Dr. Nasser Saidi participated in the panel discussion during the launch of the IMF Regional Economic Outlook (REO) report held in Dubai on Oct 21st, 2025.

Despite rising global policy uncertainty, economies in the Middle East and North Africa have demonstrated resilience this year, driven by increased oil production, lower energy prices, strong remittances and tourism inflows, and supportive global financial conditions. Can this resilience be maintained? What risks remain and how can MENA policymakers best navigate them? What new opportunities might emerge for the region in a rapidly shifting global economy?

The insightful discussion titled “Resilience Amid Uncertainty: Will it Last” delves into these critical issues highlighted in the IMF’s Regional Economic Outlook: Middle East and Central Asia issued in Oct 2025.

Watch the discussion below:

“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.

“CEBC isn’t just an organization; it’s a platform for real change in MENA’s energy future.”
Dr. Nasser H. Saidi, founder & chair, Clean Energy Business Council (CEBC)

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.

“Global Economic Diversification Index 2024” was released by the Mohammed Bin Rashid School of Government (MBRSG) at the World Governments Summit held in Dubai on 12th Feb 2023. 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. 

Economic diversification is a gradual, transformative process for countries that are dependent on commodities or a limited set of products or services.

Diversification for commodity producers leads to greater macroeconomic stability, more sustainable growth patterns, enables a gradual move to higher value-added economic activities (from over-dependence on primary commodities) and helps lower trade concentration (i.e., increase a country’s ability to export a wider set of products to a larger set of trade partners). This requires active and productive private sector participation, and in parallel, governments need to rollout effective policy reforms (often structural) and undertake productive investments – while diversifying the government revenue base by raising non-commodity-related revenues.

The Global Economic Diversification Index (EDI), based on publicly available indicators, data and information,provides a quantitative measure of the state and evolution of the economic diversification of countries going back to 2000. The current edition expands the coverage of countries to a total of 112 countries (7 additional countries compared to the previous EDI edition) owing to improved data availability.

The United States, China and Germany retain the top 3 ranks in the EDI for 2022, with the top 10 nations having small margins between scores (implying the strength of diversification). Western European nations account for almost two-thirds of the top 20 highly-ranked nations and while 26 of the top 30 nations are high income, there are representatives from upper-middle income (China, Mexico, and Thailand) and one lower middle-income nation (India).

At the other end of the spectrum, however, the diversification process has been long and slow. Four nations – three from Sub-Saharan Africa alongside Kuwait from the Middle East and North Africa region (MENA) – continue to remain in the bottom 20 ranks of the EDI over the period. The share of MENA nations in the bottom 20 ranks fell to just 10% from one-fourth in 2000. At the same time, there were 13 Sub-Saharan African nations among the lowest 20-ranked nations in the year 2022 from nine in 2000. Furthermore, the catch up for lower ranked nations in the post-Covid era will be a tougher ask, given the long-term scarring effects and output loss induced by the pandemic in addition to an already limited fiscal space and existing debt burdens.

As the global economy slowly recovers post-pandemic, it is contending with a lasting structural change: the accelerated adoption of digital technologies, which has resulted in societal gains such as higher labour force participation rates and productivity gains among others (especially in nations where the basic infrastructure was already in place). Despite challenges in data availability in this realm, this edition of the EDI includes indicators that aim to capture the growth of the digital economy: three digital-specific indicators are added to the trade sub-index.

Using this updated list of indicators and availability of data, a revised trade+ (“trade-plus”) sub-index is calculated for the years 2010-2022, for a subset of 106 countries. The revised trade+ sub-index is also used to calculate a digital augmented EDI+ (“EDI-plus”) score and ranking. Other than the Sub-Saharan Africa region, all regional groups improved their trade+ sub-index scores in 2020-2022. While the top four ranked countries are the same in both the trade and trade+ sub-indices, of the bottom 20-ranked nations in the original trade sub-index, thirteen are worse-off when including digital indicators. This finding is in line with what other studies have shown i.e. if adoption is delayed, existing digital divides can widen leading to deteriorating outcomes and prospects in the absence of an acceleration of reforms. South Asia shows a significant upwards jump in trade+ scores over time and this is reflected as well in the EDI+ scores as well.

A clear outcome across countries is that digital economy investments improve trade diversification, notably through the ability to export services. For commodity producers and exporters, the report finds that they can strongly improve their overall EDI and trade rankings by investment in and adoption of new digital technology and its services. Additionally, country geographical size does not appear to be an impediment to economic diversification and EDI scores (e.g. highly-ranked nations such as Singapore, Ireland and Netherlands among others are relatively small economies, both in the EDI and EDI+ versions).

Commodity producing nations are vulnerable to volatility in commodity prices. Prices can be more or less volatile depending on the type of commodity.  For instance, price of oil has been more volatile than the price of copper, wheat or cotton and other commodities, as shown by historical data. In the EDI sample of countries, more than 50% of the commodity dependent nations are reliant on fuels. The demand and supply shocks that occurred during the pandemic and those caused by ongoing wars, in addition to the planned energy transition to Net-Zero Emissions, increase the urgency for fossil fuel exporters to diversify – else these nations run the risk of being left with lower valued or stranded assets.

Sub-Saharan Africa’s commodity exporters posted the lowest EDI scores over time, with the 2020-2022 average score falling below the 2012-2015 period, underscoring not only the pandemic’s negative impact on performance but also the divergent paces of recovery. However, both the MENA and Eastern Europe & Central Asia regions reported a slight improvement in the 2020-2022 period versus pre-pandemic scores: these nations were all fuel exporters (i.e. not exporters of any other commodities). The report also finds that countries that reduced (increased) the share of resource rents have seen an increase (decline) in EDI scores, but the relation is one of correlation and not causation. Among the GCC, UAE and Bahrain have higher EDI scores compared to their peers, while Saudi Arabia and Oman have both gained over 10-points in 2020-2022 compared to their EDI score in 2000. Improvements in GCC scores have resulted from the implementation of reforms at a much more aggressive pace after the pandemic – including incentives to invest in new tech sectors, plans to broaden tax bases, trade liberalisation through free trade agreements and improvements to regulatory and business environment among others facilitating rights of establishment and labour mobility – that support diversification efforts and provide long-term economic resilience.

