The opinion piece titled “Whoever controls digital currency will direct the future of money” was published in Arabian Gulf Business Insight (AGBI) on 18th September 2025.

Whoever controls digital currency will direct the future of money

CBDCs are tools of sovereignty in a world shifting eastward, edging away from dollar dominance

We are living in a rapidly transforming financial landscape.

In July the US passed the Genesis Act, the first formal federal framework for stablecoins. It mandates full reserve backing in US dollars or short-term treasuries – a bid to make America the “crypto capital of the world”, funding deficits while reviving the dollar’s long-cherished “exorbitant privilege”.

The prize is tempting. Global cryptocurrency value has rocketed from just $5 billion in 2015 to more than $3 trillion by mid-2025, fuelled by technology, institutional adoption, exchange-traded funds and speculative fever.

Yet crypto’s story is one of boom and bust. Volatile prices, thin reserves and fragile pegs have repeatedly triggered bank-run dynamics. Stablecoins, e-money and cryptocurrencies are “currencies” in name only: they lack the unit of account, the store of value and the state guarantee that underpin true money.

That’s why the next chapter won’t be written by private tokens but by central banks.

The digital economy already accounts for $16 trillion – 14 percent of global GDP – and it is being supercharged by artificial intelligence. Such a system demands infrastructure with security, trust and scale.

Enter central bank digital currencies (CBDCs).

CBDCs come in two forms. Retail CBDCs extend digital cash to the public. Wholesale CBDCs streamline interbank payments and settlements. Both can cut costs, enhance security and integrate seamlessly with tokenised assets.

More strategically, they are becoming tools of sovereignty in a world shifting eastward, fragmenting and edging away from dollar dominance.

For many states, CBDCs are no longer optional – they are defensive shields against US financial power and offensive tools for economic inclusion.

The UAE has grasped this early. Its planned digital dirham could be live by the end of 2025, supporting domestic payments, cross-border trade and e-commerce.

It builds on the UAE’s role as a crypto hub – home to Vara, the world’s first independent virtual asset regulator and to pioneering tokenisation projects in real estate. Fractional ownership platforms let investors buy into Dubai property for as little as AED2,000 ($550). Tokenised assets are moving from theory to practice.

A digital dirham will make the payment system more efficient, facilitating transactions between individuals, businesses and governments, securely and at a lower cost.

It will widen access. Millions of expatriate workers and small businesses in the Gulf remain excluded from formal finance.

A state-backed digital currency can bring them into the fold securely, lowering remittance costs and expanding economic participation. Smart contracts will add automation, creating new efficiencies in trade and finance.

Globally, the race is on. As of July, 137 countries are exploring CBDCs; 72 are in advanced development and three have already launched.

China leads with its e-CNY, piloted in 29 cities with transactions topping $986 billion. The UAE, meanwhile, has conducted joint CBDC trials with Saudi Arabia and China through the Bank for International Settlements-backed mBridge project, and with Riyadh through Project Aber.

These efforts hint at an alternative financial architecture – one not reliant on the dollar.

Today, the greenback still accounts for nearly half of all international payments and dominates trade finance with an 82 percent share. But 98 percent of stablecoins are also pegged to the dollar, reinforcing its grip.

The stakes are geopolitical as much as financial. Imagine a trade transaction flowing between China and the UAE, settled instantly in e-CNY and digital dirham without touching dollars or the Swift payments system. That is no longer hypothetical – it’s already been tested.

Such flows foreshadow a future in which cross-border transactions are faster, cheaper and less dollar-dependent.

The UAE is well placed. It is the third-largest crypto adopter in Mena and among the top 40 globally, handling more than $30 billion in transactions in the year to June 2024, according to Chainalysis.

Decentralised finance usage in the country has grown 74 percent year on year, and the Dubai Land Department predicts tokenised real estate could reach $16 billion by 2033.

But the opportunity is also a challenge. Unless the UAE and other forward-leaning economies scale CBDCs quickly, they risk ceding ground to dollar-denominated stablecoins.

Washington has made its intentions clear. Beijing has already built its alternative framework. The global financial system is being redesigned – and whoever controls it will shape trade, power and trust in the digital age.

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



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

The opinion piece titled “Tariffs, Taco and Cepas: diverging trade paths in a fragmenting world” was published in Arabian Gulf Business Insight (AGBI) on 17th July 2025.

“Tariffs, Taco and Cepas: diverging trade paths in a fragmenting world”

On July 9 the 90-day tariff pause imposed by the Trump administration came to an end, reigniting global trade tensions.

Several countries now face a fresh wave of levies scheduled to take effect on August 1.

These include a 25 percent tariff on nations such as Japan and South Korea, both currently in trade negotiations with the US; 30 percent on the European Union, Mexico and South Africa; 35 percent on Canada; 40 percent on Laos and Myanmar and a steep 50 percent rate on Brazil.

In a broader escalation, the administration also threatened an additional 10 percent tariff on Brics nations should they pursue what it describes as an “anti-American” policy stance.

For many small, developing, export-orientated countries, the loss of access to US markets represents a major economic shock.

Adding to the pressure, a 50 percent tariff was announced on copper – a critical material used in everything from wiring and plumbing to clean energy and AI infrastructure.

Other sectors under consideration for new imposts include pharmaceuticals, semiconductors and lumber, potentially broadening the impact across global supply chains.

Unlike the April announcement, which triggered a stock market sell-off, last week’s developments barely ruffled investor sentiment.

Wall Street remains at record highs, and Nvidia reached a $4 trillion market cap milestone – suggesting markets view the threats as negotiating theatrics, summed up by the acronym Taco: Trump Always Chickens Out.

But this calm may prove premature. Markets could be underestimating the risk that rhetoric hardens into policy.

US protectionism, aimed at shielding domestic industries under the guise of national security, has proven disruptive. It has fractured supply chains, distorted trade and investment flows and injected global economic uncertainty, affecting far more than direct trade partners.

Policy volatility has surged to levels not seen since the pandemic, heightening uncertainty over monetary policy, debt and interest rates, given tariffs’ impact on inflation and growth. Tariffs act as a tax on imports, raising prices for both intermediate goods and consumer products.

The Fed is left with a dilemma: keep policy tight to fight inflation and risk stifling weak growth, or accommodate price shocks and face Trump’s attacks on the Fed chair for not cutting rates.

GCC nations were initially hit with a blanket 10 percent US tariff, with sectors like aluminium and steel facing duties of up to 25 percent. The latest list now imposes a 30 percent rate on Algeria, Iraq and Libya, and 25 percent on Tunisia.

A major focus is the transshipment of goods from China, an issue raised in the US-Vietnam trade agreement, which introduces a 20 percent general tariff and a 40 percent rate on transshipped goods. Yet the definition of “transshipment” remains vague: does it mean rerouting and repackaging, or include Chinese inputs?

For Gulf countries like the UAE, Saudi Arabia and Qatar, global logistics and re-export hubs, with deep trade ties to China and extensive special economic zones, the implications are serious. These states could face further tariff pressure unless they increase local value addition to ensure goods meet domestic origin criteria.

The UAE’s agreements with China to develop EV and solar glass manufacturing facilities mark strategically important steps toward localisation. This shift is increasingly essential, particularly as rules of origin pose major hurdles in trade talks, as seen in the ongoing US-India negotiations.

In contrast to US protectionism, the UAE has pursued a radically different path. By negotiating around 27 comprehensive economic partnership agreements (Cepas), it has positioned itself as a global model of trade and investment liberalisation.

These Cepas go well beyond traditional free trade deals, covering goods, services, digital trade and investment. They also address non-tariff barriers and standards, creating a seamless framework for global commerce.

Such deep trade agreements also drive investment and innovation. The UAE is a case in point: its non-oil foreign trade surged 19 percent year-on-year in Q1 to AED835 billion, far outpacing the global average of just 2-3 percent.

At this pace, the UAE is set to reach its AED4 trillion trade goal within two years – ahead of its 2031 target.

It has also emerged as a major FDI destination. Inbound investment rose 49 percent to $46 billion in 2024, ranking second globally for greenfield projects, behind only the US.

Beyond trade and investment, the UAE is attracting entrepreneurs, skilled professionals, including tech talent, and high-net-worth individuals, a testament to a stable, business-friendly ecosystem.

Trade remains a critical engine of economic growth. Cepas support not just liberalisation, but also economic diversification and modern industrial strategy.

For the GCC, these deals are forging resilient new corridors linking the Gulf with fast-growing Asian markets and the demographic powerhouse of Africa.

Combined with the region’s rapid tech adoption, from AI to green data centres and clean energy exports, Cepas can place the GCC on a more sustainable growth path.

In a world where political and economic fragmentation threatens prosperity, the UAE offers a compelling countermodel: strategic openness remains the most viable path to a resilient, high-growth economy.

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

Dr. Nasser Saidi spoke with Dubai Eye’s Business Breakfast team on 23rd June 2025 about the UAE adding a Ministry of Foreign Trade, if there would be any competition with SaudiArabia for tourism & also the outlook for economic growth in the UAE.

Listen to the full radio interview at the link below (from 5:48 to 12:26):

Transcript below: 

Dr. Nasser Saidi’s comments on the agreement between Dubai’s global ports operator DP World and Oman to develop and operate the Al Rawdah Special Economic Zone appeared in an article in The National titled “Oman’s new economic zone signals Gulf intent in global supply chains amid trade war” published on 28th May 2025.

The comments are posted below.

The UAE’s experience in the development, efficient and profitable management and sound governance of special economic zones and free zones over the past 40 years can provide a valuable framework for Oman’s initiatives, said Nasser Saidi, president of Nasser Saidi and Associates, former Lebanon economy minister and vice-governor of the Central Bank of Lebanon.

The new SEZ will also offer opportunities for well-established businesses in the UAE to transfer knowledge and skills, best practices in governance, infrastructure development and investor services can be shared. Oman’s SEZs can learn from the UAE about smart ports, blockchain in customs clearance and the use of artificial intelligence in logistics, he added.

By developing specialised zones and infrastructure, Oman can enhance connectivity and economic co-operation across the region, integrate itself into regional value chains and position itself as a key player in regional trade and economic networks, Mr Saidi said.

This would complement the UAE’s established role in global logistics and trade and enhance the region’s resilience against global supply chain disruptions, he added.

Dr. Nasser Saidi’s comments on the UAE starting negotiations for a CEPA with the EU appeared in an article in The National titled “UAE-EU trade deal to boost FDI to Emirates amid rising global uncertainties, economists say” published on 11th April 2025.

The comments are posted below.

The announcement of EU-UAE trade talks is “timely”, as there is greater global fragmentation and decoupling with China, in general, said Nasser Saidi, a former economy minister in Lebanon and vice governor of its central bank.

“It is in the economic and financial interest of the UAE and the GCC to expand and deepen relations with the EU, given the latter’s growing trade and investment confrontation with the US,” he said. “As the US imposes tariffs on the EU, the bloc has to diversify and divert to other markets.

“For the UAE, this provides a perfect opportunity to further open up and strengthen its trade and investment linkages with the EU.”

The bottom line is that a policy of continued openness and liberalisation by the UAE will be beneficial at a time when other countries are moving towards more trade barriers and increased protectionism, Mr Saidi added.

Top exports from the UAE to the EU include fuels and precious metals, as well as aluminium and plastics – providing inputs for Europe’s industry and manufacturing, Mr Saidi said.

The top imports from the EU to the UAE are machinery, mechanical appliances and electrical equipment, “both essential to facilitate the UAE’s ambition to emerge as a leading manufacturing and industrial hub”, he said.

Beyond the remit of trade in goods, the CEPA with the UAE will allow EU countries to increase trade in services, including tourism, with collaboration in key areas such as artificial intelligence, renewable energy, climate technology and climate finance, as well as financial services and capital markets, he added.

“Existing EU-Middle East air travel routes could be strengthened further with a fully deregulated open skies policy in a bid to increase both passenger and cargo movements,” he estimated.

At a time of rising economic uncertainty relating to trade, Mr Saidi suggested the UAE and EU could also explore options to sign swap agreements between the European Central Bank and the UAE Central Bank, strengthen payment networks and complete trade transactions in euros and/or using digital currency.

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

The video can be viewed below

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

Watch the TV interview via this link 

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

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

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

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

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

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

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

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

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

Dr. Nasser Saidi’s joined as a keynote speaker at the ABB Channel Partners Event on 29th of January 2025, with a presentation titled “The Age of Electricity Beckons“.

A press release of the event quotes Dr. Saidi: 

“Climate change is the name of the game,” said Dr Saidi, President of Nasser Saidi & Associates and guest speaker of the event. “Private and public fundings need to be mobilized to accelerate investment in and development of renewable energy and climate technology across the region, one of the most climate stressed globally.

”

Dr. Nasser Saidi’s joined as a keynote speaker presenting on “UAE-China Partnership for a Transforming Global Economic Geography“ at the China-UAE Investment Summit session held during the Abu Dhabi Finance Week on 10th of December 2024.

What are the building blocks of such a Comprehensive Strategic Partnership? Regional / multilateral cooperation measures aside, bilateral efforts could range from a free trade agreement to banking/ financial integration and investing in future technologies among others.

In this TV interview with Al Arabiya aired on 17th Sep 2024, Dr. Nasser Saidi discusses the performance of UAE banks due to underlying strong macroeconomic conditions: 3.5% real growth and 7.8% current account surplus creating liquidity, rise in foreign assets, and strong core financial soundness indicators. 

Watch the TV interview via this link 

البنوك تستفيد من ظروف التشغيل القوية وتحسن أسعار النفط والسيطرة على معدلات التضخم

قال ناصر السعيدي رئيس شركة ناصر السعيدي وشركاه، إن الإمارات تسجل نموا يصل إلى 3.5% في العام الحالي، إلا أنه يجب النظر إلى فائض الميزان الجاري إذ يصل إلى 7.8% في 2024.

وأضاف السعيدي في مقابلة مع “العربية Business”، أن ارتفاع الفائض يعكس دخول أموال ضخمة للبلد، وهذا ما تم ملاحظته في ميزانية المصرف المركزي وارتفاع حجم الأصول الخارجية التي وصلت لأعلى مستوى قياسي.

وأشار إلى زيادة السيولة في السوق، في نفس الوقت شجع ارتفاع الفائدة على نمو الودائع بما فيها ودائع غير المقيمين.

وذكر السعيدي، أن الوضع الميكرو اقتصادي مهم حتى نتفهم أسباب ربحية المصارف الإماراتية خلال الفترة الحالية.

Dr. Nasser Saidi’s comments appeared in a CNN Arabia article titled “زيارة ولي عهد أبوظبي إلى الهند.. ما الاتفاقيات الاقتصادية المتوقعة؟” focusing on the UAE delegation visit to India in Sep 2024, during which discussions are expected to centre around strengthening trade and investment ties. This article was published on 9th September 2024 & can be accessed directly.

Dr. Saidi’s comments are posted below:

وقال ناصر السعيدي، رئيس شركة ناصر السعيدي وشركاه، في تعليقاته لـCNN الاقتصادية، «من المرجح أن تتمحور المناقشات حول مواصلة تعزيز الشراكة الاستراتيجية والتكنولوجيا والخدمات المصرفية والمالية».

وقال ناصر السعيدي، «تتمتع الإمارات بميزة نسبية وخبرة في تطوير البنية التحتية الأساسية، والشبكات والأنظمة التي توفر الخدمات الأساسية، والتي تمكن وتسهل النشاط الاقتصادي، وحركة أو تخزين البضائع، والمياه، والطاقة بما في ذلك الطاقة المتجددة، والبيانات،ومراكز البيانات المستدامة».

(Translated as:

“Discussions will likely revolve around continuing to strengthen strategic partnerships, technology, banking and financial services,” Nasser Al Saidi, chairman of Nasser Al Saidi & Partners, told CNN Business.

“The UAE has a comparative advantage and expertise in developing the core infrastructure, networks and systems that provide essential services, enable and facilitate economic activity, the movement or storage of goods, water, energy including renewable energy, data and sustainable data centers,” Nasser Al Saidi said.)

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

The comments are posted below.

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

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

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

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

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

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

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

Dr. Nasser Saidi’s comments appeared in an article in The National titled “Trade deals and tech in focus as President Sheikh Mohamed visits China and South Korea” published on 28th May 2024.

The comments are posted below.

“Energy remains at the heart of the UAE’s burgeoning relation with China, though in recent years it has extended beyond,” Nasser Saidi, Lebanon’s former economy minister, told The National.

The UAE could benefit from linking its financial markets to Shanghai and Hong Kong, greatly helping financial flows, Mr Saidi said.

Potential linkages could also include the adoption of yuan for trade and the extension of China’s Cross-Border Interbank Payment System, which is considered an alternative to the SWIFT payment system, he added.

The opinion piece titled “Grey list removal is milestone for investor confidence” appeared in the Arabian Gulf Business Insight (AGBI) on 1st March 2024.

The article is published below.

Grey list removal is milestone for investor confidence

Coming off the FATF list is testament to UAE’s willingness to improve overall governance

A collective sigh of relief could be heard this week over the UAE’s removal from the Financial Action Task Force “grey list”.

Being on a grey list can damage a country’s reputation, and its sovereign credit rating, and adversely affect macroeconomic stability.

The FATF provides a framework of country measures to protect the integrity of global financial systems from illicit cash flows, money laundering and terrorist financing.

The grey list includes countries “that are actively working with the FATF to address strategic deficiencies in their regimes”, whereas the “black list” are high-risk jurisdictions (currently including North Korea, Iran and Myanmar) “that are not actively engaging with FATF to address these deficiencies”.

The International Monetary Fund finds that FATF grey-listing results in a large reduction in reported capital inflows, including foreign direct investment (FDI), portfolio flows, banking, payments and other flows.

Despite being on the list since 2022, the UAE has been resilient, has worked actively with FATF and continued attracting FDI and capital inflows.

The United Nations Conference on Trade and Development reports that the UAE (despite its much smaller economic size) ranked second after the US for greenfield FDI – in which a company creates a subsidiary in a different country from the ground up – in 2023, with project announcements rising by 28 percent.

In 2022, the UAE was ranked first in both the West Asia and Mena regions, receiving 47 percent and 32 percent respectively of total FDI inflows to the regions.

Both Abu Dhabi Exchange and Dubai Financial Market reported higher net foreign inflows in 2022-23, thanks to economic growth, a rising weighting in the MSCI Emerging Markets Index, and more initial public offering listings.

Dewa, Borouge, Salik and Empower are IPOs that gained high levels of foreign participation in 2022. In 2023, the UAE’s eight IPOs raised $6 billion. On the Abu Dhabi Exchange there was a 35 percent jump last year in the foreign ownership of shares in listed companies.

The UAE’s removal from the grey list is testament to the country’s willingness to improve the overall governance and transparency of its banking/financial sector and address weaknesses.

The removal also shows the country has increased its ability to deter illicit money flows, undertake financial investigations and extradite financial criminals.

The return to conventional status will confirm and strengthen investors’ trust and confidence in the UAE as a trade and financial centre, leading to an increase in capital, FDI, transfer of technology and portfolio flows.

The removal will support the development and expansion of the banking and financial sector (domestically and internationally) and financial markets, as well as the outward facing financial free zones. Another major beneficiary will be the asset and wealth management activities of UAE-based family offices.

The FATF de-listing reinforces the positive news for the UAE from the Organisation for Economic Co-operation and Development’s review of preferential tax regimes. This rated the UAE’s corporate tax regime for free zones and IFCs as “not harmful”.

It is important that the UAE continues on its journey in adopting and implementing international best practice and standards, and strengthens its financial regulatory regimes and systems.

However, an unintended consequence of FATF standards is an increase in compliance costs.

The costs of doing business for banks and financial service providers is often heightened by de-risking. The cost of providing formal financial services to micro- and small businesses, which are a major source of job creation and economic diversification, often rises.

Safeguards against money laundering and terrorist financing need to be designed and implemented to avoid negatively affecting financial inclusion and disincentivising the use of the formal financial system by ordinary individuals, businesses and micro- and small businesses in particular.

Simplified customer due diligence requirements can be introduced for low-risk financial inclusion products; processes for higher risk products can be enhanced using a risk-based approach to address concerns over money laundering and terrorist financing.

Similarly, digital ID systems can be used to support anti-fraud functions and to develop e-solutions that circumvent burdensome paper-based systems.

The UAE’s removal from the grey list is an important milestone and signals the growing integrity and maturity of the country’s banking and financial sector through the adoption of international standards.

This positive move further cements the UAE’s position as an international trading and financial hub.

Aathira Prasad joined Vonnie  Quinn on 28th of February, 2024 as part of the Bloomberg Daybreak: Middle East & Africa edition. The discussion focused on macroeconomic outlook in the UAE & Saudi Africa, in addition to our views on Egypt.

Watch the interview (from 27:19 to 33.40): https://www.bloomberg.com/news/videos/2024-02-28/daybreak-middle-east-africa-02-28-2024-video

Dr. Nasser Saidi’s comments (in Arabic) focus on trade & investment barriers over the past few years as well as the future of global trade (given recent geo-political developments). This is included in the article titled

“مستقبل النظام التجاري العالمي متعدد الأطراف إلى أين؟”

published by Al Etihad on 26th Feb 2024. The full article can be viewed here and Dr. Saidi’s comments are extracted below.

ختبار صعب
يرى الخبير والمستشار الاقتصادي الدكتور ناصر السعيدي، عضو المجموعة الاستشارية الإقليمية لصندوق النقد الدولي لشؤون الشرق الأوسط، أن ما يشهده النظام التجاري العالمي من مؤشرات متزايدة على التفكك وتراجع عولمة التجارة الدولية، يضع منظمة التجارة العالمية أمام اختبار صعب، الأمر الذي يتطلب من المشاركين في المؤتمر الوزاري الـ13، ضرورة صياغة خريطة جديدة لمستقبل التجارة العالمية وإيجاد حلول للتحديات الجسام التي تعصف بها.
ويشير السعيدي إلى أن من بين هذه التحديات ضرورة معالجة ومنع الزيادة المستمرة والسريعة في القيود التجارية منذ عام 2016 نتيجة للحرب التقنية والتجارية بين أميركا والصين منذ إدارة الرئيس الأميركي السابق دونالد ترامب، فضلاً الضغوط التي تقوم بها الولايات المتحدة على حلفائها مثل الاتحاد الأوروبي لتبني سياسات مناهضة للصين، مما أدى إلى إعادة هيكلة سلاسل التوريد العالمية وانخفاض الإنتاجية وزيادة التكاليف وزيادة الضغوط التضخمية.
تزايد القيود
ويلفت السعيدي إلى عاملين آخرين وراء تزايد القيود والحواجز التجارية والاستثمارية، تمثلا في جائحة كوفيد-19 التي أدت إلى تفاقم المخاوف بشأن الطاقة والأمن الغذائي، قيام عدد كبير من الدول بالتوسع في اتخاذ تدابير حمائية غير مسبوقة، فيما تمثل العامل الثاني في الحرب الروسية الأوكرانية التي أدت إلى فرض عقوبات واسعة النطاق على التجارة والاستثمار مع روسيا وتعطيل سلاسل التوريد العالمية.
ويعتبر السعيدي أن غالبية هذه الحواجز والقيود التجارية والاستثمارية تشكل انتهاكاً صريحاً لقواعد واتفاقيات منظمة التجارة العالمية وتحتاج إلى معالجتها من خلال الاجتماع الوزاري، إلى جانب قضايا أخرى ذات أهمية كبيرة تتعلق بإصلاح المنظمة وتحديداً قضية إصلاح نظام تسوية المنازعات وإعادة تفعيل وإصلاح هيئة الاستئناف، إذ يوجد نحو 30 نزاعاً في منظمة التجارة العالمية في مأزق قانوني حالياً لأنه لا توجد وسيلة لتسويتها.
الحرب التجارية
ويلفت السعيدي، كبير الخبراء الاقتصاديين والاستراتيجيين الأسبق لدى مركز دبي المالي العالمي، إلى أن مصدر القلق الرئيسي حول مستقبل التجارة العالمية يتمثل تهديد العوامل الجيوسياسية وما يتصل بها من مخاوف «الأمن القومي» للفوائد الرئيسية للعولمة على مدى السنوات الثلاثين الماضية، لاسيما وأن هناك حرباً باردة جديدة تتكشف، وفي هذه المرة بين الولايات المتحدة والصين وقد تكون عواقبها وخيمة على التجارة وعلى الاقتصاد العالمي، حيث حذر صندوق النقد الدولي من أن هذا قد يؤدي إلى انخفاض يتراوح بين 2.5% و7% من الناتج المحلي الإجمالي العالمي.

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

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

Aathira Prasad joined Yousef Gamal El-Din on 18th of October, 2023 as part of the Bloomberg Daybreak: Middle East edition. The initial discussion focused on the Israel-Gaza conflict and its regional impact, followed by if that could lead to any impact on growth in GCC nations like the UAE. The interview also touched upon Egypt’s inflation levels and rumours of a state asset sale soon before ending with the outlook for oil prices (& OPEC+ decisions).

– The impact of the conflict will depend on how long-drawn-out the conflict is likely to be, whether there are spillovers & if other parties are drawn into the conflict. Growth will slow down.
– Negative impacts likely on tourism & hospitality, FDI flows, and commodity prices (especially if the conflict continues & there are disruptions to transport and logistics).
– Investor confidence will be affected.
– Middle East accounts for more than 1/3-rd of the world’s seaborne oil trade; IF conflict leads to disruption at any of the major oil transit chokepoints, it could impact supplies in an already tight market.
– As of end-2022, MENA was hosting about 2.4mn refugees + about 12.6mn internally displaced persons (Source: UNHCR). Any further addition to this would put severe strain on the hosting nations’ budget & finances.

Watch the interview below (from 29:40 onwards): https://www.bloomberg.com/news/videos/2023-10-18/bloomberg-daybreak-middle-east-africa-10-18-2023-video

Dr. Nasser Saidi’s comments appeared in an article in AGBI titled “New Middle East members expand Brics reach” published on 24th August 2023.

The comments are posted below.

“It is an important geo-strategic move, the bloc can focus on issues and objectives relevant to them as opposed to a Bretton Woods agenda set by the West,” said Nasser Saidi, a prominent Lebanese economist and former government minister. 

Dr Saidi said that the current and future Brics members are not holding common currency discussions. But the potential for using local currencies for trade financing and settlement is critical if the announcement is to have lasting significance. 

“This is extremely important for the emerging market nations which are currently dependent on dollar fluctuations and the Fed’s rate decisions,” he said, referring to the US Federal Reserve. 

Comments from Dr. Nasser Saidi and Aathira Prasad appeared in an article in The National titled “Expansion of the Brics group could lead to ‘different world order’, analysts say” published on 24th August 2023.

The comments are posted below.

“Expanding the Brics to include six new members, including the UAE and Saudi Arabia from the GCC, underscores the potential for the expanded bloc to become the architect of a different world order – one that reflects the shift in global economic and financial geography towards the East,” president of Nasser Saidi and Associates, Nasser Saidi, and its director of macroeconomics, Aathira Prasad, said.

“Joining the group will allow these GCC nations to diversify strategic alliances and also help set a global policy agenda.

“There are many economic challenges that are common to this set of nations including impact from climate change, energy transition, infrastructure for development, poverty as well as growing inequality across and within nations – being part of the bloc will enable these nations to tailor solutions according to their needs and interests.”

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

An extended version of the article is posted below.

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

Nasser Saidi and Aathira Prasad

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

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

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

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

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

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

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

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

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

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

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

[2] IRENA.

