by the Paris Agreement limits the temperature increase to 0.01°C per annum, which reduces the loss substantially to about 1%. According to a nasa study, 2010-2019 was the hottest decade ever recorded. A goal of the Paris climate accord was that global temperatures need to be kept from rising more than 1.5°C, but a United Nations report in Nov 2019 found that the world’s emissions would need to shrink by 7.6% each year to meet the most ambitious aims of the Paris climate agreement.
[2] See “Global trends in renewable energy investment 2020”, Frankfurt School-unep Centre, BNEF report, June 2020.
^[3] “The future of oil & fiscal sustainability in the GCC region, imf Working Paper, January 2020.
^[4] IRENA, “Global renewables outlook: energy transformation 2050, April 2020.
[5] IMF, “Putting a price on pollution”, December 2019.
^[6] IEA, “World energy investment 2020”.

 
 
 
The op-ed by Dr. Nasser Saidi, titled “How the US elections matter for the Middle East“, appeared in The National on 2nd Nov 2020 and is reposted below.
 

How the US elections matter for the Middle East

The bottom line is that the outcome of the US elections will directly impact a host of global issues
 
The opinion polls largely predict a win for Joe Biden on Tuesday.
FiveThirtyEight, a political analysis website, in its extensive analysis and simulations too favours Mr Biden, barring a major polling error. But a contested election is probably on the cards, given the likelihood that more than 90 million postal ballots – mostly Democrats – are likely to be systematically challenged by Republicans.
With a day left for the US Presidential elections, what would a potential change of guard at the White House mean for the Middle East? What is at stake?
First, a potential return to multilateralism and international co-operation from the current unilateral policies of withdrawal from the Paris climate accord, the Trans-Pacific Partnership or the World Health Organisation or the Iran nuclear deal.
International co-operation – such as the Global Access Facility – will be critical when the vaccine for Covid-19 is ready and needs to be distributed globally.
A widespread availability of vaccines is a global public good. A discriminatory or preferential national treatment would be detrimental to the global economy and hamper recovery from the pandemic.
More broadly, a US reversion to multilateralism would be welcomed internationally. This would mean less confrontation on trade, tariffs and investment policies with China, the EU, Canada-Mexico and others. This would lead to a win globally and – by encouraging non-US trade and investment – result in a cheaper dollar.
Significantly, under a Biden administration, global policy uncertainty, which has been peaking, would diminish. This would, in turn, encourage trade, investment flow and global economic recovery.
Lower, volatile oil prices and a strong dollar along with US tariffs on aluminium and steel, have cost a number of Arab countries over the past four years.
Currently, GCC members are pegged to the dollar. Oil is priced in dollars, trade is dollar denominated – a strong dollar penalises sectors like trade, tourism, transport and logistics that these countries have relied on for economic diversification.
Given the Covid-19 lockdown and the global energy transition away from fossil fuels, it is unlikely – given weaker demand – that oil prices will revert to levels seen a few years ago: the IMF’s latest World Economic Outlook puts oil prices, based on futures markets at $41.69 in 2020 and $46.70 in 2021 versus an average price of $61.39 last year.
But a likely cheaper dollar under Mr Biden would support an economic recovery in the region, driven by the non-oil sector, tourism and services exports – and as countries reopen in phases – also in foreign investment in real estate.
The impact on the oil market will be more important.

The article titled “Eight steps to pull the Lebanese economy back from the brink” appeared in The National on 28th Oct 2020 and is reposted below.
 

Eight steps to pull the Lebanese economy back from the brink

Without the immediate implementation of these comprehensive reforms, Lebanon is heading for a lost decade
 
Lebanon is engulfed in a long list of overlapping and connected problems –fiscal, debt, banking, currency and balance of payments crises – that together have created an economic depression and a humanitarian crisis. People are going hungry: food poverty has affected some 25 per cent of Lebanon’s own population. But the fiscal and monetary instability has caused more than just a shortage of bread.
Confidence in the banking system has collapsed. The Lebanese pound has depreciated by 80 per cent over the past year.
Inflation is at 120 per cent and hyperinflation – a runaway increase in prices – is on the horizon.
Unemployment has risen to 50 per cent, leading to mass emigration and depleting Lebanon of its main asset: its human capital.
The explosion at the Port of Beirut, combined with the Covid-19 lockdown, created an apocalyptic landscape.
It aggravated the country’s economic crises. The cost of rebuilding alone exceeds $10 billion – more than 35 per cent of the this year’s GDP – which Lebanon is incapable of financing.
Prospects for an economic recovery in Lebanon are dismal. The new government must recognise the economy’s large fiscal and monetary gaps and implement a comprehensive, credible and consistent reform programme.
The immediate priorities are economic stabilisation and rebuilding trust in the banking and financial system.
Lebanon desperately needs a recovery programme – akin to the Marshall Plan that helped rebuild Europe after the Second World War – of about $30-35bn, in addition to the funds to rebuild Beirut’s port and city centre.
To achieve this, the new government will have to implement rapidly an agreement with the International Monetary Fund, based on a national consensus. The confidence-building policy reform measures over the next six months must include:
A credible capital controls act to protect deposits, restore confidence and encourage the return of remittances and capital back into the country. Credit, liquidity and access to foreign exchange are critical for private sector activity, which is the main engine of growth and employment.
The restructuring of public, domestic and foreign debt to reach a sustainable ratio of debt to GDP. Given the exposure of the banking system to the debt of the government and central bank (known by its French acronym, BDL), public debt restructuring would involve a restructuring of the banking sector, too.
A bank recapitalisation process that includes a process of merging smaller banks into larger banks. Bank recapitalisation requires a bail-in of the banks and their shareholders (through a cash injection and the sale of foreign subsidiaries and assets) of some $25bn, to minimise a haircut on deposits. This will require passage of a modern insolvency law.
Monetary policy reform is needed to unify the country’s multiple exchange rates, move to inflation targeting – that is, price stability – and shift to greater exchange rate flexibility. Multiple rates create market distortions and incentivise more corruption. The BDL will have to stop all quasi-fiscal operations and government lending. Credible reform requires a strong and politically independent banking regulator and monetary policymaker.
Reform the Electricite du Liban (EDL), the country’s largest utility, and appoint a new board to improve governance and efficiency.
Reform the inefficient subsidies regime that covers electricity, fuel, wheat and medication. These generalised subsidies do not fulfil their purpose – only 20 per cent goes to the poor.
All that the subsidies do is benefit rich traders and middlemen and they are the basis of large-scale smuggling into sanctions-ridden Syria. Subsidies reform should be part of a social safety net to provide support for the elderly and vulnerable.
Pass a modern government procurement act. This would help prevent corruption, nepotism and cronyism.
Restructure and downsize the public sector. Start by removing the 20 per cent of public sector “ghost workers” – people on payrolls who don’t actually work for the government – and establish a National Wealth Fund, a professional holding company that would independently manage public assets. These include basic public utilities like water, electricity, public ports and airports, Lebanon’s carrier Middle East Airlines, the telecom company Ogero, the Casino du Liban, the state-run tobacco monopoly and others, in addition to public commercial lands.
These assets are non-performing, over-staffed by political cronies and suffer from nepotism. In most cases, they are a drain on the treasury.
A comprehensive IMF programme that includes structural reforms is necessary. It is the way to restore trust in the economy and win back the trust of the private sector, the Lebanese diaspora, foreign investors and aid providers. This would then attract funding from international financial institutions and Cedre Conference participants, including the EU and the GCC.
Such measures, if properly executed, would translate into financing for reconstruction and access to liquidity. They would also stabilise and revive private sector economic activity. Without the immediate implementation of these comprehensive reforms, Lebanon is heading for a lost decade.
Nasser Saidi is a former Lebanese economy minister and first vice-governor of the Central Bank of Lebanon
 

The Beirut blast and its recovery/ reconstruction dominate news in the Middle East. Our take on the path for Lebanon’s economic recovery is part of this Weekly Insight edition. Given the scheduled global PMI releases last week, we take a close look at the region’s PMIs and Mobility indicators in parallel. Also covered are the latest monetary indicators from Saudi Arabia and FDI flows in the Arab region (Q1 2020).     

1. Beirut blasts and Lebanon’s way forward

The Beirut port explosion on Aug 4th – which left at least 158 people dead, 6000 injured and 300k homeless – was possibly the last straw for the people already immiserated by an economic, banking & financial meltdown (since Oct 2019) alongside dealing with the Covid19 outbreak. The explosion led to calls for resignation of the government (three ministers have resigned, including after the blast, citing failure to reform), with demonstrations gaining traction over the weekend. In addition to the loss of human lives and destruction of buildings (homes and businesses), it is critical to understand the importance of the ports: 80% of the country’s food imports come through the port, in addition to medical supplies as well as oil and gas. The silos have been demolished (which hold 2-3 months supplies of grain), leading to shortages of food (& higher prices – food inflation had surged by 108.9% in H1 2020 and by 250% in Jun 2020); expedited imports of food and fuel will also be constrained by damaged logistics (transport and warehouses). Additional cuts in electricity (given the impact on fuel supplies) will negatively affect hospitals (that are fighting the Covid19 outbreak in additional to normal operations) and businesses.
Damage to infrastructure (port, transport, logistics and related facilities), housing and businesses is extensive. A detailed survey will be required to assess the total costs of reconstruction but it is clear that Lebanon does not have the fiscal space and will require international support. The destruction will further depress economic activity through a negative impact on consumption, investment and export activity. We forecast an overall reduction in real GDP by some 30% (Great Depression levels) along with continuing and potentially accelerating inflation.  Beirut’s governor stated (without presenting evidence or survey estimates) that the repair bill for the capital alone will cost up to USD 5bn while overall cost of damages is estimated at around USD 15bn. The Cabinet’s approval of an exceptional allocation of LBP 100bn [or USD 26.3mn at the central bank’s set rate of LBP 3,800 to the USD at money transfer firms] to deal with the crisis will fall way short of requirements. International donors pledged EUR 252.7mn for humanitarian aid at the Paris conference yesterday held to raise emergency relief for Lebanon. President Macron during his visit to the location stated that he would “propose a new political pact” to all political forces in Lebanon, also assuring that aid would “not go to corrupt hands”.
The way forward is to undertake a comprehensive series of macroeconomic reforms, including at various sectoral levels – ranging from reforms of the power sector to the banking sector, to exchange rate reform alongside an active intent to increase transparency and stamp out corruption. So far, there has been a refusal by the authorities to bite the bullet and undertake reforms. The donor conference yesterday (as well the CEDRE pledges in 2018) are promising: but the aid should only be released within the umbrella of a broader IMF programme – with clear conditionalities of reform (and potentially bringing in independent ‘technocrats’ to form a new government). The country is in urgent need of an equivalent of a Marshall Pan (size of USD 25-30bn and growing), given cumulative losses owing to lack of reforms so far.

Source: Khatib & Alami.

2. PMI Activity recovers across the globe, including in the Middle East

Global manufacturing PMIs mostly ticked up, given rebounds in both output and new orders. India was one of the nations reporting a lower PMI in Jul: unsurprising given the fast pace of Covid19 confirmed cases – it took only 9 days for India to go from 1.5mn to 2mn – and restricted lockdowns in parts of the country. In spite of the V-shaped recovery in PMI, all is not smooth: restrictions have not been eased fully, demand is largely domestic-driven, and supply chains issues remain – average vendor delivery times lengthened for the 12^th consecutive month for global manufacturing PMI. A resurgence in cases/ 2nd and 3rd waves will only add to the burden.