Lastly, the report highlights an increasingly relevant discussion related to climate change and the vulnerability of commodity-dependent nations. As countries adapt to and mitigate climate change risks, energy transition and “Green economy” 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 export of clean energy from these nations could widen their export base (both in terms of products and trade partners). Furthermore, regional integration would aid diversification efforts of commodity producers and also provide a massive opportunity to link with domestic or regional value chains, adding to diversification efforts.

“Global Economic Diversification Index 2023” was released by the Mohammed Bin Rashid School of Government (MBRSG) at the World Government Summit held in Dubai on 14th Feb 2023. Dr. Nasser Saidi & Aathira Prasad were co-authors of the report, which  was developed in cooperation with 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. The report’s release was covered in newspapers like The National and Khaleej Times among others. 

Economic diversification has been a guiding policy theme for commodity producing nations to minimize volatility, support economic growth and development, create jobs. alongside greater private sector activity and more sustainable public finances. While research about economic diversification centers around its determinants and the impact of policies on economic development, there had been no agreed, available measure or index of economic diversification till the first edition of the Global Economic Diversification Index (EDI) was published in 2022. The EDI measures and ranks countries on the extent of their economic diversification from a multi-dimensional angle, exploring diversification of economic activity, international trade as well as of government revenues (away from a dependence on natural resource or commodity revenue).

The EDI is based solely on quantitative indicators, with no survey or perception indicators, providing a quantitative benchmark and ranking of the economic diversification of countries, using 25 publicly available indicators, data and information. This edition of the EDI extends the coverage to a total of 105 countries, for the period 2000 to the Covid19 affected 2020 and 2021, allowing an international, cross-country, regional comparison and ranking of commodity dependent countries.

The United States, China and Germany hold on to their top 3 positions in this edition of the EDI. Nations that rank 4th to 10th have only a 6-point difference between them, highlighting the strength of diversification among the highly ranked countries. Three oil producing nations continuously remain in the bottom 10 nations across the period, but the MENA region has recorded an improvement towards the latter part of last decade (supported by the acceleration of many oil producer’s diversification plans).

Overall regional rankings held steady even during the pandemic years (though the scores were much lower): North America topped the list while Sub-Saharan Africa remained a laggard. The analysis highlights that while commodity dependent nations have made gains in both output and trade diversification sub-indices over time, revenue diversification has been holding back overall advances for many. Tax revenue as a % of GDP in Norway, highly ranked in the revenue sub-index, stands at a high 30%+ and compares to single digit readings in countries like Bahrain, Iran or Kuwait, to name a few.

Within the GCC, UAE and Saudi Arabia have made the most significant economic diversification progress, thanks to a conscious effort to diversify into the non-oil sector. Following the onset of Covid-19, which put the brakes on non-oil sectors of focus (like tourism, infrastructure and logistics), there has been an accelerated shift in policies rolled out to enable economic transformation. This includes structural reforms (especially directed at the labour market and increased mobility), embracing the digital economy, efforts to broaden the tax base and a concerted push towards the privatisation of certain state-owned assets and enterprises to de-risk fossil fuel assets among others. This will support the next phase of economic diversification in the region.

“COVID-19 and its impact on Arab economic integration“, prepared by Nasser Saidi & Aathira Prasad, is available on UN ESCWA (United Nations Economic and Social Commission for Western Asia)’s website. 

The paper explores the impact of the COVID-19 pandemic on the Arab region’s global and regional economic integration. In terms of output, oil exporters faced a double whammy of lower domestic demand and supply shocks along with lower oil prices and exports, while tourism-dependent countries took a severe hit. The Middle East’s decline in international and regional trade was sharpest across all regions, and the decline in services trade was even harsher. With respect to labour, there was evidence of reverse migration alongside resilient remittances, but the recovery will be long for those in the informal sector, especially women and young people. Overall, the Gulf Cooperation Council (GCC) countries seem to be the main drivers of greater regional (and indirectly of greater global) economic integration, and Mashreq countries are becoming increasingly integrated with the GCC.

To enhance regional integration in a post-pandemic world, the Arab region needs to rethink its trade and investment policies (agreements with key partners in the GCC and Asia, reduce restrictions related to trade in services, strengthen links to the global value chain, and invest in digital trade), while allowing for greater mobility of labour and enhancing financial (and capital market) linkages. Moreover, policy coordination is paramount to address some of the common challenges facing the region, including mitigating the risks of climate change and food security.

Dr. Nasser Saidi participated as a panelist at the IMF’s event related to the Regional Economic Outlook report for the Middle East and North Africa region held on 24th May, 2022. The panel discussion was titled “Divergent Recoveries in Turbulent Times in the Middle East & North Africa” and discussed in addition the impact of US elections on the Middle East.

Dr. Nasser Saidi touched upon the potential risks of a global recession / stagflation, its impact on MENA nations, drivers of inflation, rising food prices and on Lebanon’s recovery prospects (post elections).

Watch the video of the webinar below:



Weekly Insights 15 Jul 2021: Covid19 cases, vaccination & beyond (MENA & UAE) + Saudi-Omani cooperation

1. Covid19 outbreak continues to rise in parts of the Middle East and North Africa (MENA)

• Cumulative Covid19 cases in the MENA region have surpassed 10mn.
• The GCC, which accounts for 14% of the population accounts for just over 1/5th of the cases; Iran, home to 21% of the region’s population, accounts for just over 1/3-rd of cases.
• Bahrain, which had seen a massive spike in cases (reaching close to 2k daily cases per mn persons) towards end-May, has come down significantly. Kuwait, Oman and UAE have the highest readings as of this week.
• At least 14 out of the 22 countries in the region have now logged the new, more infectious variant (WHO) & surges are visible in many nations including the UAE, Libya, Iraq, Morocco and Tunisia among others.