In this interview with Al Arabiya aired on 18th July 2023, Dr. Nasser Saidi discusses the future prospects of the US dollar, central banks’ appetitite for gold, potential for the renminbi and the petroyuan in the context of UAE’s agreement with India to settle trade in rupees instead of the dollar.

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

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

The GCC should leverage its power to trade as a bloc

Nasser Saidi

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

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

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

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

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

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

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

Focus on FTAs

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

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

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

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

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

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

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

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

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

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

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

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

Bloc power 

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

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

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

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

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

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

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

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

Aathira Prasad’s comments (posted below) on the prospects for UAE-Turkey CEPA in the backdrop of President Erdogan’s election victory, appeared in the article titled “With Erdogan’s win, UAE looks to strengthen trade relations with Turkey” on Zawya dated 30th May 2023.

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

China-GCC FTA will be a game changer

Nasser Saidi & Aathira Prasad

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

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

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

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

Economic diversification

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

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

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

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

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

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

Energy is essential

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

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

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

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

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

Tourism growth

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

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

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

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

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

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

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

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

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

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

Dr. Nasser Saidi’s comment (posted below) on UAE’s recent spate of trade deals appeared in the article titled “Analysis: UAE steps up pace of solo trade deals in regional economic race” on Zawya dated 25th May 2023.

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

Why nations must diversify their economies to avoid stagnation

Nasser Saidi & Aathira Prasad

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

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

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

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

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

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

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

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

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

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

GCC economic diversification

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

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

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

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

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

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

Economic diversification 2.0

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

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

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

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

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

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

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

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

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

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

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

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

“The Gulf Falcons Report” (click to download) was prepared by Nasser Saidi & Associates (commissioned by the Abu Dhabi Global Markets) for the Abu Dhabi Finance Week held from 14-18 Nov 2022. 

Introductory remarks

The Gulf Falcons embody a vision of the future for the Gulf, transforming, in three decades, from an empty desert to the new opportunities of space. The GCC have fast growing populations and economies, and maintained macroeconomic stability despite global and regional crises.

The largest Gulf Falcons, Saudi Arabia and the UAE account for 34% of MENA’s GDP and 42% of its total trade. Sound macroeconomic policies, good governance and institutions enabled the Gulf Falcons to use their 30% of global oil reserves to transform and diversify their economies, build world class infrastructure, achieve high GDP growth, and run fiscal, current and balance of payment surpluses. Major strides have been achieved in raising the standards of living and human development.

In its next phase of diversification, the region will benefit from global fragmentation while choosing to explore new routes to development, investing in digitalisation and new tech sectors. Implementing a regionalised globalisation policy, the rising Gulf Falcons will drive and support regional economic integration and transformation.

The Gulf Falcons with their SWFs and international financial centres are fast becoming a global financial powerhouse, with the ability to globally manage, control and deploy wealth. The Gulf Falcon Markets are key to financing the drivers of regional transformation, through (a) by financing the emerging new global energy map, the energy transition, renewables and combating climate change. The UAE and Saudi can become global clean energy finance hubs; (b) structural change through financing infrastructure, privatisation, PPP, efficient management of State assets, and de-risking fossil fuel assets; (c) financing regionalised globalisation to enable greater economic integration and transformation of the GCC-connected region including Middle East and East Africa; (d) financing digitalisation and investment in new and disruptive technologies will open new avenues of growth.

The op-ed by Dr. Nasser Saidi and Aathira Prasad, titled “‘Economic Diversification 2.0′: Steering the Gulf through the global economic crisis“, appeared in The National on 15th Nov 2022 and is reposted below.

The Mena region displays divergent recovery patterns in the post-Covid era, with oil exporters growing at a relatively faster pace. But a global economic downturn is looming. What are the priorities for the region’s financial community?

Medium and long-term risks in Mena (like climate change and regional conflicts) notwithstanding, the GCC, largely recovered from Covid-19, should shift on to an “Economic Diversification 2.0” path. While the so-called “Gulf falcons”, the UAE and Saudi Arabia, are the frontrunners with regard to actively diversifying away from oil, future growth prospects require a focus on the “new economy”, in addition to the “old” non-oil sectors (like tourism, infrastructure and logistics) that supported the “Economic Diversification 1.0” phase. But moving to a new diversification path necessitates new tools and investments.

There are multiple drivers of Economic Diversification 2.0. First, the new economy (including industry 5.0, the Internet of Things, AI, blockchain, FinTech and virtual assets) should be supported by an enabling set of investments and policies. This includes a broad-based embracing of the digital economy, in addition to increased investments (both domestic and regional) from the region’s financial markets and sovereign wealth funds (SWFs), which are able to deploy more than $3 trillion in liquid wealth.

This should go in tandem with developing and deploying countercyclical monetary and fiscal tools and policies. The International Monetary Fund estimates that the region’s oil producers could accumulate around $1tn in oil windfalls between 2022 and 2026. These funds should be used to secure fiscal sustainability, a move that has already been evident in the recent months with most GCC nations avoiding the temptation of increased spending. While reining in spending, policymakers could also use this opportunity to mobilise non-oil revenues and phase out costly generalised subsidies in favour of cash income transfers and targeted subsidies.

Liberalisation and structural reforms go hand in hand with the above-mentioned policy tools. This includes labour market reforms (like long-term residency and incentives to raise female labour force participation rates), alongside encouraging more private sector activity and accelerated capital market development. Last but not least, policies that support regional economic integration should be encouraged by accelerating the outward orientation of trade and investment policies towards Asia and Africa, other Arab countries, and the development of the Red Sea Basin, among others.

As the GCC embarks on Economic Diversification 2.0, financial markets need to be the handmaiden of growth and become an enabler of economic transformation. The low hanging fruit is the use of government debt markets to finance infrastructure and development projects as well as smooth volatile government finances. Government debt markets can become a growing source of funding to diversify away from reliance on bank financing, especially for long-term projects.

Structural change requires growing the role of the private sector. The UAE and Saudi Arabia are already undertaking a concerted push towards the privatisation of certain state-owned assets and enterprises to de-risk fossil fuel assets, with the advantages of raising revenues, diversifying financial markets, and attracting foreign investment. Recently enacted public-private partnership laws will also encourage privatisation, attract new tech and innovation and foster job creation. Financing mega projects and infrastructure via capital markets, and more efficient management of public assets will boost the development of broader, deeper and more liquid capital markets, also enabling the region’s SWFs to more efficiently manage their growing wealth and domestic assets, thereby increasing financial access and deepening. Indeed, the SWFs are recalibrating their asset allocation to focus on the region to drive growth. As a case in point, Saudi Arabia’s PIF plans to invest $24 billion in six Arab nations.

The ongoing global energy crisis, along with technological innovation lowering the cost of renewables, has created the conditions for a new global energy map. Alongside the GCC’s existing energy linkages with Asia, new links can now be forged with Europe for gas and green/ blue hydrogen. These structural changes should be supported by a multi-faceted energy transition strategy by the region’s oil producers that includes focusing on renewables, clean energy, clean technology, hydrogen and nuclear projects in light of their net-zero emissions commitments. The path to achieving the region’s ambitious renewable energy targets will require massive investments, which can be financed by the issuance of green bonds and Sukuks in the regional markets and by creating dedicated “green banks” and “green funds”.

Aathira Prasad joined Yousef Gamal El-Din on 22nd of July, 2022 as part of the Bloomberg Daybreak: Middle East edition, speaking about the latest Dubai inflation numbers, expectations for oil price movements as well the latest developments in Turkey (& impact on the lira.

Watch the interview from 32:40 to 41:00 in the video below, which can also be accessed from the original link: https://www.bloomberg.com/news/videos/2022-07-22/-bloomberg-daybreak-middle-east-full-show-07-22-2022

Aathira Prasad joined Yousef Gamal El-Din and Manus Cranny on 30th of June, 2022 as part of the Bloomberg Daybreak: Middle East edition, discussing the signs of inflation in the GCC region.

Watch the interview below, which can also be accessed from the original link: https://www.bloomberg.com/news/videos/2022-06-30/prasad-signs-of-inflation-easing-video

Aathira Prasad joined Yousef Gamal El-Din and Manus Cranny on 3rd of June, 2022 as part of the Bloomberg Daybreak: Middle East edition, discussing the OPEC+ decision to increase oil production, views on Turkey (growth, surging inflation & lira’s vulnerability) as well as touching upon the surge in inflation & prospects for food importers

Watch the interview below, which can also be accessed from the original link: https://www.bloomberg.com/news/videos/2022-06-03/prasad-inflation-causing-spillover-effects-video

Aathira Prasad joined Yousef Gamal El-Din and Manus Cranny on 21st of April, 2022 as part of the Bloomberg Daybreak: Middle East edition, discussing the growing risks of prolonged rise in food prices globally and its impact on the MENA region as well as the UAE’s plans to issue local currency bonds.

Watch the interview below, which can also be accessed from the original link: https://www.bloomberg.com/news/videos/2022-04-21/prassad-food-prices-likely-to-rise-further-video

Aathira Prasad joined Manus Cranny on 18th of March, 2022 as part of the Bloomberg Daybreak: Middle East edition, discussing the the soaring food prices in Egypt, higher oil prices and the country getting support from the IMF while also touching upon the inflationary situation in Turkey.

Watch the interview below, which can also be accessed from the original link: https://www.bloomberg.com/news/videos/2022-03-18/egypt-in-talks-with-imf-on-possible-funding-sources-video



Aathira Prasad joined Yousef Gamal El-Din and Manus Cranny on 20th of January, 2022 as part of the Bloomberg Daybreak: Middle East edition, discussing the advantages for Turkey on the news that the country signed a $4.9 billion currency swap agreement with the UAE, in addition to views on Qatar (ahead of the World Cup this year) and the energy market (with a focus on oil).

Watch the interview below, which can also be accessed from the original link: https://www.bloomberg.com/news/videos/2022-01-20/turkish-reserves-get-5b-boost-from-uae-swap-pact-video

Aathira Prasad joined Yousef Gamal El-Din on 19th of December, 2021 as part of the Bloomberg Daybreak: Middle East edition, sharing her views on UAE’s extension of central bank support, risks to the oil market from the Omicron variant and the consequences of the Lira’s demise on Turkey’s economy.

Watch the interview below, which can also be accessed from the original link: https://www.bloomberg.com/news/videos/2021-12-19/lira-hits-new-low-despite-end-of-cycle-video

Aathira Prasad joined Manus Cranny on 6th of December, 2021 as part of the Bloomberg Daybreak: Middle East edition, discussing the UAE’s resilient recovery, recent strong PMI readings in the GCC and thoughts on the oil market given the spread of the Omicron variant.

Watch the interview below; this can also be accessed at: https://www.bloomberg.com/news/videos/2021-12-06/prasad-on-dubai-s-emergence-from-virus-challenges-video

Aathira Prasad joined Manus Cranny on 16th of Nov, 2021 as part of the Bloomberg Daybreak: Middle East edition, discussing the outlook for the oil market as well as Dubai’s potential IPO pipeline and related market exuberance.

Watch the interview below from 01:21:00 to 01:27:00; this can also be accessed at: https://www.bloomberg.com/news/videos/2021-11-16/-bloomberg-daybreak-middle-east-full-show-11-16-2021-video

Weekly Insights 14 Oct 2021: Global divergence in growth predicted – can MENA cope?

 
1. The IMF expects global growth to recover by 6% in 2021, but at divergent paces
The main message from the IMF remains a sombre one: for full global recovery, vaccine deployment has to be increased; as supply chain constraints continue amid high demand, and even as employment is below pre-pandemic levels inflation is a worry (expected to decline in 2022, but highly uncertain); as economies rollback stimulus measures, economies need to be prepared for liquidity challenges as well as capital outflows.

 
2. Inflation is a major risk factor: more so, if pandemic-induced supply-demand mismatches persist for longer

• A confluence of (a) supply chain disruptions; (b) cyclical recovery of demand post-Covid (fueled by fiscal & monetary stimulus); and (c) weather shocks is leading to the current uptick in prices
• Disruptions are likely to continue into early next year but any prolonged supply shortages will lead to more uncertainty; wages are another question mark (depending on demand vs supply)

 
 
3. The Middle East & North Africa region is estimated to grow by 4.1% this year and next

• The oil exporters will benefit from the recent uptick in prices, and along with a relatively higher pace of vaccination, witness a return to pre-pandemic growth levels by next year
• Oil importers will be hit by the rising oil prices and food prices (exerting greater pressure on poorer families), but a faster vaccination pace could support a return to “normal” sooner in tourism dependent nations (like Egypt & Jordan)
• Covid19 and its aftermath will likely result in a further widening of inequality: be it health (pace of vaccination), jobs (nearly one third of the employed population in the region is facing high risks of layoff or reduction of wages and/or hours of work: ILO/ESCWA), poverty (18mn people have been pushed into poverty in MENA: World Bank)
• What needs to be done? Highlights the need for social safety nets / cash transfers; support for women and youth to return to the labour force; ensure that children return to school & resume studies after the pandemic-gap. In the absence of support, the region might be looking at a phase of greater social unrest

 
4. Inflation in the MENA region is ticking up, as food prices increase sharply

 
5. A Bird’s Eye View of the Fiscal Outlook: Global govt debt at just below 100% of GDP; higher vs. pre-pandemic

• Fiscal balance remains in deficit in 2021 across all regional groupings, with the global reading at 7.9% vs MENA’s 4.3% and Saudi’s 3.1%. A summary of fiscal measures since Jan 2020 are charted for select MENA countries (below)
• Governments have scaled back spending in 2021, but government revenues are still low compared to pre-pandemic levels. Furthermore, when stimulus measures (~ $16.9trn in pandemic-related fiscal measures) are rolled back, businesses could be struggle to meet financing requirements, resulting in lower revenues/ insolvencies/ bankruptcies
• Government debts have increased in 2020 & 2021, and is unlikely to fall back to pre-pandemic levels soon => greater risk to global interest rate hikes & refinancing risks (esp those nations with limited fiscal space)
• What can be done to ease MENA’s fiscal pain? 1. Reduce spending on subsidies, wages; 2. Improve mobilization of revenues + introduction of new taxes (e.g. carbon tax) and/or increase in existing taxes (VAT, excise) to be supported by cash transfers to the poor (where needed); 3. introduction of fiscal rules (only 1/3-rd have such rules in place currently); 4. support businesses (after stimulus measures are removed) by providing deferred tax payment options

 
6. UAE’s record-high federal budget for 2022 & Saudi Arabia’s ambitious FDI targets hogged headlines this week

• UAE’s federal budget for the 5 years 2022-26 stands at a record high total of AED 290bn
• Budget expenditure for 2022 is set at AED 58.931bn, with bulk of it allocated to development projects & social benefits
• Given the oversubscribed orders for UAE’s debut federal bonds, more federal issuances can be expected in the future (eventually in local currency) & used towards infrastructure spending
• Saudi Arabia’s highly ambitious National Investment Strategy expects to raise net FDI to SAR 388bn annually & raise local investments to SAR 1.7trn by 2030
• FDI inflows have been low in recent quarters compared to historical averages of between USD 8-10bn a quarter during 2008-10. Net FDI touched USD 5.5bn last year.

 
 
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Dr. Nasser Saidi’s comments appeared in a CNN Arabia article titled “أبوظبي تشجع الشركات على ادراج أسهمها بإطلاق صندوق يفوق مليار دولار” on the IPO fund launched for Abu Dhabi Securities Exchange. This article was published on 13th October 2021 & can be accessed directly.

His comments are posted below:

وأشار المحلل المالي ناصر السعيدي لـ”CNN” إلى أن تحسن أسعار البترول عامل مهم في زيادة الطروحات الأولية ولكن السبب الأهم بالنسبة إليه هو الخصخصة وتوجه دول الخليج إلى تخفيف الاعتماد على الوقود الأحفوري.
“هناك نقطتان مهمتان تشجعان على الطروحات الأولية وهي الخصخصة وهذا هو الوقت الملائم للقيام بذلك فدول الخليج تملك السيولة وتتجه نحو طرح شركات مربحة في قطاعات لم تكن متاحة أمام المستثمرين من قبل ما يفسر طرح أكوا باور وأدنوك للحفر.”
وأضاف أنّ النقطة الأهم هي الحاجة إلى تخفيف مخاطر متعلقة بأن يصبح الوقود الأحفوري من الإصول غير القابلة للاستغلال في المستقبل.”
“أتوقع أن تتسارع هذه الوتيرة وأن تنفتح أسواق الأسهم الخليجية بشكل أكبر بما في ذلك السعودية والكويت فتنوع الأسهم يجذب قاعدة أكبر من المستثمرين.”
 

Aathira Prasad joined Yousef Gamal El-Din on 7th of Oct, 2021 as part of the Bloomberg Daybreak: Middle East edition, discussing the UAE’s debut federal bond issuance and potential to create a local currency debt market for stable access to capital, volatility in the oil market, UAE’s non-oil sector outlook & an overview on  MENA’s growth prospects.

Watch the interview below from 31:08 to 39:42; this can also be accessed at: https://www.bloomberg.com/news/videos/2021-10-07/-bloomberg-daybreak-middle-east-full-show-10-07-2021
 


Weekly Insights 7 Oct 2021: Moving Towards Gradual Economic Recovery in the GCC

1. UAE’s debut federal debt to support and accelerate the development of a government debt market

• UAE’s Federal government raised USD 4bn in its debut bond sale, after having received orders upwards of USD 22.5bn. This underscores investors confidence in the country’s fundamentals and its recovery story
• The individual emirates have tapped markets multiple times, but this is the first Federal issuance
• With USD 2bn raised in 40-year notes, the UAE has successfully secured cheap and long-term funding for the government. The funds are to be used for financing of long-term projects like infrastructure and to also support investments by the Emirates Investment Authority (UAE’s SWF)
• This will support and accelerate the development of a government debt market, which can be used to finance budget deficits (will not be necessary to maintain a balanced budget, but it would be prudent to introduce fiscal rules)
• Government gross debt for UAE stands at an estimated 38% of GDP in 2020 – slightly lower than the 40% average for the GCC and much lower than Bahrain’s 130%+ and Oman’s 80%+
• The next step is to create a local currency bond market: a steady pipeline of issuances would result in stable access to capital that can be tapped when needed; furthermore, given UAE’s peg to the dollar, the central bank can also use this to conduct open market operations (support liquidity)

2. PMIs indicate a divergent recovery in the Middle East

• PMIs of fuel exporters Saudi Arabia, UAE and Qatar continue to expand in 2021, supported by strong domestic demand thanks to high vaccination rates and ease of restrictions
• Higher raw material prices & rising fuel costs are hurting businesses bottomline; however, full costs are not being passed on to consumers (yet!) amid concerns of strong competition
• Meanwhile among oil importers, both Egypt and Lebanon remain in contractionary territory
• The political deadlock had been a major factor in Lebanon’s plunge in addition to the growth freefall; the formation of the government has not changed businesses sceptical viewpoint
• Optimism of a recovery in the next 12-months reached an all-time high in Egypt in Sep, on indications of rising pace of vaccination and slow easing of travel/ tourism restrictions

3. Qatar’s GDP grows by 4% in Q2 2021, thanks to a 6% surge in non-oil sector activity

• GDP in Qatar grew by 4% yoy in Q2 2021, supported by a 6% surge in non-oil sector growth alongside a 0.7% increase in mining & quarrying
• Restoring trade and travel links with Saudi, UAE, Bahrain and Egypt after the embargo was lifted in early 2021 has also benefitted the economy
• Compared to a year ago, hospitality sector posted the largest increase (41%) in Q2 as did transport (26.9%) and trade (26.1%) – not surprising, since these sectors were most affected by the Covid19 outbreak.
• Manufacturing picked up by 13.4% yoy in Q2, after a slight 0.7% gain in Q1
• Another interesting point is the growth in activity in agriculture & fishing – possibly a result of policies introduced to support local agricultural products & improve food security

4. Broad money in Saudi Arabia grows at a slower pace than credit growth; e-commerce transaction gains continue

• Consumer spending in Saudi Arabia has been rising gradually in month-on-month terms, with e-commerce transactions doubling in Aug (SAR 6.9bn from SAR 3.3bn in Aug 2020)
• Weekly PoS transactions in clothing, health, restaurants & food are rising with the easing of restrictions (tracked by the Oxford COVID-19 Government Response Tracker/ stringency index)
• Credit growth has been rising at a faster pace than broad money supply (M2)
• Claims on the private sector continues to outpace public sector loans in Aug 2021 – as seen in most months this year. Separately, residential new mortgages increased in Aug, after two consecutive months of declines in Jun & Jul

5. Unemployment rate among Saudi females ticks up to 22.3% in Q2 2021

• Overall unemployment rate among Saudi nationals fell to 11.3% in Q2 2021, down from Q1’s 11.7%. Youth unemployment (20-24) dropped to 22.2% in Q2 (Q1: 23.6%)
• Unemployment rates among Saudi males dipped to 6.1% in Q2 from 7.2% in Q1
• Unemployment rate among female Saudi citizens inched up to 22.3% from 21.2% in Q1 – a result of a jump in unemployment rates in all age brackets above 35+
• Female participation in the workforce inched up to 32.4% in Q2 2021 (Q1: 32.3%; 2016: 19%)
• Women earn slightly more than men in the 15-19 age group, but the pay gap widens after that. On average, in Q2 2021, a Saudi male employee is paid 1.3 times compared to a female national though the gap has narrowed significantly over time

6. Saudi fiscal deficit has been revised down to an estimated 2.7% of GDP in 2021

• Fiscal deficit in Saudi Arabia narrowed to SAR 12bn in H1 2021 compared to SAR 143bn in H1 2020
• Revenues increased by close to 40% yoy in H1 2021 – a result of a surge in tax revenue (+171.7% yoy) and 11% rise in oil revenues. Share of oil revenue declined to 55% (H1 2020: 69%) while taxes on goods & services rose to 27% (given the VAT hike)
• Total expenditure declined by 0.9% yoy to SAR 465bn in H1 2021; private investment indicators improved by 12.3%: finance ministry.
• Saudi Arabia revised down its 2021 budget deficit to SAR 85bn (equivalent to 2.7% of GDP) from the previous SAR 141bn (or 4.9%) estimate
• Deficit is estimated to narrow to 1.6% of GDP next year, and surpluses are forecast from 2023 onwards.

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Weekly Insights 23 Sep 2021: UAE’s growth forecasts rebound in 2021 & 2022

1. UAE expected to grow by 2.1% this year (Central Bank); Dubai by 3.1% (Dubai DED)

• The UAE central bank expects UAE growth to rebound by 2.1% this year (2020: -6.1%), supported by a recovery in the non-oil GDP (+3.8% from -6.2% in 2020)
• Separately, the Dubai Department of Economic Development forecasts Dubai’s GDP to increase by 3.1% yoy in 2021, with recoveries the most among Covid19-affected sectors like accommodation and food services (+8.5%) and wholesale & retail (4.7%). This is underscored by the 5 stimulus packages announced by the emirate’s government since the start of the pandemic that amounted to AED 7.1bn, or 1.6% of Dubai’s GDP. (Dubai Statistics Centre preliminary estimates for GDP growth stood at an estimated 1% qoq in Q1 2021)
• The PMI indicators for both UAE and Dubai remain in expansionary, supported by optimism ahead of the Expo event which begins in Oct, with a drop in daily cases alongside a strong vaccination campaign.

2. An update on Covid19 cases & vaccination campaigns ahead of the start of the Expo

• Daily cases in the UAE have been falling consistently (under 500 for the past few days), and with test positivity rates at just 0.2%, stringency levels have been eased slowly.
• Visitors to the Expo need to be either vaccinated or present a negative PCR: the share of vaccinated people in DXB’s main tourist market all exceed 60%, with daily cases on the decline (except in the UK & US) and vaccination rates are also picking up (especially in Europe & China).

3. The decline in credit disbursed to UAE’s private sector continues past H1 2021

• Overall domestic credit disbursed in UAE fell by 1.6% yoy and 0.1% mom in Jul 2021
• July marks the 16th consecutive month of yoy decline in credit to the private sector and 13th consecutive month of yoy decline in lending to the business sector.
• A breakdown of lending by economic activity shows that the major shares with respect to credit by economic activity remain largely unchanged in Jun 2021: personal loans for consumption (21.3%), construction (20.3%), government (14.6%), others (9.3%) and trade (8.6%) together accounted for 65% of total loans.

4. Remittances from the UAE surge in Q2 2021

• In Q2 2021, total remittances from the UAE surged by 17.8% yoy and 8.2% qoq to a total of USD 45.0bn. In Q1 2020, given the stringent lockdowns, remittances had dropped by 10.3% yoy to USD 38.2bn.
• Remittance transfers via exchange houses declined in Q2 2021; transfers via banks have gained traction after Covid19, up 31% qoq and 12% qoq in Q1 and Q2 this year respectively.
• India retains its spot as the largest recipient of remittances from the UAE. However, its share in remittances dropped to 28.8% of the total in Q2 this year (vs. 31% at end-Q4 2020 and 37.8% at end-Q1 2020). The decline in share of remittances to India could be due to two factors: one, job losses; two, residents who were affected by the flight ban and stuck in India.

5. UAE banking system remains well capitalized;  monetary base contracted in Jul 2021

• UAE’s monetary base contracted by 1.4% mom in Jul, with Banks & OFC’s Excess Reserves (11% of monetary base) declining by almost half (vs a month ago) while Certificates of Deposits purchased by banks (35.9% of monetary base) rose by 4.0% mom.
• Of the monetary aggregates, M1 and M2 declined by 0.8% mom and 0.7% respectively in Jul while M3 inched up by 0.1%, thanks to the 4.5% rise in government deposits. (These values are not seasonally adjusted)
• The increases in the multipliers of M1, M2 and M3 indicate slower decline (/faster uptick) in the monetary aggregates M1, M2 (and M3) compared to the contraction of the monetary base

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In this interview with Al Arabiya, Dr. Nasser Saidi discusses the UAE’s rollout of 50 initiatives to boost economic diversification and propel UAE into its next phase of growth as well as the upcoming Expo2020 Dubai (and beyond).

Watch the interview and read the article (in Arabic) that was published on 5th September 2021, and is posted below.

السعيدي: هذه القطاعات الأكثر استفادة من “إكسبو 2020”

السياحة والتجارة والاستثمار ستستفيد بجانب قطاع النقل والاقتصاد الرقمي

Weekly Insights 1 Sep 2021: Thinking beyond the Expo 2020 Dubai

Dubai is gearing up for the Expo extravaganza, scheduled to start in just over a month’s time on October 1st. Plans and preparations have been underway since the Emirate won the rights to hold the mega-event in Nov 2013.

Little did anyone envisage the scenario within which the Expo would eventually take place. Expo 2020 will be the first global mega-event to be held permitting physical entry of visitors, after the Tokyo Olympics and Paralympics went ahead sans spectators (given the spiraling Covid19 crisis in the country). Holding a mega event during a global pandemic will be no mean feat. Nevertheless, Dubai has been open for tourists since July 2020 and has managed to control the epidemic amid a highly effective vaccination campaign. Restrictions were tightened when cases surged and eased later. Vaccination rates are among the highest globally: over 18 million doses have been administered to a population of 10 million.