3. What can we learn from the latest PMI & Mobility indicators?

PMIs in the region indicate a sharp V-shaped recovery following the lockdown period, but is it too much optimism from those surveyed? Order books have improved, though export orders remain weak, indicating domestic demand driving the rise.
This is reflected in the retail and recreation segment of the Google Mobility indicators: with less stringent restrictions in place, movements were higher in the days running up to the Eid Al Adha holidays (across the three nations) while in Saudi Arabia, a similar trend was also visible towards the last week of June, ahead of Jul’s hike in VAT. For firms in the retail and recreation sector, social distancing measures are likely to eat into the firms’ profits (if any) and the road to recovery is likely to be slow. In spite of marketing efforts, it will be affected by spending capacities, salary reductions/ cuts in allowances/ job losses & return of expat labour to their home countries (e.g.~500k Indians have registered for repatriation flights from the UAE).
Workplace mobility is still around 20% below the baseline numbers (excluding Eid holidays): widespread availability of telework technology and the feasibility of performing work remotely has kept firms operational. However, those sectors where work from home is not the ideal option (think retail, tourism, hospitality), the learning curve has been steep – e.g. retail firms’ rolling out previously unavailable online options.
Bloomberg reported that while working from home, workdays were longer by 48.5 minutes, with 1.4 more emails sent to colleagues per day and an 8% increase in emails sent after hours (questioning the work-life balance and happiness quotient) though offering more flexible work hours (and potentially higher productivity levels). The UAE government’s announcement of flexible working hours for its staff is a good move to raise productivity, reduce peak hour traffic and can act as a precursor for the private sector to emulate. The obvious next step is providing the option for employees to work from home, when possible – think of either shorter work hours (in the office) daily or working from home a full workday during the week.

4. Saudi Arabia: monetary indicators

Monetary statistics for Jun 2020 in Saudi Arabia reinforce the trends from the Mobility indicators in the previous panel. Both indicators of consumer spending – cash withdrawals and point-of-sale (POS) transactions have ticked up in Jun, ahead of the hike in VAT from July 1^st. Loans to the private sector is picking up, thanks to the various measures in place to support the economy as it tackles the Covid19 outbreak. Initiatives like the provision of concessional financing for SMEs and loan guarantee programme likely supported the faster pace of growth. The Corporate Sustainability Programme launched by the Ministry of Finance mid-Jul to support the private sector will also provide support going forward. The final chart tracks new letters of credit opened, by sector – an insight into trade finance. A letter of credit is a financial instrument, usually issued by a bank, which guarantees the seller will receive payment for goods sold to a foreign customer. The Covid19 outbreak put the brakes on activity from Apr-May. Recovery is visible in June’s data, but the difference is stark: LoCs opened for foodstuffs has been rising faster than say motor vehicles (accounted for 25.6% of total in Jan 2020 vs 7.2% in Jun). It is time to switch trade finance to blockchain technology – which will make trade faster, safer, and simpler (elimination of paperwork and associated costs, increased transparency and prevention of fraud)!

5. FDI flows in the Arab region

In Q1 2020, the number of new FDI projects in the Arab region contracted by 30% yoy to 185 projects in Q1 2020, with investments down by 27.3% to USD 11.2bn while job creation slipped by 23% to 21.3k, according to the Arab Investment & Export Credit Guarantee Corporation (Dhaman). GCC’s share of investments in the Arab region show that Saudi Arabia and UAE together account for 86.6% of the total in Q1 this year. FDI flows are likely to slow in the region this year, mirroring global trends: UNCTAD estimates global FDI inflows to decline by USD 1.1trn this year. The slowdown of implementation of ongoing projects will hurt prospects in the region as well as potential shelving of projects in the near- to medium-term – underscoring the need to diversify sectors into which FDI flows (oil and gas & real estate).
Egypt, UAE and Saudi Arabia together accounted for two-thirds of the FDI inflows into the Arab region during the period 2015-2019 though in terms of number of projects, UAE topped the list (41.4% of the total). The top two sectors attracting investments – coal, oil and gas and real estate – together account for almost half of the total investments (from just 7% of total number of projects). The largest number of FDI projects recorded during 2015-19 were in business services (13%) and financial services (11%) – but its share of investments was only 2% each.

 
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This article appeared in the print edition of Gulf Business, August 2020, which can be accessed online.

Flying together: Are mergers the way ahead for the GCC’s airline industry post pandemic?
Cost cutting measures by airlines will not suffice to stem the hemorrhage
Covid-19 has devastated the global aviation industry along with the tourism and hospitality industry. Even though domestic travel resumed in many nations (in Saudi Arabia, US and China among others) and flying restrictions eased (e.g. intra-Europe flights, UAE’s Etihad and Emirates are each flying to over 50 destinations), 42 per cent of all global commercial airlines fleet are still grounded, according to research by Cirium [at the time of going to press]. It is little wonder that the International Air Transport Association (IATA) forecast a 55 per cent decline in traffic levels this year. According to IATA, airline passenger revenues are expected to drop to $241bn in 2020, a 50 per cent decline compared to 2019. This is likely to be an underestimate. Covid-19 has generated the deepest recession in advanced economies since the great depression. Its deadly waves are still unfolding in Africa and Latin America, destroying demand for travel, with a second wave likely, according to epidemiologists.

Markets have reacted accordingly, with the Refinitiv global airlines price return index down by almost half (as of July 13). By end-June, Zoom’s market capitalisation of $72.44bn was worth more than the combined $62bn value of AA, Southwest, Delta, United, IAG (BA), Air France-KLM and Lufthansa. In May, Singapore Airlines reported its first loss in its 48-year history, while many airlines are under severe financial stress or have filed for bankruptcy (Latam, Avianca, South African and others), Chapter 11 protection, or are being restructured (Thai). The US provided a massive $58bn to rescue its airline industry.

To survive the post-Covid-19 world, the aviation sector – including airlines, airports and aircraft manufacturers – will have to be restructured. Despite chatter about “travel bubbles” and “immunity passports”, experts question whether recovered patients are fully immune. About 33 per cent of respondents to an IATA survey (conducted in the first week of June 2020) suggested that they would avoid travel in future as a continued measure to reduce the risk of catching the virus. For now, one of the major deterrents to travel is the quarantine period: only 17 per cent of the survey respondents were willing to stay in quarantine. If no vaccine is discovered, people will refrain from travelling abroad, with local destinations and road trips preferred. Social distancing will become the norm on flights, reducing available seat capacity by 33-50 per cent, reducing passenger load factors and raising questions about economic efficiency and financial viability.

The triple whammy of lockdowns, low oil prices and financial market turbulence has dealt a severe blow to the Middle East. The lockdown has directly impacted the UAE’s trade, tourism, transport and logistics sectors, which lie at the core of its diversification strategy and its role as a global business hub. Similarly, Saudi Arabia may need to review its development plans that include tourism as a key diversification option. The travel and tourism sectors have been critical to the GCC with the sector contributing $245bn to GDP (roughly 8.6 per cent) in 2019, while supporting nearly seven million jobs, according to the World Travel and Tourism Council. With more than half of the total GCC population consisting of internationally networked and mobile expatriates, the spillover and multiplier effects to the overall economy from the post-Covid-19 world requires structural adjustment and revision of diversification policies.

The GCC countries – with five airlines each in Saudi Arabia and the UAE, alongside Oman and Kuwait with two airlines each – have rapidly expanded their international networks in recent years. With small domestic markets and populations, the strategy has ended up subsidising foreign travellers. As international and regional travel remains highly restricted, the airlines’ revenue streams have all but evaporated. According to the latest estimates from IATA, wider Middle East and North Africa (MENA) traffic is estimated to fall by 56.1 per cent year-on-year in 2020, resulting in a $37bn loss in net post-tax profit. This will risk over 1.2 million jobs (half of the region’s 2.4 million aviation-related employment) and cause a $66bn shortfall in contribution to the region’s GDP. Saudi Arabia, Qatar and the UAE are the most exposed.

How should GCC airlines adjust to the massive loss of revenue? Like other airlines globally, Emirates, which expects at least 18-months for a recovery of travel, has grounded much of its fleet, placed employees on unpaid leave, cut the salaries of its workforce by up to a half, and initiated job cuts to reduce its operating costs of some $23bn. The CEO of Qatar Airways disclosed an estimated 55 per cent drop in revenues from last year, and stated that about 20 per cent of its workforce would be cut.  Job losses in Saudia are also estimated to be very steep, with the Saudi government providing support by suspending airport slot use rules for the summer season and extending licences and certifications for crew, trainers and examiners. However, the cost cutting measures by the airlines will not be sufficient to stem the hemorrhage.

The majority of GCC airlines are fully government owned. How can they support their airlines? Should the governments consider a bailout? Already, in a bid to tackle the crisis, large stimulus packages amounting to some 18 per cent of GDP are being rolled out across the GCC, including a combination of fiscal measures along with central banks’ monetary and credit packages. But with oil revenues accounting for more than 55 per cent of total government revenues in the UAE and over 70 per cent in Saudi Arabia and Bahrain – according to the IMF – the drop in crude prices is being felt strongly. And with the decline in other revenues (including VAT, taxes and fees), a bailout for the airlines – while supportive of the sector – would imply a massive increase in budget deficits. The GCC cannot afford a bailout of their airlines, given the impact of Covid-19 and oil prices on budgets, with the IMF forecasting 2020 average deficits of 10.5 per cent for the region.

The case for mergers
The alternative and better policy for adjustment is through a combination of consolidation, downsizing and mergers. The UAE, Saudi and other countries should consider merging their airlines, which would achieve large cost savings and optimise revenue streams. Given that the governments fully-own or control the airlines, mergers and consolidation allows for a smoother and less costly adjustment process: no anti-trust considerations, labour disputes or having to realign cultural differences.

The economic rationale behind mergers is multi-faceted: it allows for (a) economies of scale: given that the airlines’ functions and operations (including back office functions, maintenance and support services etc) are largely identical, as are their Airbus and Boeing fleets; (b) cost reductions from the rationalisation of networks – Etihad and Emirates fly to more than 100 destinations in common, leading to cannibalisation and costly competition. A merger would reduce redundant flights and increase passenger load factors while optimising route planning and reducing competition for other passenger and cargo services; (c) more effective and intensive utilisation of existing fleets and airports; (d) scaling down to increase productivity; (e) phasing out airport expansion plans by avoiding duplication of services.

The bottom line is that a restructuring and merger of the flagship carriers within the GCC nations and their low-cost airlines would achieve substantial overall cost savings, strengthen the combined groups, make the merged airlines regionally and internationally more competitive and avoid duplication of costly bailouts at a time when the region lacks the fiscal space.