2. Vaccination is the best way out of the pandemic amid  adoption of Stringent Policy Measures

• As the Delta variant spreads, empirical evidence shows that vaccine are key in preventing hospitalizations – hence the urgency to increase vaccination pace across the MENA region.
• Egypt and Saudi Arabia are the least stringent in the MENA region; Lebanon, after weeks of high stringency levels, seemed to have its cases under control (from near 3,500 daily cases in mid-Mar to just 150 end-Jun).
• Oman, where cases are currently 44% down from the peak in Jun, continues to remain cautious: it has announced lockdowns during the Eid holidays next week & remains the most stringent. Its vaccination pace is the slowest among the GCC nations, with only 5.3% of the population fully vaccinated.

3. Vaccination pace in the Middle East has quickened, but with wide disparities

• There has been a significant vaccine divide across the Arab world, with the richer oil producing/ exporting GCC nations running successful campaigns versus the relatively poorer parts of Yemen.
• UAE and Bahrain are top ranked at the global level, having successfully administered 162.2 and 129.8 doses per 100 persons respectively; these nations have also started providing a booster shot to those that have been vaccinated for more than 6 months. However, the region is also home to Yemen where only 1 dose has been administered per 100 persons (vs 0.06 in mid-May) and 2.7 doses in Iraq (vs 0.07 in end-Mar).
• Vaccination pace has substantially quickened compared to mid-Mar and is likely to continue as more production comes online, including from the region’s economies: UAE’s Hayat-Vax and Egypt’s Sinovac.
• Faster the vaccination pace, shorter the path to herd immunity and return to near-normalcy in terms of economic activity – albeit with social distancing and masks.

4. Mobility improves in the UAE

• Given its relatively lower stringent levels, it is no surprise that both Dubai and Abu Dhabi (within the UAE) report a rise in mobility across different categories
• Retail & recreation remains below pre-pandemic levels: with a significant drop during Ramadan and a spike for Eid
• Interestingly, grocery and pharmacy visits have crossed to pre-pandemic readings, though Dubai has higher footfall than Abu Dhabi
• Weekly traffic congestion moves in line with stringency, though Abu Dhabi is picking up faster vis-à-vis Dubai – also reflected in workplace mobility
• With Eid holidays next week, anecdotal evidence suggests high levels of domestic & international tourism –latter limited to neighbouring nations (flights to India are still suspended; UAE stays on the UK’s red list)

5. Both UAE & Dubai PMIs show expansion, though pace has slowed

• UAE PMI edged down by 0.1 points to 52.2 in Jun; Dubai PMI eased by 0.6 to 51.6
• The silver lining was employment in both: increased at the fastest pace since 2019; but it is slower than the long-run series average. Expo starting in Oct will also add create new employment opportunities
• Raw material shortages were widely reported, affecting output growth
• Supply chain problems + rising freight costs + lengthened delivery times meant rise in purchasing costs => input cost inflation
• Survey respondents highlighted low sales; export sales fell in UAE given flight cancellations
• Vaccination pace + less stringent measures + “open for tourism” + reforms (100% foreign ownership, long-term visas) implies that a recovery is underway, but high number of daily cases (~1500) & new variants are cause for concern

6. Saudi Arabia & Oman: long-term cooperation

• Oman’s Sultan visited Saudi Arabia this week: his first foreign trip since his ascension.
• Economic cooperation on many fronts likely to benefit from the discussions: trade, investment and infrastructure among others (in addition to security, cultural & other diplomatic discussions)
  • Trade: Oman’s exports to Saudi Arabia stands at roughly 5% of total exports, but in the recent years, transportation materials have accounted for a substantial part of its exports to Saudi (chart)
  • Investment: Saudi Arabia is considering developing an industrial zone in Oman; last month, an Omani delegation presented around 150 investment opportunities worth an estimated OMR 1.5bn across multiple sectors including real estate, tourism, food security as well as renewable energy among others
  • Infrastructure: the Omani-Saudi road connection will reduce cost of transport, travel time & facilitate movement of goods.
• Other opportunities abound (non-exhaustive list):
  • Though oil remains a major export item for both nations, there is a conscious effort to move to cleaner energy including solar, wind & now green hydrogen.
  • Privatisation programs/ stakes in state-owned entities (including monetization of energy assets)
  • Saudi Tadawul/ Nomu could offer attractive listing / cross-listing opportunities

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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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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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The article titled “Saudi Arabia’s Many Transformations” appeared in a special G20 edition prepared by Arab News French. The oped piece (in French) can be accessed directly on AFN with the title “Les nombreuses transformations de l’Arabie saoudite”.
The English version is posted below.