From Oct 2020, the Emirate opened to host multiple global conferences and sports events – albeit at a smaller scale compared to the Expo – and have other major events on the horizon like the Indian T20 IPL championship matches (mid-Sep), T20 Cricket World Cup (mid-Oct) and Formula 1 (Dec 3-5) among others. These will be testing grounds for the control of crowds ahead of the Expo. Of course, having a well-connected airport will be critical in this regard: some 2/3rd of the world’s population lives within 8 hours flight from Dubai and 1/3rd lives within 4 hours. Expo 2020 will be the first expo with the vast majority of visitors using international travel.  Even though passenger traffic at Dubai’s international airport plummeted to 25.9mn in Covid19-affected 2020 (from 86.4mn in 2019), it was ranked the world’s busiest airport for international passengers, and passengers are expected to rise to 28mn this year. Anecdotal evidence suggests a surge in tourist visa applications and ticket demand following the recent announcement of entry for all WHO-approved vaccinated persons into the UAE: while the 25mn Expo visitors may be a tad too optimistic during an ongoing pandemic, the WHO approval will increase the likelihood and perception of health safety and encourage visitors.

Hosting such mega-events are usually found to be a drain on country or city budgets: to take an example of the recently concluded spectator-free Tokyo Olympics, the official budget by 2019 stood at USD 12.6bn (vs the estimation of USD 7.5bn in 2013) though the audit board places the amount as at least double. In the Expo’s case this year, where visitors are allowed entry, they also have to account for additional spending given the Covid19 countermeasures (i.e. costs of testing, adapting to social distancing policies etc.). However, the economic case for hosting such events is based on the increase in economic activity (infrastructure development, job creation and the multiplier effect, event-related revenues), rise in tourists and spending (supported by enhancement to key tourism infrastructure e.g. extension of the Dubai Metro to the Expo, roads to and hotels near the Expo etc.), building the intangible “Dubai brand” as well as other qualitative and social impacts (strengthening trade and business with global counterparts, the “feel-good” factor – more important during a pandemic when trying to return to “normal”).

Expo 2020 has prioritized health and safety guidelines (including a mask mandate), and plans to dazzle the rest of the world with its AI-assisted queue and crowd controls and roving paramedics. A trial period earlier this year saw these practices being tested as residents previewed the area. While this should put visitors’ minds at ease, we expect that the Expo will benefit from UAE residents’ multiple visits (domestic) in addition to those from its major regional and  international source countries (India, Saudi Arabia, UK, Russia etc.). Having hosted 2.5mn overnight visitors in H1 2021, and 5.51mn persons in 2020 (of which 3.27mn were in Jan-Feb), Dubai has already gained sufficient experience to safely secure visitors (& manage events during a pandemic – this is just scaling it up many times over!).

Will the Expo affect UAE’s growth prospects?

In 2020, UAE’s growth fell by 6.1% yoy dragged down by a 7.7% plunge in private sector activity. By economic activity, four sectors saw double-digit declines last year: accommodation and food (-23.6%), transport (-15.5%), wholesale and retail (-13.1%), construction (-10.4%). Not surprising considering that these sectors were directly affected by the pandemic. This is in addition to the oil sector which fell by 6%, given compliance with lower production levels agreed by the OPEC+ bloc. However, the UAE’s diversification policy measures have meant that the oil sector now accounts for less than 1/3-rd of GDP, thereby lessening the impact of the global slowdown in the demand for oil. However, the sectors it diversified into – including trade, tourism and hospitality – were significantly impacted by Covid19.

How soon these sectors recover is a critical question. High immunization rates and the easing of restrictions allowing for tourists’ entry, along with the ability to host global conferences, entertainment and sporting events have already boosted the confidence of consumers and businesses. Consider the UAE’s non-oil sector PMI: at 54 in Jul, this was the highest reading since Jul 2019; it has already improved to an average reading of 52.2 in H1 this year vs 50.2 in H2 2021, thanks to the pace of vaccination, improvements in domestic demand and recovery in employment. Tourism numbers and hotel occupancy rates have been picking up, despite having restricted entry from India (during its Covid19 wave), the UK (since UAE was placed on UK’s Red and Amber lists requiring mandatory “quarantine on return”) and direct travel from Saudi Arabia still suspended. Higher frequency indicators like mobility, traffic and money supply growth also indicate a broad-based improvement.

Some pain points need to be tackled, key among them being the dip in loans to the private sector. Private sector loans, which accounted for roughly 70% of overall loans in H1 2021, witnessed a marginal 0.4% growth year-to-date (till Jun) vis-à-vis the 1.7% uptick in loans to GREs. Furthermore, funding to SMEs remains trivial, with the Jun reading at 12.2% of overall business and industrial sector credit and just 5.9% of overall domestic credit.

Standing at the 1-month countdown to the start of the Expo, the 192 pavilions, around 50k employees (so far) and the related infrastructure are ready to receive the world: a successfully run event will boost Dubai’s/ UAE’s image as a global frontrunner in safely hosting large-scale events during the pandemic era. The Expo will act as a stepping stone for potential investors to buy into “Brand Dubai” and move businesses and families into the country. A long list of recent reforms including visa changes (long-term golden visas, retirement visas, remote visas) and ownership rules (allowing 100% foreign ownership outside the free zones) make Dubai/ UAE an attractive global hub to live, work and play. A successfully managed Expo will only further accentuate this message to the world.

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Weekly Insights 5 Aug 2021: Domestic Demand Drives Economic Recovery in Saudi Arabia & UAE +“Tanker Tensions”

1. UAE and Saudi Arabia’s PMI supported by domestic demand

• Latest non-oil sector PMI for July remained in expansionary territory in both UAE & Saudi Arabia
• UAE’s PMI jumped to a 2-year high of 54 (Jun: 52.2), on strong output and new orders readings (highest since Jul 2019) while employment rose at the fastest pace since Jan 2019. Domestic demand played a significant role in the recovery.
• In Saudi Arabia, PMI eased to 55.8 (Jun: 56.4), on weaker growth in output, new orders and employment. The PMI readings have stayed above 50 for the 11th straight month. Respondents mention improvements in demand given competitive pricing.
• Both UAE and Saudi firms cited increase in input prices (given delays in shipments) and lengthened delivery times; these costs, however, were not passed on fully to consumers as the main objective still remains to stimulate demand/spending
• Looking forward:

• • For UAE, Expo (starting from Oct) and easing of restrictions will offer further respite (flights for residence visa holders from India, Pakistan & 4 other nations have resumed)
  • Higher oil output amid an OPEC+ agreement to support growth; services sector (especially tourism) to benefit from the recent opening up for vaccinated persons/ tourists

2. High vaccination rates & stringency levels will support a return to “normal”

• Both Saudi Arabia and the UAE have benefitted from a string of reform measures (100% foreign ownership, privatisations, visas, capital market reforms etc) in addition to the timely rollout of Covid19 stimulus packages.
• In addition, high immunization rates have also supported the recovery phase: UAE is home to one of the highest vaccination rates globally (71% fully vaccinated) while in Saudi Arabia, 56% have received one dose or more. UAE recently announced vaccination for 3 to 17 year olds to further curb the spread of the pandemic.
• The stringency index for the UAE has ticked up a notch (up 16 points since end-Jun till mid-Jul, during Eid holidays) and stands now as the second-most stringent among the GCC (Oman tops the list & Qatar the least)

3. UAE mobility edged down slightly in Jul vs Jun 2021

• The increase in stringency is reflected in the latest UAE mobility data till end-Jul
• Both retail and recreation mobility as well as grocery and pharmacy visits have slipped during last month. Though the almost-week break for Eid saw an increase in mobility (except for workplace), it remained relatively subdued for the rest of the month, causing the overall Jul figure to be lower vs Jun. Grocery and pharmacy visits are in pre-pandemic territory.

4. Consumer spending in Saudi Arabia slowed in Jun, but recovery from the initial Covid dip continues

• Overall consumer spending has been rising through 2021, with an increase in cashless transactions.
• While ATM transactions have declined by 4% yoy in H1, e-commerce transactions are still rising, having almost doubled in H1 2021 vs. the same period a year ago.
• Cash is no longer king: a report by Fintech Saudi found that only 18% of Saudis aged between 16 and 22 years use cash, while almost half of people who are 60 and above use cash till date
• Point-of-sale transactions in Jun increased the most (in yoy terms) within the “hotels” and “restaurants and cafes” categories. Big-ticket items like electronics and jewelry declined in yoy terms, given the impact of big purchases in Jun 2020 (ahead of the tripling of VAT)

5. Bank claims to the private sector rise, with a healthy dose of mortgage loans

• Credit to the private sector has accelerated by an average of near 15% yoy in H1 2021, rising in line with the pre-pandemic pace. (This is in contrast to the UAE where private sector lending has been on the decline vs. an expansion in credit to both government and public sector entities. Read last week’s Insights)
• Residential mortgage finance has been one of the fastest growing segments, surging on the back of plans to increase home ownership. The banks have in H1 2021 lent SAR 77bn for new residential mortgages for individuals, up from USD 60bn in the same period a year ago.

6. Volatile oil prices amid tanker tensions in the Middle East

• Multiple tanker incidents in the Gulf of Oman in the span of a week is causing tensions in the Middle East region. Multiple countries have pointed the finger at Iran for these attacks.
• This is near the Strait of Hormuz chokepoint – famous for oil transit. Bloomberg estimates that 12mn barrels per day of crude and condensate passed through the Strait last year (from oil producers in the Middle East) in addition to a quarter of global LNG supplies.
• Two aspects to consider in this regard: 1. rise in geopolitical risk and more specifically, maritime risk. At a time when shipment delays are rampant given recent lockdown measures in Asia, the supply chain does not need further interruptions from attacks (increasing travel time and costs); 2. These tensions complicate the efforts to revive the nuclear deal (signed in 2015): while no future date has been set for the next meeting yet, the 6 rounds of informal negotiations have not been very successful. Iran’s political transition, with its new President, adds another layer of uncertainty to the picture.
• Whichever manner this plays out, oil prices are likely to remain volatile: prices remain an interplay between tight supply concerns amid a potential decline in demand. With cases rising in the US and China, two of the largest oil consumers globally, concerns are rife about lower global demand (weak PMI data in both nations support this notion). With the recent Reuters survey finding that OPEC July oil output hit a 15-month high, lower oil prices could be on the horizon sooner than later.
• Lastly, the commitment to fight climate change is also leading countries to greener paths of economic development. According to the World Bank, oil intensity of global output had already declined by about one-third in the two decades to 2019! The current commitments (including from the Middle East region) will further accelerate the move away from oil.

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Aathira Prasad joined Manus Cranny and Yousef Gamal El-Din on 4th of August, 2021 as part of the Bloomberg Daybreak: Middle East edition, discussing escalating tensions in the Gulf region as Iran’s President Ebrahim Raisi is sworn in. She also shared her views on Egypt’s rising food prices and the UAE’s easing of restrictions for fully-vaccinated travellers from South Asia and Africa.

Watch the interview below; this can also be accessed at: https://www.bloomberg.com/news/videos/2021-08-04/iran-s-new-president-sworn-in-as-new-crisis-grips-gulf-video

Weekly Insights 29 Jul 2021: Global growth & inflation outlook + credit & inflation (GCC/ UAE)

1. Global growth forecast at 6% in 2021: IMF

• The IMF’s World Economic Outlook, updated this week, forecasts global growth at 6% this year (unchanged from the Apr 2021 estimate).
• However, the underlying forecasts show greater divergence: an uptick in advanced nations growth estimates (+0.5 ppt from Apr 2021 forecast) was offset by a 0.4 ppt drop in emerging markets growth.
• Multiple risk factors to growth: dealing with new variants amid an uneven vaccine rollout globally (in low income nations less than 1% of the population have recived one dose), continuation of supply-demand mismatch and steady increase in inflation, earlier-than-expected tightening of interest rates in the US, early withdrawal of fiscal support etc.

2. Global government debt was close to 100% of global GDP in 2020

• IMF: fiscal measures rolled out to support during Covid19 estimated at $16.5trn as of early July 2021 => fiscal deficits across all regions in 2020
• Much of these funds have already been utilised in EMEs, while advanced economies (AEs) have $4.6trn still to be used. Deficit narrows in 2021, in all regions except Euro Area
• Fiscal deficit will fall to 4.5% of GDP in oil-producing nations in 2021 (2020: -8.3%); reflected clearly in KSA as well
• Government debt rose to 122.8% last year in AEs (vs 2019’s 103.7%); in Saudi, it rose to 32.5% (22.8%)
• As inflation rises, some emerging markets have started to hike interest rates => less policy space
• If the Fed hikes rates earlier-than-expected, then fiscally constrained nations with high debt levels will be more vulnerable => further increasing fiscal risks/ corporate bankruptcies etc.

3. IMF calls inflation “transitory”, but PMI survey responses mention shortages & rising costs…

• Latest flash PMI readings show expansion in economic activity as restrictions are eased
• However, with shortage of materials and supply chain risks, firms are struggling to keep up with demand and higher costs are on the cards
• Food prices have been rising for 12 straight months before falling by 2.5% mom in Jun; but still up 33.9% yoy
• Higher oil prices are also affecting major importers; oil price is now closer to pre-pandemic levels
• Inflationary risks: pent-up demand amid long-drawn-out supply bottlenecks, earlier-than-expected rate hikes (leading to rise in risk premiums, borrowing costs)

4. … as evidenced by rising shipping costs; air cargo costs to become more competitive, soon?

• Shipping costs are at multi-year highs and freight rates are likely to stay high the rest of this year given factors like lack of containers & shipbuilding capacity, Covid19 related delays
• Compared to congested container shipping and given the attractive speed of air cargo, the latter is becoming increasingly more advantageous price-wise.
• Nearly 60% of respondents in IATA’s passenger survey (Jun 2021) plan to take a flight within 1-2 months => air cargo capacity is growing => resulting in relatively cheaper air cargo fares
• Within the Middle East, cargo capacity was up by 17.1% in Jun (vs 2019), supported by strong ME-Asia and ME-North America trade lanes

5. Closer home, a mixed GCC inflation picture: High food prices in Kuwait, Qatar & deflationary trends in others

6. Credit disbursed in the UAE dragged down by private sector slump

• Overall domestic credit disbursed in UAE fell by 1.6% yoy and 0.8% mom in May 2021
• Loans to the private sector have been declining since Apr 2020, with the latest reading down by 2.8% yoy (and -0.3% mom). Since Apr 2020, loans to both the business sector and overall private sector has declined by an average 2.1%, while loans to the government and public sector have gained 13.7% and 17.5% respectively
• Interestingly, the central bank’s credit sentiment survey for Q2 2021 showed that banks expect demand for business loans to increase for the Sep quarter (net balance of +28), with economic activities retail & wholesale trade, manufacturing, construction, transport & communications, and others dominating demand.
• In Mar 2021, construction (20.5%), personal loans for consumption (20.4%), government (15%), others (9%) and trade (8.7%) accounted for 65% of total loans. However, if one tracks loans disbursed since the onset of Covid (taking an index with Mar 2020 as 100), the biggest “gains” accrued to the agriculture, mining, others, utilities and trade activities.

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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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Dr. Nasser Saidi commented on the latest move from Saudi Arabia – changes in import rules and preferential tariffs – in the FT article titled “Trade emerges as latest flashpoint in deepening Saudi-UAE rivalry” published on 14th Jul 2021.

The full article can be accessed at: https://www.ft.com/content/0cb64e0b-fcad-4992-beed-191261caa406

The comments are posted below:

Economists say co-operation under the auspices of the GCC, rather than competition between members, would be a better route to a prosperous and diverse regional economy. “This is a moment of opportunity to rewrite the rules and come up with a new customs union agreement and look forward to the future,” said Nasser Saidi, a Dubai-based economist.

Building a comprehensive agreement to include services as well as goods would turn the Gulf’s Arab states into a global bloc that could negotiate more effectively with other power centres, he said.

“It’s in the interest of everyone to move to a proper common market, leaving out the politics,” he said. “It took the EU years to get it right, and there were disputes along the way — so it could take some time.”

Weekly Insights 8 Jul 2021: Diverging PMI readings, Saudi’s new import rules & Oman’s IMF TA request

1. Global Manufacturing PMI near multi-year highs; PMIs slow in Asia as a more severe wave of the pandemic hits

• Global manufacturing PMI slipped to 55.5 in Jun, easing from the 11-year high of 56 in May, with Europe the “bright spark” while Asia paled in comparison (India fell into contractionary territory after 10 months; PMIs in Vietnam and Malaysia plunged to 44.1 and 39.9 respectively).
• Supply disruptions continued, and average vendor lead times “lengthened to the greatest extent in the near 24-year survey history”; average input prices “rose to one of the greatest extents in the survey history”.
• Asia is witnessing a more severe wave of Covid19 cases in the past weeks: of every 100 infections last reported around the world, about 35 were reported from countries in Asia and the Middle East. The region is currently reporting a million new infections about every 7 days.
• While new orders are rising, lockdowns/ restrictions are causing delays and disrupting shipping, with some estimating that the impact could affect shipments as far out as Christmas this year.

2. Shipping costs are still on the rise => air cargo relatively attractive

• Global shipping costs (especially on long-distance routes) continue to rise, as demand recovers amid shortage of containers. According to Sea-Intelligence, Feb 2021 marked the height of container congestion, with almost 12% of global container capacity (around 2.8m TEU) absorbed in vessel delays. In Apr 2021, the congestion figure was at 8.6% or 2.1mn TEU. Increase waiting times at the Yantian port in Jun imply more congestion.
• So, air cargo is now relatively attractive compared to containers price-wise (vs. Q2 2020 when aircrafts were grounded & hence air cargo fares spiked): IATA. Furthermore, the speed of air cargo provides another competitive edge. Cargo tonne km (CTKs) flown in May 2021 were 9.4% above pre-crisis level (May19), though slowing from Apr’s 11.3% reading.

3. Mixed PMI readings in the Middle East: Lebanon and Egypt stay below-50

• While PMIs improved in H1 2021 vis-à-vis last year, it still remained well below the 2019 average
• Though UAE PMI edged down slightly in Jun, as foreign sales dropped amid supply delays, employment rose for the first time since Jan and at the quickest pace in more than two years. In Saudi Arabia as well, job creation rose at the fastest pace since late 2019

4. Saudi Arabia’s rules on local content, labour & value-added: impact on GCC trade?

• The GCC customs union agreement (Jan 2003) was designed for highly oil-dependent economies and importing goods and services from the EU, US & Japan to a lesser extent.
• Since 1973 there has been a tectonic shift in global economic geography towards Asia with China the main trade partners for most GCC nations. At end-2020, China accounts for around 1/5th of Saudi’s total exports; for the UAE, it stands at around 10% of total exports. In contrast, intra-GCC trade stood at just above USD 90bn as of end-2019 (GCC Secretariat), a trivial 5.5% of GDP.
• The GCC agreement & subsequent amendments also did not account for the rapid growth of production and exports from the free zones and/ or special economic zones leading to the current dispute concerning the domestic content of trade.
• Free zone trade is significant for UAE/ Dubai, given the operations of Jafza: in 2019, Jafza generated trade worth USD 99.5bn (roughly about the value of intra-GCC trade!)

• The GCC agreement and subsequent limited amendments also did not account for the rapid growth of production and exports from the free zones and/ or special economic zones leading to heightened competition between Saudi products & UAE FZ/SEZ exports.
• The GCC nations have not adapted to these changed domestic and external structural changes, hence the pressure on the customs union and on trading rules (such as domestic content).
• The GCC needs to move to a new trade and investment agreement (replacing the customs union) and moving to a true common market that allows for deep integration (including for trade in services and labour mobility), allowing the GCC to benefit from economies of scale resulting from more open and greater market size, which would be a magnet for FDI.
• A new GCC-wide deep trade & investment agreement would also allow the GCC to negotiate as a bloc with the EU, China, ASEAN, USMCA and emerging African trading blocs, a must for participation in global value chains.
• Short-term impact: certain goods will be excluded from preferential tariffs implying an increase in customs duties and consequently the cost of doing business. UAE, a major re-exporting hub, is Saudi Arabia’s second largest trade partner after China (w.r.t import value).
• The current dispute, while disruptive in the short-term, can open the door to a more efficient, modern, trade & investment framework and agreement that would boost growth prospects and allow for greater diversification, higher value-added regional trade (rather than re-exports from the rest of the world) and integration into evolving global value chains.

5. Is Oman’s technical assistance (TA) request timely?

• Oman has requested for Technical Assistance from the IMF to help it develop a medium-term debt strategy and strengthen its fiscal structure, given high budget deficits & jump in debt to GDP in 2020.
• Oman’s non-oil economy grew by 5.7% to USD 14.8bn in Q1 2021: NCSI. However, with a 20.6% plunge in oil sector activity, overall GDP contracted by 2.5%. The IMF forecasts 2.5% growth this year, given a recovery in aggregate demand post-vaccine rollout (21.5% of population has received at least one dose).
• There have been several recent positive policy developments

A.On the fiscal side: (a) 5% VAT introduced; (b) expected to phase out water and electricity subsidies by 2025; (c) ongoing discussions re the introduction of income taxes for high-income earners

B.Institutional reforms: two new agencies were established: (a) the Oman Investment Authority to improve management of public assets and maintain oversight of State-owned Enterprises; and (b) Energy Development of Oman to manage and finance investments in energy

• However, Oman’s debt-to-GDP ratio surged to 80% in 2020, from about 15% in 2015 & given fiscal/ financial support during Covid19, budget deficit widened to 19.3% of GDP. The latter is esitmated to ease this year, to 2.4% of GDP. Fiscal reform is required to ensure fiscal & debt sustainability.
• Oman has been tapping the international debt markets in 2021: raised USD 1.75bn in nine-year sukuk in Jun (2nd transaction in international debt markets, following USD 3.25bn in 3-part bonds in Jan).
• Other than fiscal, another major issue is that of unemployment: unemployment in Oman was estimated at 4.97% by ILO in 2020 (2019: 1.8%). More importantly, in 2019, youth unemployment was at 11.6% & female youth unemployment at a massive 36.3%. Covid19 last year would only have further exacerbated this.
• Oman’s request for TA could be the precursor for an IMF-sanctioned reform programme. Egypt has seen the benefits of reform measures, being the only MENA nation to post a positive growth in 2020

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Dr. Nasser Saidi’s comments appeared in the Reuters article titled “Saudi Arabia amends import rules from Gulf in challenge to UAE“, published 5th July 2021.

Comments are posted below:

“The original customs union agreement, established Jan 2003, no longer serves the needs of the GCC countries … including Saudi and the UAE and in light of the increased competition between the two countries pursuing similar non-oil diversification activities,” said Nasser Saidi, a Dubai-based economist.

“The current dispute, while disruptive in the short-term, can open the door to a more efficient, modern, trade and investment framework and agreement that would boost growth prospects and allow for greater diversification, higher value-added regional trade,” he said.

State of the UAE & Saudi Arabia economies: a peek into the latest macroeconomic data

(GDP, Fiscal, Money & Credit, Labour Market, Trade, Inflation)

1. UAE’s GDP declined by 6.1% in 2020; hospitality and logistics were the worst affected sectors

• The UAE’s GDP declined by 6.1% in 2020, according to the FCSA, down from an upwardly revised 3.4% growth in 2019. The slump was driven by both oil and non-oil sector, which fell by 6% & 6.2% respectively.
• While the share of oil sector to overall GDP remained unchanged at 29.1%, the sectors that posted a slight increase in overall contribution to GDP include manufacturing (8.8% in 2020 from 2019’s 8.3%), communication (3.3% vs 2.9%), finance and insurance (8.2% from 7.9%) and public sector (5.6% from 5.2%).
• Only a few sectors posted positive growth in 2020; unsurprisingly, the most negatively affected were hospitality (-23.6%), transportation (-15.5%) and trade (-13.1%).

2. UAE fiscal balance moves into deficit in 2020, following two years of surplus

• Both public revenues and expenditures in the UAE declined in 2020, by 22.7% yoy and 15.8% respectively, thereby moving the balance into a deficit of AED 3.04bn. Oil revenues fell by 22.4% yoy
• Oil revenues accounted for 41.35% of overall revenues and 42.7% of non-tax revenues in 2020. Though total tax revenues fell by 22.4% yoy in 2020, its share in total revenues continued to be ~3.25% (similar to 2018 & 2019)
• Wages and salaries continue to represent about 30% of total spending in 2020 but in yoy terms, it declined by 16.7%. Subsidies also fell by 5% yoy, but account for 11% of overall spending
• Fiscal consolidation should be major policy reform for the UAE in the medium- to long-term to reduce dependence on oil & gas revenue. Subsidy reform and reducing public sector wage bills could be reforms on the spending side while new/ higher taxes can support revenues (e.g. carbon tax, property tax)

3. Credit to UAE’s private sector continues to decline in 2021; activity-wise differences exist

• Overall domestic credit disbursed in UAE fell by 0.6% yoy in Apr 2021 though rebounding by a marginal 0.52% mom (Mar: -0.9% mom)
• April marks the 13th consecutive month of yoy decline in credit to the private sector and 10th consecutive month of yoy decline in lending to the business sector. Loans to the public sector (which includes government-related enterprises) broke the pattern by ticking up just 0.2% in Apr (Mar: 7.0% and following 12 months of double-digit growth)
• A breakdown of lending by economic activity shows that the major shares with respect to credit by economic activity remain largely unchanged: construction (20.5%), personal loans for consumption (20.4%), government (15%), others (9%) and trade (8.7%) together accounted for 65% of total loans. Sectors with continuous growth for 4 quarters (from Jun 2020) include transport (average 46.7% yoy growth), agriculture (44%) and utilities (29%).

4. Rising credit & changing consumer preference (away from cash) is the story in Saudi Arabia 

• Data from the Saudi Central Bank shows claims from the private sector outpacing public sector loans in May 2021 – as seen in most months this year
• A continued preference for PoS/ e-commerce transactions from a previously preferred “cash is king” position. ATM transactions have dropped by 0.7% in the Jan-May period vs a 65.8% and 125.9% hike in PoS & e-commerce transactions
• Weekly PoS transactions show an uptick in early Jun: the distinct rise in PoS transactions in clothing, health, restaurants coincides with when restrictions were eased (tracked by the Oxford COVID-19 Government Response Tracker)

5. Unemployment rate among Saudi nationals (apecially females) dip to a 5 year-low in Q1 2021

• Overall unemployment rate among Saudi nationals fell to 11.7% in Q1 2021 – a 5-year low; more dramatic was the plunge in unemployment rate for Saudi females – 21% in Q1 2021 vs a high 34% at end-2016. By age group, the rate remained highest among females within 25-29 & 20-24 age group (37.9% and 37% respectively).
• Meanwhile, female participation in the workforce increased from 19% in 2016 to 32.3% in Q1 2021. However, both male & female labour force participation rates declined slightly compared to Q4 2020. Though women are joining the workforce in large numbers, many of the job opportunities fall in the lower-paid sectors.
• Women earn slightly more than men in the 15-19 age group, but the pay gap widens after that. On average, in Q1 2021, a Saudi male employee is paid 1.3 times compared to a female national and at the oldest age bracket (65+) it stands at around 2.4 times! The gap has narrowed however compared to previous years.

6. Oil exports from Saudi Arabia increase to 72.5% of total exports in Apr; Exports to Asia account for more than half of total exports

• Oil was trading at USD 75 a barrel yesterday (30 Jun), about 40% higher compared to the start of the year, after a report revealed lower US inventories for a 6th straight week. All eyes are on the OPEC+ (set to meet today), who have already warned of “significant uncertainties” ahead: a modest increase in production is likely amid higher demand for oil (summer travel bookings, anecdotal evidence suggests, are picking up in US & Europe)
• Oil exports are rising, accounting for 72.5% of total exports in Apr 2021. The top region for Saudi Arabia’s exports is still Asian nations, and much of the exports is oil. Though many nations – India, Japan and Malaysia – continue to struggle with the pandemic, many others have relatively low levels of cases; as restrictions ease, demand will increase and oil exports will pick up faster.