The aviation industry, with its massive investments in airports, airlines, transport and logistics, has been at the core of the efforts of the GCC countries to diversify their economies through tourism, hospitality, trade and infrastructure services. Covid-19, low oil prices and the global recession are threatening the viability of these diversification strategies. Structural reforms (such as airline mergers and consolidation) and economic policy readjustment will be required for a sustainable post-coronavirus future. The current crisis poses an unprecedented opportunity for consolidation and rationalising of government spending, while also reviewing the structure of state-owned enterprises and government-related entities.

This article titled “How GCC countries can adapt policies for a post Covid-19 world” appeared in The National on 23rd June, 2020. The original article can be accessed here.

 

How GCC countries can adapt policies for a post Covid-19 world

by Dr. Nasser Saidi and Aathira Prasad

As countries emerge from three-months of Covid-19 containment, policy makers need to plan for a transformed post-pandemic world and create a new development model

Covid19 continues to be part of life as we know it. The GCC nations are gradually emerging from lockdown. There are nodes of optimism as the number of recoveries outpace the confirmed cases, including in the UAE.
Stimulus packages across the GCC included a number of common policy actions – rate cuts, liquidity enhancing measures, deferment of loans and credit card payments. Also noteworthy is the support extended to small and medium sizes enterprises (SMEs) and affected sectors impacted by the pandemic-induced lockdowns which include tourism, hospitality and aviation.
After almost 3 months of lockdowns, countries are phasing their recovery plans. As we gradually emerge from Covid-19 containment, policy makers need to plan for a transformed post-pandemic world, which underscores the need to create a new development model.
For the GCC countries, this means reviewing three broad policy measures related to monetary and fiscal policies as well as structural reforms.
Most GCC nations are pegged to the dollar except for Kuwait which pegs its dinar to a basket including the greenback. Hence, the countries follow the Fed’s interest rate moves, which may limit the use of other instruments of monetary policy and might restrict other policy moves from the central banks other than stimulus packages to increase liquidity.
So what can the central banks do to support their economies, while maintaining a peg or moving to a currency basket? Two innovative ways of providing support would be the establishment of GCC central bank swap lines and monetising new government debt issued for deficit financing.
The establishment of GCC central bank swap lines, with an option for the larger central banks (SAMA, UAE) to tap the Fed or People’s Bank of China (PBoC) would enable regional central banks to tap additional liquidity during times of market stress, support financial stability and provide a liquidity backstop.
Monetising new government debt issued for deficit financing can help avoid the crowding out of the private sector and inject liquidity, given the lack of developed local currency debt markets and central banks’ limited ability to conduct open market operations.
On the fiscal policy front as part of their pivot towards diversifying their economies and becoming less reliant on oil revenues, a move towards deficit financing along with the institution of fiscal rules for long-term fiscal sustainability can help accelerate the development of local currency debt and mortgage markets to finance housing and long-term infrastructure projects.
Rationalising government spending either by reducing the size of government, shifting activities to the private sector, and moving to targeted subsidies is another element of fiscal reform. In conjunction governments can issue long term debt that can be bought by central banks during a crisis period which is happening in the US and Europe today.
Diversify government revenues by improving the management of public commercial assets and increasing the efficiency of tax collection is an important element of fiscal reform. Consolidating the large number of fees and charges on consumers and businesses into fewer broad-based taxes, can help lower business and living costs.
The Covid pandemic is also an incentive for “Green New Deals” through investment in public health, domestic AgriTech for food security, renewable energy, clean cities and technologies, that will support job creation and economic diversification. Governments can take the first step to ensure a project pipeline, focusing on public-private partnerships, with targeted incentives for SME participation.
Accelerating the digitisation drive will also lower the cost of broadband internet and accessibility while speeding up the implementation of 5G.
The establishment of social safety nets and protection programs and pension schemes will also help reduce financial burdens that can come around in periods of crisis. For employees, a contribution towards a pension fund would ensure sufficient savings in the event of job losses or retirement and for employers, this provides them with an investment fund and support end-of-service or gratuity payments.
Structural reforms including the acceleration of privatisation, working closer with private sector participation is key. Developing insolvency frameworks to support out-of-court settlement, corporate restructuring and adequately protect creditors’ rights is another important element. Enhancing the environment that continues to attract and retain human capital through a permanent residency programme could help generate significant economic gains.
A positive side-effect of Covid-19 is the realisation that working from home is a feasible option. Companies can offer flexible work options, reduce office space and rents, while employees can stay at cheaper home locations, save on rents, and telecommute. To realise these benefits, requires removing barriers by amending labour laws and liberalising voice over Internet Protocol (VoIP).
The Covid-19 perfect storm is an unprecedented opportunity for the GCC countries for a policy reset, to steer toward a new development model for a post-pandemic world and move away from business as usual.
 

Titled “Low Oil Prices, Coronavirus, and the Future of Gulf Economies”, this panel discussion was held by the Arab Gulf States Institute in Washington (AGSIW) as a webinar on 7th April 2020.
Gulf Arab states have announced $97 billion in emergency stimulus packages and other support measures to help offset the economic impact of the coronavirus outbreak. Spending needs are likely to increase over the short term, and regional governments must simultaneously manage the fiscal repercussions of oil prices sliding below $30 per barrel. Saudi Arabia and Oman announced budget cuts across various government ministries as states across the Gulf explore opportunities to rein in spending.

How will the spending needs and constraints stemming from the coronavirus and low oil prices affect the fiscal health of Gulf Arab states? What policy options do these states have at their disposal to confront these interrelated crises? What are the longer-term implications for economic diversification efforts across the Gulf region?

 
Watch the discussion below:

Will the GCC nations require a second round of stimulus packages, asked Zeina Soufan from Dubai TV to Dr. Nasser Saidi on the show which was broadcast on 3rd Apr 2020. The interview can be viewed here.

Dr. Nasser Saidi’s comments appeared an article titled “UAE seen as GCC nation best able to weather oil crash, coronavirus” that appeared in S&P Global Platts on 26th Mar 2020.
Comments from the article are posted below. The full article can be accessed here.
With all GCC countries set to post fiscal deficits, they may have few options in plugging the shortfall.
“Given the ongoing financial crisis, the debt overhang of around $500bn in the GCC will make it increasingly difficult for sovereigns and corporates to finance their deficits through borrowing as access to banking and financial markets will become more difficult and expensive,” Nasser Saidi, president of Dubai-based consultancy Nasser Saidi & Associates, said.
 

The article titled “The Arab World’s Perfect COVID-19 Storm”, was first published on Project Syndicate on 24 March 2020, and can be directly accessed here.

As the GCC nations roll out various economic, financial, health and travel-related initiatives, the latest country-by-country measures is compiled below. Scroll down to see a map of the confirmed Covid-19 cases in the Middle East & North Africa region.
The list is update as of 3:00pm on 21st June, 2020.
 
Table: GCC responses to tackle the Covid19 outbreak

Map: Number of Confirmed Covid19 cases by country (Source: Johns Hopkins University)
google.charts.load('current', { 'packages':['geochart'], // Note: you will need to get a mapsApiKey for your project. // See: https://developers.google.com/chart/interactive/docs/basic_load_libs#load-settings 'mapsApiKey': 'AIzaSyA4Q3e-hV2dI5w-sv8d4jG0V2jS1dXidTM' }); google.charts.setOnLoadCallback(drawRegionsMap); function drawRegionsMap() { var data = google.visualization.arrayToDataTable([ ['Country', 'Confirmed cases'], ['Bahrain', 21331], ['Kuwait', 39145], ['Oman', 29471], ['Qatar', 86488], ['Saudi Arabia', 154233], ['Lebanon', 1536], ['Iraq', 29222], ['Jordan', 1015], ['United Arab Emirates', 44533], ['Syria', 204], ['Iran', 202584], ['West Bank & Gaza', 448] ]); var options = { region: '145', // Middle East colorAxis: {colors: ['#00853f', 'black', '#e31b23']}, }; var chart = new google.visualization.GeoChart(document.getElementById('regions_div')); chart.draw(data, options); } google.charts.load('current', { 'packages':['geochart'], // Note: you will need to get a mapsApiKey for your project. // See: https://developers.google.com/chart/interactive/docs/basic_load_libs#load-settings 'mapsApiKey': 'AIzaSyA4Q3e-hV2dI5w-sv8d4jG0V2jS1dXidTM' }); google.charts.setOnLoadCallback(drawRegionsMap); function drawRegionsMap() { var data = google.visualization.arrayToDataTable([ ['Country', 'Confirmed cases'], ['Algeria', 11631], ['Morocco', 9957], ['Tunisia', 1156], ['Djibouti', 4565], ['Libya', 544], ['Sudan', 7007], ['South Sudan', 1882], ['Iran', 202584], ['Egypt', 53758], ['Syria', 204], ['Yemen', 922] ]); var options = { region: '015', // North Africa colorAxis: {colors: ['#00853f', 'black', '#e31b23']}, }; var chart = new google.visualization.GeoChart(document.getElementById('regions_div2')); chart.draw(data, options); } google.charts.load('current', { 'packages':['geochart'], // Note: you will need to get a mapsApiKey for your project. // See: https://developers.google.com/chart/interactive/docs/basic_load_libs#load-settings 'mapsApiKey': 'AIzaSyA4Q3e-hV2dI5w-sv8d4jG0V2jS1dXidTM' }); google.charts.setOnLoadCallback(drawRegionsMap); function drawRegionsMap() { var data = google.visualization.arrayToDataTable([ ['Country', 'Confirmed cases'], ['Iran', 202584], ['Syria', 204], ['Afghanistan', 28833] ]); var options = { region: '034', // SAsia colorAxis: {colors: ['#00853f', 'black', '#e31b23']}, }; var chart = new google.visualization.GeoChart(document.getElementById('regions_div3')); chart.draw(data, options); }
Middle East

North Africa

Iran & Afghanistan

Dr. Nasser Saidi discusses the GCC’s responses to the ongoing Covid19 outbreak, in an interview that aired on Al Arabiya on 17th March 2020. In the interview, he reiterates the need for fiscal policy stimulus (given its effectiveness) vs monetary policy action; also highlights the sectors and countries that would be most adversely affected.
The video can be viewed below; the write-up can be accessed at https://ara.tv/4rmup

 

The below comments were published in Gulf Today, in an article titled “Global energy platform spotlights latest breakthroughs, challenges“, on the basis of the discussion at the Middle East Energy 2020 conference, held in Dubai on 3rd March 2020. Dr. Nasser Saidi’s comments are posted below.
 