Saudi Arabia’s Many Transformations

Saudi Arabia’s membership, presiding and hosting the G20 is a first for any Arab country. This recognises and signals the global economic importance of Saudi Arabia, as well as its prominence as the biggest economy in the Arab world. Saudi is systemically important for the world’s oil markets: not only is it home to 17.2% of the world’s proven petroleum reserves, it is also the largest exporter of oil and plays a leading role in OPEC. It is a major international investor through its sovereign wealth funds, as well as a sustained source of remittances. Accordingly, the economic developments and prospects of Saudi reverberate across the Arab region due to its size, trade, investment and remittances links to other GCC countries and to labour and/or non-oil exporters. Saudi is systemic for the region.
Saudi Arabia has embarked on a transformation path, following the sharp oil price shock in the summer of 2014, aimed at gradually diversifying away from its high level of dependence on oil. This resulted in the launch of the Vision 2030 and National Transformation Plans about 4 years ago. The country undertook major initiatives including fiscal and structural reforms (energy price reforms, spending rationalisation, introduction of VAT and excise taxes), capital market reforms (ranging from opening up of Tadawul, launch of Nomu parallel market for growth companies, deepening the domestic Sukuk market) as well as social reforms (greater opportunities for women), opening up new sectors – entertainment, hospitality, tourism beyond- and strategically, undergoing a transition to moderate Islam. Reforms are being gradually implemented, but the Covid19 pandemic, the Great Lockdown and fallouts from the decline in oil prices have underscored key new challenges.
A “New Oil Normal” has emerged. Even prior to Covid19, weakening global energy demand, an energy transition was underway. Technological innovation has increased the competitiveness of shale oil and renewable energy, increased supply and constrained OPEC+’s ability to control prices. On the demand side, growing energy efficiency, COP 21 commitments have brought about significant behavioural and policy changes, implying a downward trend in oil demand relative to activity. The prospect of plentiful fossil fuel (including shale), with increasingly ubiquitous, cheap renewable energy, along with energy transition policy and regulatory measures, portends permanently lower real oil prices and threatens Saudi’s medium and long-term growth prospects.
Decarbonisation policies aiming at mitigating the risks of climate change will reinforce the drivers of the New Oil Normal by systemically lowering demand for fossil fuels. In addition, climate change has deep implications for Saudi Arabia and the MENA region. Desertification and extreme heat conditions are increasing, along with growing water scarcity. According to the World Bank, climate-related water scarcity is estimated to cost the region 6 to 14% of its GDP by 2050, if not earlier, and widespread droughts could potentially lead to “water wars”. Rising sea levels is expected to put about 24 port cities at risk in the MENA region.
Despite the growing evidence of climate change, financial markets have not fully priced in climate risk.  This is likely to change. A shift in market sentiment will lead to a Minsky Moment resulting in a sharp drop in the price of fossil fuel assets. This poses an existential threat and risk for Saudi Arabia (though it is of the world’s lowest cost producers), that its fossil fuel reserves, its prime source of wealth, become stranded assets, investments which are no longer able to earn an economic return due to low oil prices.
Two other deep forces are transforming the global economic landscape. New technologies (digital, 4th industrial revolution, AI, robotics) are leading to structural economic and social changes, transforming consumer and producer markets, agriculture, manufacturing and services. Digitalisation is becoming ubiquitous. By contrast, globalisation, the handmaiden of the growth of international trade, foreign investment, portfolio flows and the movement of people, arrested by the Global Financial Crisis, is being reversed by the forces of populism, nationalism and the Covid pandemic.  How should Saudi react to these multiple challenges? A new growth lifting and diversification strategy is required.
Saudi’s next growth phase: Digitalisation, Decarbonisation, Green Deal, Regionalisation
First, Saudi Arabia needs to accelerate its diversification path away from oil through decarbonisation and de-risking fossil fuel assets. Decarbonisation requires a ‘Green Deal’, a low-carbon energy transition plan, the phasing out of energy subsidies and the introduction of carbon taxes to reduce consumption, and including a major drive to accelerate investment in and adoption of renewable energy and Clean Tech policies by both government and private sectors. Already Saudi is planning to invest some US$ 20 billion to develop 30GW of renewable energy by 2025. Aramco’s part-privatisation and opening upstream and downstream fossil fuel assets to PPP should be accelerated. These investments & divestments can fuel the development of Saudi’s capital markets to become a regional, if not a global centre, for green bonds and Sukuk, for green and climate finance.
Saudi’s comparative advantage in solar energy can be the basis for a new energy infrastructure and new exports, enabling Saudi to shift to selling renewable-energy-based electricity to Europe (via an interconnected power grid), to East Africa, but also to Pakistan and India. Technology can also be used in climate risk mitigation, ranging from AgriTech (e.g. desert agriculture, vertical farming) to smart water management (in cities, households, industry and agriculture) to green/ sustainable construction and buildings. Through their linkages, building clean and smart cities will accelerate Saudi Arabia’s move to embrace innovation and technological progress. Importantly, these investments are job-creating: 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[1]. A green deal, investment in renewable energy, climate resilient infrastructure and cities and using instruments to transfer climate risks to markets (carbon taxes and carbon trading) can be transformative for the Saudi economy.
The other building block is digitalisation, the national deployment of broadband and 5G to support a digitalised economy & society with investments in smart grids, smart city technologies and the deployment of new digital technologies, low-cost cloud computing, the IoT, AI and big data analytics. Digitalisation would raise efficiency and galvanise growth in government, services and industry, augment the domestic and international connectivity of the Saudi economy, create new jobs and activities, raise overall productivity and economic growth. Digitalisation of the banking & financial sector would enable FinTech to widen access to finance within Saudi and Islamic finance to the global Islamic community.
To counter the forces of deglobalisation, Saudi needs to be the driving force for greater regional economic integration with a focus on removing the ‘soft barriers’ to trade & investment and integrating infrastructure and logistics: energy, water, transport & logistics, digital highways in the GCC, but also MENA countries with infrastructures gaps (Egypt, Iraq, Jordan, Lebanon) and East Africa.  Saudi should formalise it’s shifting trade and investment patterns towards Asia and China through new trade and investment agreements with China, Japan, Korea, and the newly formed RCEP area. Greater regional and international integration would enable Saudi Arabia achieve its Vision 2030 targets and propel the nation to new heights within a transforming global economic landscape. Saudi has many transformations ahead.
[1] IRENA, Global RE outlook, Apr 2020
 

Dr. Nasser Saidi participated as a panelist at the IMF’s event related to the Regional Economic Outlook report for the Middle East and North Africa region held on 27th October, 2020.
The panel discussion was titled “Coping with Covid19: Challenges & Policy Priorities for the MENA region and the Global Economy” and discussed in addition the impact of US elections on the Middle East.
The IMF report can be accessed at https://www.imf.org/en/Publications/REO/MECA/Issues/2020/10/14/regional-economic-outlook-menap-cca
Watch the video of the webinar below:

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.