7. GCC inflation (% yoy): Kuwait’s food inflation is running at 10%+; Saudi’s inflation is influenced by the VAT hike last year; May’s month-on-month readings have food inflation rising at a faster pace than headline

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Download a PDF copy of this week’s insight piece here.
1. Manufacturing PMI rises globally; but, widespread vaccination required for confidence boost going forward

• The vaccination pace has been steadily increasing in many advanced nations including the US and UK – allowing the nations to reduce and/or remove severe restrictions. This has resulted in a return in confidence, evident in recent PMI data.
• However, the recent surge in Covid cases in India and Brazil could result in spillovers (Singapore reverted to Phase 2 restrictions); the only way out seems to be to vaccinating a vast majority of the global population.
• Unfortunately, poor countries are severely lagging behind in vaccination: in Africa, just 1% of the population has received at least one jab and 4.4% in Asia. This compares to 22% and 44% in Europe and America respectively. Vaccine shortages are still a problem (India’s Serum Institute is said to be severely behind on production)
• Another word of caution : while global manufacturing PMI hit a 11-year high, record supply chain delays are leading to production constraints; input costs rose at the fastest rate in a decade

2. Shipping costs climb as demand increases, while air cargo struggles to keep up

• Container ship port calls are in many regions back to pre-pandemic numbers or higher (UNCTAD). But, high demand alongside shortage of containers has led to a surge in shipping costs (especially on long-distance routes). The recent Suez Canal blockage calls into question the vulnerability of trade chokepoints.
• Demand for commercial air traffic remains depressed: long-haul flights are still bearing most of the brunt as domestic travel is slowly picking up (as seen in China and the US). Travel bookings indicate strong domestic travel intentions and Europe could also witness a boost when it opens in summer for vaccinated tourists.
• Closure of long-haul routes continue to affect Middle Eastern airlines (revenue passenger kilometers were down by 81.7% yoy in Feb vs 74.7% globally); but, strong cargo growth was recorded (growing by 8.7% yoy in Feb 2021 vs the 9.5% drop in 2020; Middle East-Asia route grew the most – by 26.7% in Feb vs -7% in 2020)

 
3. April PMIs edged up in UAE & Saudi Arabia: but employment sub-index diverges (as UAE stays below 50)

• In MENA, both Saudi Arabia and UAE posted higher PMI readings in Apr; Egypt declined further, falling below-50 for the 5th consecutive month.
• While vaccination pace is quite varied in the region, it seems to have a significant impact on business confidenc and the expectations of continued economic recovery. UAE has been the leader in vaccinating its residents, administering 108.99 doses per 100 persons, versus Saudi Arabia’s 28.2 and Egypt’s 0.64. This confidence has translated into the PMI readings.
• With UAE’s major export markets still rattled by Covid19, near-term outlook has risks; employment sub-index also fell for the 3rd month in a row. Though export orders rose, demand was largely domestic based.

4. Consumer Spending Rebounds in Saudi Arabia

• The Saudi Central Bank’s monthly data on consumer spending showed a rebound in Mar, partly due to the low base in Mar 2020. PoS transactions continue to rise, accelerating by 64.7% yoy and 31.5% mom in Mar. ATM cash withdrawals fell by just 4% yoy, following 7 months of double-digit declines, and by 21% mom.

• Retail spending by sector showed a decline only in education (-2% mom and -18.3% yoy); clothing and footwear posted the highest pickup in mom terms (+68.2%). Spending has been slower in a few sectors ahead of the month of Ramadan (when many discount offers are available) like food and beverages, and electronics.

5. Varied patterns of domestic credit growth in Saudi Arabia & the UAE

• Loans disbursed in both Saudi Arabia and the UAE has been ticking up in 2021.
• Total domestic credit disbursed in UAE grew by 2.1% yoy in Jan-Feb 2021; the uptick has been in claims to the public sector (+17.9%), government (+11.6%) and private financial institutions (+8.8%) vs loans to the private sector (-2.3%). Together, loans to the government & public sector accounted for 30% of total in Feb 2021.
• In Saudi Arabia meanwhile, claims on the private sector grew by 14.6% yoy in Q1 2021 – faster than claims on the public sector (+13% yoy).

 

 
 
 
 
 
 
 
 
 
 
 
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Chart 1. Saudi Arabia’s Shareek investment package to jumpstart the economy

• The Shareek strategy (SAR 27trn stimulus over the coming decade) aims to jumpstart and shift expenditure patterns post-Covid by emphasizing investment vs consumption spending (incl.govt current spending), while implementing diversification. As proposed, the plan should be strongly supportive of non-oil growth, increase overall productivity growth and lead to job creation. 
• Jobs are one of the biggest concerns for the country: female unemployment was running close to 50% for the 20-24 age group in Q3 & close to 20% for males in the same age group. It has come off highs earlier in 2020, but remains one of the highest in the region
• FDI has improved massively from the fall to USD 1.4bn (0.2% of GDP) in 2017; according to the Saudi Central Bank’s estimates, overall FDI reached USD 5.49bn in 2020 (+20% yoy, still below 1% of GDP).
• Saudi Arabia has been aggressively courting foreign investors: revamped over half of the 400 FDI regulations, introduced new laws (e.g. bankruptcy, PPP) and recently stated that presence of firms’ regional HQs in Saudi would become a necessary condition to bid for government contracts.
• FDI inflows would be directed away from oil & gas into more job creating & higher value-added sectors (e.g. renewable energy and clean tech, ‘clean’ petrochemicals, desert agriculture & AgriTech, digital economy).  Potentially, this revival of investment  and a successful program could attract back a fraction of Saudi private wealth held offshore (estimated at 56% of GDP).

 
Chart 2. Monetary indicators in Saudi Arabia: PoS & e-commerce transactions and claims on the private sector rise in Feb


 
Chart 3. Overall GDP in UAE contracted by 7.4% yoy in Q2 2020; recovery expected in H2

• New data: Non-oil GDP fell by 9.9% in Q2 2020, following a 1.9% decline in the previous quarter. Finance and insurance was the lone sub-sector to post growth in Q2.
• Stringency was the highest and mobility lowest in Q2. Mobility data shows improved activity in H2 of 2020, which bodes well for GDP. UAE’s PMI, which averaged 50.2 in H2 2020 (vs 47.1 in Q2 and 47.5 in H1), also indicates a faster recovery in H2. Faster vaccination rollout and the Expo later this year will result in increased consumer and business confidence.
• With an aim to grow faster in the post-Covid world, the UAE has been proactively announcing reforms: with the latest industrial strategy (“Operation 300bn”), Dubai’s 5-year plan to increase trade to AED 2trn and its 2040 urban development plan alongside various incentives to attract high-skilled professionals (10-year visas, remote working visas, path to citizenship etc.)

 
Chart 4. Q3 GDP data from other GCC nations suggest better quarters ahead for the UAE – the least restrictive of all

While overall % yoy GDP improved in Q3, some sectors (including oil, given OPEC+ cuts & others like trade, hospitality) contracted even more

 
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Chart 1. Lebanon: Cascading Collapses

• According to the finance minister, the central bank has only USD 1-1.5bn to use to fund subsidies (i.e. just for 2-3 months more).
• The Lebanese pound plummeted to record lows of 15000 per dollar on the black market on Tuesday (from 10k on Mar 2nd)
• Overall inflation was at 146% and food inflation at 402% in Dec 2020. The pound’s fall has further hiked food prices.
• This latest collapse, alongside statements of potential lifting of subsidies, has triggered fears of shortages of food.
• Funding of (ill-designed) subsidies can no longer be continued at the same pace.
• “Reserves”, which are really “banks’ dollar Legal Reserve Requirements at the Banque du Liban” (this is a liability of the BDL – these are depositors’ money deposited by the banks at the BDL), have halved from a year ago. News of BDL’s “revised” mandatory minimum reserves to USD 15bn (down from USD 17bn) is only a stopgap solution.
• Given the ongoing political deadlock (the current caretaker government had resigned last Aug), it looks like a very long and painful road to reforms and some semblance of “normalcy”.

 
Chart 2. Saudi Arabia: Reforms to Boost Recovery?

• Saudi Arabia’s GDP declined by 4.1% in 2020, driven by substantial drops in both oil and non-oil sector acivity (at -6.7% and -2.3% respectively). Private sector was recovering at a faster pace in Q4 vs other sectors.
• By economic activity, the mining and quarrying sector accounted for 44% of overall GDP in 2020 (growing by 0.8% yoy) though the finance insurance and business services (share of 6.1%) grew the fastest, up by 1.3%.
• By expenditure compoenents, consumption accounts for around 50% of overall GDP; last year, government final consumption expenditure was the sole component showing positive growth (+4.2%) while gross fixed capital formation plunged by 13.5%.
• PMI (which hit a 14-month high in Jan and eased in Feb) and rising credit growth alongside various announcements to increase private sector activity (regional HQs and approval of the Private Sector Participation law, to name a few) and attract FDI will bode well for the economy in the medium to long run.

 
Chart 3. UAE: Successfully (?) Mitigating Covid19’s Impact

• UAE Central Bank governor: banking system’s overall liquidity has returned to pre-Covid level; 320k+ cutomers benefitted from the Targeted Economic Support Scheme (TESS) & ~175k customers are under deferral arrangements
• Loans to the private sector dropped by 1.5% during Apr 2020- Jan 2021 while credit to government and GREs surged by 16% and 22% respectively. Financial soundness indicators have improved: ELAR remained above the 10% reegulatory minimum requirement while CAR, Tiel 1 capital ratio and CET 1 indicate well-capitalised banks.
• In Jan 2021, monetary base contracted by 2.47% mom, due to a 15.6% drop in Banks & OFC’s Excess Reserves (which accounts for 19.8% of monetary base) while Certificates of Deposits purchased by banks (32.5% of monetary base) rose by 4.6%
• The increases in the multipliers of M1, M2 and M3 indicate faster rise in the monetary aggregates M1, M2 and M3 vs contraction of the monetary base.

 
Chart 4. Up, Up & Away? Dubai’s Population ticks up to 3.4mn in Covid19-struck 2020

• In spite of anecdotal evidence of job losses and repatriation flights, official Dubai Statistics Centre estimates that Dubai’s population grew by 1.6% yoy to 3.41mn in 2020.
• As expected, expatriate population accounted for more than 90% of overall population; males accounted for close to 70% of overall population – not surprising, with the construction sector accounting for almost 1/3-rd of employment in the UAE
• The population pyramid shows that about 70% of males and 55% of females are between the 25-49 years age group. The gap between males and females are largest in the age groups of 30-34 and 25-29.
• The Dubai Urban Masterplan 2040 projects population to surge by 76% to 5.8mn. This follows recent reform measures including in visas (long term visas for professionals and investors, retirement and remote working visas), 100% foreign ownership and even a path towards citizenship – all of which are likely to boost population numbers.
• Dubai’s openness at a time when other regional nations are pursuing localisation policies will likely work in its benefit, though competition might be rife should Saudi Arabia emerge successful in its current reform path.

 
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Chart 1. MENA & OECD high-income economies reformed the most in Women, Business & the Law Index 2021

• The latest edition of Women, Business and the Law found that economies in MENA reformed the most, posting an average score of 51.5 in 2021. Agreed, most started from a low base, have lot to catch up on and cross-country variations are the highest!
• Within the region, the lowest score is at 26.8 (West Bank & Gaza) and highest at 82.5 (UAE)
• WEF’s Global Gender Gap Index found that gender gap in MENA narrowed by 3.6 points b/n 2006 & 2019: assuming same progress rate, it will take approx. 150 years to close gender gap in MENA

 
Chart 2. Removing Regulatory Barriers Is Only the Start: it’s a Long Way to Gender Parity!

• Consider the “best performing” regulatory aspects in MENA (from the table below):
  • Entrepreneurship: 7 of the 19 nations score a perfect 100 and others 75;
  • Mobility & workplace regulations should encourage women to enter the workforce;
• Does this translate into practice?

 
 
Chart 3. Have Better Regulations Supported Entry of More Women Entrepreneurs in MENA?

• Less than one-fifth of new limited liability company owners are women in the Middle East: ranges between a high of 21.5% in Bahrain to low of 6.9% and 8.8% in Algeria & UAE respectively
• Sole proprietorships are more frequently used by female entrepreneurs: but, evidence shows a wide disparity of women business owners relative to men. This male-female gap is the lowest in Morocco with share of women business owners (as sole proprietors) at 41% versus men at 59%

 
 
 
 
 
Chart 4. Access to Finance is a Major Barrier

• One of the biggest challenges when it comes to women entrepreneurs is access to finance
  1. Higher the access to bank accounts for women, the higher the share of female entrepreneurs;
  2. Higher the lending to women, the higher the share of female entrepreneurs

• MENA reported the largest access to finance gender gap of any region: 52% of men vs only 35% of women have an account; the gender gap in financial access increased between 2011 and 2017!
• Borrowing from a financial institution was low for both men and women in MENA: 10.4% and 7.4% respectively in 2017 (lower than in 2011). When in need of emergency funds, women raise money from friends & family (65%) than other sources

 
Chart 5. Gender Inequality in Labour Market Outcomes Persist in the MENA region

• Ratio of female to male labour force participation rates (LFPR) continue to be the lowest in MENA
• Large variations in Female LFPRs within MENA: as high as 56% in Qatar, 34% in Libya (low-income) to lows of 6% & 11% in Yemen and Iran respectively. In most cases, female LFPR is higher among single women than married (signalling the influence of cultural/ social norms)
• Even when women actively participate in the workforce, their share of employment in senior & middle management is small: 15.8% in the UAE, 19.3% in Tunisia, 19.8% in Iran and 28.9% in Lebanon (ILO)
• Despite relatively high levels of education, female unemployment is high in MENA & female youth unemployment even higher!

 
What can be done to support regulatory reform aiming for gender equality?

• Removing legal and regulatory barriers is necessary but not sufficient condition to reduce the yawning gender gap in the Middle East & North Africa region
• The IMF estimates that reducing the gender gap in labour force participation to double (rather than triple) the average for emerging market and developing economies would have doubled GDP growth in MENA over the past decade: a gain of USD 1trn in cumulative output
• Digital economy and labour market reforms (part-time, flexible work arrangements) will boost women’s overall participation
• Support for women entrepreneurs via: (a) access to finance (loan guarantees, grants, microfinance); (b) women-led networks (VC, angel investors) to invest in women-owned businesses; (c) a “sandbox” for texting new products/ concepts
• Encourage the collection of disaggregate data by gender by the private sector, share them with regulators for policymaking (e.g. share of females employed in senior & management levels, reason for leaving employment, banks’ loan portfolios etc.)

 
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Chart 1. Will vaccines give a jab to growth?

• PMI readings for both Saudi Arabia and the UAE eased moderately in Feb 2021.
• An uptick in Covid19 cases since beginning of this year, in both UAE and Saudi Arabia – at vastly different levels – led to more restrictive measures (likely to remain till Ramadan in mid-Apr)
• UAE’s stringency index increased to 56.3 in Feb vs Jan’s 50 & seems to have spilled over in weaker demand, thereby hampering sales and new orders growth. Though near-term outlook is uncertain, businesses optimism was decidely higher for the 12-months ahead period, potentially due to the fast pace of vaccination rollout and the upcoming Expo event

Chart 2. Saudi Arabia: Riding the digital wave

• Proxy indicators for consumer spending (ATM withdrawals & PoS transactions) continue diverging; recent restrictions on gatherings / entertainment will likely affect overall spending for Feb
• E-commerce received a jumpstart during the pandemic period: number of transactions picked up by 400% yoy in 2020 & sales value up by 341.2%. This compares to year 2017, when only 38.5% (of those aged 15+) had used the internet to pay bills or buy something online and just 25.7% had used mobile phone or internet to access an account (Source: Global Findex database)
• Overall loans picked up in the country, with loans to both the private and public sector rising around 15% and 18% respectively in Jan, after posting increases of 13% and 18% in 2020

 
Chart 3. UAE bank loans: where’s the appetite?

• About 70% of UAE banks’ loans went to the private sector as of end-2020, with the public sector & government together accounting for ~30% of all loans
• Overall, the surge in lending to GREs and the government – at 16.1% yoy and 19.8% respectively – in 2020 contrasted the drop in lending to the private sector (-1.0%)
• The uptick in loans towards agriculture surged by 106.6% yoy at end-Dec 2020, following increases of 8.7% and 25.5% respectively in Jun and Sep 2020, underscoring the 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 construction sector (accounting for ~20.5% of total loans) ticked up by 5.2% yoy as of end-Dec (vs 0.2% drop in 2020); personal loans for consumption (~20.4% of total loans) dipped by 1.3% as of end-Dec

 
Chart 4. Growing Pains: UAE’s SMEs amid Covid19

• The share of SME lending in total domestic lending remained unchanged at 5.7% in Q3 (Q2 2020: 5.7%),though lower than 5.9% share as of end-Q1
• Within the MSME segment, as of end-Q3, the largest share of loans was disbursed to medium-sized firms (57.3%) and close to 1/3-rd to the small enterprises
• The number of MSMEs in the UAE declined by 8.5% qoq to 114,361 as of end-Sep. This drop was visible across all 3 segments, with small enterprises plunging by 13.7% qoq as of end-Sep (Jun: +5%) and micro and medium enterprises down by 3.7% and 2.6% respectively
• With total lending remaining almost stable alongside a sharp drop in number of MSMEs, the amount disbursed per firm increased across the board at end-Sep: overall by 9.2% qoq while amounts to micro, small and medium firms grew by 4.8%, 13% and 3.8% respectively
• Banks’ provisions for bad and doubtful debts amounted to USD 42.5bn as of Dec 2020, up from USD 36.1bn at end-2019. With a large number of MSMEs dropping out of business, expect non-performing loans to tick up & eat into banks’ profitability

 
 
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It is no secret that the GCC is home to one of the largest migrant communities globally. Five MENA nations feature in the top 20 migrant attracting nations globally (by number of persons). Expat share in population across the GCC varies from Saudi Arabia’s less than 40% to UAE’s high 88%. According to the UN, top 20 migration corridors from Asia and Africa include those to the GCC nations: in 2019, India-UAE was the second-largest migration corridor in Asia (but, second only to refugee movement from Syria to Turkey), while migration from Egypt to Saudi and UAE occupied the top 5^th & 6^th spots among African nations.
Burdened by Covid19 and lower oil prices last year, job losses in the GCC and return migration has raised key concerns about the sustainability of dependence on expatriate labour. With published monthly data of labour/ employment lacking in most GCC nations, reliance on anecdotal evidence is high. Official NCSI data showed that more than 270k expats left Oman between end-2019 to Nov 2020 (roughly 16%). This Covid19-related “expat exodus” coupled with recent moves to nationalize various professions and replace expats with nationals in senior positions at state-run firms, highlight a growing predicament facing many GCC nations – how does a government justify the need to hire expatriate labour amid rising youth unemployment levels?

This pressure is building up in nations with high shares of population under the age of 25. Depending on labour force participation rates, the IMF estimates that the GCC labour force could grow by an additional 2.5mn nationals by 2025. While similar numbers are more intense in the labour-exporting nations within the MENA region, needless to say that there are some common challenges: job creation (in the private sector), gender disparity, preference to wait for a public sector job, address low levels of efficiency and productivity, to name a few.

• An interesting statistic from the ILO, namely young people not in employment, education or training (NEET) is at a high 16% in the GCC nations (though it pales in comparison with 40% in non-GCC Arab nations) implies that job creation has not been keeping pace with the growth in youth workforce.
• Gender disparities are a commonly acknowledged drawback in the GCC (and wider MENA region). The World Economic Forum’s Gender Gap 2020 report highlighted that it would take the MENA region close to 140 years to achieve gender parity! The Covid19 pandemic throws another spanner in the works with women being more negatively affected on the job front (globally and in the region). Whereas formal education attainment has improved over the years, issues of mobility, cultural norms/ gender roles continue to be significant barriers preventing women from joining the workforce. Even the previously mentioned NEET levels are much higher for women: in 2019, 51.9% of young women in Arab states were classified as NEET vs 17.8% of young men.
• In the GCC nations, labour markets remain segmented: wage premiums in the public sector for lower working hours drives the nationals’ preference for public sector employment. However, the higher wage bills (a strain on government budgets) have not translated into an improvement in the quality of public services (UAE is an outlier) and some standalone studies have highlighted a stagnation in public sector productivity levels.

Remittances in the GCC: should they be taxed?

According to the World Bank, outward remittances from the GCC touched USD 112bn in in 2019: while this was a drop of 6% yoy, as a share of GDP it still stood at 11.9% in Oman, 11% in Kuwait and 10.7% in the UAE. Together, UAE and Saudi Arabia account for more than 2/3-rds of total remittances from the GCC. Did the pattern of remittances change during the Covid19 pandemic? The combined effect of the pandemic and related job losses alongside lower oil prices were expected to have an adverse effect on remittances. The World Bank expects global remittances to drop by 7% yoy to USD 666bn in 2020 (and by a further 7.1% in 2021) and inward remittances into the MENA region to decline by 8.5% to USD 55bn in 2020 (and by 7.7% to USD 50bn in 2021) negatively affecting labour exporting countries like Egypt.

At the GCC level, quarterly (headline) data are available in Saudi Arabia, UAE and Kuwait. Saudi Arabia has witnessed a continued drop in remittance flows consistent with the oil price declines (it saw 12 straight quarters of yoy declines since 2017), alongside the introduction of nationalization policies in many sectors. While the drop in Q2 was consistent across all three nations, both Saudi and UAE reported an increase in remittances in Q3 (Kuwait is yet to release Q3 data). This could be a result of multiple factors: job losses resulting in transfer of savings to the home country, an increase in digital remittances (versus unrecorded cash during trips home), transfer of excess savings (given lack of travel, leisure activities), exchange rate movements and/ or remittances to support families in the home country. The World Bank identified a potential (yet to be evaluated) “Hajj effect” when analyzing remittances into Pakistan and Bangladesh – savings that had been set aside for Hajj were sent home instead given travel restrictions and the reduction in the issuance of Hajj visas.
Should remittances be taxed?
While there have been sporadic calls for a tax on remittances, this has yet to take a credible form and is oft refuted by government/ central bank officials. Oman is currently studying a proposal for a personal income tax on high-earners – if introduced, it will be a first in the region and could see similar rollouts across the region (depending on its impact). Though this will raise a question of “taxation without representation”, there are other approaches to encourage expats to retain their saving and invest in the economies (versus investing in their home country). This essentially boils down to a combination of labour and financial market reforms. Here is a non-exhaustive list.    

• Economic diversification into job-creating non-oil sectors (including knowledge-based sectors). This also requires a supportive business environment with the necessary legal framework to ease the cost of doing business as well as additional measures to support SMEs (supporting entrepreneurs)
• Allowing 100% foreign ownership would encourage FDI inflows, create jobs and prompt entrepreneurs and businesses to re-invest into the domestic economy
• Increased labour mobility: a rollout of residency visas versus job-linked visas would encourage expats to stay longer, thereby encouraging investments in the domestic economy (e.g. UAE’s 10-year visas for skilled professionals). Similarly, undertaking pension reforms as well as introducing unemployment insurance schemeswould help retain workers and reduce turnover and training costs.
• Encouragement of investment of domestically mobilized savings in the local economy needs the backing of a deep, broader and more liquid financial market. The introduction of a housing finance/ mortgage market could be one of the ways in addition to facilitating investment in domestic equity/ debt markets.
• Programs for capacity development to resolve skill mismatches via vocational and on-the-job training programs
• Supporting increased participation of female workforce through paid maternity/ paternity leaves and access to childcare facilities. Encouraging women to work increases growth and productivity, not only because women jobseekers typically have higher than average education, but also because this can increase mobility across sectors and jobs and increase household earnings, thereby increasing consumption and investment in housing.

In the backdrop of the Covid19 pandemic, the UAE introduced many expat-friendly schemes to attract and retain a high-skilled workforce, essential to support its vision for the 4^th Industrial Revolution future. Even if we consider the “expat exodus” from the country last year, there are silver linings: in early Nov, the Indian Ambassador revealed  that more than 200k Indians were returning to the country (this compares to the 600k persons that travelled after May); PMI’s employment sub-category is finally in the expansion territory after months of sub-50 readings. Rather than focusing on inward facing nationalization policies, other GCC nations could take a leaf out of the UAE’s example to encourage job creation (including for their citizens). This would be an enlarge the cake, win-win policy as opposed to taxation of remittances.
 
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The article titled “Will the UAE’s accelerated vaccine campaign help fuel economic growth?” appeared in the print edition of The National on 16th February 2021 and is posted below.
 
 

Will the UAE’s accelerated vaccine campaign help fuel economic growth?

Nasser Saidi & Aathira Prasad

The drive could help improve herd immunity and gradually return business activity to pre-pandemic levels
 
Countries around the world, including in the Gulf region, have registered a sharp increase in Covid-19 cases amid a rise in new virus strains.
As the number cases grows, the UAE has reintroduced more stringent restrictions and penalties for non-compliance to ensure the safety of residents and stem the pandemic’s spread.
In tandem with safety measures, the country has also hastened its vaccination drive since December and is currently a global leader, having administered 51.11 vaccine doses for every 100 people as of Sunday, making it second only to Israel.
With four vaccines being expended currently – Sinopharm, Pfizer-BioNTech, AstraZeneca and Sputnik V – the government is on track to vaccinate more than half the population by the end of the first quarter of this year.

Is this sufficient to support economic recovery?

Given the paucity of monthly indicators or data from official sources, we use purchasing managers’ index numbers released by IHS Markit to gauge the level of business activity in the UAE and Dubai.
Both PMIs have stayed quite close to the neutral 50-mark from December to January after having spent two consecutive months in contractionary territory. Job prospects seem to be improving in Dubai and across the country.
However, Dubai’s tourism sector, which recorded a sharp increase in activity in December, returned to sub-50 levels as tourists returned after the New Year holidays and travel restrictions were tightened.
With the vaccination drive, it is evident that as the nation inches closer to achieving herd immunity, domestic activity and business and consumer levels will gradually build up to pre-pandemic levels.
Investor and business-friendly reforms to convince skilled professionals to take up residence in the country will help spur economic activity. While the success of these structural reforms will not be immediate, their steady and effective application is expected to support economic growth in the medium and long term.

How can the UAE step up its recovery?