Nasser Saidi, Chairman, Clean Energy Business Council Mena, said, “Currently, there are seven gigawatts of renewable energy projects in the region and this is very encouraging for the transformation of the energy mix in GCC countries. If you look at prices, we are currently at $0.14 per kilowatt for renewable energy and heading towards $0.01. This means the region is not only at the forefront in adopting renewable sources such as solar power, it means fossil fuel power generation is now being outcompeted by renewables.”
He added, “If you’re going to invest in the regional energy sector, it has to be in renewables. They are much more efficient, cleaner for the environment and can be achieved at much less cost.”
Saidi also added that ending regional energy subsidies, which have historically kept energy prices lower, will benefit both public and private sectors, consumers and the planet, with money previously set aside for subsides instead being utilised in renewables-based research and development, job creation and a greater understanding of how much energy is being consumed versus how much is actually needed.
The clean energy advocate also stressed the region is primed to take the lead in energy grid integration, stressing his desire for “everyone across the GCC to have their own power plant” is unnecessary.
“Let’s integrate the grids across the UAE, across the GCC. Integrated cooperation across the GCC will make for greater efficiency. It means that if there is a surge in energy demand in one location, it can be satisfied by other countries on the grid.” Saidi told Middle East Energy delegates that while clean energy targets are a start, they mostly form part of a wider framework centred around climate policy and decarbonising economies for the future, insisting Mena governments and energy companies are already in the driving seat to chart a decarbonised future.
“There is an enormous opportunity for the region to invest in the industry and create jobs. We’ve long been energy consumers; now we should become exporters of renewable energy. There’s no reason why we cannot be at the forefront, as producers of solar technology, to link Europe and North Africa,” added Saidi.
“If there’s one place where we should be doing research and development in solar it is here, not in Europe. We have approximately 355 days of sunshine. Let’s take the lead, build homegrown technology and become exporters of that technology. We can partner with countries such as China who are at the forefront of solar technology. I think this is the answer.”
 

Dr. Nasser Saidi presented an opening keynote, titled “Climate & Financial Stability are Interdependent Public Goods“, at the Clean Energy Business Council (CEBC)’s Sustainable/Climate Finance event, held in Dubai on 2nd March 2020.
The presentation provided an overview of the major issues relating to climate change globally, before moving on to exploring the various fiscal and regulatory tools available for climate action, with a specific focus on financing. Dr. Nasser Saidi also spoke at length how the Middle East can adapt to climate change before ending with a snapshot of how the CEBC plans to contribute to this effort.
 
 

Dr. Nasser Saidi participated as a speaker at the the Oman Center for Governance and Sustainability’s annual Corporate Governance conference held in Muscat on 5th Dec 2019.
Titled “MENA Corporate Governance: a steep path to improvement & reform”, the presentation highlighted recent developments in international and regional governance. It also identified issues facing the MENA/ GCC region including (a) Conflicts of interest; (b) Role of boards in strategy; (c) Governance of AI; (d) Governance of SOEs & GREs; and (e) Governance of subsidiaries & holding companies.
The presentation can be downloaded here.

The world’s biggest crude oil producer, Saudi Aramco launches the subscription period for its much-anticipated IPO as it rolls on with its ambitions to become the globe’s pre-eminent integrated energy and chemicals company.
Host Mustafa Alrawi, assistant editor in chief of The National, and Kelsey Warner, The National’s future editor, talk with Dr Nasser Saidi, regular contributor to The National and president of the economic advisory and business consultancy Nasser Saidi & Associates, about the Aramco IPO. Dr. Saidi discusses the IPO’s strategic importance, outlook for the oil market and strategy alliance with China.
In this episode:
Kelsey and Mustafa on Adipec (0m 32s)
Dr. Saidi on the IPO (8m 21s)
Headlines (27m 14s)
https://audioboom.com/posts/7421977-adipec-and-the-saudi-aramco-ipo

The article titled “How carbon taxes can boost state coffers and clean the environment” appeared in The National’s print edition on 7th October, 2019 and is posted below. Click here to access the original article.
 

Greta Thunberg’s impassioned speech dominated the recent UN climate summit. “Change is coming, whether you like it or not,” she said. We must act on Greta’s hectoring. She represents a generation whose voice is not being heeded by a generation of policymakers placing a high discount rate on an increasingly existential threat to our planet. They will be long gone, but their legacy will be planetary ecocide.
Last year, global energy-related carbon dioxide emissions rose by 1.7 per cent to the highest level since 2013, according to the International Energy Administration, with this year estimated to be steeper. While the sharp decline in cost of renewables (90 per cent for solar) has led to the rapid growth of its dissemination, it has not been enough to offset the increased use of fossil fuels. The growing existential threat of climate change necessitates quicker and sustained policy action.
The Middle East is particularly vulnerable. The region’s share of global emissions reached a record 6.3 per cent in 2018, nearly double its 3.3 per cent share of world GDP. Some Arab countries fall among the top nations when it comes to emissions per capita.
Reducing greenhouse gas emissions requires deploying low-carbon energy in addition to improving the efficiency of energy consumption (see my previous column). The announced renewable energy policies of GCC nations are a step in the right direction. They aim to shift preferences, consumer and producer choices towards renewables and away from fossil fuel activities and production. But there is room for more to be done.
Government policies can be augmented by a determined carbon pricing that increases the relative cost of fossil fuel generated energy compared to that produced by renewables. Carbon pricing is the most effective and cost-efficient means to reduce emissions. It forces producers and users of carbon fuels to internalise external costs of their emissions and ties them to sources through a price on carbon (the polluter pays principle).
There are two efficient options: emissions trading systems, or cap-and-trade as implemented in the EU and carbon taxes. Carbon taxes are more comprehensive since they apply to all CO2 emissions from the combustion or consumption of fuels (coal, oil, gas) to limit emissions. The tax is applied at the point of production, including a border adjustment on imports of energy-intensive products to shield domestic manufacturers from international competitors that do not face a similar tax. A carbon tax sends a clear price signal to polluters to discontinue their polluting activity, or bear the cost for emissions. The carbon price also encourages clean technology and market innovation, fuelling new, low-carbon drivers of economic growth and decarbonisation.
Introducing a tax in the GCC would result in structural change for local economies. The challenge for policymakers is that the high energy-intensive sectors such as petrochemicals, aluminium, aviationand shipping have been the basis of economic diversification strategies. They would be the most directly impacted by carbon taxes. Fossil fuel assets can be sold (as in the Saudi Aramco planned IPO), while capital stock would need to be written down, phased out or destroyed to be replaced by “green assets & capital”. The policy choice is between starting on the energy transition path now, or later facing the dismal alternative of massive adjustment and stranded assets.
Iata has adopted the Carbon Offsetting and Reduction Scheme for International Aviation and the International Maritime Organisation is considering measures to decarbonise maritime transport by 2035. Similarly, a record 515 institutional investors managing $35 trillion (Dh128tn) in assets (nearly half the world’s invested capital) last week urged governments worldwide to step up action to tackle climate change and achieve the Paris Agreement’s goals. Central bankers are also going green: extreme-climate scenarios will be introduced into financial stress tests, given the sector’s exposure to climate-related risks and the writedown in the value of fossil fuel assets.
Given the GCC’s high carbon footprint, the introduction of a carbon tax would generate substantial revenues for the governments. Revenues could range between $5.5bn to $19.4bn for a carbon tax ranging from $20 to $70 per tonne of CO2 in the UAE to $11.4bn to $40bn in Saudi Arabia.
It’s worth noting that a carbon tax is cheaper to collect and brings substantially more revenue than the amounts being raised by the VAT (in 2018, UAE and Saudi Arabia collected $7.35bn and $12.5bn, respectively).
More in state revenues mean it can be used to finance decarbonisation and make the energy transition smooth: by investing in climate-resilient infrastructure; retrofitting buildings and structures; subsidising renewable investments by the private sector and in vulnerable industries such as transport. Part of the revenue can be apportioned to national funds backing research and development and develop the domestic clean technology and renewables sectors, including desalination.
Carbon tax revenues would finance clean economic diversification and investment-led green economy growth for the GCC. It is a win-win.

The article titled “Climate Change is an Existential Threat for the Middle East & the GCC” will be published in the Aspenia Issue, Fall edition 2019, and can be downloaded in Italian.
 