Dr. Nasser Saidi’s presentation titled “The Economic Consequences of COVID-19 & Impact on Clean Energy” was part of the Clean Energy Business Council’s webinar titled “A Pandemic, Oil Price Collapse, A Recession: Is the Future still Green?” held on May 6th 2020.
A summary of the webinar is available on the CEBC website (https://cebcmena.com/knowledge-centre/reports-and-publications/) and can be downloaded directly here.
Watch the webinar below:

Dr. Nasser Saidi participated as a panelist at the IMF’s launch of the Regional Economic Outlook report for the Middle East and North Africa region on 27th April, 2020.
The panel discussion covered the macro outlook for the region given the inter-twined effects of Covid19, fall in oil prices and financial shocks.
The IMF report can be accessed at https://www.imf.org/en/Publications/REO/MECA/Issues/2020/04/15/regional-economic-outlook-middle-east-central-asia-report
Watch the video of the webinar below (link to the IMF: https://www.imf.org/external/mmedia/view.aspx?vid=6152433693001)


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.
 
 

This article titled “Female work force participation is key to the Middle East’s economic development” appeared in The National on 3rd March, 2020. The original article can be accessed here.

 

Female work force participation is key to the Middle East’s economic development

by Aathira Prasad and Dr. Nasser Saidi

Removing legal and regulatory barriers is necessary but not sufficient condition to reduce the yawning gender gap

A young, fast-growing population should have been the cornerstone of growth in the Middle East and North Africa. It is the world’s second youngest region behind Sub-Saharan Africa with close to 60 per cent of the population under 30.
Young, fast growing populations provide a booming labour force and consumption market, fuelling economic growth. Instead, there is low growth and job creation is weak. This has led to rising levels of unemployment underlying the youth disenfranchisement, social and political unrest in 2011 and ongoing anti-government protests from Algeria to Sudan, and from Lebanon to Iraq.
The “demographic dividend” has been a curse instead of a boon. The prospects are daunting: the World Bank estimates the Mena region needs to create more than 300 million jobs by 2050, as the world is preparing for the so-called Fourth Industrial Revolution that harnesses technology and the use of AI. That is likely to impact medium and low skill jobs in the region. So what then are the implications for women and their economic integration?
While the role of women as a mainstay of economic development is not subject to dispute, women in the Mena region have been shackled by a plethora of socio-economic and legal barriers. Though there has been significant progress on legal and regulatory barriers – the World Bank’s Women Business and the Law 2020 edition noted despite enacting the maximum number of reforms, it remains the region with the lowest average score of 49.6 compared with the previous edition’s 44.9.

Removing legal and regulatory barriers is a necessary, but not sufficient, condition for reducing the yawning gender gap. According to the World Economic Forum’s Global Gender Gap 2020 report, gender parity will not be attained in the region for another 140 years.
While formal market labour force participation rates in the Mena region have increased over time, women have largely remained on the sidelines, despite their higher educational attainment and outperformance of men in standardised tests. The female labour force participation rate (FLFPR) has been rising, but still remains around 21.7 per cent for the region, one of the lowest in the world, and when women do participate, they experience higher unemployment rates at an average of around 19.8 per cent and closer to 40 per cent for young women. On average, women earn 70 per cent of men’s wages.
Given the barriers, women’s preference for public sector jobs is not surprising. There is a wide gender gap in self-employment and entrepreneurial activity in the region. On average, self-employed females (sole or micro enterprises) account for 30 per cent of female employment in the region, rising to as high as 63 per cent in Morocco, compared with 12.4 per cent in OECD countries.
However, only one in ten self-employed women are employers, compared to one in four self-employed men and even lower in larger firms. Similarly, women’s representation is lacking even in pre-seeded start-ups, with women accounting for just a quarter of founders, according to findings by venture capital firm Wamda and the STEP conference. A shift in ownership would help women. Female-owned businesses tend to hire more women (25 per cent) than their male counterparts do (22 per cent).
Still, some countries are leading on gender equality. The UAE – despite being ranked only 120th globally – continues to be one of the region’s best-performing countries, having closed 65.5 per cent of their overall gender gap, according to the Global Gender Gap 2020.
Digging deeper into the components, the UAE shines in the educational attainment and health sub-components, where the Emirates is close to parity, but gaps remain. The UAE government has been supportive in raising the profile of women within the government/ public sector. Women comprise 66 per cent of public sector workers. Along with nine women ministers in the UAE Cabinet, women already occupy 44 per cent of leadership roles in federal government entities and Emirati women represent 30 per cent of the UAE’s diplomatic corps.
While public policies supporting female labour force participation are to be applauded, this mindset needs to be embraced by the private sector as well to benefit the economy as a whole.

How can the region progress?

Economic growth and development do not necessarily lead to gender equality and empowerment of women.
What the region needs is affirmative action programmes that actively promote women and reverse marginalisation and discrimination.
Alongside legal and regulatory changes, and reducing the costs of doing business, the region needs to accelerate its economic diversification towards services and a more digitised economy that both tend to favour the employment of women and their economic integration.
Legal reforms allowing for part-time and flexible work arrangements help youth and women. Digital economy participation requires a public-private partnership in strengthening vocational and digital-related training for women, promoting quantitative skills training along with a massive push towards STEM.
Governments should support with public policies like more generous parental leave, greater availability of affordable childcare/childcare subsidies, promotion of work-life balance as well as gender budgeting to promote equality through fiscal policy.
Last but not least, availability of timely data on factors that facilitate and discourage the entry of women into the workforce is necessary to support policymaking at the national level, while also facilitating the private sector in its decision-making.
The bottom line is that investing in institutions and soft and hard infrastructure for greater inclusiveness will gradually lead to a change in ingrained cultural attitudes and to greater empowerment and economic integration of women.