It is in the best interests of the UAE and Dubai, which is hosting the Expo later this year, for the wider region and the rest of the world to achieve high vaccination levels.
The longer countries remain unvaccinated, the greater the risk of newer strains emerging that could potentially result in another cycle of infections and subsequent movement restrictions.
There are two potential ways to support this.
First, it is crucial to increase the production of vaccines. A recent paper by the University of Chicago said “increasing the total supply of vaccine capacity available in January 2021 from two to three billion courses per year generated $1.75 trillion in social value, while additional firm revenue was closer to $30bn”, far outweighing the investment required to do so.
Vaccination is a public social good that has several private benefits while the coronavirus remains a global threat. So, the UAE’s plans to manufacture the Sinopharm Covid-19 vaccine later this year would be a win-win situation that would cater to both domestic and global demand – especially if the vaccine is to be administered on an annual basis – and boost growth.
Secondly, the manufactured vaccines need to be distributed faster to reach those in need. To this end, the UAE is well-positioned as a global logistics and transport hub – both for delivering vaccines to smaller nations in the region and using its vast cargo network to transport Covid-19 shots around the world.
Abu Dhabi’s Hope Consortium was set up for vaccine storage and distribution while Dubai’s Vaccine Logistics Alliance will support the World Health Organisation’s effort to deliver two billion doses of vaccines this year.
This could be supported by vaccine aid – either in its contribution to global alliances such as Covax, which plans to deliver 2.3 billion doses this year, or through the free delivery of vaccines to smaller and poor nations, for example, India’s campaign to distribute free vaccines in Nepal, Bhutan and Bangladesh.
A global recovery is essential to the UAE’s overall growth prospects. As a country that relies on trade and tourism, which accounted for about 15 per cent of national gross domestic product and about 30 per cent of Dubai’s GDP in 2019, the impact of Covid-19 has been significant.
Despite Opec+ production cuts and a subdued demand for crude, signs of a recovery in oil demand (declining oil inventories in China and India) and higher oil prices (about $60 now) will be beneficial to trade and growth.
The UAE’s oil and related product exports are about 40 per cent of total exports and the main export destinations include India, China and Japan, which together account for more than 25 per cent of overall exports and are recovering faster than European markets and the US – to the UAE’s benefit.
Lastly, no outlook is complete without risks. Long-term diversification away from oil is an overarching imperative, as is decarbonisation and debt sustainability, especially in the context of another potential taper tantrum or a faster-than-expected increase in interest rates that leads to tighter financing conditions.
The UAE should continue to press forward with its clean energy initiatives and energy efficiency policies. As the success of the Mars Hope probe has demonstrated, the country has the will, leadership and access to technology and resources to turn the challenge posed by the pandemic into a lever that can help its economy and activities become green, clean, innovative and resilient to climate change.
 

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The UAE has seen a surge in Covid19 cases recently, touching a high of 3,977 new cases on Feb 3rd from just under 1,000 new cases on 27th of Dec and settling around a 7-day average of 331.55 new confirmed cases per million persons (latest available). As the cases ticked up, the UAE has re-introduced more stringent restrictions and an active crackdown on non-compliance. Mobility indicators indicate a strong negative relation with the Stringency Index: the tighter the government-imposed restrictions, the stronger is the observed reduction in mobility (Chart 1).
The Vaccination Drive
On the other hand, the UAE is also ramping up its vaccination drive since mid-Dec and is currently a global leader (second to Israel) having administered 45.77 vaccine doses per 100 people (as of 9^th Feb, Chart 2). With 4 vaccines being expended currently – Sinopharm, Pfizer-BioNTech, AstraZeneca and Sputnik V – the government looks on track to vaccinate more than 50% of the population by end of Q1 of this year.
Is this sufficient to support economic recovery?
Given the paucity of monthly indicators/ data from official sources, we use the PMI numbers released by IHS Markit to gauge the level of business activity in the country and in the emirate of Dubai (Chart 3). Both PMIs have stayed quite close to the 50-mark (neutral) in Dec-Jan after two consecutive months of being in the contractionary territory. Job prospects seem to be improving in both UAE and Dubai, with increases in Jan (after nearly a year). Dubai’s tourism sector, after an uptick in Dec, has however returned to sub-50 levels – not unsurprising considering the outflow of foreign tourists after the New Year holidays (Dubai-London Heathrow travel corridor was the busiest international air route in the world in Jan, with more than 190k seats scheduled, according to OAG) and potential decline in domestic and international tourists as border/ quarantine restrictions were reinstated.

With the vaccination drive, it is evident that as the nation inches closer to herd immunity levels, domestic activity as well as business and consumer levels will gradually build up to pre-pandemic levels. However, domestic activity will not be sufficient to sustain long-term economic growth. It is pertinent to note that the UAE has in the past months passed a spate of investor and business friendly structural reforms including to attract skilled professionals to take up residence in the country. While the success of these reforms will not be seen immediately, steady and effective implementation is likely to support economic growth in the medium and longer-term.
How can the UAE step up its recovery? The UAE as a vaccination hub

It is in the best interests of the country, that is hosting the Expo later this year, to see high levels of vaccinated populations within the wider region (and globally). The longer countries remain unvaccinated, the greater the risk of the emergence of newer variants that could potentially result in another cycle of infections and lockdowns/ closures.
Two potential ways to support this:

1. Increase the production of vaccines: a recent paper estimates that “increasing the total supply of vaccine capacity available in Jan 2021 from 2bn to 3bn courses per year generated USD 1.75trn in social value, while additional firm revenue was closer to USD 30bn”, far outweighing the investments required to do so. Vaccination is a public social good with multiple private benefits, just as Covid is a global public bad. So, the UAE’s plans to manufacture Sinopharm Covid19 vaccine later this year would act as a win-win: it would cater to both domestic and global demand (especially if the vaccine is to be administered on an annual basis) and boost the economy.
2. The manufactured vaccines need to be distributed faster to reach those in need. In this backdrop, the UAE can put its position as a global logistics and transport hub to good use: vaccine delivery to smaller nations in the region as well as using its vast cargo network to transport vaccines across the globe. Dubai, with its Vaccine Logistics Alliance, will support WHO’s effort to deliver 2bn doses of vaccines this year; this is in addition to Abu Dhabi’s Hope Consortium which was set up for vaccine storage and distribution. This could be supported by vaccine aid – either in its contribution to global alliances like Covax (which plans to deliver 2.3bn doses this year) or via the free delivery of vaccines to smaller low-income nations (e.g. India’s free vaccines to Nepal, Bhutan and Bangladesh).

A global recovery is essential to the UAE’s overall growth prospects: as a country that relies on trade and tourism (together accounting for close to 15% of UAE’s GDP in 2019 and closer to 30% of Dubai’s GDP), the impact of Covid19 has been drastic (evident from UAE and Dubai GDP estimates). The oil sector, which constitutes 30% of UAE’s GDP, has been bogged down by the OPEC+ production cuts, alongside the subdued demand for oil. Even as the country promotes clean energy and energy efficient policies, signs of a recovery in oil demand (declining oil inventories thanks to turnaround in consumption in China and India) and higher oil prices (around USD 60 now) will be beneficial to trade and growth: UAE’s oil and related product exports are close to 40% of total exports and the main export destinations include India, China and Japan (which together garner more than 25% share of overall exports). A recovery in tourism is likely to take longer in comparison: virus containment, travel corridors, “vaccine passports” and “contactless” airport experiences seem to be some of the ways forward for future travel.
Lastly, no outlook is complete without risks: long-term diversification away from oil is a necessity, as is decarbonization efforts, and debt sustainability policies (especially in the context of another potential taper tantrum / faster-than-expected increase in interest rates, leading to tighter financing conditions).
 
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Click here to play the interview that appeared on Emirates News, Dubai One (telecast date: Feb 8, 2021).

Dr Nasser Saidi explains how #HopeProbe Mission will boost the UAE and regional economy. #EmiratesNews #DubaiOneTv #UAE #Dubai @gregfairlie pic.twitter.com/EESl0wZP3p

— Emirates News (@Emirates_News) February 8, 2021

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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 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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1. Trade recovers in Q3; services trade lags
WTO’s latest Q3 data indicate a distinct rebound in trade: the volume of merchandise trade globally was up 11.6% qoq from an upwardly revised 12.7% drop in Q2. Exports dropped in yoy terms among all regional groups with the exception of Asia, where the value and volume inched up by 2% and 0.4% respectively. With Covid19 cases surging in Q4 across most regions, partial lockdowns and restrictions were re-imposed, which is likely to lead to a drop in overall trade in the final quarter.

 

Global new export orders growth – a leading indicator for trade activity – slowed in December, according to the latest global manufacturing PMI, and was linked to intensifying supply chain delays. The most cited response for delays amid rising demand was the lack of shipping capacity/shortage of containers. The recent surge in freight prices underscores the dilemma: sea freight on the China-Brazil route reached an unprecedented USD 10k per TEU from USD 2k per TEU a year ago. Other routes from Asia have also posted above-average values: trip costs to Europe and the US reached more than USD 4k per TEU.
This week, the WTO launched a new dataset along with the OECD tracking bilateral services trade of over 200 economies. The chart shows that the share of intra-regional trade in services is low in Africa (7%), South & Central America (12%) and the Middle East (13%). Unfortunately, since no bilateral services transactions are reported by African or Middle Eastern economies, it is difficult to gauge the underlying factors leading to this situation. The decline in services trade was significant in 2020 given restrictions on international travel and related drop in tourism revenues.
2. Tourism woes continue globally; Middle East significantly affected
The UNWTO reported a 72% drop in international tourist arrivals during the Jan-Oct period, with the Middle East region continuing to lag its global counterparts in tourism arrivals (-73% year-to-date). International tourism as a share of total tourism is significantly high in Bahrain (97%) and UAE (83%), making these nations more vulnerable than say, Saudi Arabia, with its share at 26%. With air travel restrictions still in place in many nations, and hotels either closed or open at lower capacity, the road to recovery will be long.

 
 
 
Occupancy rates in the region have improved towards the end of 2020, with residents opting for staycations than international travel given restrictions. Egypt reopened international tourist flights to three governorates (including Red Sea) last Jul: overall, the country welcomed 3.5mn tourists last year, resulting in overall revenues of USD 4bn, down from 11.6mn tourists and USD 13bn in revenues in 2019. In the UAE, Dubai opened for tourists in July: almost 17.88 million passengers passed through the Dubai Airports last year, while occupancy rates in the emirate’s hotels touched 71% in Dec, the highest since Feb. The UAE-UK travel corridor (announced 12^th of Nov) resulted in an acceleration in bookings, with the Dubai-London Heathrow travel corridor revealed as the busiest international air route globally in the first week of January. Interestingly, Cairo-Jeddah was the second most popular route.
With the rollout of vaccines, and nations heading towards achieving herd immunity, the latter half of this year might see a pickup in air travel and tourism: this should also support Dubai’s Expo event scheduled to start in Oct 2021 and Qatar’s 2022 FIFA World Cup.
3. The Global Vaccination Drive picks up

Israel, the UAE and Bahrain top the list of the share of total population that have received at least one dose of the Covid19 vaccine – at 22.4%, 11.57% and 5.96% respectively (updated at 1:30pm UAE time on 14th Jan 2021). In terms of the share of fully vaccinated population, UAE tops at 2.53% followed by Israel at 1.21% and the UK at 0.63%.

UAE’s ability to vaccinate quickly its small and highly concentrated, urbanised populations – with 96 vaccination locations across Abu Dhabi alone and others in the rest of the emirates, more than 100k persons were vaccinated per day in the last two days – is also a testament to its established and reliable healthcare systems.
Given the data, UAE’s aim to vaccinate 50% of the population by end-Q1 does not seem far-fetched. The faster the vaccination drive, the greater relaxation of quarantine rules, higher the number of travel corridors (“immunity passports”) and UAE could become one of the top tourist destinations globally. One step further, and if the nation manages to achieve herd immunity, could the nation also aspire to become a “vaccine tourism” hub? (setting aside the ethical aspect). Furthermore, with UAE also planning to manufacture the Sinopharm vaccine, the potential for Abu Dhabi/ Dubai as vaccine manufacturing and distributing hubs is rising (with the international connectivity of its Etihad and Emirates airlines).
Bottomline: With the global vaccination drive, depending on how soon countries are able to achieve herd immunity, we can expect a resumption of activity in travel and tourism. Additionally, efficacy of the vaccines will not only raise consumer confidence (and demand), but also result in lowering business uncertainty, resume manufacturing and services sector activity and ease supply constraints, thereby boosting global trade.
 
 
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1. Heatmap of Manufacturing/ non-oil private sector PMIs

PMIs across the globe were released this week. Overall, recovery seems to be the keyword with improvements in Dec – in spite of the recent Covid19 surge, the Covid variant and ongoing lockdowns/ restrictions – with new orders and export orders supporting sentiment, with some stability in job creation. However, supply chain issues continue to be a sticking point: the JP Morgan global manufacturing PMI – which remains at a 33-month high of 53.8 in Dec – identifies “marked delays and disruption to raw material deliveries, production schedules and distribution timetables”.
In the Middle East, while UAE and Saudi Arabia PMIs improved (the former recovering from 2 straight months of sub-50 readings), Egypt slipped to below-50 after 3 months in expansionary territory. While Egypt’s sentiment dipped on the recent surge in Covid19 cases, the 12-month outlook improved on optimism around the vaccine rollout. However, the UAE’s announcement of the rollout of Sinopharm vaccine in early-Dec seems to have had little impact on the year-ahead outlook, with business activity expected to remain flat over 2021 (survey responses were collected Dec 4-17) and job losses continuing to fall at an accelerated rate.
2. Covid19 & impact on Dubai & UAE GDP
The UAE has seen a negative impact from Covid19: the central bank estimates growth this year to contract by 6% yoy, with both oil and non-oil sector expected to contribute to the dip (this is less than the IMF’s estimate of a 6.6% drop in 2020). Oil production fell in Q2 and Q3 by 4.1% and 17.7% yoy respectively, in line with the OPEC+ agreement, and spillover effects on the non-oil economy saw the latter’s growth contract by 1.9% yoy in Q1 (vs oil sector’s growth of 3.3%). The latest GDP numbers from Dubai underscore the emirate’s dependence on trade and tourism to support the non-oil economy: overall GDP dropped by 10.8% yoy in H1 2020; the three sectors (highlighted in red border below) trade, transportation and accommodation (tourism-related) which together accounted for nearly 40% of GDP declined by 15%, 28% and 35% respectively. Dubai forecasts growth to decline by 6.2% this year, before rising to 4% in 2021.

News of a 5^th stimulus package worth AED 315mn (announced on 6^th Jan) for Dubai – an extension of some incentives till Jun 202, refunds on hotel sales and tourism dirham fees, one-time market fees exemption for establishments that did not benefit from reductions in previous packages and decision to renew licenses without mandatory lease renewal among others – will support growth this year, as well as the uptick from Expo 2021 (based on widespread vaccinations across the globe and potential resumption of air travel by H2 this year). With plans to inoculate 70% of the UAE population by 2021, we remain optimistic about UAE/ Dubai prospects subject to the effective implementation of the recent spate of reforms (including the 100% foreign ownership of businesses, retirement & remote working visas etc.) as well as embracing new and old synergies – Israel and Qatar respectively. Medium-term prospects can be further enhanced by accelerating decarbonization and digitisation – read a related op-ed published in Dec.
3. UAE credit and SMEs
The UAE central bank has extended support to those persons and businesses affected by Covid19 by launching the Targeted Economic Support Scheme, which is now extended till Jun 2021. Overall credit disbursed till Sep 2020 was up 2.9% yoy and up 1.2% ytd: but during the Apr-Sep 2020, the pace of lending to GREs (+22.7% yoy) and government (+19.6%) have outpaced that to the private sector (-1.0%).

 
It has been a difficult period for MSMEs (Micro, Small and Medium Enterprises): the number of MSMEs declined by 8.5% qoq in Sep 2020, following an uptick of 3.9% qoq in Jun 2020, signaling deteriorating business conditions that may have forced such firms to close. This also suggests a potential increase in NPLs once the current banks’ support (e.g. deferring loan periods) come to a close. Overall domestic lending also fell by 0.9% qoq as of Sep 2020. The largest share of loans within the MSME sector continues to be to the medium-sized firms (57.3%) and about 1/3-rd to the small enterprises. Considering the amount disbursed per firm, medium enterprises pocketed AED 1.8mn in Q3: this is 3.4 times the amount disbursed per small firm and 5.3 times the amount disbursed to microenterprises.
SMEs also need to think beyond the financial pain point to survive in the post-pandemic era. In addition to reducing/ streamlining operational costs[1], learning digital skills, boosting online profiles and hosting a robust payments and collections platform will also support SMEs to be more bankable in the future.
4. Back to “business as usual” for the GCC

The recent GCC Summit saw Qatar’s blockade (imposed in 2017) being lifted: this improves and will support political stability (a “united GCC” front) and is likely to restore UAE and Saudi businesses direct trade and investment links. Allowing bilateral tourist movements will support upcoming mega-events in the region like the Dubai Expo this year and Qatar’s 2022 World Cup. Trade will be restored among the nations: imports from the UAE had dropped to a negligible 0.1% last year, from close to 10% in the year before the blockade. Oman, meanwhile, had gained – with businesses opting to re-route trade with Qatar through Oman’s ports.
Greater GCC regional stability, implies lower perceived sovereign risk, including credit risk which –other things equal- will lead to an improvement in sovereign credit ratings, lower spreads and CDS rates and encourage foreign portfolio inflows as well as FDI.
 
[1] Even Mashreq Bank, Dubai’s 3^rd largest lender, is planning to reduce operational costs by moving nearly half its jobs to cheaper locations in the emerging markets (to be completed by Oct 2021), according to a Bloomberg report.  
 
 
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The op-ed by Dr. Nasser Saidi, titled “Accelerating decarbonisation and digitisation can build upon UAE’s game-changing reforms“, appeared in The National on 27th Dec 2020 and is reposted below.
 

 
Adjusting to Covid-19 has defined this year – from partial or full lockdowns to remote working and stalling global trade, investment and tourism, with cleaner air the rare bright spot.
Hopes of a V-shaped recovery diminished with the emergence of new Covid strain and subsequent lockdowns. Yet, despite the “Great Lockdown” resulting in a deep recession, markets are exuberant amid expectations that the production and distribution of several vaccines will create a path to normality in 2021.
Unlike the global financial crisis from 2008 to 2009, which began as a housing bubble and a demand shock, the current health crisis began as a supply shock that disrupted global supply chains and caused a spillover to the demand side, where it hit trade, tourism and consumption.
Given the widespread impact of the pandemic and despite concerted monetary and fiscal stimulus equal to 12 per cent of global gross domestic product, not only will the road to recovery be longer but the cumulative output loss will be much larger than during the 2008 financial crisis, with long-term scarring of labour markets and economies expected.
The UAE’s combined monetary, fiscal and health stimulus package – equal to 18 per cent of its GDP – cushioned the economy after a demand-induced oil price shock and the effects of a global lockdown.
After several weeks of movement restrictions and stringent health measures, the UAE’s public health system proved effective and resilient, allowing the economy to reopen earlier than regional peers.
While maintaining social distancing and applying Covid-19 protocols to keep the community safe, the UAE reopened offices, businesses, allowed tourists to enter and successfully held events and conferences – both online and on site. This bodes well for the delayed Expo 2020 Dubai and the resumption of tourism.
With the reverberations of Covid-19, the UAE’s policy reforms were spot on – from the game-changing 100 per cent foreign ownership of businesses to the remote working initiative to the retirement and 10-year residency visas for skilled professionals – amid the country’s intentions to become a knowledge-based, innovative economy.
Liberalisation and market access reforms are set to attract foreign investment, boost capital flows to the property market, enhance workforce skills and support innovation and productivity growth.
With energy market volatility and lingering coronavirus-induced uncertainty, what activities can drive an economic recovery next year and support medium-term growth prospects?
For GCC oil producers, de-risking fossil fuel assets by following a strategy of part-privatisions and public-private partnerships in energy reserves, upstream and downstream operations and related infrastructure such as pipelines is important. This has started with Adnoc and Aramco.
With the oil price required to balance budgets higher than current prices, deficit financing instruments should be developed by governments. We can expect new government bonds to be issued next year that will encourage more corporate bond issuances and private debt placements.
The UAE is accelerating its decarbonisation efforts, focusing on energy efficiency, transitioning to renewable energy and building on its leadership in renewable energy projects and investment in climate risk mitigation and adaptation.
Greater investment in agriculture technology for food security, which includes sustainable vertical farming and desert agriculture, should take place in tandem with the sustainability and energy efficiency drive.
Decarbonisation and the diversification of the energy mix will support the growth of the UAE’s capital markets through the issuance of green bonds and sukuk, as well as the financing of PPP and privatisation deals for renewable energy and clean technology.
Indeed, the UAE can become a regional, if not a global, centre for renewable energy finance.
Covid-19 has led to a strong impetus to digitise as working and learning from home became more popular. The UAE should build on its strong e-commerce and e-services base by massively investing in 5G to support the Internet of Things and building smart cities and infrastructure.
This is critical for the retail sector to move online from brick-and-mortar shops. Liberalising the telecoms sector and lowering the costs of broadband services will help the country become a fully digitised economy and a regional hub for digital services.
The UAE has world-class core infrastructure in transport and logistics, power and telecoms. These assets can serve infrastructure-poor countries in the region, East and Central Africa, India, Pakistan and Central Asia. Electricity from solar power can be exported through cross-country, integrated grids.
Finally, the UAE’s normalisation of relations with Israel heralds a new regional economic geography: new trade and investment opportunities, as well as the reduction of geopolitical tensions.
 

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Chart 1: PMIs in UAE/ Dubai remain below-50 for the 2nd consecutive month; mobility & traffic pick up though demand remains weak

Though UAE is one of the more “open” economies across the Arab world (in the Covid19 era), the PMI readings in both UAE and Dubai stayed below the 50-mark for two consecutive months. Vaccine exuberance seems to have been overshowed by the decline in business, as business expectations turn negative for first time ever in Dubai.
Demand weakness remains the main reason for the dip following an uptick after the initial lockdowns were lifted; with the recent surge in Covid19 cases in Europe & Asia, recovery has been slow in tourism and travel sector. There is some signs of optimism: flight bookings in the London-Dubai sector accelerated by 112% after the UAE-UK corridor was announced in early Nov; Israeli tourists are flocking to the city after the normalization of relations (& travel corridor) so much so that flydubai is now offering 4 Dubai-Tel Aviv flights daily.
UAE’s recent liberalisation measures (rights of establishment, visas & immigration) add to the medium-term optimism and potential acceleration in the rollout of vaccines by next year offers hope for visitor arrivals in time for Expo in Oct next year. However, the extent of business closures/ rising NPLs as an aftermath of the Covid19 crisis remains to be seen.
Mobility data from Google shows the pace of recovery at grocery and pharmacy stores was much faster than that for the retail and recreation outlets (restaurants, cafes, malls, theme parks etc); congestion levels are still about 33% below 2019 levels, though certain days in Nov-Dec showed positive readings (i.e. congestion this year at a higher rate than that day a year ago).

Chart 2: Saudi Arabia’s plans to diversify away from oil needs to be accelerated
Global demand for oil is recovering but remains weak given the impact of Covid19 and ongoing lockdown restrictions, therefore, plans to diversify away from oil dependence will need to be accelerated. In this regard, accelerated privatisation of state-owned assets is an essential structural reform: it is promising that the government estimates the sale of government companies and assets to double to about SAR 30bn in 2021. This will also encourage private sector investment and attract capital inflows.
Is the Saudi target to achieve a balanced budget by 2023 realistic? It depends on how fast both the global economy, Asia/China (critical for the growth of oil and gas demand) and the Saudi economy can recover from the effects of Covid19, in addition to how the OPEC decision to raise production pans out. On the domestic front, rationalising spending by phasing out subsidies and lowering public sector employment/ wages will likely support the move towards a balanced budget.

 
 
 
 
 
 
 
 
 
 
Chart 3: Saudi Arabia’s tax revenue supported by VAT, while capex spending is scaled down
The estimated rise in non-tax revenues is likely due to a combination of the recent rise in oil prices (+33% since Nov) and OPEC’s decision to resume oil production (plans to add 500k barrels a day to crude markets starting in Jan, with subsequent moves decided at monthly meetings). VAT hikes will contribute to the uptick in tax revenues, assuming there are no deferrals/ exemptions on taxes on goods & services next year. The Aramco dividend – of which 98% will accrue to the government – will also add to the government’s coffers (though the allocation between PIF/ reserves at SAMA or MoF is not clear).
Though the government’s capex spending has been significantly scaled down (-26.6%), it is a positive move, with the private sector being given more opportunities to execute infrastructure and developments projects (the massive NEOM project and others) and PPP, thereby supporting private sector growth and job creation (outside of the public sector).

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

 
 
 
 
 
 
Download a PDF copy of this week’s insight piece here.
 
Chart 1: PMIs in the Middle East/ GCC have had a slow restart compared to US/ Europe/ Asia post-lockdown, even during the latest wave
Manufacturing PMI readings have picked up in Nov across the globe, thanks to increases in export orders; global manufacturing PMI also showed employment rising for the first time in 12 months & business confidence at a 69-month high. Vaccine announcements in early-Nov probably added to the mostly positive outlook.
There is a distinct divergence in the Middle East, with UAE and Lebanon still below the 50-mark in Nov. Lebanon’s reading is a clear reflection of its domestic economic meltdown while UAE’s is pegged to subdued demand in spite of the nation being the least stringent (i.e. more “open”, including for tourists) in the region.
The announcement of the efficacy of the Sinopharm vaccine in UAE and planned deployment, in addition to the recent spate of announced reforms – rights of establishment, long-term residency, remote working & retirement visas –  should support business and consumer confidence in the months ahead.

Chart 2: Will vaccines signal a recovery and rescue the airline industry?
Vaccines have been in the news since early-Nov, with the latest announcement from the UAE on the Sinopharm vaccine. As the vaccines are rolled out next year, the hope is that nations recover to the pre-Covid19 phase.
International travel markets remain weak: Middle East airlines revenue passenger-kilometres (RPKs) were down by 86.7% and 88.2% for international connectivity and long-haul traffic in Oct. This should benefit the airline industry in 2 ways: (a) in the near-term, the industry will support distribution of vaccines across the globe: being well-connected to global hubs and given its fleet size, UAE’s Emirates and Etihad are well-placed to gain. Emirates SkyCargo transported more than 75mn kilograms of pharmaceuticals on its aircraft last year; (b) as more people get vaccinated, demand for and willingness to travel will increase probably by H2 next year along with ‘travel bubbles’.
However, the success of the vaccine distribution is also dependent on the last mile delivery hurdles and vaccine storage facilities.

Chart 3: Bank credit in the UAE
The UAE central bank extended its Targeted Economic Support Scheme (Tess) for another six months until June 30, 2021
During Apr-Sep 2020, the overall pace of lending to GREs (+22.7% yoy) and government (+19.6%) have outpaced lending to the private sector (-1.0%). The pace of SME lending has been slow as well, but up 3.5% year-to-date.
Breaking down lending by sector, there has been upticks in credit to both transport, storage and communication (+52.1% yoy as of end-Sep) as well as government (13.6% yoy); mining & quarrying and construction sectors saw declines of -14.4% and -1.9% respectively.

Chart 4: Indicators of economic activity in Saudi Arabia
Among the proxy indicators for consumer spending – ATM withdrawals and PoS transactions – the latter is picking up faster, supported by transactions in food and beverage (+28.9% during Jan-Oct 2020) and restaurants and cafes (+68.9%); in comparison, transactions at hotels are down by 33%. ATM transactions dropped by one-fourth to SAR 499.87bn in Jan-Oct.
Loans to the private sector in KSA has been growing at a double-digit pace since Mar this year, with the year-to-date growth at 12.4% yoy.
Cement sales have been on the uptick, supported by the number of ongoing mega-projects (like the Red Sea development) as well as residential demand: real estate loans by banks are up 38% till Q3 this year, outpacing growth in both 2018 & 2019 while PoS transactions in the construction and building materials is up 44.2% this year (a large 247.4% uptick in Jun, ahead of the VAT hike).

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The article titled “How knowledge-based human capital can drive UAE’s diversification efforts” appeared in the print edition of The National on 27th November 2020 and is posted below.
 