While humans squabble and debate their commitment to combat climate change -despite the clear and present danger warning of the 2018 report by the Intergovernmental Panel on Climate Change (IPCC)- Nature has been relentless and unforgiving. Extreme weather events are growing in intensity and frequency. Examples of which include maximum temperatures being reached in Bahrain this June since records in 1946. The ongoing drought in India and related acute water shortage continues, threatening rural communities and leading to greater poverty. It is expected that sea levels are expected to rise between 10 and 32 inches or higher by the end of the century. Arctic ice loss has tripled since the 1980s ^[1]and Antarctica lost as much sea ice in four years – four times the size of France ^[2] as the Arctic lost in 34 years. The Global Climate Risk Index reports that “altogether, more than 526 000 people died as a direct result of more than 11 500 extreme weather events; and losses between 1998 and 2017 amounted to around US$ 3.47 trillion (at PPP rates).^[3]
Moving from Climate Crisis to Climate Opportunity
The World Bank estimates the current cost of climate-related disasters at $520bn a year, forcing some 26mn people into poverty annually.^[4]In comparison, the additional cost of building infrastructure that is resistant to the effects of global warming is only $2.7tn in total over the next 20 years. By contrast, the currently known cost of inaction is enormous and expected to reach a staggering USD 23 trillion a year by the end of this century ^[5], four times greater than the impact of the 2008 financial crisis.
The economic impact of climate change will be pervasive ranging from major disruption to food chains, the ‘creative destruction’ of fossil fuel based activities, widespread damage to infrastructure, increased inequality across and within countries unable to counter the effects of climate change, mass forced displacement of human and animal populations, and the destruction of human, animal and plant habitats. The climate change externality is global, long-term, persistent, and potentially irreversible. This has prompted Joe Stiglitz to say that ‘the climate crisis is our third world war. It needs a bold response’.^[6]
Part of the answer involves deep decarbonisation, shifting our economies from fossil fuels towards green economy solutions, based on renewable energies and technologies. Rapid technological change and innovation has made renewable energies (solar, wind, hydro, geothermal) directly competitive with fossil fuel based technologies and enabling distributed energy resources. More recently, AI and  Blockchain are being applied to renewable energies increasing their efficiency and competitiveness.  These can be powerful technologies for economic development and for lifting rural communities out of poverty through ‘electronification’ and digitalisation. We should not, however, delude ourselves: technology is not a panacea absent of political will, commitment and public and private investment. The growing political acceptance of ‘green new deals’ generates some cautious optimism.
MENA/GCC climate change impact and risks
While climate change will be global, its regional impact will be varied and unequal, with MENA along with Sub-Saharan countries among the most vulnerable. Growing desertification, widespread drought, high population growth rates (leading to a doubling of population by 2050), rapid urbanisation, extreme heat, compound the effects of water scarcity to magnify the impact of climate change. Last year was the fourth warmest on record, with Algeria recording the hottest temperature (51.3°C) reliably recorded across Africa.
About 17 countries are already below the ‘water poverty line’ set by the UN. The World Bank estimates that climate-related water scarcity will cost the region 6 to 14% of its GDP by 2050, if not earlier. The MENA region’s annual recharge rate of renewable water resources amounts to only 6% of its average annual precipitation versus a world average of 38%. In this context, it should be remembered that Saudi Arabia has exhausted almost 4/5-th of its aquifer water after misguided “food security” policies encouraged water & energy intensive modern farming to transform a largely desert country to become the world’s 6^thlargest exporter of wheat! This has now stopped but the environmental damage is permanent.
Climate Change and Conflict
Home to 6% of the global population but just 1% of freshwater resources, the MENA region (already in the throes of conflicts over resources, land, ideologies and religion) will very likely be fighting “water wars” by mid-century. Ethiopia is building its Grand Renaissance Dam and Egypt claims that it will cut downstream flows and water supply to Egypt by some 25%. The potential for conflict is growing, with Egyptian President el-Sisi openly declaring that the dam is “a matter of life and death.”^[7]
A growing body of evidence (for example Burke et al. (2014))^[8]and research shows a strong linkage between climate and conflict, with adverse climatic events increasing the risk of violence at both the interpersonal level and the intergroup level, in societies around the world and throughout history. While climate change was not the main driver of the Arab Firestorm in 2011, the Syrian civil war is linked with  an extended drought period between 2006-2011 which caused 75% of Syria’s farms to fail and 85% of livestock to die, devastating rural communities, resulting in forced displacement. The Libyan and Yemen wars as well as the Sudan civil unrest have been exacerbated by low rainfall and associated drought leading to rural impoverishment and migration.
Reliance on desalinated water for domestic use is another concern. MENA accounts for nearly half of the world’s desalination capacity and the GCC’s dependence on desalination is almost 90%. This leaves a large carbon footprint as the region is reliant on energy-intensive thermal desalination plants. Ironically, the region is also at the risk of flooding: the World Bank identified 24 port cities in the Middle East and 19 in North Africa at particular risk of rising waters ^[9]. For countries like Kuwait and the UAE, the threat of rising sea levels could permanently impact up to 24% and 9% of their GDP respectively. Furthermore, the wide disparity in regional wealth and incomes (about $70k per capita in Qatar to less than $1k in Sudan) implies differences in adapting to and mitigating climate change risks.
Oil Producers Face an Existential Threat
Climate change poses an existential challenge, threatening the economic viability of the MENA oil producing countries. The energy transition to comply with COP21 and related commitments leading to a global shift away from fossil fuels to renewable energy, implies that the main source of wealth and income of the GCC and oil producers could rapidly depreciate in value as a result of the fall in demand and prices. Fossil fuel assets could become “stranded assets” i.e. assets that are not able to meet a viable economic return as a result of unanticipated or premature write-downs. To counter this existential threat, the GCC countries need to accelerate their economic diversification plans and develop and implement decarbonisation strategies. The nations have tentatively and timidly embarked on this path.
MENA/GCC policies to combat climate change
The GCC nations have initiated a phased removal of fuel, electricity and water subsidies to reduce the high energy intensity of consumption and production induced by distortionary subsidies. The removal of subsidies will reduce energy use and help shift the energy mix away from fossil fuels, and also creates fiscal space allowing funding of renewable energy investments and climate-resilient infrastructure.
The Middle East and GCC are part of the Global Sun Belt: more energy falls on the world’s deserts in 6 hours than the whole world consumes in a year! Harnessing solar power is an efficient policy choice, while wind power market is slowly catching up in Jordan and Morocco, though more than 56% of the GCC’s surface area has significant potential for wind deployment.
The GCC nations and especially UAE, are taking a lead in MENA in increasing energy efficiency-a low hanging fruit- and investing in renewable energy.  There is now a GCC renewable energy project pipeline comprising over 7 GW of new power generation capacity to be realised within the next few years. The surge in projects has been supported by the rising cost competitiveness of renewables (it is now actually cheaper to build new wind and solar PV plants than it is to run existing fossil-fuel ones), as well as the falling costs of energy storage (by 2021, the capital costs of lithium ion battery-based storage are expected to fall by 36% compared to the end of 2017 ^[10]).
IRENA’s 2019 report ^[11]estimates that by 2030 the region is on track to leverage renewables to save 354 million barrels of oil equivalent (a 23% reduction), create some 220,500 new jobs, reduce the power sector’s carbon dioxide emissions by 22%, and cut water withdrawal in the power sector by 17%. Renewable energy related targets range from UAE’s ambitious goal of 44% of capacity by 2050 (from 27% clean energy in 2021) to Bahrain’s target of 10% of electricity generation in 2035, and Saudi Arabia’s 30% of generation from renewables and others (mainly nuclear) by 2030. The other important component of reducing energy consumption is energy efficiency, with a 6% target of reducing electricity consumption in Bahrain (in 2025) to 30% in the UAE (in 2030). Countries are now starting to commit to a net-zero emissions goal – 15 nations have declared the intention of reaching net zero emissions in or before 2050 ^[12]. The GCC are yet to announce their intentions in this regard.
In addition to the deployment of renewable energy projects, energy efficiency investments are another area for reform. Retrofitting existing buildings will improve energy efficiency and reduce carbon emissions. Green buildings ^[13]is another policy initiative which has gained traction: the Dubai Municipality has issued the Green Building Regulations and Specifications for all new buildings in the emirate since March 2014. But Dubai is the only city in the MENA region to join the Building Efficiency Accelerator programme, to double the rate of energy efficiency by 2030.
Climate Change Challenges facing MENA and the GCC
Looking ahead, the countries of the region face three broad challenges:

1. Institutional challenges:
2. Policies are in place to move away from fossil fuels to clean energy; however, until subsidies are eliminated, the legacy of building large conventional plants to feed demand is unlikely to end.
3. These policies should ideally be supported by adopting a Zero Net Emissions policy, to serve as a comprehensive, unifying basis for climate change policy. Other GCC nations could follow the UAE’s policy direction and establish Ministries of Climate Change & Environment.
4. Unified regional standards are needed to remove barriers to trade and investment, are necessary for regional power market integration and to benefit from economies of scale.
5. Build capacity to support the creation and development of climate change policy and regulatory experts who can support the government and private sector create policies and strategies to meet a Zero Net Emissions policy.
6. Financing:
7. Introducing Carbon Taxes in MENA would generate substantial revenue, increase energy efficiency and part fund decarbonisation strategies.
8. Support for small-scale players and installations: significant initial capital requirements for big facilities deter the entry of small-scale players. Support for home and business PV installations would improve energy efficiency and creation of distributed energy resources.
9. Facilitate New Energy Financing: global green bond issuances reached a record USD167 billion in 2018. The GCC could become the center for MENA and emerging market green bonds and Sukuk.
10. Develop Green Banks to fund the private sector in decarbonizing, from energy efficiency, to retrofitting, to climate risk mitigation investments.
11. Adopting technological innovations: implement Blockchain (for power/ grid chain management) and AI to increase efficiency, ability to store and share solar power via interconnected grids and smart meters.

Concluding remarks
Climate change poses some daunting challenges and existential risks for the MENA region, the GCC and other MENA oil producers. The bottom line is:

• The MENA countries are highly vulnerable to climate change because of their geographic conditions, demographics, lack of climate resilient infrastructure, deficient institutional capacity and preparedness to mitigate climate change risk. They also face–mainly in North Africa- the rapidly growing spillover effects of climate-induced mass displacement and migration from Sub-Saharan Africa. They face growing risks of climate related conflicts.
• The global energy transition and decarbonisation policies imply a growing risk that the fossil fuel resource wealth of the oil producers will become stranded assets. Similarly, the region’s banking & financial sector faces stranded assets risk, given its heavy exposure to the oil & gas sector. These are existential risks.
• The GCC countries have developed energy sustainability policies. These are modest given their large natural comparative advantage of harnessing solar & wind power and their substantial financial resources allowing accelerated investment in renewable energy assets. A Net Zero Emissions climate policy should be developed and implemented.
• To mitigate climate change risks, the region’s oil producers must accelerate their economic diversification away from oil & gas. This implies a rapid phasing out of fossil fuel subsidies. Decarbonisation and economic diversification are complementary strategies and a win-win opportunity. By diversifying into renewable and sustainable energy and climate risk mitigating industries and activities, the GCC can create jobs and a new alternative export base, through a Green New Deal.

 
[1]https://www.nationalgeographic.com/environment/global-warming/global-warming-effects/
[2]https://www.weforum.org/agenda/2019/07/antarctica-lost-sea-ice-4x-the-size-of-france-in-3-years/
[3]https://www.germanwatch.org/sites/germanwatch.org/files/Global%20Climate%20Risk%20Index%202019_2.pdf
[4]https://www.worldbank.org/en/news/press-release/2016/11/14/natural-disasters-force-26-million-people-into-poverty-and-cost-520bn-in-losses-every-year-new-world-bank-analysis-finds
[5]WEF discussion: https://www.youtube.com/watch?v=su38ondAwkg
[6]https://www.theguardian.com/commentisfree/2019/jun/04/climate-change-world-war-iii-green-new-deal
[7]See “How Climate Change Could Exacerbate Conflict in the Middle East”,
[8]Burke, M., Hsiang, S.M., Miguel, E. (2014): “Climate and Conflict”, downloadable at: https://www.nber.org/papers/w20598
[9]Egypt’s coastal city Alexandria, the second largest city, is at risk of being submerged by rising sea levels.
[10]See Lazard’s report https://www.lazard.com/perspective/levelized-cost-of-energy-and-levelized-cost-of-storage-2018/
[11]https://www.irena.org/-/media/Files/IRENA/Agency/Publication/2019/Jan/IRENA_Market_Analysis_GCC_2019.pdf
[12]https://eciu.net/news-and-events/press-releases/2019/one-sixth-of-global-economy-under-net-zero-targets
[13]Green building is the practice of creating structures in a resource efficient way without having any negative impact on the environment.
 

The article titled “Why climate change is an existential threat to the Middle East” appeared in The National’s print edition on 22nd August, 2019 and is posted below. Click here to access the original article.
 

Why climate change is an existential threat to the Middle East

While humans squabble and debate their commitment to combat climate change, nature has been relentless and unforgiving. Extreme weather events are growing in intensity and frequency.
June 2019 was the hottest June in 140 years, setting a global record, and maximum temperatures last seen a century ago were felt in Bagdad, Bahrain and Kuwait. The ongoing drought in India and related acute water shortage continues, threatening rural communities and leading to greater poverty.
Sea levels are expected to rise between 10 and 32 inches or higher by the end of the century. Arctic ice loss has tripled since the 1980s and Antarctica lost as much sea ice in four years – four times the size of France – as the Arctic lost in 34 years. The Global Climate Risk Index reports that “altogether, more than 526,000 people died as a direct result of more than 11,500 extreme weather events; and losses between 1998 and 2017 amounted to around $3.47 trillion (at purchasing power parity rates).
The clear and present danger warning of the 2018 report by the Intergovernmental Panel on Climate Change (IPCC) is going unheeded.
While climate change will be global, its regional impact will be varied and unequal, the Middle East and North Africa (Mena) along with Sub-Saharan countries are among the most vulnerable. Growing desertification, widespread drought, high population growth rates (leading to a doubling of population by 2050), rapid urbanization and extreme heat compound the effects of water scarcity to magnify the impact of climate change. The near absence of climate change combating and risk mitigation policies are aggravating the impact.
The World Bank conservatively estimates that climate-related water scarcity will cost Mena 6 to 14 per cent of its GDP by 2050, if not earlier, while some 17 countries are already below the ‘water poverty line’ set by the UN. The lack of efficient water management infrastructure and policies exacerbate natural water scarcity.
Home to 6 per cent of the global population but just 1 per cent of freshwater resources, Mena will very likely be fighting “water wars” by mid-century. The Tigris and Euphrates rivers are drying up, building up tensions between Turkey, Iraq and Syria over water resources. Ethiopia is building its Grand Renaissance Dam and Egypt claims that it will cut downstream flows and water supply to Egypt by some 25 per cent. The potential for conflict is growing, with Egyptian President el-Sisi openly declaring that the dam is “a matter of life and death”.