The article titled “A six-point plan to rebuild Lebanon’s economy” appeared in The National’s online edition on 5th January, 2020 and is posted below. Click here to access the original article.
 

A six-point plan to rebuild Lebanon’s economy

Debt needs to be re-profiled, banks require a bail-in and peg to the US dollar should be abandoned
 
As I write this column, Lebanon is in turmoil, trying to form a government, while the economy is going through its worst crisis since its 1975-1990 Civil War. Several weeks of unjustified, panic-inducing bank closures, compounded by the imposition of de facto, illegal, capital controls, payment restrictions and foreign exchange limitations led to a liquidity crunch, a payments and credit crisis, undermining confidence in the banking sector.
In turn, these measures are generating a sharp contraction in economic activity and domestic and international trade. There is an emergence of a parallel market where the Lebanese pound has depreciated by about 30 per cent; a jump in price inflation; business closures and bankruptcies; growing unemployment and rampant poverty. The rapid deterioration of economic conditions has worsened public finances, with the minister of finance saying on Twitter that revenues are down 40 per cent, suggesting a likely budget deficit of 15 per cent for 2019 – double the government’s target of 7.6 per cent of GDP.
Lebanon is suffering from decades of corruption, unsustainable economic policies and incompetent public management. Persistent budget and current account deficits, with unsustainable Ponzi-like financing by the central bank, resulted in a sovereign debt-to-GDP ratio exceeding 155 per cent.
Not surprisingly, the price of Lebanese eurobonds have recently plummeted to historic lows, with rating agencies downgrading Lebanon’s sovereign and bank debt to junk territory, while credit default swap rates – the cost of insuring against default – have shot up to 2,500, second only to Argentina.
Without rapid, corrective, policy measures, the outlook is of economic depression, growing unemployment and a sharp fall in consumption, investment and trade.
With the Banque du Liban printing money to finance the budget, the Lebanese pound will continuously depreciate on the parallel market, resulting in rapidly accelerating inflation and a decline in real wages, along with a sharply growing budget deficit due to falling revenues. As a result, financial pressures on the banking system will increase, with a scenario of increasing ad hoc controls on economic activity, imports and payments, and resulting market distortions.
Lebanon’s politicians have irresponsibly aggravated the economic and financial crisis by delaying the formation of a new government. What needs to be done to address the interlinked currency, banking, fiscal, financial and economic crises, and rebuild confidence in the banking and financial sector?

1. Form a credible, independent new government

Rapidly empower a government of competent, experienced and politically-independent members that are able to confront and hold accountable an entrenched kleptocracy and its associated policymakers. The policy imperative is to develop and implement a comprehensive, multi-year macroeconomic reform plan, including deep structural measures.
A credible and effective government will have to implement unpopular economic reforms and approach the international community for a financial package in order to avoid an extended, deep and painful recession which will be accompanied by social and political unrest.

2. Tackle subsidies and other inefficiencies

The new government should undertake a swift, comprehensive and front-loaded fiscal reform. These should sustainably reduce the fiscal deficit by cutting wasteful expenditure and subsidies, increase electricity and petrol prices to international levels, combat tax evasion and overhaul the public pension system. They should also reform and resize the public sector and implement structural reforms, starting with the massively inefficient energy sector.
Other state-owned assets and government-related enterprises, such as the Middle East Airlines, casino, airport, ports and telecoms can either be sold or managed as independent, efficient, profitable private sector enterprises.

3. Restructure public debts

Public debt (including central bank debt) will have to be restructured. Domestic Lebanese pound debt is entirely held by the Banque du Liban and local banks. A re-profiling would repackage debt maturing over 2020–2023 into new debt at 1 per cent, maturing in five-to-10 years.
Similarly, foreign currency debt should be restructured into longer maturities of 10 to 15 years, with a guarantee from a new Paris V Fund (see below), which would drastically lower interest rates.
The suggested debt re-profiling would reduce it to sustainable levels, radically cut the enormous debt service costs now exceeding 10 percent of GDP and would create fiscal space during the adjustment period.

4. Reform the country’s banks

About 70 per cent of bank assets are invested in sovereign and central bank debt. The debt restructure implies a major loss for the banks. To compensate for these losses, a bail-in by the banks and their shareholders is required, a large recapitalisation and equity injection, of the order of some $20 billion (Dh73.45bn), including a sale of assets and investments.
The banks have been major beneficiaries of a bail out and so-called “financial engineering” operations by the BDL generating high profits, have substantial reserves and assets, as well as deep pocketed-shareholders to enable a recapitalisation and restructuring. A consolidation of the banking system will be required to restore its soundness and financial stability and the ability to support economic recovery.

5. Scrap the dollar peg

Lebanon’s overvalued exchange rate acts as a tax on exports, subsidises imports and worsens the large current account deficit. To support the overvalued peg, Banque du Liban has borrowed massively from the domestic banks creating a domestic liquidity squeeze, and kept interest rates high to attract capital inflows and remittances. These policies have crowded out the private sector, depressed economic growth and increased the cost of public borrowing, aggravating the budget deficit and increasing debt levels. Lebanon needs to change its monetary policy and move to a managed flexible exchange rate regime. This starts with admitting the failure of the pegged regime and recognising the de facto devalued parallel market rate.