 

How knowledge-based human capital can drive UAE’s diversification efforts

Nasser Saidi & Aathira Prasad

Recent structural reforms related to labour will help remove distortions in the market, attracting high-skilled professionals and investment
 
The UAE recently announced an expansion of its current 10-year golden visa to include medical doctors, scientists and data experts as well as PhD holders, in a bid to attract professionals to the country. The liberalisation comes on the heels of visas for retirees and options for remote working in Dubai: these provide added incentives for expatriates to remain, invest and contribute further to the country’s development.
Currently, an expat’s UAE residential status is linked to an employer, and in the event of job loss, the person has 30 days to either find a new job or secure a new visa. With Covid-19 changing the outlook for jobs globally, these steps come at an opportune time for the country to retain the best talent.
Traditionally, construction and services were the largest sectors offering employment within the UAE’s private sector, according to the UAE central bank’s quarterly report. This data, however, excludes free zone activities. For example, the DIFC is home to 2,584 firms and over 25,000 employees while the DMCC last reported 17,500 member companies in its free zone.
The UAE has also made great strides in increasing the private sector’s participation in the economy as it set sights on greater economic diversification. According to the 2019 Labour Force Survey by the UAE’s Federal Competitiveness and Statistics Authority, the share of the private sector in the UAE has increased to 70 per cent in 2019 from 58 per cent in 2009 – a positive move that underscores diversification efforts.
By economic activity, a few sectors have seen an increase in their share: manufacturing (9.2 per cent in 2019 vs 7.7 per cent in 2009), construction (17.5 per cent vs 12.3 per cent), hotels and restaurants (5.4 per cent vs 4 per cent). The real estate sector has seen a significant drop during the decade, which is not surprising given the boom prior to 2010.

Another interesting insight from the Labour Force Survey offers a morale booster for women – women are relatively are more educated than their male counterparts (about 50 per cent of employed Emirati women have a bachelor’s degree while 10 per cent have a bachelor’s and above). The comparable numbers for expat women are at 42.8 per cent and 33 per cent, respectively. A high proportion of women work as professionals and managers as well. This shows that though women are transforming the labour force they still face a glass ceiling. It is time that we have more women on boards and at top management levels in the private sector.
The survey also showed that the public sector, with better salaries and benefits, continued to outweigh the private sector in terms of appeal. Though wages by sector breakdown is not available (publicly), it is safe to assume the government sector has relatively higher salaries where close to three-quarters of citizens work. According to the UAE’s Labour Force Survey, more than one-third of Emirati respondents disclosed receiving monthly wages between Dh20,000 to 35,000 (versus just 5 per cent of expats in the same income bracket).
But for long-term growth and to further increase the private sector’s contribution to GDP, it is important to increase the proportion of UAE nationals in privately-held firms.
While attracting foreign talent to take up such jobs in the near-to-medium term is necessary, it is also critical to reform the education sector and invest in building a knowledge economy.
There is a persistent skill mismatch in the country compared to market requirements. Though spending per capita is high and student-teacher ratios are comparable to OECD levels, the outcomes are not strong: the PISA 2018 scores, for example, reveal that UAE students are placed 50th in maths, 49th in science and 46th in reading. It is time to invest in curricula that support job readiness, ‘Digital Education-for-Digital Employment’, early exposure to the workplace (summer internships and labour policies that facilitate such changes, for example), vocational and on-the-job training. Increasingly, emphasis should be to invest in and promote STEM (Science, Technology, Engineering and Mathematics) – especially given the official policy focus on innovation and a shift to the digital economy in the UAE and the region.
The recent structural reform related to labour will help remove distortions in the market, attract high-skilled professionals and help the UAE diversify further while also supporting domestic investment (including in the real estate sector). This will happen in tandem with a reduction in outflow of remittances, which in turn will boost the balance of payments. Last year, outward remittance flows from the UAE reached $44.9bn.
Long-term residents will be keen to invest in medium- and long-term financial instruments, secure mortgages and invest in start-ups and growth companies.

Dr. Nasser Saidi’s comments appeared in the Arab News article titled “Economic boost tipped after UAE company ‘game-changer’” and can be accessed directly here.
Comments are highlighted below.
Economics expert Nasser Saidi said: “The liberalization of foreign ownership laws breaks down major barriers to the right of establishment. The reform is a game-changer.”
“It will encourage foreign direct investment, but also lead to a recapitalization of jointly owned companies and encourage entrepreneurs to invest in businesses and new ventures. Importantly, it will encourage the retention of savings in the UAE,” Saidi added.
“Along with the change in visa regulations, the new reforms will boost the UAE’s growth prospects,” Saidi said.

Download a PDF copy of this week’s insight piece here.
 
UAE needs to attract FDI into viable, sustainable economic diversification sectors & projects
The liberalization of foreign ownership laws in the UAE (announced this week) breaks down major barriers to the rights of establishment and will be a game-changer for the country. This reform will help to reduce costs of doing business, lead to a recapitalization of existing jointly owned companies and encourage entrepreneurs to invest in new businesses and new ventures, supporting innovation and the introduction of new technologies while also promoting inflows of foreign direct investment. Foreign companies within UAE’s free zones would also be allowed to link up with the domestic economy, supporting local businesses and thereby boosting overall growth. The barriers between free zones and the domestic economy would become blurred, if not absent leading to greater competition and improved competitiveness.
The latest announcement follows a spate of reforms undertaken this year – including labour (long-term residency via a 10-year visa, Dubai’s virtual/remote working visa and retirement visa, Abu Dhabi’s freelancer permit/ license) and social (removing laws which criminalized alcohol consumption, cohabitation) – aimed to revive the economy attempts from the negative impact of low oil prices, Covid19 and the Global Lockdown. Importantly, these reforms will encourage the retention of savings in the UAE, reduce remittances and capital outflows, thereby structurally improving the balance of payments. Overall, the result will be an improvement in the Doing Business ranking of the UAE.
We focus on FDI in this Weekly Insight piece. FDI inflows are essential to the UAE’s diversification efforts, as it would not only create jobs, raise productivity and growth, but could also lead to transfer of technology/ technical know-how and promote competition in the market. According to the IMF, closing FDI gaps in the GCC could raise real non-oil GDP per capita growth by as much as 1 percentage point.
While FDI inflows into the Arab region have been slowing in the past decade, the UAE still remains one of the top FDI destinations in the region. Inflows dipped during the time of the financial crisis (to USD 1.1bn un 2009 from an all-time peak of USD 14.2bn in 2007), but rebounded to USD 13.8bn last year, before the Covid crisis. Reforms to improve the investment climate (including allowing 100% ownership at free zones and protecting minority investors), its ease in doing business, good infrastructure as well as macroeconomic and political stability are factors that have aided the increase in FDI.
In 2019, UAE was the second largest destination for FDI inflow into the Arab region (USD 13.6bn or 3.4% of GDP, accounting for 21% of total), behind Egypt (USD 13.7bn or 2.8% of GDP, 23% of total) while it dominated FDI by number of projects (445). Interestingly, UAE is also a major capital exporter, having invested a total USD 8.7bn into the Arab nations last year (topping the list and accounting for 14.4% of total FDI inflows into the region). In part, this reflects the UAE’s hosting of multi-national enterprises investing across the region.

 
In spite of the Covid19 outbreak negatively affecting FDI inflows[1], Saudi Arabia defied the trend by posting a 12% yoy increase in inflows to USD 2.6bn in H1 2020[2] – in part linked to its mega-projects related to achieving Vision 2030. In Q1 this year, the UAE, along with Saudi Arabia and Egypt accounted for a share of 65.4% of total investment cost of projects in the region, valued at USD 11.2bn. Outflows from the UAE still accounted for 38.2% of GCC’s share of foreign investments in Q1 this year[3].

China’s investments in the UAE have been rising, with UAE the top destination country (among Arab nations) accounting for more than one-third of Chinese projects tracked during Jan 2003-Mar 2020 (with the number of projects in double-digits in 2018 and 2019). According to AEI’s China Global Investment Tracker, the value of Chinese investments touched a high of USD 8bn in 2018, thanks to a handful of large projects (including with ACWA Power and Abu Dhabi Oil). Sector-wise, investments were concentrated in energy (both oil and gas as well as renewables), real estate and transport – together accounting for 87.8% of total investments during 2016-2020. This is largely in line with FDI inflows into the Arab region as well, with the top 5 sectors (real estate, renewables, chemicals, oil & gas and travel & tourism) accounting for close to two-thirds of total inflows in 2019.
For the oil producing & exporting countries of the GCC and the wider MENA, the broader trade and investment landscape was further disrupted (in addition to Covid19) as a result of the profound changes in the structure and dynamics of the energy sector and market. The deep recession and Covid19 lockdown and induced collapse in transport and travel led to a sharp fall in the demand for oil and cratering of oil prices. Fossil fuel prices are unlikely to recover even in the medium term due to the increasing competitiveness of renewable energy (solar, wind and geothermal), persisting competition from shale oil & gas and new fossil fuel discoveries, while climate change mitigation policies and greater energy efficiency are leading to a downward shift in the demand curve for fossil fuels.  Accordingly, returns on investment in oil and gas (O&G) will decline. The implication is that FDI into the traditional O&G in the UAE and the GCC will be on a downward trend. The challenge will be to attract FDI into viable, sustainable economic diversification sectors and projects.
The new post-Covid19 FDI landscape for the UAE will likely be boosted if the recently announced deep structural reforms are executed well, alongside a review of existing economic strategies. The next obvious step is greater regional integration – a GCC common market (to start with), allowing for free movement of both labour and capital – as well as formalizing trade and investment treaties with major partners including China.
 
 
[1] UNCTAD expects global FDI flows are expected to contract between 30 to 40% during 2020-21.
[2] Source: UNCTAD
[3] Source: Arab Investment & Export Credit Guarantee Corporation

Download a PDF copy of this week’s insight piece here.
 
Knowledge-based human capital to drive the next phase of UAE’s diversification efforts
The UAE this week announced an expansion of its current 10-year golden visa to include medical doctors, scientists and data experts as well as PhD holders, in a bid to attract professionals to the UAE. The liberalisation comes on the heels of visas for retirees and options for remote working in Dubai: these provide added incentives for expatriates to remain, invest and contribute further to the country’s development. Currently the UAE residential status for expatriates is linked to an employer, and in the event of job loss, the person has 30 days to either find a new job or secure a new visa. With the backdrop of Covid19 and related job losses – UAE’s PMI Employment sub-index fell to its lowest in over 11 years and the latest November reading falling for the 10th consecutive month –   many long-term residents were forced to return to their home countries, taking their savings back with them generating capital outflows from the economy.
While UAE does not release monthly data on employment, the central bank’s quarterly report offers a glimpse into the recent trend. Construction and services were the largest sectors offering employment within the UAE’s private sector. This is an incomplete picture, as the database on private sector employment excludes the Free Zone activities. For example, the DIFC is home to 2584 firms and over 25k employees while the DMCC last reported 17.5k member companies in the free zone. In terms of pace of growth (in quarter-on-quarter terms), construction has been registering a decline since Q2 last year, though other sectors posted upticks in Q1 (prior to Covid19-related lockdowns). No data is yet available for that period, but Embassy estimates suggest 400k+ (net) and 60k persons having returned to India and Pakistan respectively during the past months.

Structural change signals the UAE’s greater economic diversification
The UAE Ministry of Human Resources and Emiratisation also offers additional details of number of establishments in the country (unfortunately, also excluding free zones). Close to 50% of the firms (as of Jan 2020) were operating in the sectors most affected by Covid19: an update of this data is likely to show a significant difference in the composition. Interestingly, if we consider the number of employees per firm, mining & quarrying (the oil sector) tops the list – in contrast to the capital-intensive nature of the sector.

As is oft-cited, there is a preference to work in the public sector: 78.2% of UAE citizens surveyed in the Labour Force Survey 2019[1] declared as working with either the federal or local government (versus just 12% in the private sector). However, comparing this data with the 2009 survey, the share of the private sector has increased from 58% to 70%- a positive move, and underscoring the UAE’s diversification efforts. By economic activity, a few sectors have seen an increase in their share: manufacturing (9.2% in 2019 vs 7.7% in 2009), construction (17.5% vs 12.3%), hotels and restaurants (5.4% vs 4%). Real estate sector has seen a significant drop during the decade, not unsurprising given the boom prior to 2010; but a slight dip in financial and insurance activities is surprising (2.5% in 2019 vs 3.2% in 2009).
Women are transforming the labour force: more educated but facing a glass ceiling
Another interesting insight from the Labour Force Survey offers a morale booster for women – women are relatively are more educated than their male counterparts (about 50% of employed local women have a bachelor’s degree, and about 60% have a bachelor’s and above; the comparable numbers for expat women are at 33% and 42.8% respectively); a high proportion of women work as professionals and managers (28.5% among female expats, 45% of female citizens). It is time that this translates into having more women on boards and at top management levels in the private sector[2].
The Survey also confirms the disparity in wages between local and expat population: more than one-third of Emirati respondents disclosed receiving monthly wages between AED 20-35k (versus just 5% of expats in the same income bracket). This brings to the forefront two issues:
(a) Private-public sector wage gap that deters citizens from joining the private sector. Though wages by sector breakdown is not available (publicly), it is safe to assume relatively higher salaries in the government sector where close to three-fourths of citizens work. Public sector remains oversaturated, and with higher wages and relatively better benefits, highly educated young people prefer to remain unemployed till they get a public sector job – doing little to help the private sector.
(b) The need to attract high-skilled professionals to support private sector activity. This needs to be carefully addressed: while attracting foreign talent to take up such jobs in the near- to medium-term is necessary, it is critical to reform the education sector and invest in building a knowledge economy. There is a persistent skill mismatch and low educational quality in the country compared to market requirements. Though spending per capita is high and student-teacher ratios are comparable to OECD levels, the outcomes are not strong: the PISA 2018 scores, for example, reveal that UAE students are placed 50th in math, 49th in science, and 46th in reading. Radical modernisation of education curricula is essential for creating a 21st century able workforce. It is also time to invest in curricula that support job-readiness, ‘Digital Education-for-Digital Employment’, early exposure to the workplace (e.g. summer internships and labour policies that facilitate such changes), vocational and on-the-job training. Increasingly the focus should be to invest in and promote STEM (Science, Technology, Engineering and Mathematics) – especially given the official policy focus on innovation and a shift to the digital e-economy and -services in the UAE and the region.
What next? The recent structural reform moves (related to labour) will help remove distortions in the labour market, attract high-skilled professionals and help UAE to diversify into higher value-added and more complex economic activities, while also supporting domestic investment (including in the real estate sector). This will happen alongside a reduction in outflow of remittances, which in turn will boost the balance of payments: last year, UAE expatriates sent $44.9bn in outward remittances in 2019, comparable to the value of oil exports at $49.64bn[3]. It is important in this regard to accelerate capital market development: long-term residents will be keen to invest in medium- and long-term financial instruments, participate in a mortgage market and given an opportunity, also invest in startups and growth companies.
 
 
[1] This is published by the UAE’s Federal Competitiveness and Statistics Authority.
[2] A KPMG report on Female Leaders Outlook identified that 94% of CEOs that participated from the UAE were male. The 2019 UAE report includes input from 50 UAE-based women leaders, up from 29 in 2018.
[3] Data from OPEC’s Annual Statistics Bulletin.

Download a PDF copy of this week’s insight piece here.
 
PMIs & Recovery (?) Indicators in the Middle East/ GCC: A pictorial representation
Chart 1: PMIs in the Middle East/ GCC
PMIs in the Middle East/ GCC have not kept pace with the increases seen across the US/ Europe/ Asia post-lockdown. Non-oil sector activity has been subdued given sector composition, a majority of which are still negatively impacted by the outbreak: tourism, wholesale/ retail & construction.  Job cuts continue as part of overall cost-cutting measures & business confidence remains weak.

 
Chart 2: Stringency Index & Mobility
Most economies in the Middle East are re-opening in phases, with restricted lockdowns where cases are surging. The UAE remains one of the most open (least stringent) nations in the region.
However, when it comes to mobility, the UAE seems to be a few steps behind its regional peers. This seems to be in line with a recent McKinsey finding that countries focused on keeping virus spread near zero witnessed their economies moving faster. So, ending lockdowns and reopening the country is not sufficient for resumption of economic activity. Another potential reason could be that increased use of e-commerce is leading to less footfall in retail and recreational facilities.

 
Chart 3: Indicators of economic activity in the UAE
Last week, the UAE central bank disclosed that its Targeted Economic Support Scheme directly impacted more than 321k beneficiaries including 310k distressed residents, 1,500 companies and 10k SMEs. The overall pace of lending to GREs (+23% yoy during Apr-Aug 2020) and the government (+20.3%) have outpaced lending to the private sector (-0.7%).
UAE banks still lent most to the private sector (70.1% of total as of Aug 2020 vs. 76% in end-2018 and 72% in end-2019), while the public sector & government together account for close to 30% of all loans in Aug 2020 (vs. 25% a year ago). Breaking it down by sector, there has been upticks in credit to both transport, storage and communication (+51.9% yoy as of end-Jun) as well as personal loans for business (+18.7% yoy) while construction sector has seen a dip (-2.9%).

 
Chart 4: Indicators of economic activity in Saudi Arabia
In contrast to the UAE, loans to the private sector has been edging up in Saudi Arabia, growing by an average 13.2% yoy during the Apr-Sep period. Proxy indicators for consumer spending – ATM withdrawals and PoS transactions – are on the rise post-lockdown. Ahead of the VAT hike to 15% in Jul, there was a surge in PoS transactions in Jun, which has since then stabilized. By category, food and beverage and restaurants and cafes, continue to post increases.
Saudi Arabia published its first-ever flash estimates for GDP this week: showing a 1.2% qoq increase in Q3, though in yoy terms, growth was still down by 4.2%.

 
Chart 5: Linkages with the global economy
In linkages with the global economy, we consider

1. Trade: for the GCC region, there was a significant drop in overall trade with the world during the lockdown period. While exports have started to pick up again, the pace of exports to China are relatively faster.
2. Passenger traffic: though international revenue passenger kilometers in the Middle East improved slightly in Sep, it continues to be the worst affected globally in terms of year-to-date data (-68.7% till Sep), as travel restrictions remain. Resumption of domestic travel (e.g. Russia, China) has supported rebounds in some regions.
3. Cargo volumes (cargo tonne-kilometers or CTKs) show a clear V-shaped recovery for the Middle East, due to “added capacity” following the peak of the crisis, according to IATA.

 
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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 is an edited version of the post issued originally on 29th Sep; Table 1 & related text have been updated]

Supporting the recovery of UAE’s private sector: focus on SME finance
To support the UAE economy in the backdrop of Covid19, the central bank (since Mar 2020) has rolled out a number of measures including liquidity injection via loosening of banks’ capital requirements, loan repayment deferrals and the Targeted Economic Support Scheme (TESS) among others. According to the UAE central bank, as of end-Jul, banks and financial institutions had availed AED 44.72bn worth of interest-free loans (89.44% of total) as part of the TESS facility. It needs to be highlighted that banks used close to 95% of these funds towards postponing loan payments for the affected sectors. It was also disclosed separately that 300k individuals, 10k SMEs and more than 1500 private sector firms had used the economic stimulus.

The latest data from the UAE central bank shed some light on the broader credit movements: the accompanying chart shows the monthly changes in gross domestic credit. The dotted lines are credit to businesses and individuals (the private sector) which show no substantial increases – in fact, it increased by an average 0.9% year-to-date (ytd) for businesses and dropped by 2.1% ytd for individuals. The uptick in lending to the public sector (government related entities) and government have been discussed previously here and here, but the non-bank financial institutions (which include private equity & venture capital firms, other investment firms, alternative asset managers, insurance firms and others) has also witnessed a 11.8% rise in credit ytd. There is not much visibility of the activities of NBFIs in the UAE (in terms of publicly available data), and it is not clear if the SME customer segment, important for recovery, was catered to (via consumer finance, SME financing & credit card products, to name a few).

However, at the risk of sounding like a broken record, the question is whether the package has achieved its goal of supporting the economy or whether it resulted in a crowding out of the private sector (businesses and individuals) in favour of the government, public sector & also the financial institutions? The UAE central bank’s latest quarterly report does mention that MSMEs (Micro, Small and Medium Enterprises) benefitted from the economic package – highlighting the 10.4% yoy increase in lending in Q2 this year. But, at the end of the day, share of SME lending in total domestic lending was at 5.7% in Q2 (Q2 2019: 5.6%), lower than 5.9% share as of end-Q1.

Additional data is beneficial: the tables below provide more details of bank lending to the MSMEs, segregated by micro, small and medium enterprises[1]. Within the MSME segment, as of end-Q2, the largest share of loans was disbursed to medium-sized firms (56.6%) and close to 1/3-rd to the small enterprises.

The number of MSMEs in the UAE have increased by 3.9% qoq to 124,935 as of end-Jun – not surprising given the central bank’s mandate of reduced duration for opening new SME accounts (all banks need to open accounts for SME customers within a maximum timeframe of two days, provided documentation and AML/CTF obligations are met). The number of accounts in the micro- and small segments increased by 4.6% and 5% qoq in Q2. Nevertheless, if we consider the amount disbursed per firm, medium enterprises pocketed AED 1.76mn in Q2: this is 3.7 times the amount disbursed per small firm and more than 5.3 times the amount disbursed to microenterprises.

The results are quite eye-opening, but not surprising (unfortunately): the GREs have benefitted in terms of the pace of overall domestic lending during the Covid19 period (remember that many of these firms are part of the sectors most affected by the pandemic!) and while lending to the SMEs has been dismal, within the SMEs, the medium-sized firms have benefitted the most. Considering how significant SMEs are to the UAE[2], it is imperative that financial institutions support them to bring the economy back on track. Some of the policies rolled out by the central bank had a 6-month deadline, and since no announcements have been made (yet) regarding extensions, anecdotal evidence points to banks winding down loan repayment deferrals and similar policies (for businesses/ individuals).

With the economy not yet back on the pre-Covid19 track, and the central bank’s own call of a 4.5% decline in non-oil GDP this year, targeted policy stimulus measures need to continue. With rising indebtedness of both individuals (due to job losses or pay cuts) and businesses (directly and indirectly affected by Covid19), there are likely to be spillovers into the financial sector via rising non-performing loans.

Furthermore, as companies wind down operations in the near- to medium-term, nascent insolvency and bankruptcy frameworks in the UAE are likely to be tested. According to the World Bank Doing Business 2020 report’s resolving insolvency sub-category, the UAE’s recovery rate was 27.7 cents on the dollar (vs OECD high income nation’s average of 70.2 and MENA average of 27.3), at a cost of 20% of the estate (vs 9.3 in OECD and 14% in MENA), taking 3.2 years to resolve (vs OECD’s 1.7 and MENA’s 2.7)[3]. However, the strength of the insolvency framework – given recent but untested legislation – stood at an impressive 11 (out of a total score of 16; compares to the OECD average of 11.9 and higher than MENA’s 6.3).

Support of the private sector is critical for economic recovery
To provide adequate ongoing backing to the private sector (including the SMEs) is essential. What policy measures need to be in place? (a non-exhaustive list)

• Banking sector continues to support the private sector via reduced bank charges and fees, reduction in minimum balance requirements, zero-interest instalment plans etc.; of course, banks’ compliance/regulatory departments need to ensure that firms they lend to follow practices of good financial reporting and governance.
• Limited funding to SMEs from the banking sector is likely to continue, given the current status of opaque information/ reporting/ data. Lack of collateral and issues of transparency are oft-cited constraints to SME lending in the region. The recently announced credit guarantees for loans to SMEs is likely to provide support and if successful, could be continued at a nominal rate. Open lines of communication with the credit bureaus can help manage credit risks and ease SME’s access to credit. Two ways to resolve the issue of collateral: 1. Expand the nature of acceptable collateral to both movables and immovables; 2. Establish transparent, blockchain-based collateral registries/ platforms. Furthermore, an SME rating agency (like in India) could provide additional information to lenders. Resolving this constraint alone could kickstart a new wave of entrepreneurship in the country.
• Backing from the government can come via a simple move like reducing the cost of doing business (various free zones have reduced fees and related charges for a short period) or ensuring no payment delays or boosting specific sectors (Abu Dhabi’s recent announcement to develop AgriTech) or through a wider mandate by instructing the various sovereign wealth funds to invest in local companies, through a dedicated fund, based on best practices.
• Leapfrog on the massive changes Covid19 has brought about in the adoption of technology: varied e-commerce offerings, such as helping SMEs establish interactive websites, to creating innovative payment systems to neo-banking options. Alongside embracing the technology and greater digitalisation, it is necessary to also invest in and create the right ecosystem (bringing together the necessary skillset, retraining existing employees, reducing set-up and ongoing/ recurring business costs etc.).

[1] The UAE central bank expanded the definition of SMEs so that a larger segment will be in a position to qualify for SME lending. 

[2] According to Ministry of Economy, the SME sector represents more than 94% of total firms operating in the UAE, accounting for more than 86% of the private sector’s workforce. In Dubai alone, SMEs make up nearly 95% of all companies, employing 42% of the workforce and contributing ~40% to Dubai’s GDP.

[3] https://www.doingbusiness.org/content/dam/doingBusiness/country/u/united-arab-emirates/ARE.pdf

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Charts of the Week: This is a crucial period for GCC, including the UAE. How can one decide on the balance between reopening the economy, supporting economic activity, while also containing the spread of Covid19? What policy measures should top the list to support businesses and consumers?

1.Spread of Covid19 in the GCC/ UAE
Confirmed Covid19 cases in the Middle East has crossed 1.75mn, with the GCC nations accounting for 43.7% of total cases. Many of these nations have seen a recent spike in cases, after stay-at-home orders and travel restrictions were lifted in addition to reopening previously constrained activities (e.g. mosques, gyms, salons). Among the GCC nations, the spread of the outbreak is still varied. The chart on the right maps the share in total daily increase in confirmed cases per million persons (x-axis) against the share of the country in overall output (y-axis), with the size of the bubble denoting the 7-day average of the daily increase in cases.

Among the GCC nations, Oman seems to be relatively better off – when it comes to both the 7-day average of daily increase in Covid19 cases as well as the daily confirmed cases per million people; not surprising considering that it is the most “stringent” among the group – the Oxford Covid-19 government response stringency index[1] places Oman at 86.11 vs the least stringent being UAE at 36.11 (Sep 2020). The UAE, which accounts for one-fourth of GCC’s GDP, has the highest 7-day average of daily increase in Covid19 cases (size of bubble). While officials have stressed the need for greater adherence to social distancing measures, no lockdown has been imposed as yet. Within UAE, Dubai is already welcoming tourists subject to Covid19 negative tests.

Source: Worldometers, Our World in Data, Nasser Saidi & Associates. The size of the bubbles on the RHS chart denotes the 7-day average of daily increase in cases.
This implies a sharper downturn in GDP this year due to the outbreak, while the effects of lower oil prices and the OPEC+ led cut in oil production will worsen the growth outlook. Given the large proportion of expat population in the country, a dip in growth will also spillover into the labour-importing nations: ranging from job losses (& the return of these residents to home countries), as well as lower remittances. In anticipation of lower growth this year, the government and central bank have rolled out private sector stimulus packages to support the economy, while reducing expenditures (UAE posted a record budget surplus of AED 9.75bn in Q2 this year). The Federal ministries have reduced spending (including compensation of employees), with overall cuts in capital and infrastructure spending will be detrimental to economic growth.