Climate change poses an existential challenge, threatening the economic viability of oil-producing countries. The energy transition to comply with COP21 is leading to a global shift away from fossil fuels to greater energy efficiency and renewable energy, implying a secular downward trend in demand for fossil fuels and prices.
The implication is that the main source of wealth and income of the GCC and oil producers could rapidly depreciate in value because of the fall in demand and prices. Fossil fuel asset prices could rapidly deflate leading to “stranded assets” – that is, assets that are not able to meet a viable economic return as a result of unanticipated or premature write-downs. It is estimated that about a third of oil reserves, half of gas reserves and more than 80 per cent of known coal reserves would remain unused in order to meet global temperature targets under the COP21 Agreement.
The “stranded assets effect” would directly impact all economic activities and businesses that extract, distribute and those that use fossil fuels intensively as inputs for production, such as transportation. In turn, the prices of fossil fuel exposed assets (stocks, bonds and financial securities), would rapidly deflate to reflect the growing risks, and loans would become impaired, resulting in a loss to investors, including banks, pension funds, insurance companies and SWFs.
Central banks are raising the alarm that climate risk is a direct financial risk for the banking and financial sector. Mark Carney, Governor of the Bank of England, has highlighted three broad channels through which climate change can affect financial stability. He names physical risks affecting the insurance industry; climate change liability risks due to claims arising from climate change; and transition risks. Transition risks will crop up as changes in policy and technology result in a reassessment of the value of a large range of assets that emerge once they have been stranded. Citigroup forecast that the total value of stranded assets could be over $100 trillion in a 2015 report (based on $70 per barrel of oil, $6.50/MMBTU of gas and $70 per tonne of coal).
The bottom line is that the GCC faces three direct risks from climate change: physical, as heat, rising sea levels and water scarcity become reality; economic, as wealth destruction ensues vast oil reserves becoming stranded assets; and financial, with a banking and financial sector highly dependent and exposed to the oil and gas sector.
What should the GCC countries do? To counter these existential threats, they need to accelerate their economic diversification plans, develop and implement decarbonisation strategies and develop neighbourhood climate risk mitigation policies. The nations have tentatively embarked on this path.

Dr. Nasser Saidi gave the opening keynote presentation titled “Managing in an Increasingly Turbulent Geopolitical Climate” at the Corporate Counsel Middle East Forum held in Dubai on 18th Apr 2019.
The presentation focused on the current global and regional geopolitical climate as well as the ongoing economic wars. In the regional backdrop, the presentation highlighted how the GCC have been undergoing a transition and transformation, also highlighting the ongoing structural reforms across multiple areas. Of interest for the corporate counsel was the recent changes in laws related to attracting FDI, opening up new sectors for foreign companies, changes to the legal, regulatory and financial infrastructure. It ended with a glimpse into expected changes  in the near to medium term: including taxation reform, corporate restructuring & insolvency as well as how digital laws and regulations were needed to support FinTech, e-commerce etc.
The presentation can be downloaded here.

The MENA-OECD Working Group on Investment and Trade‘s 2018 meeting was held in Dead Sea, Jordan on 27-28 Nov, 2018. (More: http://www.oecd.org/mena/competitiveness/investment-and-trade.htm)
A policy brief titled “Trends in trade and investment policies in the MENA region” was prepared by Nasser Saidi & Associates to aid discussions during this meeting.
The executive summary is shared below; the paper can be downloaded here.
 

Executive summary

The Middle East and North Africa (MENA) region accounted for only 5% of global exports and 4.3% of total imports in 2017. Merchandise exports from the MENA region to the rest of the world stood at 893bn USD in 2017 (up from just under 250bn USD at the start of this century). MENA countries are particularly vulnerable to terms-of-trade shocks because of the volatility of their export earnings, caused by the high concentration of exports in primary commodities and exacerbated by the high concentration of export markets. The region can achieve greater economies of scale if each country can better use its comparative advantage through production sharing networks and integration into global value chains.
There has been a significant shift in the region’s trade patterns toward Asia over the past few decades. Asia now accounts for about 55% of the region’s total trade compared to around 40% in 1999.  Regional trade remains dismal at under 10%. MENA oil importers’ share of trade within the region remains relatively high: Lebanon (44% of total exports in 2017) Jordan (43%), and Egypt (22%). Maghreb countries export the least within the region (under 10%), with much of their exports going to Europe.
FDI inflows into the region increased between 2000 and 2008, thanks to efforts to improve the business environment and investment climate and to related structural and institutional reforms. Slowdown appeared after the financial crisis in 2008 followed by regional turbulences, with limited recovery. In 2017, investment flows into the GCC were 15.5bn USD, almost 3.5 times lower than in 2008 at their peak. The bulk of FDI inflows into the region have gone into energy, real estate, financial services and consumer products.
Overall, the MENA region remains less regionally integrated in terms of trade and investment flows. The main barriers to growth in trade and investment (including intra-regional) are multi-fold:

• Though average tariffs have reduced over time, they remain very high; non-tariff barriers (e.g. burdensome technical regulations, import authorisation procedures, cumbersome customs clearance and border controls) are obstacles to both regional and global integration;
• MENA’s trade facilitation performance – in terms of procedures, harmonisation, transparency, border agency cooperation and so on – leaves much to be desired;
• Though regional trade agreements are in place, their implementation and enforcement are lacking and benefits are not visible;
• Lack of diversification is a serious drawback, given that oil and agricultural products remain by far the most important exports;
• Regional economic integration has seen very little progress due to different factors including weak institutions, the lack of infrastructure and state-owned enterprises;
• Cumbersome licensing processes, complex regulations and opaque bidding procedures create both business and investment barriers;
• Competition legislation is particularly needed in countries where markets are highly concentrated and where barriers to imports are still high;
• Trade has been negatively affected by the wars, sanctions and political barriers in the region; and
• The scarcity of quality data and statistics on both domestic and foreign investment means a lack of evidence-based public policy and increases perceived investment risk.

While the region has undertaken significant reforms to support trade and investment – ranging from lowering tariffs to improving infrastructure to protecting minority investments to institutional investment reforms – it is evident that there is a long way to go for greater trade integration. In this context, it is recommended that the MENA region:

• Invest heavily in trade-related infrastructure and logistics;
• Deepen intra-regional trade through trade facilitation;
• Invest in moving towards greater digital trade facilitation;
• Use GCC countries as engines of economic integration;
• Reflect the shift in trade partners in new trade and investment agreements;
• Improve legal and institutional framework to support private sector growth and diversification
• Make a digital transformation in order to support trade and investment: from transport (electric vehicles), to banking and financial services (Fintech), commerce (e-commerce), to health and agriculture (Agrytech), and the government sector  ;
• Ensure the availability, harmonisation and dissemination of regular, timely, comparable and quality statistics, which are essential to conduct sound trade and investment policies.

Preparing for the next global financial crisis

Public debt in advanced economies rose by more than 30 percentage points of GDP, with total global debt reaching some $250tn by the second quarter of 2018
The Fed’s quarter point rate increase to 2.25 per cent last week is the eighth hike in the past two years, a continuing reversal of the unprecedented monetary easing following the Great Financial Crisis (GFC) as the regulator pivots to a course of higher interest rates and Quantitative Tightening (QT). The GFC had led to concerted efforts to stimulate economies using monetary policy and bailing out of failing banks. The result was a sharp build-up of global debt.
With central banks lowering nominal (and real) rates to unprecedented levels and injecting liquidity through unconventional monetary policies (QE), the world went on a borrowing spree effectively driving up real estate and asset prices on financial markets. Public debt in advanced economies rose by more than 30 percentage points of GDP, with total global debt (including government, household, financial and non-financial corporates) reaching some $250 trillion by the second quarter of 2018. The assets of the world’s largest central banks (US, UK, EU, and Japan) have increased to $15.3tn (an unprecedented 38 per cent of GDP), of which about two-thirds comprise government bonds.
The large global debt build-up now threatens a new financial crisis. Higher interest rates and QT is leading to a growing vulnerability of emerging markets economies. Over $200 billion of dollar-denominated bonds and loans issued by emerging market governments and corporates will mature during 2018 and they will need to repay or refinance about $1.5tn in debt in 2019 and in 2020. Emerging and middle-income countries with high debt levels, large fiscal and current account deficits and US dollar denominated debt maturing over the near term will face rollover risk.
Lessons from the Twin Oil and Financial Shocks of 2008-2009
At the onset of the Great Financial Crisis (GFC) of 2008, banks in the Middle East, especially the GCC, were not highly leveraged and did not have any direct linkage or exposures to the US sub-prime crisis. Financial instruments like mortgage backed securities and other instruments that became toxic assets, were absent from the markets. Ten years later, banks in the region remain well-capitalised, and largely compliant with the latest BIS requirements. Similarly, the region’s financial markets were not directly exposed. The bottom line is that the lack of international integration of the financial markets in the region meant limited spill-over effects from developed markets.
But under-developed domestic financial markets generate an imbalance in regional banks’ US dollar balance sheets. They rely heavily on less-stable funding such as short-term interbank deposits, wholesale sources, bonds and swaps. When the crisis hit in 2008, these sources of funding melted like ice in the desert. Banks and financial institutions found their correspondent bank lines and facilities evaporated. Similarly, the market meltdown meant that sovereign wealth funds and central banks found their ‘liquid assets’ turned illiquid; prices plummeted and there were no counterparts. These financial and liquidity shocks were compounded by the sharp decline in oil prices with the onset of the Great Recession. For GCC economies there was downward pressure on wages, incomes and on domestic asset prices, including real estate, which fell sharply.
But the GCC banking sector was spared a full blown crisis. Policy responses included sustained government spending, lower interest rates (in tandem with the Fed), an easing of liquidity through direct injections in the money market and /or access to new central bank facilities, reductions in reserve requirements and relaxation of prudential loan-to-deposit ratios. Kuwait, Saudi, the UAE and other countries in the wider Arab world introduced deposit guarantees which helped stem capital outflows.
In the aftermath, the GFC did lead to a strengthening of the regulatory framework and oversight in the GCC countries through the implementation of Basel III requirements, which improved risk management and operational efficiency, and the establishment of credit information bureaus to enhance credit risk assessment and management. Room for improvement remains, corporate governance needs to be strengthened further along with greater disclosure and transparency. Strong corporate governance is core to mitigating the microeconomic, internal risks of banking and financial crises.
Another Financial Crisis is Brewing
The next financial crisis will likely be triggered as central banks starting with the Fed end QE and initiate QT. The large overhang of global debt, rising international interest rates along with QT, a contraction of liquidity and credit growth, increase the risk of a recession in 2019. These risks are being compounded by Trumpian trade wars, that can derail the recovery of growth of international commerce and severely dampen investment. The warning signs are there: trade volumes are declining along with dampened business confidence and delays in investment decisions. The expectation of a downturn and recession can trigger a global financial crisis in advance of the downturn.
Three policy reforms can help prepare the GCC countries in advance of the next financial crisis.