6. Enter into an IMF programme

To underpin the deep reforms, Lebanon will require an Economic Stabilisation and Liquidity Fund, of some $20bn to $25bn, as part of a Paris V reform framework. To be credible, the policy framework should be an IMF programme, with requisite policy conditions, in order to attract multilateral funding from international financial institutions and CEDRE participants, including the EU and the GCC countries. Importantly, the programme should include a targeted Social Safety Net (via cash transfers, unemployment insurance and other methods) to provide support during the reform process and aim at lowering inequality and reducing poverty in the medium term.
The ongoing October 17 protests and revolt are a historical opportunity for Lebanon to undertake deep political and economic reforms to avoid a lost decade of economic depression, social misery, growing poverty and massive migration. The livelihood of several generations is at stake. It is time to build a Third Republic.
 

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.

Dr. Nasser Saidi participated as a panelist at the IMF’s launch of the Regional Economic Outlook report for the Middle East and North Africa region, which took place at the Dubai International Financial Centre on 28th October, 2019.
The panel discussion covered many aspects including the economic outlook for UAE, Saudi Arabia, Egypt and other nations while also addressing the issues of geopolitical risks, job creation and climate change among others.
The IMF report can be accessed at https://www.imf.org/en/Publications/REO/MECA/Issues/2019/10/19/reo-menap-cca-1019
Watch the video of the panel discussion below:

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.
 

This is part 2 of a two-part column. The first can be found here.
 
The article titled “How should MENA address the existential threat of climate change?” appeared in The National’s print edition on 28th August, 2019 and is posted below. Click here to access the original article.
 

How should MENA address the existential threat of climate change?

The starting point for the Middle East and Northern Africa to address the existential threat of climate change is to reduce excessive fossil fuel use by removing subsidies and investing to increase energy efficiency.
The GCC nations – starting with the UAE – have initiated a phased removal of fuel, electricity and water subsidies that have distorted consumption and production choices and encouraged energy waste. The removal of subsidies will discourage energy-intensive activities, provide cost incentives to improve energy efficiency and shift the energy mix away from fossil fuels towards renewables. Eliminating subsidies also provides greater financial resources to fund renewable energy investments and climate-resilient infrastructure.

But Dubai is the only city in Mena to join the Building Efficiency Accelerator programme, aiming to double the rate of energy efficiency by 2030. Overall, effective implementation of energy use targets and standards could lower energy use by some 30 per cent. Increasing energy efficiency is low hanging fruit and should be accelerated given the high returns on investment.
The Middle East and GCC are part of the Global Sun Belt: more energy falls on the world’s deserts in six hours than the whole world consumes in a year.
Harnessing solar power is an efficient policy choice. The GCC nations, especially the UAE, are taking a lead in investing in renewable energy in Mena. 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. To put it in perspective, one gigawatt is roughly equal to 3.125 million photovoltaic solar panels, 412 utility-scale wind turbines or 110 million LED bulbs. The surge in projects has been supported by the rising cost competitiveness of renewables: it is now cheaper to build new wind and solar PV plants than it is to run existing fossil-fuel ones. The falling costs of energy storage is addressing the intermittency problem of renewables; by 2021, the capital costs of lithium ion battery-based storage are expected to fall by 36 per cent compared to the end of 2017. While the wind power market is slowly catching up in Jordan and Morocco, the GCC has under-invested: more than 56 per cent of the GCC’s surface area has significant potential for wind deployment.
The International Renewable Energy Agency’s (IRENA) 2019 report estimates that by 2030 the GCC is on track to leverage renewables to save some 354 million barrels of oil equivalent (a 23 per cent reduction). Its efforts will also create some 220,500 new jobs, reduce the power sector’s carbon dioxide emissions by 22 per cent and cut water withdrawal in the power sector by 17 per cent.
Renewable energy related targets range from the UAE’s ambitious goal of 44 per cent of capacity by 2050 (from 27 per cent clean energy in 2021) to Bahrain’s target of 10 per cent of electricity generation in 2035, and Saudi Arabia’s 30 per cent of generation from renewables and others (mainly nuclear) by 2030.
While these targets sound ambitious, they do not meet the threat of climate change. The acceleration and intensity of climate change requires deeper and holistic strategic planning and action. Climate change poses some daunting challenges and existential risks.
To address the stranded assets risk, the GCC needs to share risk on a global basis by privatising or selling participation in their vast energy reserves and related assets (upstream and downstream). Saudi Arabia’s announced plan to privatise Aramco is a structural reform that could be a model for other oil producers to emulate. In the same vein, the GCC sovereign wealth funds should divest from fossil fuel assets (as Norway’s Government Pension Fund Global is doing) and the banking and financial sector should gradually divest and reduce its exposure to fossil fuel assets.
The GCC countries have developed energy sustainability policies. But these are modest given their natural comparative advantage in harnessing solar & wind power and their substantial financial resources allowing accelerated investment in renewable energy assets. This is the time for the GCC to commit to and implement comprehensive, Net Zero Emissions (NZE) goal climate strategies in or before 2050, along with some 15 other nations.
Decarbonisation and economic diversification are complementary strategies and a win-win opportunity. By diversifying and investing in renewable, sustainable energy and climate risk mitigating industries and activities –through Green Economy strategies – the GCC can create jobs, innovate and develop a new alternative export base.
The existential threat of climate change is real and becoming a clear and present danger requiring national and regional concerted policies and action, with the promise of new technologies, decarbonised growth and new economic development models. The alternative of inaction is decades of decline, dismal growth prospects, growing impoverishment, instability and conflicts. The choice is clear.

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.

Dr. Nasser Saidi participated in the MENA-OECD Working Group on Investment and Trade meeting held over 27-28 Nov 2018 at Dead Sea, Jordan.
Titled “Making trade and investment policies work for all”, the meeting’s first panel session discussed the state of play of investment and trade trends and reforms in the region in a changing world economy. It also took stock of the global debate on trade and investment, while analysing the impact on regional and national policies of the growing scepticism about the benefits of international economic co-operation, and looking at ways MENA countries and societies can better benefit from trade and investment.
Click here to download Dr. Saidi’s presentation which focused on the findings of the policy paper prepared for the OECD titled “Trends in trade and investment policies in the MENA region“.
 