To compensate from lower oil prices and lower non-oil fiscal revenues, borrowing from international capital markets has gathered steam: so far this year, Abu Dhabi issued a USD 5bn multi-tranche bond (that included a 50-year tranche – the longest term for a bond issued by a GCC sovereign issuer) after having raised USD 10bn previously this year, while Dubai government sold a USD 2bn dual-tranche in early-Sep (the prospectus also disclosed that the emirate had raised over USD 3.6bn in debt this year through several instruments, used to support Emirates Airlines and expenses related to the Expo). An important point to highlight is that though Dubai government debt is placed at USD 34bn, the exposure of government-related enterprises (GREs) were not disclosed – an amount estimated at more than USD 120bn by the IMF. A related point was mentioned in the previous weekly insights: bank credit to the public sector and government are rising, threatening to crowd out lending to the private sector (which recorded a 0.1% yoy dip in Jun).

2. Economic Activity in the UAE: PMI, Mobility Indicators & Traffic Congestion

PMI for both UAE and Dubai (most dependent on non-oil sectors) declined the most in Apr – to 44.1 and 41.7 respectively. Following that dip, the PMI readings have been rising in both UAE and Dubai, though it came to a halt in Aug. Employment continues to be the biggest drag on the index (the sub-index was at the lowest in 11 years in the UAE while in a 6^th consecutive month of contraction in Dubai) while a rise in sales and related spending was attributed to steeper price discounting (respondent firms generally pointed towards subdued customer demand, not surprising given the wider economic uncertainties).

Retail and recreation readings are just under 15% lower than the baseline case in the UAE. There is however a slight difference between Dubai and Abu Dhabi with the latter having recovered faster – probably more confidence as result of specific lockdown restrictions (i.e. need to provide a negative test result to enter the emirate). Workplace is still 25% lower compared to the baseline – possibly the result of working from home policies in many firms. Congestion statistics already show a slow pickup – but below pre-Covid19 levels – more so in Dubai than Abu Dhabi.

3. Policy recommendations for the UAE
As businesses adjust, governments can provide stimulus support to facilitate transition to the new normal. The focus in this section is businesses and consumers. The main immediate concern for firms is operating costs and cash flow: lowering rents/ license fees or offering installment plans for payment of license fees/ rents would help ease financial burdens. Additionally, the government could offer grants to support firms’ digitalization/ roll out of innovative processes. Strains on businesses could have a spillover effect on the banking sector via non-performing loans or increased flight risk of business owners unable to meet repayments. Towards this end, an extension of loan repayments deferment should be considered by the central bank (this has already been done by other GCC nations). Banks should also be nudged to lend to the SMEs and not just already “established” firms with a better financial standing: this could take the form of working capital loans or trade loans, with a SME guarantee scheme (specifying criteria for eligible lenders and the assessment process).

As firms’ lower headcount to adjust, it would be beneficial to remove barriers to labour mobility (e.g. allowing part-time work visas/ freelancing options versus being tied to a specific company): this would allow employees (and families) to remain in the country to search for alternative jobs (and continue school, visit malls and use hospitals among others thereby contributing to overall consumer spending). Ensuring that sudden job losses will not require a move back to their native country, will increase confidence to invest in the economy (be it real estate or starting new business ventures). A longer-term policy would be to establish social security nets and/or unemployment insurance to reduce financial burdens alongside jobs support schemes.

[1] Check https://ourworldindata.org/grapher/covid-stringency-index?year=latest&time=2020-01-22..latest

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Charts of the Week: As manufacturing PMIs touch new highs in Aug, services PMI stalls. Regional activity is at odds with global peers. Are consumers/ businesses feeling the pinch of Saudi Arabia’s VAT hike? Why is the credit disbursement pattern different in the UAE?

1. Manufacturing PMIs: Global vs. Regional
Manufacturing PMI numbers for August signal a tentative recovery compared to the massive dip in the Covid19 lockdown period. Global manufacturing PMI reached its highest in 21 months (51.8 from Jul’s 50.6), as output and new orders rose at the fastest rates since Apr and Jun respectively, while export demand stabilised. The headline manufacturing indices in the US and Europe improved as restrictions were lifted and more production came online. However, a key point to note is that in many cases export demand has not recovered as much as domestic demand (post lockdown). Meanwhile, services sector activity has almost stalled: the initial rebound is tapering off given ongoing social restriction policies. The bottom line is that though PMIs have shown some improvement, the impact might be hampered by rising unemployment, subdued international demand alongside overall economic and public health uncertainty.

From the list above, only Japan and countries from the Middle East are sub-50 indicating a contraction. Egypt posted the 13^th straight month of contraction in Aug, while both Saudi Arabia and UAE moved below 50. The relevant question for the region is why? A sharp decline in jobs is the main drag on headline indices, as firms try to lower operational costs amid a scenario of weak demand and subdued growth prospects. In the UAE, not only did the employment sub-index fall to its lowest in 11 years (with one in 5 panelists reducing number of employees) but firms also had to deal with price discounting to remain competitive. In Saudi Arabia, the hike in VAT (from Jul) drove up input costs, adding more pressure on firms. Overall, a prolonged weaker recovery could lead to firm closures, that would lead to job losses, bankruptcies as well as an impact on the banking sector via an increase in NPLs.

2. Saudi Arabia impacted by the VAT hike: how has consumer spending fared?

Saudi Arabia’s VAT hike has negatively affected consumers as well as businesses. Consumers, who ratcheted up spending in June (similar to patterns in Dec 2017, prior to the introduction of VAT in Jan 2018), have reverted to “normal” spending habits come July. Comparing the patterns by sector, the difference in Jul is striking in purchases of big-ticket items – electronics, furniture, jewelry as well as construction and building materials. Interestingly, sectors like hotels, restaurants and clothing showed an uptick in spending in spite of the VAT hike – a probable explanation is end of lockdown and the Eid-al-Adha holidays which fell towards end of the month; new clothes are a must and restrictions on international travel resulted in people opting for more regional travel and staycations, thereby boosting payments at hotels and restaurants.

3. Is private sector activity supported by credit disbursement? A tale of two nations

Both the Saudi and UAE central banks have undertaken multiple measures to support their economies through this Covid19 phase: this includes increased liquidity, deferral of loan payments (which was recently extended further till Dec 2020 by SAMA) as well as support for the private sector (specifically those businesses most affected by the pandemic, and SMEs) from banks. However, while credit to the private sector has picked up in Saudi Arabia, the opposite was the case in the UAE. Why?

4. The big picture of credit activity in the UAE

On close inspection, lending to the private sector in the UAE has been on the decline since Aug 2018 and worsened during the pandemic phase (Fig 3). In both year-on-year and month-on-month terms, growth in credit to the public sector and government constantly outpaced the private sector, leading to a growing share of the public sector and government. UAE banks lent most to the business sector (50% of total, as of Jun 2020 vs. 53% in Jun 2019), while the public sector & government together account for close to 30% of all loans (vs. 24% a year ago). Lending remains quite high for construction/ real estate (20%), government (15%) and personal loans (20%); this compares to 21.8%, 12.9% and 21.2% respectively a year ago.

The UAE central bank has been proactive in releasing liquidity to the financial sector during Covid: in addition to the Targeted Economic Support Scheme (Tess) rolled out in Mar, in early-Aug it temporarily relaxed the net stable funding ratio (NSFR) and the advances-to-stable resources ratio (ASRR) by 10 percentage points to enhance banks’ capacity to support customers. As of July 18, banks had withdrawn AED 43.6bn, equivalent to 87.2%, of the AED 50bn Tess programme made available to them. The central bank also disclosed that, as of Jul 2020, 260k individuals and 9527 SMEs had availed the interest-free loans under Tess; credit to SMEs accounted for 9.3% of total amount disbursed to the private sector and individuals had received support worth AED 3.2bn from banks. This is but a drop in the ocean compared to the overall amount made available to the banks (i.e. AED 50bn Tess, part of the wider AED 100bn stimulus unveiled in Mar, and a further easing of buffers raising stimulus size to AED 256bn).
In this context, the questions to be answered are two-fold: 1. Are customers not seeking loans during these troubled times? Or 2. Are banks unwilling to lend during these troubled times? The answer is not crystal-clear, but more likely a combination of both (as evidenced below).

According to the latest “Credit Sentiment Survey” by the UAE central bank, about 53% of respondents stated that the demand for both business and personal loans in Q2 had declined either substantially or moderately. In the backdrop of Covid19, and heightened economic uncertainty, it is likely that consumers do not want to take on loans they cannot service or repay in case of job loss or firm closures; the same applies for businesses in sectors that are tourism-specific or aviation/travel-related firms or others affected by the pandemic (insolvencies/ bankruptcies). On the other hand, for banks, knowingly lending to such firms/ customers could result in an increase in NPLs that would affect their profit margins and bottom line: going by the H1 earnings of the 4 largest listed banks in the UAE, combined net profits are down by 36% yoy while provisions have increased (ENBD by 243% yoy). So, banks have tightened credit standards instead, hence lowering pace of lending to the private sector. Both demand side and supply side of credit are impacting credit.

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Dr. Nasser Saidi’s comments (in Arabic), discussing the forces and factors underlying UAE’s importance as a financial centre within the global financial architecture, were included in the article published by Al Etihad on 31st Aug 2020. A snapshot of the article can be viewed here.

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

1. Beirut blasts and Lebanon’s way forward

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

Source: Khatib & Alami.

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

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

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

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

4. Saudi Arabia: monetary indicators

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

5. FDI flows in the Arab region

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

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

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

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

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

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

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

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

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

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

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

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

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

Charts of the Week
1. Spread of Covid19 in the GCC
Most GCC nations have begun a phased re-opening of their economies after being in partial/ complete lockdown for weeks. Some restrictions still remain (e.g. partial capacity at mosques, restaurants, movie theatres, gyms etc.) in countries that have reopened (like the UAE); where cases are high, partial nighttime curfews and targeted lockdowns are in place. The spread of the outbreak is varied among the GCC nations.
The chart maps the share in total daily increase in confirmed cases per million persons (x-axis) against the share of the country in overall output (y-axis), with the size of the bubble denoting the 7-day average of the daily increase in cases. Among the GCC nations, the UAE seems to be performing better – when it comes to both the 7-day average of daily increase in Covid19 cases as well as the daily confirmed cases per million people.

Saudi Arabia, which accounts for the lion’s share in GCC’s GDP, also has the highest 7-day average of daily increase in Covid19 cases (size of the bubble). This implies a sharper downturn in GDP this year due to the outbreak, but the effects of lower oil prices and the OPEC+ led cut in oil production will worsen the growth outlook. It is then little wonder that the rhetoric has shifted to diversifying revenue base with more privatisations and a hint of the introduction of an income tax in the future.
The GCC nations with the highest share in total daily increase in count (the highest being Oman) are among those with a lower share of overall GDP. For these nations, the worries are multiplied manyfold: not only will growth be affected by both the outbreak and lower oil prices, fiscal constraints and lower credit ratings will restrain their access to borrow from international capital markets. While governments have tightened purse strings, reducing capital and infrastructure spending will be detrimental to economic growth (especially the private sector).
A decline in growth in oil-exporters also has a negative impact on many oil-importing nations: ranging from job losses (& the return of these residents to home countries that already face relatively higher unemployment rates), lower remittances as well as lower foreign aid and investments.
Chart 2. Economic Impact of Covid19 and low oil prices on the Middle East’s oil exporters & importers

 
2. Decline in global trade
Along with tourism, global trade has been one of the most-hit by the global Covid19 outbreak. Trade growth had been slowing for the past year, and the pandemic has only accelerated its pace. Monthly data from the IMF’s Direction of Trade Statistics reveal that the drop in export growth touched two-digits in Mar, and given lockdown measures and factory shutdowns it can be estimated that data for Apr-May will be far worse.

The WTO estimates that trade will drop by 18.5% in Q2 this year, with a full year dip of between 13% (optimistic) to 32% (pessimistic scenario). For the Middle East, the 13.9% decline in total exports in Mar is a result of both lower oil production and lower demand for oil.
Shipping estimates, denoted by the Baltic Exchange’s sea freight index, touched a 9-month high in early Jul after recovering in Jun: this should translate into an improvement in global trade after May. Air cargo traffic data from IATA also denote that the cargo levels have shown a slight rebound in Apr (the latest available data). However, note that in both cases, there is a long way to recover to their pre-Covid19 levels. Supply chains remain disrupted though there has been a rebound in manufacturing activity across the globe (latest PMI numbers from Europe and Asia).

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UAE, Covid19 & economic activity after re-opening post-lockdown
With UAE easing restrictions imposed due to the Covid19 outbreak and opening the economy in phases, a pickup in economic activity is inevitable. The Oxford Government Stringency Index (which records the number and strictness of government policies) scores the UAE at 69.44 in the beginning of Jul, down from a high of 89.81 recorded during the first two weeks of Apr (a higher score indicates a stricter government response). The question however remains whether residents have embraced the “re-opening” and gone back to “business as usual”.
Few economic indicators are released monthly in the UAE and hence the availability of Google and Apple Mobility numbers offer a good perspective of where the economy is headed to, reopening after the lockdown. Google Mobility indicators show trends over several weeks on how visits to various sectors – retail & recreation, grocery and pharmacy, parks, transit stations, workplaces – compare to a baseline value for that day of the week [1] while residential shows a change in duration of time spent at home. Apple Mobility indicators track resident activity – walking and driving – which can also be read into as “confidence” indicators i.e. you are more likely to be out exercising if you have accepted the new Covid19 realities (social distancing, wearing masks etc).
These high-frequency indicators offer an insight into retail behaviour (visit to recreation, retail outlets, groceries), as well as economic activity (transit stations, workplaces and residential) while parks and walking can be interpreted as “social well-being”, an equally important measure.

The lockdown phase in the UAE (towards the end of March) is evident from Chart 1, with the various indicators dipping to near -100%. Of the indicators, the two that are inching back to baseline are visits to groceries and pharmacies as well as workplaces. During the peak of the outbreak, when severe restrictions were in place, there was a surge e-commerce activity (especially online shopping platforms) which still continues, and could explain the current gap to baseline activity.
Workplaces are still 24% below the baseline, implying that working from home is still an option being provided by many offices. If companies continue to offer flexible work options, this would reduce office space and rents, while employees can stay at cheaper home locations, save on rents, and telecommute. Congestion statistics already show a return to normal, more so in Dubai than Abu Dhabi (Chart 2). However, to fully realise the benefits of telecommuting, it requires removing barriers by amending labour laws (e.g. part-time work/ freelancing options versus being tied to a specific company) and liberalising VoIP services (for businesses, especially for SMEs).

The uptick in “workplaces” has not been mirrored in “transit stations”. This is likely the result of a combination of two factors: (a) prevalence of using cars to travel – a report in Dec 2018 disclosed that UAE had an average ratio of one car to every three residents; average congestion is picking up faster in Dubai than in Abu Dhabi; (b) public transport is more frequently used by those without the option of personal transport, and who are more likely working in the services sector (e.g. in retail, hospitality sector and the like). Working in the hardest hit sectors during the Covid19 outbreak, these persons could have witnessed job losses or reduced working hours resulting in a slower uptick in “transit stations” category.
In spite of retail and recreation outlets operating at full capacity now, the return to baseline hasn’t been as smooth. One of the reasons could be the launch of online shopping by many retailers; another restriction is related to F&B operations: social distancing rules mean curtailed capacity, implying it will take longer for the sector to recover. Even during the Eid holidays in end-May, the uptick in this category was muted though lifting of restrictions mid-Jun on entry of kids and persons aged 60+ seems to have had a positive impact. With tourists back in Dubai starting Jul 7, the picture could change in the retailers’ favour.

Last, but not the least, the UAE central bank has released monthly statistics for May – the 2nd month after lockdown was initiated towards end-Mar. The Central Bank had launched a AED 256bn Targeted Economic Support Scheme for banks to provide temporary financial relief for individuals, SMEs and other private businesses affected by the pandemic, following which banks offered relief for customers’ loans. Alongside, support was specifically initiated for SMEs – be it to open new bank accounts faster to providing credit guarantees. However, this does not seem to be reflected in the gross credit disbursed to UAE firms (Chart 3). Loans to the government rose by 3.06% mom in May while loans to the retail sector declined in month on month terms (-0.6%).  Public sector entities (i.e. state-owned enterprises/ GREs) saw two consecutive 8%+ mom increase in loans before dropping by -0.7% mom in May.
So, what does all this mean from a policy perspective? The UAE’s drive to greater digitalization will gain traction in the new Covid19 normal: from varied e-commerce offerings to creating innovative payment systems to neo-banking options (ADGM announced associated regulations last year). A future UAE where work from home is commonplace, delinking jobs and visas are norm, and online payments are king (vs cash currently) is not far-fetched any more. The role of the private sector (including investments) is critical in achieving this goal alongside government support, and to this extend might need specific support for the SME sector which is oft sidelined given relatively lower turnover, lack of security/ collateral as well as potential for non-performing loans (and “absconding” owners).
[1] The baseline is the median value, for the corresponding day of the week, during the 5-week period Jan 3–Feb 6, 2020. 

Dr. Nasser Saidi’s comments on China’s Belt and Road Initiative & the Middle East appeared in the article titled “China’s ‘Belt and Road’ push brings risks, rewards to Mideast” in Al Monitor’s 6th July 2020 edition. The comments are posted below.

As UAE economist Nasser Saidi observed in his talk at the Harvard Kennedy School in 2018, the digital corridor project or a space station would complement the UAE’s national space program and help lift economic sectors to the next level. Collaboration in such innovative technological fields has also been described in detail in the “1+2+3” cooperation pattern laid out in the Arab Policy Paper of 2016.

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

 

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

by Dr. Nasser Saidi and Aathira Prasad

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

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

Dr. Nasser Saidi appeared in an interview with Dubai TV, broadcast on 23rd June 2020, discussing an agreement to invest in Abu Dhabi’s natural gas pipelines infrastructure.
The agreement worth USD 20.7bn is the largest single global energy infrastructure deal in 2020 – and the region’s biggest. This is significant at time of global recession & capital outflows from Emerging Markets.
The Adnoc deal will attract more than $10bn in FDI into the #UAE; part-privatisation signals openness to PPP & greater private sector involvement in energy development. Adnoc has also taken advantage of investor appetite by monetising its gas pipeline network. Is privatisation further upstream next?
The video can be viewed below from 42:14 onwards.

 

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 commented on the ongoing NMC Health saga, with recommendations for the regulator in the FT article titled “NMC scandal proves a boon for global advisers” published on 17th April 2020.
The full article can be accessed at: https://www.ft.com/content/edf10938-7500-11ea-90ce-5fb6c07a27f2
 
The comment is posted below:
To bolster local ability to handle such crises, Nasser Saidi, a governance consultant, says the financial regulator’s powers could be expanded into a supervisory body to screen regional companies seeking to list abroad. He also believes that a UAE version of the UK’s Companies House — providing information on corporate ownership and financials to the public — would benefit transparency.
 

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

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

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

North Africa

Iran & Afghanistan

Dr. Nasser Saidi commented on the ongoing NMC Health saga & Gulf firms IPO plans is part of the article titled “Oil price war, coronavirus see Gulf firms reconsider IPO plans” published by Bloomberg on 9th March 2020.
The full article can be accessed at: https://www.bloomberg.com/news/articles/2020-03-09/want-to-make-a-gulf-dealmaker-laugh-ask-when-is-the-next-ipo
 
The comment is posted below:
“When big prominent firms like NMC falter where standards were not respected, maintained and monitored, they generate reputational problems for not just the UAE but the whole of the Middle East region,” said Nasser Saidi, the former chief economist of Dubai’s financial centre.
 

Dr. Nasser Saidi’s comments on the UAE’s discovery of 80 trillion cubic feet of gas reserves in Jebel Ali is part of the article titled “Jebel Ali gas discovery could end Dubai’s LNG imports by 2025” published by The National on 7th February 2020.
The full article can be accessed at: https://www.thenational.ae/business/energy/jebel-ali-gas-discovery-could-end-dubai-s-lng-imports-by-2025-1.974897
 
The comments are posted below:
The gas finds increase “the need for integration of energy infrastructure in the UAE when you have got Sharjah, Dubai and Abu Dhabi making these discoveries”, said Nasser Saidi of economic advisory company, Nasser Saidi & Associates.
With possible room for exports from abundant reserves, there is also a greater impetus towards developing onshore liquefaction facilities if the country looks to become a gas exporter, he said.
“It opens the potential to enter into the LNG market which requires onshore LNG liquefaction,” he said.

Dr. Nasser Saidi presented the opening keynote at the Bonds, Loans & Sukuk Saudi Arabia event held in Riyadh on 19th Nov 2019.
The presentation titled “Whither Saudi Arabia & the GCC? Challenges & Opportunities” covered a perspective on growth and structural change in Saudi Arabia alongside views on MENA’s economic outlook and risks. With the global economy in a synchronized slowdown, it was also pertinent to understand the key drivers of asset prices and also discuss the impact of trade and economic wars.

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:

Dr. Nasser Saidi spoke with Dubai Eye’s Business Breakfast team on the ongoing protests in Lebanon. Some comments are listed below:
The catalysts for Lebanon’s unrest include deep economic-financial-fiscal issues, environmental problems, rampant corruption and lack of trust in the government. The government needs to address multiple issues including reduce public debt, address size of the government/ public sector & pension system, tackle corruption and increase competition among others. 
Listen to the full radio interview at https://omny.fm/shows/businessbreakfast/lebanon-economy-nasser-saidi-associates-23-10-2019

Dr. Nasser Saidi spoke with Dubai Eye’s Business Breakfast team ahead of the Lebanon Prime Minister Saad Hariri’s visit to the UAE. The UAE meetings resulted in the travel ban to Lebanon being lifted.
Listen to the full radio interview at https://omny.fm/shows/businessbreakfast/lebanon-economy-nasser-saidi-associates-07-10-2019

Dr. Nasser Saidi, in his role as the Chairman of the regional Clean Energy Business Council (CEBC), provided the introductory remarks at the event titled “ESCO Market in MENA: Challenges vs Opportunities” that took place on September 15th in Dubai.
Dr. Saidi’s presentation explored the current energy use in the Middle East region, before highlighting the benefits and challenges of energy efficiency policies and outlining the role of Energy Service Companies (ESCOs) and their regional experience. The presentation finishes touching on the way forward in energy efficiency reforms and the role of theCEBC in this regard (including the working group on energy efficiency).

The article titled “Time to open up UAE stock markets to free zones” appeared in The National’s print edition on 8th August, 2019 and is posted below. Click here to access the original article.
 

Time to open up UAE stock markets to free zones

The UAE’s three stock markets – the Abu Dhabi Exchange, the Dubai Financial Market and Nasdaq Dubai, have a total of 175 listed companies, with a combined market capitalisation of $230.6bn, or Dh846.8bn (as of 31 July), resulting in an equity to GDP ratio of 62.6 per cent. The markets are dominated by domestic retail investors but a number of measures can be taken to make them more dynamic and help further enable a transformation of the UAE into a more well-diversified, modern economy able to innovate and adapt to rapid technological change:
Allow free zone (FZ) companies to list on the exchanges to dynamise the markets
Several recent initiatives could be liberalising and market building:

• The One Free Zone Passport Initiative by the Dubai Free Zone Council allows firms to operate in multiple free zones on a single licence, lowering costs of establishment and increasing mobility. Details of how this will work in practice have yet to be announced.
• The Emirates Securities and Commodities Authority (SCA) announced that it was working with companies in free zones, and SMEs to facilitate access to finance through market listing (via a first-of-its-kind platform), through IPOs.
• Similarly, Abu Dhabi introduced a dual licensing scheme for onshore and free-zone firms last year, while the Dubai DED’s MoU with the Dubai Free Zone Council makes it possible for FZ companies to operate onshore and DMCC announced in July 2019 that it was partnering with DED to introduce a dual licensing scheme.

The game-changing reform would be to allow the listing of FZ companies on the exchanges. This structural reform would strongly boost the growth, development and diversification of the UAE’s capital markets. Allowing the listing of FZ companies would reduce the existing concentration risk, enabling companies from a wide variety of sectors from banking and finance in the DIFC and ADGM, to trading, manufacturing and industry, to health, pharmaceuticals, media, digital services, in the FZs, to provide substantial investment diversification benefits to investors, reducing the overall risk of investing in UAE markets, as well as promising returns that are not strongly correlated with the domestic economy with its high dependence on the energy sector.
Economic importance of the free zones
The UAE developed FZ clusters as a major policy instrument for economic liberalisation and diversification long before its regional peers. It has one of the highest number of FZs in the world: some 45, of which about 30 are in Dubai including Jebel Ali Free Zone (JAFZA), a global trade and logistics hub linked by a customs free corridor to Al Maktoum International Airport and processing trade worth $83bn in 2017. JAFZA is home to more than 7,000 businesses originating from over 100 countries, and attracting an estimated 24 per cent of the UAE’s FDI. The Dubai Multi Commodities Centre hosts more than 15,000 companies and contributes less than 10 per cent of Dubai’s gross domestic product. The DIFC is Dubai’s banking and financial FZ with 2003 active, registered companies, and contributed some 3.9 per cent to Dubai’s GDP last year. The bottom line is that the FZs are a major contributor, in excess of 45 per cent of Dubai’s economy and some 30 per cent of the UAE’s economy. More importantly, the FZs are the main hubs of innovation and adoption of modern technologies in the UAE and are the embodiment of economic diversification, complementing the oil and gas dependent domestic economy.
UAE capital markets can boom through the FZ companies
Despite their large economic contribution, the businesses in the FZs are not represented in the UAE’s capital markets. What if a fraction of FZs companies were allowed to list or tap the capital markets by issuing bonds, commercial paper, sukuk and other instruments? Inclusion of FZ companies would:

• Increase the size of the capital markets by some $85bn to a total capitalisation of $345bn (equivalent to 90 per cent of GDP), while the bond and sukuk markets could plausibly double in size.
• Lower risk by providing access to the more diversified economy including the FZs, attract foreign investors and FDI.
• Retain domestic saving that would otherwise be remitted abroad, thus widening the investor base and improving the balance of payments
• Widen access to equity and debt finance for FZ companies, support their development and growth, expand the size of the FZs and their contribution to the UAE economy and its diversification.
• Result in lower volatility/risk of market returns through the greater depth, breadth and liquidity of expanded markets.

The prospects are promising but opening the markets for FZ companies requires a number of building blocks: a robust legal and regulatory framework, including reforming listing rules and regulations to allow access for FZ companies; transparency and disclosure by the FZs providing data, statistics and information about FZ companies to allow comparative analysis on a regional and international basis. FZ companies would clearly need to disclose their audited financials, upgrade their corporate governance and comply with applicable international codes and standards, including AML/CFT.
The bottom line is that the UAE should open its capital markets to allow access to FZ companies that will boost capital formation, dynamise the markets, encourage domestic and foreign investment and help achieve the overarching objective of job creation and economic diversification.

In the 29th May, 2019 edition of Bloomberg Daybreak: Middle East, Dr. Nasser Saidi talks to Yousef Gamal El-Din and Manus Cranny on the Tadawul’s inclusion in the MSCI Emerging Markets index and the UAE central bank’s growth forecasts.

Watch the interview below (Dr. Nasser Saidi speaks from 35:00 to 41:00)

https://www.bloomberg.com/news/videos/2019-05-29/bloomberg-daybreak-middle-east-full-show-05-29-2019-video

Dr. Nasser Saidi’s interview with Bonds & Loans, published in Apr 2019, titled “China-US Tensions, War with Iran Dominate Medium-Term GCC Risk Landscape” is posted below. The original can be accessed here.
 