1. Build local currency financial markets. A major lesson from the GFC and from the Asian crisis, is the danger of over reliance on foreign currency bank financing for cyclical sectors like housing, real estate and long gestation infrastructure investment. Developing local currency financial markets which includes government debt to finance budget deficits, infrastructure and development projects along with housing finance/mortgage market will help the GCC.
2. Establish a modern and credible legal and regulatory financial infrastructure: Enhance debt enforcement regimes by decriminalising bounced cheques and building the capacity of the courts; develop insolvency frameworks to support out-of-court settlement and corporate restructuring. Introduce laws to facilitate mergers & acquisitions, as well as securitisation to support the development of asset backed and mortgage backed securities and other structured debt instruments.
3. Develop a counter-cyclical fiscal policy tool box for economic stabilization. This requires reforming budget laws to allow for deficit financing, along with the institution of fiscal rules for long-term fiscal sustainability.

Dr. Nasser Saidi gave a closing keynote presentation titled “Markets, Oil & Trade Wars:  Choppy Waters Ahead for the GCC” at the Middle East Global Private Markets Forum organised by Institutional Investor in Dubai on the 18th of September 2018.
The presentation covered the global macroeconomic outlook and risks, and looked in depth at the reform and transition in the GCC given the backdrop of the New Oil Normal. The session also discussed the medium-term outlook for Saudi Arabia and GCC, and concluded with a few key takeaways.
Click here to download the presentation.
 
 

Dr. Nasser Saidi was one of the opening keynote speakers at Corporate Restructuring Summit 2018 held in Dubai on September 5th,2018. The presentation titled “Building Blocks For Effective Corporate Debt Management″ started with an overview of the global debt market and the risks of monetary policy normalisation, with a more focused look at the MENA/ GCCdebt levels, before highlighting what the necessary building blocks and reforms were for creating an active, deep and liquid local currency debt market.

Click here to download the presentation; a synopsis of Dr. Saidi’s presentation and talk was published on Zawya and can be accessed here (excerpt below):

The development of securitisation laws to allow for banks to package and trade distressed debts is one of a number of capital market reforms that could help to improve both the credit position of banks and the ability of Gulf governments to withstand economic shocks, a leading regional economist has said.

He argued that local currency-denominated capital markets were needed both as an alternative source of financing, and as a useful policy tool.

“It’s important both for governments as well as for corporates. For governments, they could then use debt markets for infrastructure projects instead of tapping the banks.”

The fact that many GCC governments peg their currencies to the U.S. dollar means that they have few monetary policy levers in times of a crisis, he said, but local currency debt markets allow central banks to conduct open market operations (e.g. quantitative easing).

Dr. Nasser Saidi’s comments appeared in The National’s article titled “Will the ‘Amazon effect’ take hold in the Middle East?”, on September 5, 2018. The full article is copied below (comments highlighted) and can be accessed here.
 

Will the ‘Amazon effect’ take hold in the Middle East?

More frequent price changes for consumer goods in the United States along with increasing consistency in pricing due to the rapid growth of online retailers may be affecting inflation, a recent academic paper found.
But is the so-called “Amazon effect” also impacting the Middle East?
“Not yet,” says Nasser Saidi, the former chief economist of Dubai International Financial Centre. “Even the effect in the United States is a relatively recent phenomenon because of the scale of e-commerce and big companies like Amazon and eBay going into the retail sector.”
The US academic paper on the topic was written by Alberto Cavallo, an associate professor at Harvard Business School, who analysed how multi-channel retailers – those with brick-and-mortar and online outlets, such as Walmart – have reacted to the rise of Amazon. It found the Amazon effect was not only keeping prices low due to the higher volume of e-commerce platforms, but that traditional retailers had become more nimble on price, changing them more frequently and offering more consistency for the same items across different locations.
The study went one step further, indicating that Amazon’s ability to keep a lid on prices was also contributing to the low levels of US inflation seen in recent years.
Analysts say it will take time for a similar trend to happen in this region, mainly because pricing in this part of the world is handled very differently.
“The Amazon effect won’t happen here for some time because there needs to be a whole piece of work done here on pricing in general,” says Louise Conroy, general manager, e-commerce and digital, at Sun and Sand Sports, a UAE medium-to-large sports and lifestyle e-tailer. “The reason retail has suffered here is because it has not fallen in line with European, UK or US prices,”
Ms Conroy says brands have a different mark-up per region with UAE consumers charged more because market research has indicated that shoppers are more affluent.
“That illusion has now been shattered by the growth of e-commerce in this region because people can now see what others are paying for the same product in other markets. And with the freedom to ship across borders, consumers are starting to buy from overseas, so it was affecting local businesses.”
 
A June poll from global payments company Visa found that more than two thirds of UAE shoppers are now comfortable making purchases and paying bills online, with card payments the top method for online purchases.
However, many consumers are turning to overseas shopping sites, taking advantage of services such as Aramex’s Shop & Ship where users are given a postal address overseas to ship items, cutting the cost of delivery.
“Many global retailers now offer a direct delivery service to the UAE, with excellent courier service and low prices, opening the international retail space yet further to UAE customers,” says Camilla Hassan, the founder and managing director of the premium baby and kids store Five Little Ducks.
Ms Hassan, who spent 10 years working for e-commerce and retail for brands such as Souq.com and Dubizzle before setting up her own entity, says local retailers must factor this in when setting prices.
“There are still retailers whose prices remain typically high on international brands – assuming local customers will choose convenience and speed of getting their products over a lower price, but this is short-sighted,” she says.
While many UAE customers still do not trust the e-ecommerce experience, so swallow the higher price, says Ms Hassan, those open to online shopping are securing better deals. “Many customers who travel frequently also stock up abroad. In previous years, customers may have begrudgingly accepted the price differential and paid it; now, with all the online options, they are becoming more choosy.”
According to a report by Fitch Solutions Macro Research, a unit of Fitch Group, the Middle East’s e-commerce sector is growing at the fastest pace globally with online sales expected to double to $48.8 billion by 2021.
The study, released last month, also found that the sector will expand further thanks to a rise in grocery spending – a new segment of growth for regional e-commerce players. The UAE is set to be one of the leaders, with e-commerce spending in the country increasing 170 per cent to $27.1bn in 2022, from $9.7bn in 2017.
But that does not necessarily translate into lower prices for consumers on the shop floor because of the way retail has been set up in this region, says Mark Pilkington, an advisory board member for Smart Stores Expo, group chief executive of U-Mark and the author of Retail Therapy: Why the Retail Industry Is Broken – and What Can Be Done to Fix It due out in January.
Mr Pilkington says the historical supply chain that has existed since the industrial revolution had factories selling to brands, brands selling to retailers, then retailers selling through shops to customers.
“At each stage of the supply chain the company would mark up the product so that the product that ends up stores had a price of 7 to 8 times the factory cost,” he says. “In the [Arabian] Gulf, that is even more extreme because an additional step was added in – the cost of franchising – meaning products cost about 30 per cent more in the Gulf than they do in London and New York.”
While companies such as Amazon in the US miss out the retail portion of the supply chain, which is how they undercut brick and mortar shops, this places downward pressure on all retailers as they attempt to compete – with some firms going bankrupt in their drive to keep up.
“Then you have the big boys like Walmart and Target fighting back by reducing their prices putting further pressure on suppliers and that’s why inflation has been lower in the US because there is that price pressure,” says Mr Pilkington.
Despite internet penetration in the region sitting at 64.5 per cent, as of March this year, higher than the global average of 54.5 per cent, according to Statista, Mr Pilkington says e-commerce as a percentage of retail is still not as high in the Middle East as it is in the US and Britain.
“It’s much smaller in the gulf but growing extremely fast, so it’s only a matter of time before it puts the same pressure on as it’s done in the US,” he says. “The difficulty for the regional retailers that have their franchise pricing is that products will come into the region via Amazon and Alibaba dramatically cheaper. Therefore, the current price level will become unsustainable, putting downward pressure on prices over the next three to five years.”
There have been some big changes in e-commerce in the UAE and wider region recently. Emaar Properties chairman Mohamed Alabbar set the ball rolling in November 2016 with the unveiling of Noon, a $1bn e-commerce venture for the UAE and Saudi Arabia. It went live last year but has yet to raise its profile amid fierce competition.
In March last year, Amazon acquired Souq.com, the region’s largest e-commerce venture, for $580 million, with many customers expecting a wider array of products and lower prices.
While Souq has retained its name to date, Ms Conroy says it is in a transition phase with Amazon planning to have all of its systems integrated within the next 18 months,
“They are starting to sell products from Amazon US on the Souq portal but until they are fully integrated they will still trade as Souq,” she says. “Once Amazon fully enters the market – it will have a rippling effect in general because it means you’ve moved from the status of an emerging market to a more established market.”
However, some regional economies may be better insulated against the force of Amazon. While the Gulf economies rely more on the franchise model, Mr Pilkington says others such as Egypt have a thriving local production scene and local brands in place.
“Certainly in Egypt the international brands have very low market share because the Egyptian spending power is lower and people just can’t afford international brands,” he says, adding that local stores offer better pricing.
He cites another big market, Morocco, where in a previous role as chief executive of the retail group Kamal Osman Jamjoon, the company went in with its ladies underwear brand Nayomi.
“There were only 12 international lingerie stores in the whole of Morocco for 40 million people so you had to reckon that 95 per cent of the market were buying Moroccan brands,” he says.
This focus on local brands in those countries is something Mr Pilkington believes the Gulf economies will also have to adopt to stay competitive.
“The big retail groups, the families, will realise that they are overpaying for product from the franchises and will have to start doing their own thing,” he adds.
Ms Conroy says it is also the responsibility of premium retail brands to adjust their global pricing strategy.
“Brands will have to realise they will not be able to achieve the margins in this market they have done through traditional retail because now people have had a lot more exposure to online and are able to do price comparisons market to market.”
While for now the Amazon effect is yet to show its true colours in this region, Mr Saidi says he would welcome it.
“It would mean greater transparency and introduce much more competition across the retail space,” he says. “In particular, it would be very good for Abu Dhabi and Dubai because they are big tourist destinations.”
While the hotel industry has global price aggregators that allow customers to shop around to find the best deal, Mr Saidi says the same needs to happen on the retail side in the UAE.
“Tourists do international comparisons … so, you have to be careful that the UAE remains competitive from that point of view.”

The article titled “Trumpian Trade Wars threaten the GCC” appeared in The National’s print edition on 26th July, 2018 and is posted below. Click here to access the original article.