The article titled “A New Approach to MENA’s Refugee Crisis”, was first published on Project Syndicate on 10 July 2018, and can be directly accessed here. The Arabic and French versions of the article have also been published. 

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

The global economic meltdown has demonstrated that pan-regional financial systems that are heavily reliant on commercial banks for corporate funding are either potentially crisis prone or seriously impaired. This is particularly true if banks must suffer the pains of recapitalization, deleveraging, restructuring and de-risking, as is happening in most European countries.

By contrast, financial systems that are dependent on bond markets are enjoying more reliable and cheaper access to new funding resources. In the US, for instance, the average yields on junk-rated debt fell to a record low of below 6% in the first week of 2013.

Beyond the short-term and often volatile opportunities, recent economic history has shown that bond markets are naturally fungible as a leading channel of liquidity for governments, as well as public and private companies. Even those regions (both mature and emerging) whose banking systems are still sound display a structural trend towards strong bond market development.

The name of the game is capital market disintermediation, which will occur, sooner or later, either in a vicious or virtuous way.

It may be a case of the former for continental Europe, where the combined effects of the required accelerated deleveraging (as mandated by global capital standards) along with forthcoming “mark-to-market” of non-performing loans (NPLs), could drive to a strong and rapid contraction in banks’ commercial lending supply.

It may, more optimistically, be the latter for the MENA region, where banks enjoy a relatively better funding structure with more reasonable loan-to-deposit ratios, coupled with higher interest margins, nominally stronger capital base and higher profitability ratios.

Still, the case for the disintermediation of traditional banks’ funding channel is laid out due to a number of fundamentally safe and sound reasons:

• The regulatory case for deleveraging, and the effect of the forthcoming mark-to-market of NPLs on real estate lending (with particular reference to the UAE and Kuwait), will also hurt MENA commercial banks’ lending capacity;
• The high interest margin charged on corporate lending appears less attractive when compared with the true cost of credit. It is startling that a top-rated company in the MENA region borrows at an interest of 10-12%, while a subpar firm in the US at half the rate through junk bonds. Self-financing, other pockets of “shadow financing” and the international capital markets will start competing more aggressively as regional banks threaten the direct funding business. In particular, “shadow financing” and capital markets benefit from the comparative advantage of softer regulation, lower cost of funding and larger economies since these provide a variety of financing options.

Addressing the issue

The solution is to push for the development of local currency fixed income markets (both conventional and Islamic) in order to ensure stable access to new funds. This move not only creates a yield curve that will price all kinds of financial assets transparently, but also provides monetary policy tools and enables the development of risk management techniques.

Deeper bond markets in local currencies will likewise allow open economies to better absorb volatile capital flows. As well as provide institutional investors with instruments that satisfy their demand for safe and stable long-term yields, locally denominated debts can guarantee a stable source of capital and reduce financial instability associated with asset price .

Considering the heavy investments needed in MENA’s infrastructure projects, it is ideal to raise financing through securities backed by future cash flows from the infrastructure services, as is typical of project-financing schemes.

On macro-economic terms, the development of a strong, liquid and transparent local currency bond market would be highly beneficial for the economies of MENA. This will improve the optimal allocation of financial resources in the overall system.

As it stands now, the MENA nations lack the important ingredients of a well-functioning debt capital market. These elements include a credit rating culture, market transparency, benchmarks, long maturities, a broad spectrum of institutional investors and a derivatives market for managing interest rate and credit risk.

Disintermediation to benefit banks

Only recently, a credit default swap (CDS) OTC market has gained prominence, but it is still in its infancy. On micro-economic terms, the disintermediation to come could also benefit the banking system in at least two ways:

Firstly, the proactively controlled re-composition of MENA banks’ balance sheets, profit and loss accounts would prevent abrupt and negative impacts on their financial stability and value creation capacity. The loss in net interest margin from direct loans could be gradually replaced -at least partially – by the higher fees coming from debt capital market structuring and placing activities.

The deleveraging and de-risking of the banking system would liberate financial and commercial resources for redeployment in more innovative and value adding activities (from asset management to bank-assurance; from private banking to corporate advisory). It will also reduce credit charges as well as the formation of NPLs.

In order to achieve this, regional banks should consider the opportunity of building some smart investment banking capabilities: focusing internally on the product design and risk management activities while considering third party alliances for the more standardized ones.

Secondly, MENA banks could benefit directly from the development of an efficient bond market that could help them pursue a longer term and cheaper liability structure – therefore reducing the currently high asset-liability management (ALM) imbalance.

We feel that a medium-term notes (MTNs) market for domestic banks that are active in the region could be an achievable target for the short term and a first step in the right direction. Such initiative should be considered a high priority project for policy makers, central banks and regulatory bodies.

In order to strengthen MENA’s local bond market, governments must express strong commitment to implementing a proactive debt management program (DMP). Part of this scheme should include extensive marketing and communication effort aimed at institutional global investors.

The DMP aimed at the development of an MTN market for domestic banks should start identifying and supporting focused issuance programs for local banking champions, thereby helping them access international investors.

It could also consider the creation of a “bond of bonds”, which can pool together the issuance needs of mid to small banking players, thus creating diversification in terms of names, countries and sub-sector of activities.

Eventually, some form of credit enhancement through credit protection on the first loss or on specific senior and super senior tranches, could be considered and provided by government-owned financial guarantees and credit insurance entities.

Last, but not the least, money markets and financial derivative markets should be developed alongside the debt capital markets to facilitate liquidity management by both central banks and investors.

[This article was co-authored with Claudio Scardovi of AlixPartners and published by Zawya] 

Click here to download the presentation given at the University of Chicago Booth Conference on MENA Women Entrepreneurs:Successes, Challenges & Policies (held on Jan 16, 2013).