Trumpian Trade Wars threaten the GCC

We are witnessing the demise of multilateralism and rule-based international cooperation
 
The protectionist stance of the current US administration has been evident since US President Donald Trump took office: the ongoing re-negotiation of the North American Free Trade Agreement (Nafta), non-participation in the Trans-Pacific Partnership (TPP), and the tariff hikes – which began with solar panels and washing machines (in January) to the latest threat of potential additional tariffs on $500 billion worth of Chinese exports.
The nationalism-protectionism of “America First” is coupled with an isolationist view of regional and international agreements on trade, investment, climate, human rights and even defence agreements (Nato). We are witnessing the demise of multilateralism and rule-based international cooperation built since the Second World War.
We have entered the phase of Trumpian Trade Wars, from the imposition of steep tariffs on steel and aluminium in early March this year, to the latest (July 6) announcement of a 25 per cent tariff on about $34bn worth of Chinese goods. China, the EU and others have announced retaliatory tariffs, which does not bode well for global trade. The Financial Times estimates that, should countries retaliate, the value of trade covered by the measures and countermeasures resulting from Mr Trump’s trade policies could reach more than $1 trillion (some 6 per cent of world trade), which would derail global growth and recovery in the EU. The escalating economic tension between the US and Europe, after China has already rattled global stock markets, could lead to a financial crisis given the headwinds of monetary policy tightening and geopolitical turmoil.
Why is the US running large trade deficits? The main answer is that the US has a low level of savings compared to the level of investment. The personal savings rate in the US is running around 3.2 per cent compared to the thrifty Chinese rate of about 35 per cent. The US is spending more than the income it generates, running both a fiscal and a current account deficit, attracting capital inflows and borrowing to finance these deficits. The deficits look set to increase given the US fiscal stimulus package and tax cuts passed in 2017, which encourage consumption and imports at a time when the US economy is overheating.
Tariffs on solar panels, steel and aluminium or cars will raise the cost to US businesses and consumers and disrupt global supply chains. A 25 per cent tariff on all cars and parts would raise US consumer prices by $1,400 to $7,000 for high-end vehicles. For the proposed auto tariffs, nearly 98 per cent of the targeted car and truck imports by value would hit key US allies: the European Union, Canada, Japan, Mexico, and South Korea. Trumpian Trade Wars are not only beggar-thy-neighbour policies, they are beggar-thy-allies.
Cars and phones are prime examples of highly globally integrated industries. Many of the goods that the US imports (such as electrical and electronics) are US designed but manufactured in China, Mexico and other countries with an advantage of lower costs, but relatively low value added in global value chains. The profits, however, are made by US businesses like Apple, Amazon and others. Economists look at “trade value added”, but unscrupulous politicians broadcast headline grabbing total trade numbers.
Although the highlighted US-China trade deficit was at $375bn last year, the US runs trade deficits with 102 nations (not just China) and has run deficits since 1975, averaging $535bn per annum since 2000. The trade deficit on goods was $810bn in 2017 but substantially less at $566bn on goods and services: the US is a major exporter of services and tends to run a large services surplus.
The notion that imposing tariffs on Chinese imports would erase US trade deficits is flawed, absent macroeconomic developments and policies that would change the saving-investment gap. On the other hand, trade retaliation might be costly for export-led China and tit-for-tat tariff hikes between the two largest economies of the world would result in slowing global trade, severe disruption of global supply chains, lower investment, derail economic growth and result in a sharp correction of financial markets.
The announcement of a widening of the scope of tariffs signals that US strategy is shifting away from the protection of local industries (solar, steel) based on “national security” to one based on intellectual property and the acquisition of new tech. The wider, more strategic objective is an attempt to prevent China’s declared ambitions of moving up the activity and trade complexity ladder, with higher value tech goods and services, the “Made in China 2025” horizon.
China is inching closer to developing an edge in AI, blockchain, Big Data, FinTech, life sciences (Crispr) and related technologies. Indeed, the EU might join the US to rein in the emergence of China as a tech frontrunner.
With the US imposing tariffs on a variety of goods, trade will be diverted to other countries. Already, China is buying soya beans from Brazil, shifting from the US. China will shift and develop new markets for its exports, reorienting its trade towards the EU, Asia, and the Middle East, leading to lower prices of affected commodities (which could lead to potential retaliation by the EU and Japan). China has other options: it could retaliate through non-tariff barriers to trade rather than imposition of tariffs; raise informal barriers to US investment in China; diminish the flow of investment in US Treasuries; as well as allow a depreciation of the yuan (justified by lower export and overall growth as a result of US tariffs). We could be entering a phase of currency wars.
The bottom line is that growing US trade protectionism will lead to a shift in global trade patterns and international alliances away from the US and the creation of new trade blocs. Already, the EU and Japan have signed a major trade agreement eliminating most tariffs, covering a market of some 600 million people and a third of the global economy.
China is likely to seek a similar free trade and investment agreement with the EU (which is already China’s most important trade partner) and seek strategic partnerships with Germany and other European countries. It will likely also want to join the Trans Pacific Partnership. China will likely accelerate implementation of its Belt & Road initiative leading to a deeper integration of B&R countries into its economy and its global value chains, opening new markets. China will also accelerate and increase its investments in robotics, AI, Blockchain, Big Data, FinTech, and high tech to bring forward its ambitious “Made in China 2025” strategy. The Chinese dragon will not be contained.
What does all this mean for the GCC? The GCC exported $9.4bn of aluminium in 2017, (of which the UAE provided $5.6bn worth, representing 10.1 per cent of world exports) and is the largest exporter to the US after Canada and Russia. Already adversely affected by aluminium tariffs, the region would be additionally hurt by a decline in world trade and world growth which would lower oil prices, and particularly if China were hard-hit.
The GCC’s total trade with China was close to $110bn last year, with the largest export from the region being crude oil, and accounts for more than two thirds of China’s trade with the Middle East.
Given growing US protectionism, the time is right for the GCC to reorient their international trade agreements and pivot towards Asia, including the long delayed Free Trade Agreement with China.
 

The below quotes from Dr. Nasser Saidi appeared in the cover story titled “Oil Price Hike: Shot in the Arm for GCC”, in Qatar Today’s Jun/July 2018 edition. The full article can be downloaded here.
 
Dr Nasser Saidi, President of the Dubai-based Nasser Saidi & Associates, too says the latest developments [in the energy markets] will definitely ease the fiscal pains in the GCC which have in the recent past seen removal of subsidies in a phased manner as well as the introduction of VAT and excise taxes.
While higher oil prices and thereby higher oil revenues will help soften the effects of fiscal austerity, it still remains lower than breakeven prices projected for most GCC nations. It therefore remains critical that further structural reforms be undertaken for greater economic diversification.
There have been some positive reforms in the labour market, announcements of residency (in the UAE, Qatar and Bahrain) as well as opening up sectors for 100% foreign ownership. There will be spillover effects into the non-oil sector also, alongside improvements in business and consumer confidence (already visible with the uptick in indicators like PMIs, GCC projects, slow pickup in credit growth, etc). The UAE government recently also announced several measures to reduce business costs, which will also have a positive impact on non-oil growth, says Dr Saidi.
Dr Nasser Saidi, President of the Dubai-based Nasser Saidi & Associates, says that though the markets for crude oil and gasoline are closely linked, it was not automatic as the prices of both products moved in tandem till 2008, and there has been some divergence ever since.
He says that oil continued to remain a global commodity versus the dominance of natural gas in regional pockets (which is influenced by factors like infrastructure, storage, inventories, etc). The natural gas price shocks post-2008 were attributed to commodity-specific events (e.g., weather-related events like hurricanes) or bottlenecks at refineries, while oil price changes are affected by geo-political changes and global tensions.
“For Qatar, which supplies almost 25% of the world’s LNG demands, there remains a strong demand from Asian economies (especially China) and Europe. Qatar has already announced expansion plans to increase its LNG export capacity to 100 million MTPA by 2024 as against the present output of 77 MTPA,” says Dr Saidi, who was former Minister of Economy and Trade and Minister of Industry of Lebanon.
Saidi believes that oil prices will settle around the $55-$65 per barrel mark in the medium term and there are various supply and demand-side factors that affect the oil prices, including factors like production of shale oil, competitive renewable energy, energy efficiency policies, meeting commitments of COP 21 and beyond, etc.

The Executive Summary of the White Paper titled “Taxation, Illicit Trade in Tobacco Products and Finance of Terrorism in the Middle East” is posted below. Click to download the English and Arabic versions.

The sharp decline in oil prices alongside an appreciating US dollar has resulted in a “double whammy” for oil-exporting nations, including the GCC. Given their high dependence on oil exports for government revenue, countries face massive losses. To address the volatility and vulnerability of oil revenue and address fiscal sustainability the GCC countries will need to prioritize fiscal reform and put in place policies to diversify the sources of government revenue, as well as revise expenditure plans. This could happen through a reduction in fossil subsidies alongside the introduction of taxes. Current discussions focus on the introduction of value added taxes and increasing trade tariffs and taxes on consumption of tobacco and alcohol among others.

This White Paper addresses two important issues relevant to imposing and increasing excise taxes on tobacco: (a) the need to avoid sudden, large tax hikes that would lead to an increase in illicit trade and (b) as a result provide financing to organised crime groups (OCGs) and terrorist organisations operating in or out of the Middle East region. The vastness of the illicit trade network is evident in the fact that trade in illicit (and untaxed) tobacco recently became the fourth-largest global tobacco business by volume, just behind British American Tobacco, Philip Morris International and Japan Tobacco International.

The GCC countries currently have relatively low illicit penetration rates, but are wedged between the tobacco industry’s established smuggling centres. Tariff and tax induced price differentials along with the lack of secure borders within the Middle East are a major driver of illicit trade. We find that an increase in ad-valorem taxes could lead to a massive spread (of more than USD 1 million per container) in cigarette prices between the lowest and highest markets across the region: a definite incentive for a surge in illicit trade.

This policy paper puts forward a GCC action plan to impede illicit trade growth. This multi-pronged approach includes both legal and regulatory measures, alongside tax and capacity building. These include: (i) Support the GCC countries to become members of the Protocol to Eliminate Illicit Trade in Tobacco Products (ITP) (ii) Assist the GCC in developing common standards to comply with the ITP through a track and trace solution (iii) GCC policy harmonisation and coordination to introduce domestic excise taxes (iv) Gradual implementation of excise tax introduction and tax increases (v) Invest in the build-up of taxation capacity and administration (vi) Use modern technologies for tax administration including digital fiscal markers (vii) Develop Public-Private-Partnerships to ensure compliance

http://nassersaidi.com/wp-content/uploads/2012/03/The-Redback-Cometh-Renminbi-Internationalisation-What-to-do-about-it-DIFC-Economic-note-18.pdf

DIFC Economic Note 18, The Redback Cometh Renminbi Internationalisation & What to do about it, analyses the growing international role of China which spans trade, investment, foreign reserve accumulation and Sovereign Wealth Funds. Despite the growing economic & financial international role of China, its currency, the Renminbi (RMB) remains largely a domestic currency. There are increasing calls for the RMB to become an international payment, investment and reserve currency. However, the move towards internationalization necessitates the development of an onshore capital market complemented by domestic policy reforms leading to a changed financial structure, with lower dependence on bank financing.

Internationalization of the RMB forms an integral part of the process of capital market development and financial sector reform. To date, there have been three main channels of RMB internationalization: the introduction of the RMB as the settlement currency for cross-border trade transactions, the provision of RMB swap lines between the People’s Bank of China (PBoC) and other central banks and the creation of a RMB offshore market. In this context we estimate that the RMB will emerge as the third global currency by 2015! In addition, the paper also discusses the GCC’s rising stature as a major trading partner for China, underscoring the fact that it is in the GCC’s strategic interest to move towards greater economic & financial integration with China through accelerating the GCC-China free trade agreement, establishing links between financial markets, finance bilateral trade using the RMB and establishing RMB swap lines with GCC Central Banks.

The Redback cometh and we need to prepare for this momentous coming.