Despite a positive macro outlook, a blend of rapidly rising regional tensions and an evolving trade dispute between China and the US will weigh more heavily than previously thought on the GCC’s economic prospects in the medium term, argues Dr. Nasser Saidi, Founder and President of Nasser Saidi & Associates and Lebanon’s former Minister of Economy.
Bonds & Loans speaks with Dr. Saidi about the regional economic outlook, progress on fiscal reforms in the region, structural shifts in the Middle East’s political dynamic, and how to avoid the pitfalls of state-led development as currently practiced.
Bonds & Loans: What do you see as the top risks facing GCC markets in 2019?
Nasser Saidi: The first major risk is the oil price. The second relates to spill-overs of international political and economic tensions. The third is climate change.
Oil prices and revenues continue to dominate the macroeconomic risk paradigm in the region, dominating trade, current accounts, and gross output. Despite reform efforts over the past few years, we have yet to see substantial progress on making the GCC less vulnerable to oil price volatility, or on diversification more broadly. Oil prices over the next two years, which we anticipate will hover between the USD55 and USD60 per barrel bracket, subject to added geopolitical risk, remain substantially below breakeven points, which will continue to weigh on the region’s current account deficits. This means that many of the GCC countries will have to continue with fiscal adjustments to address their sustainability, while drawing from new and existing funding sources to make up the difference.
Spill-overs from global economic tensions – and here specifically, the economic standoff between the US and China – is also a significant risk. This isn’t just about trade, it seems, but rather increasing confrontation at multiple levels: trade; China’s role on the global stage; technology; intellectual property; market access. More fundamentally, it’s about economic regime change in China, the world’s second largest economy. As China forges ahead with its larger strategic objectives, it is becoming a globalist on a scale yet to be seen.
The main reason why economic warfare between the US and China is important for the GCC is that it could weigh on GCC integration with Asian supply chains. Asia currently accounts for a substantial portion of commodities demand, and China is now the largest importer of GCC oil and gas, so any reduction of the growth rate in China – coupled with the fact that the US is looking to increase production and shipments of shale oil – will have a negative effect on global oil demand.
Finally, climate change is a huge risk. Extreme weather events are increasing, especially in this part of the world, and insurers – as well as investors and the banks – have significantly under-priced climate risk. We could end up having a Minsky moment as a result: once the industry reckons with the scale of its exposure to the fossil fuels industry, we could see an acute and substantial drop in the value of assets exposed to climate risk. This is a social as well as financial risk, but it is largely only viewed as a social risk at present. That is starting to change, particularly in Europe, but it needs to shift much more quickly.
Other global macro risk factors relate to the massive build-up of household and corporate debt on the horizon blended with a tightening liquidity environment, and the uncertain interest rate trajectory in the US. In emerging markets, this is compounded by the fact that a sizeable portion of that debt is denominated in foreign hard currencies, and rising maturities over the next three years.
Bonds & Loans: A significant portion of your presentation at last year’s Bonds, Loans & Sukuk Middle East conference focused on political shifts emerging across the wider Middle East. How have some of those shifts played out? Do you see geopolitical risk rising or falling?
Nasser Saidi: You still have wars ongoing in Syria and Yemen. In Syria, to an extent, we are seeing a lower level of violence, but self-congratulatory statements about defeating ISIS are blatantly misplaced; rebel and national armed forces may have temporarily vanquished the group militarily, but all of the conditions that led to the formation and growth of ISIS – high levels of unemployment, poverty, disengagement with the state, lack of viable economic prospects – continue to persist. These conditions will not change unless global powers start seriously re-considering how they approach post-violence reconstruction in places like Iraq, Syria, Yemen, and Libya among other places.
A failure to address these conditions could likely lead to another boiling over of discontent, particularly among the region’s youth. Best estimates for growth in most countries in the Middle East don’t exceed 2.2%, which barely covers population growth in many of them – so what this means is a decline in real income per capita.
Added to this are rising geopolitical tensions linked to the spat between China and the US, particularly around the Belt and Road Initiative, which the GCC countries – particularly the UAE and Oman – are investing heavily into. This is to further integrate the Middle East into China’s global logistics and trade infrastructure. But it’s unclear whether that will come at the cost of relations with the US. That the GCC no longer talks as one coherent bloc of countries compounds this risk, and diminishes the region’s capacity to negotiate at the global level.
Finally, I am increasingly concerned that we may see armed confrontation with Iran. If you listen to the rhetoric of the top brass in the US, and their diplomatic activities within the Middle East, they seem to be setting the stage for war with Iran – not dissimilar to the build-up seen before the first gulf war with Iraq. Any armed confrontation would of course have dire implications for global oil prices, and the region more specifically.
Bonds & Loans: As the largest economy in the region, many look to Saudi Arabia for a sense of the trajectory many of the region’s economies are on, particularly in terms of reform. How would you assess GCC states’ progress on diversifying their economies away from oil?
Nasser Saidi: This is one of the biggest challenges facing the region. It has become quite obvious since the collapse in oil prices that this is not cyclical, but structural, which means the region’s governments need to target diversification in three major ways: trade diversification, in the sense that these countries need to ween themselves off their overreliance on oil exports; production diversification, so moving away from oil to non-oil activities and services; and government revenue diversification.
Saudi Arabia is the biggest economy in the Arab world, followed by the UAE. What happens in Saudi Arabia is important because of its size, and the economic benefits that its neighbours enjoy through trade. But it’s also to some extent a litmus test on the success of reforms in the region. What has been proposed in Saudi Arabia, in terms of modernisation efforts included in the National Transformation Plan and Vision 2030, is really the mother of all reform efforts in the region, and all the countries in the GCC need the country to succeed in this endeavour. Failure will invite a backlash from more conservative segments of leadership, and potentially, large pools of the population, but it will also weigh on the development of neighbouring economies as they depend heavily on the opening of the Saudi economy to boost their prospects.
Bonds & Loans: There continues to be significant optimism around Egypt’s economic prospects, but some of its fundamentals – like youth unemployment, and productivity – are worrying. Do you think the country can achieve its ambitions without a fairly radical shift away from how the economy is managed?
Nasser Saidi: It’s an important point, but we should also pay heed to what has been achieved so far. The IMF, and its regional peers like the UAE, Saudi Arabia, and Kuwait, have lent substantial support to the country – in large part because the country is too big to fail. We’ve seen a rise in interest rates and greater monetary policy freedom, with inflation trending down towards 8.5% from peaks in excess of close to 30% in 2017. We’ve seen a partial reform of fuel subsidies, price adjustments in the power sector, and a decline in recorded unemployment over the past couple of years, with some facilitation by Egypt’s neighbours of youth participation in their labour markets.
The country needs to reconsider its state-led development strategy, which means PPPs and privatisation need to move further up the policy agenda. But it comes with a warning. Under Mubarak, the beneficiaries of privatisation largely included the coteries around the leader – including his family. There was no trickle-down, in other words, and that issue still remains; addressing this would also help address unemployment. What this also means is that the country needs to achieve a transformation away from strong dependence on agriculture and the Nile, which remains its lifeline. This can be achieved through the dispersion and increased use of technologies and modern techniques in the agricultural sector to raise productivity and reduce dependence on dwindling water supplies, as we are seeing increasing desertification. More broadly, the industrialisation strategy undertaken by Egypt – which has been largely military or state-led – cannot be the future; this applies as well to the GCC governments, which also need to foster a more vibrant and prominent private sector.
Economic reforms – like the removal of subsidies, increasing cost recovery through public services – require a new social contract. We have the beginnings of one, but it’s not there yet.
More crucial is the issue of overall governance. What you effectively have is a government within a government. President Sisi has consolidated power and is looking for a renewal of his mandate, not unlike Ergodan in Turkey, and there is a high level of concentration of power; parliament in Egypt has largely become a Potemkin parliament. The question of inclusiveness – politically, economically, socially – looms large.
Bonds & Loans: The UAE economy has undergone a significant transformation over the past decade. Can the country continue to thrive if it does not adjust to shifting demographics on the ground via the changing nature of labour migration?
Nasser Saidi: The situation in the UAE is different to that of Saudi Arabia and its neighbours in the sense that it is much more diversified. Dubai contributes about 40% of the UAE’s GDP, if you include the Emirate’s free zones – where a range of multinational private corporates operates. It has been able to secure significant foreign investment, much more FDI than others in the region. This is due to the quality of core infrastructure and logistics hubs, rule of law, and free zones.
For a long period, the country attracted a great deal of low-skilled, low-cost labour to build that infrastructure. Much of that infrastructure has now been achieved, which means moving onto the next phase: modernisation and digitalisation of the economy. But it will take a long time before modern sectors emerge as strong contributors to GDP, as well as human capital; that labour needs a viable pathway to remaining in the UAE for the long-term.
There have been a number of reforms addressing this. There is a 10-year residency visa for export specialists; 100% foreign ownership is now allowed in non-strategic sectors of the economy; there is the prospect of allowing companies operating in free zones to secure dual licenses that allow them to operate both onshore and in free zones. This is the beginning of a much longer-term liberalisation effort that will foster long-term residents.
But over the long-term, the country may do well to move towards the Swiss model. If you look back at Switzerland’s history, and the development of its infrastructure, it was largely developed at a time when the country was overwhelmingly agrarian by nature. It has turned itself into a strong services hub for Europe and the rest of the World by strategically investing in key sectors, but it also reformed the way in which expat workers could obtain long-term residency and, eventually, citizenship, turning a transient working population into a strong contributor to GDP composed of long-term residents.
Creating permanent economic citizens has many benefits. It is helpful in terms of balance of payments; in building a social security system and long-term investment pools, which goes hand in hand with deepening the capital markets and the insurance and pension segments. It also means the development of a true middle class, which means moving away from a model based on tourism to one that fosters more organic, domestic support of key sectors; but it also means diverging from the country’s existing overreliance on real estate and hospitality, which is unsustainable in its current form.

Dr. Nasser Saidi presented “The Role of Boards in Promoting Good Corporate Governance” to the chairmen and board members of UAE’s listed companies at workshops organised by the Emirates Securities & Commodities Authorities in Dubai (on 5th Feb, 2019) and in Abu Dhabi (on 7th Feb, 2019).
The presentation discussed the importance of corporate governance, and how to build an effective board governance structure, while also highlighting some results from international frameworks for corporate governance. “Good corporate governance is not about compliance, it is an investment to improve performance, shareholder value & economic development” was one of the key takeaways highlighted during the talk.

Dr. Saidi provided a keynote address on “The Fintech Challenge: Transforming Banking, Finance, Payments & Central Banking” to the UAE Central Bank on Nov 20, 2018.
The presentation, given as part of the UAE Central Bank’s Strategy Session, covered issues like why Fintech is growing globally and in the MENA region, industry trends, as well as how central banks are adapting and embracing Fintech. Developing the right ecosystem for FinTech and how central banking could change over the next generation were also key discussion points.

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

Dr. Nasser Saidi delivered a presentation titled “The Coming Chinese Century: Building a Strategic Alliance between the UAE Falcon & the Chinese Dragon” to the Ajman Executive Council on 18th September 2018. The presentation focused on the US-China trade wars, and concluded with recommendations on how the UAE/ Ajman and China can strengthen relations going forward.
 
More details on the knowledge event, which was attended by H.H. Sheikh Ammar bin Humaid Al Nuaimi, Crown Prince of Ajman and President of the Ajman Executive Council, can be accessed here.
The presentation can be downloaded here.

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

The article titled “Making it clean: changing the global energy mix” was published in the latest Aspenia Issue, July 2018, and can be downloaded in English and Italian.
The speed of transition to a new global energy mix has accelerated in the past decade. A changing global economic geography with a shift towards fast growing energy-hungry emerging economies (China specifically) as the main growth engines meant a corresponding increase in energy demand that propelled energy prices upwards. Oil prices hit an all-time high of USD 145 in July 2008 before the Global Financial Crisis, and then later in August 2013 to around USD 115. High oil prices provided an incentive for nations (especially emerging ones that ran high oil trade deficits), households and businesses to find substitutes for fossil fuels and lower energy intensity. The EU provided subsidies for renewable energy investments. Concurrently, the OECD countries implemented energy efficiency policies aimed at energy saving, leading to a trend decline in energy used to GDP ratios by some 1%-2% per annum, and breaking the historical link between economic growth and energy demand.
Two additional factors supported the acceleration in energy transition: technological innovation and growing awareness of climate change risks. Innovation in hydraulic fracturing or fracking techniques to extract “tight oil, resulted in the shale revolution and a rapid growth of on-shore oil production in the US. Fracking technology has diffused internationally and its cost has declined: the breakeven oil price for new shale oil wells ranges between USD 46-55, while an oil price between $24 and $38 would cover operating expenses in the US.[1] And the shale oil revolution is spreading internationally: Argentina’s Vaca Muerta (Spanish for Dead Cow), is a shale gas and oil formation the size of Belgium, with technically recoverable oil reserves and shale gas of 27 billion barrels and 802 billion cubic feet respectively, the second largest in the world after China’s 1.12 trillion cubic feet. Technology is changing the economic geography of energy and its global market!
Similarly, technological innovation and investment have dramatically cut the cost of renewable energy. Since 2009, the global benchmark levelised costs of electricity (LCOE) for solar PV has tumbled by 77%, and that for onshore wind by 38%, while lithium-ion battery price index shows a fall from $1,000 per kWh in 2010 to $209 per kWh in 2017[2]. Declining battery costs means falling energy storage costs, which addresses the problem of intermittency of renewable energy. The decline in battery storage costs also means a potential revolution of international trade in renewables-based chemicals and fuels. Government policies to curb climate change alongside technological advances and rapidly falling costs for solar and wind power^[3] has meant that renewables are becoming increasingly more competitive, resulting in unsubsidized clean energy world records last year. There is no longer a need to subsidise renewable energy system solutions: global renewable energy prices will be competitive with fossil fuels by 2019 or 2020.

Fig 1: Global levelised cost of electricity and auction price trends for solar PV, CSP, onshore and offshore wind from project and auction data, 2010-2022 (Source: Renewable Power Generation Costs in 2017, IRENA, Jan 2018)

There has also been a massive shift in public opinion and awareness of the implications of global warming. Addressing the risks of climate change has become a key policy priority embodied in the COP21 commitments. All nations (except the US Trump administration) have committed to reduce emissions by at least 20% compared to business-as-usual by 2030. The subsequent COP 22, 23 commitments have all seen unwavering support from countries across the globe (ex-Trump’s US).
A New Oil Normal
The implication of the above trends is that there will be a permanent and persistent secular downward shift in the demand for fossil fuels, putting downward pressure on oil prices. This is the New Oil Normal. For coal producers & coal based utilities and fossil fuel producers and exporters like the GCC countries, the risk is that their vast coal and hydrocarbon reserves will become ‘stranded assets’: they will no longer be able to earn an economic return.
The bottom line is that the increasing prosperity of emerging nations, greater energy efficiency, technological innovation and policy commitments to reduce carbon emissions are resulting in a radical changes of the global energy mix and market. Looking ahead, given their size and demographics China, India and other emerging Asian countries will account for around two-thirds of the growth in energy consumption over the coming decade, to be followed by Africa. Increasingly, these emerging economies are switching to renewable energy sources, given their economic and environmental competitiveness.
A New Energy World is emerging
New investment in clean energy reached USD 333.5bn in 2017, up 3% from the year before but short of 2015’s record-high USD 360.3bn, but higher in real terms. A record 157 gigawatts of renewable power were commissioned in 2017, up from 143GW in 2016, and far out-stripping the 70GW of net fossil fuel generating capacity added last year. Solar alone accounted for 98GW, or 38% of the net new power capacity coming on stream during 2017[4]. A regional comparison shows that the balance of investment has shifted from Europe as largest-investing region to Asia. China set a new record for clean energy investment in 2017, and the UAE was among those investing more than USD 1bn in clean energy along with 10 other emerging nations (from a total 20 countries). And Saudi Arabia announced a massive 200 gigawatts solar power development in the Saudi desert with Softbank that would be world’s biggest solar project and would be about 100 times larger than the next biggest proposed development!

Fig. 2, Global cumulative installed capacity, 2016 and projected, 2040 (Source: Bloomberg New Energy Finance)

Renewable energy sources are set to represent almost three quarters of the USD 10.2trn the world will invest in new power generating technology until 2040, with solar and wind dominating the future of electricity (Fig 2). The world is also increasing investments in clean technologies. A transport and mobility revolution (electric vehicles) will lead to cleaner, healthier cities for increasingly urbanised populations. Not just ‘smart cities’ but also ‘clean cities’.
Twin Revolutions: Renewables and AI & Blockchain
We are witnessing the birth of twin revolutions which will conflate: AI and Blockchain technologies are fusing with new energy. AI is supporting the 4^th industrial revolution: think energy and water digitization, smart grids, smart meters, “deep learning”[5], demand management (i.e. manage demand response of different devices that run in parallel), and digital asset management (i.e. where machine learning algorithms collate, compare, analyze, and highlight risks and opportunities across a utilities infrastructure thereby providing an opportunity for power companies) among others. Blockchain technology has the potential to offer a reliable, low-cost way for financial and/or operational transactions to be recorded and validated across a distributed network with no central point of authority, leading to a greater decentralization of energy systems.[6] Applications lie across a vast spectrum: digital tokens to reward users for saving energy, adding smart contracts onto a blockchain, asset and inventory tracking, traceability of water, gas & electricity flows & maintenance, data sharing, fraud detection, electric vehicle charging, and so on. Peer to peer energy trading[7] , the ability of neighbouring homes, ‘prosumers’, to sell solar energy to one another as well as to a shared grid is already being tested.
The challenge to the widespread adoption of blockchain technologies will be to develop an enabling legal and regulatory framework. Country policy frameworks need to be developed to focus on cleantech investments, innovation and commercial conversion, in addition to ’soft’ and ‘hard’ investments to facilitate and integrate the twin revolutions of clean energy and AI and blockchain technologies.
Clean Energy & Economic Development
Energy, water and basic infrastructure are building blocks of economic growth and development. Some 1.1 billion people, of which some 600 million in Sub Saharan Africa, do not have access to electricity. In the absence of electricity they cannot have access to the internet and the digital economy, digital services, let alone participate in the 4^th Industrial revolution. The renewable energy revolution offers a new hope to spur and enable economic development of Africa (with its largely untapped hydro and solar potential), India and Asia, using off-grid power systems and decentralisation that do not require expensive, centrally administered national grids. Renewable energy can be local, at village level.
A Renewable Energy Promise?
The IEA has recently warned that the world is headed for irreversible climate change in five years[8]. It is increasingly unlikely that we will be able to keep global warming below 2°C despite COP commitments. Our best hope is to accelerate the global adoption of intelligent renewable energy systems and clean tech for our cities and transport systems, to rapidly change the global energy mix and mitigate the risks of catastrophic climate change.
 
[1] See Federal Reserve Bank of Dallas https://www.dallasfed.org/-/media/Documents/research/econdata/energycharts.pdf?la=en
[2] See Bloomberg New Energy Finance (BNEF) https://about.bnef.com/blog/tumbling-costs-wind-solar-batteries-squeezing-fossil-fuels/
[3] IRENA estimates that renewable energy will cost less than fossil-fuel generated electricity by as early as 2020.
[4] http://fs-unep-centre.org/sites/default/files/publications/gtr2018v2.pdf
[5] Google cut its electricity bill with AI: the DeepMind-powered AI coordinated datacenter tasks like cooling, and led to a 15% improvement in power-usage efficiency in 2016. Source: https://www.greentechmedia.com/articles/read/google-employs-artificial-intelligence-to-cut-data-center-energy-use#gs.SuwB65o
[6] See Exploring the Impact of Blockchain in the Energy Industry http://nassersaidi.com/2018/02/15/exploring-the-impact-of-blockchain-in-the-energy-industry-30-jan-2018/
[7] The Brooklyn Microgrid paroject: http://brooklynmicrogrid.com
[8] https://www.theguardian.com/environment/2011/nov/09/fossil-fuel-infrastructure-climate-change

The article titled “Reform of UAE’s ownership and residency laws will only improve growth prospects” appeared in The National on 25th May, 2018 and is posted below. Click here to access the original article.

Reform of UAE’s ownership and residency laws will only improve growth prospects

The UAE Cabinet announced two major policy initiatives this past Sunday: a 10-year residency visa for skilled professionals along with a 5-year visa for students and ownership reforms allowing foreigners to own 100 per cent of businesses in most sectors.

These long awaited and welcome reforms are promising policy initiatives that can change medium-term growth prospects for the country. We need to await the new laws and implementation decrees for a full assessment of the economic and wider social and cultural implications.

However, the announcements herald broader and necessary structural reforms: removing barriers and opening the economy to foreign direct investment, liberalizing rights of establishment and ownership, and removing distortions in the labour market and immigration system through retaining and attracting higher skilled human capital.

Sound implementation of the new visa rules would attract middle to higher income professionals and gradually change the mix of skills of the labour force towards more educated, higher skilled workers and professionals. The reform enables the UAE to attract as well as retain qualified human capital which would facilitate the transfer of technology and know-how and diversification of the economy into higher value added, more complex activities. In addition, the policy change would increase domestic investment by current foreign residents. Skilled professionals are mainly middle and high income and would invest more and buy assets in the UAE if they are assured of long term residency.

Uncertainty on residency and visa rules increases risk and discourages investment in real estate and long lived assets. There are good economic and financial reasons to extend even the 10-year residency. Singapore is a good example: permanent residency is granted when one invests at least 2.5 million Singapore dollars in a new business or the same amount in the Global Investor Programme which invests in local companies.

Rescinding the Kafala labour sponsorship system, its distortions and its abuses, increasing labour mobility within and between sectors will also benefit the economy. Binding employees to employers for a fixed period of time restricts labour mobility, reduces economic efficiency and productivity growth and the resilience of the UAE economy to economic shocks as well as its capacity to innovate by shifting labour and capital to new activities.

The move to allow 100 per cent foreign ownership could see an immediate impact across all non-oil sectors – retail, manufacturing, with health and education potentially being the “quick-win” sectors, along with the hospitality and real estate (given that longer-term residency would be an incentive for expats to own homes and businesses).

The long awaited Foreign Investment Law should clarify the conditions and scope of the liberalisation of foreign ownership: would it apply across all sectors with exceptions (“strategic sectors”) and would it ease the limit on foreign ownership of listed companies and securities? Liberalisation and reduction of barriers to foreign investment should also be accompanied by steps to reduce the overall costs of doing business and consolidate fees, that have been rising in the past two years.

Removing barriers, reducing and consolidating the plethora of fees would help the country improve its ranking and move up to within the top-20 nations in the World Bank’s Doing Business report. The UAE ranks the highest in the Arab world and and 21 globally.

The aim of the announced policy reforms is to promote economic diversification by boosting the knowledge-based sector. That includes new technologies such as AI, blockchain technologies, fintech, life sciences, clean energy and technology such as solar and wind, space and aeronautics which would augment and complement the UAE’s advanced infrastructure and logistics, and other technologies underlying the 4th Industrial Revolution.

To develop these complex activities requires human capital with STEM (science, technology, engineering and mathematics) skills and know-how. The new visa and residency rules are important in that they can attract STEM human capital.

New visa and residency rules would also provide incentives to reduce the outflow of remittances and capital: long-term, protected residency and visas, will encourage residents to invest in the UAE instead of sending their savings abroad.

Outbound remittances from the UAE were about AED 164.3 billion ($45bn) last year alone. Reducing capital outflows and remittances would improve the structure of the country’s balance of payments. In this regard, the time is right to accelerate the development of the financial markets – for example by issuing long-term government bonds and encouraging the issue of high grade corporate bonds- facilitate access to finance, develop the mortgage market, develop a pensions system and otherwise increase the availability of medium and long-term financial instruments. Introducing pension plans for expatriates and allowing retirees to settle in the UAE would also provide incentives to expatriates to remain, invest and contribute further to the country’s development.

Details are not yet available as to how and when the reforms will be rolled out and their applicability to existing businesses and visas. The important matter will be clarity of the rules and regulations and the speed of implementation. Will the visa be related to current jobs (as it is now) or would it be on residency and not linked to employment, meaning that employees made redundant are free to stay in the country and search for another job.

It will be important to translate the cabinet decisions into laws that protect investors’ rights whether it is FDI-related or personal human capital in order to obtain the benefits of liberalisation.

(Reproduced from this article published in Emirates 24|7)

UAE banks need to create a comprehensive property database and an early warning system to manage their mortgage credit amidst prospects for a fresh boom in this sector, a well-known Arab analyst has proposed.
Nassir Al Saeedi, former chief economist at the Dubai International Financial Centre, said recent announcements by the UAE government to embark on $multi-billion projects mean that the country, mainly Dubai and Abu Dhabi, are on the verge of a fresh boom in the real estate sector, one of the key components of the UAE GDP.
Saeedi, Lebanon’s ex-economy minister, said the boom would also be supported by an expected influx of foreign capital into the UAE, which is “now considered as a safe haven for investment” in a region battered by political and economic upheaval.
In an article published in the London-based Saudi Arabic language daily Al-Hayat this week, Saeedi said news that the UAE central bank is planning to enforce new mortgage credit curbs “reflect its concern about the new real estate boom.”
“We believe that despite potential risks, exploiting the new real estate boom is still possible …but unlike the unstable period of 2005-2009, banks should adopt a bolder and more open approach towards their mortgage lending policy by giving more attention to expanding their asset value and income sources,” he said.
“To achieve this, banks must develop a comprehensive property database covering key information about the sort of investment, the financed property units, and their condition, location and nature…this will enable banks to better evaluate their assets.”
He said the UAE’s 51 banks, which control the largest asset base in the Middle East, also need to develop what he described as an “early-warning” system so loan managers at banks can predict market troubles before they take place.
“In other words, banks need to install a signboard that will allow them to build a more diverse and balanced credit portfolio for mortgage initiatives…they then can price them more effectively in a way that takes all risks into account,” he said.
“We are convinced that such mechanisms would act as a general balance for mortgage risks and stabilize the real estate sector…this will help attract more funds into this sector, prevent any mortgage crisis in the future and cut lending costs for banks…but we have to admit that the UAE real estate sector is still beset with challenges…however, these challenges can be used to set up an effective organizational structure that will define future strategies and ensure stability and safety in this sector in the long term.”

Listen to my interview with Dubai Eye on the UAE central bank’s cap on mortgages: http://www.dubaieye1038.com/page/Dr._Nasser_Saidi_15.01.2012/85621?feed=5
 

Making the case for active approach to real estate lending and management, a version of this op-ed piece was published in The National on Jan 14, 2013 (http://www.thenational.ae/thenationalconversation/industry-insights/property/proactive-approach-can-allay-fears-of-boom-and-bust).
 

http://nassersaidi.com/wp-content/uploads/2012/03/From-Frontier-to-Emerging-Does-Market-Reclassification-Matter.pdf

DIFC Economic Note 19, titled From Frontier to Emerging – Does Market Reclassification Matter?, discusses and compares the market classification criteria and methodology used by the various index providers, including MSCI, noting the similarities and differences. MSCI have indicated that the UAE and Qatar are being considered for re-classification from Frontier to Emerging market status, subject to a number of reforms. Evidence on the effects of reclassifications in both developed and developing economies is studied in this paper and we find that while MSCI have undertaken some 14 reclassifications over the years, six of them have been downgrades while there have been no reclassification from Frontier to Emerging, yet.

Using past examples of classification changes, this paper examines the short- and long-term impacts of the reclassification – including an empirical analysis of the effects on markets returns of the classification of Egypt and Morocco as emerging markets. Our results indicate that the initial announcement of a potential reclassification leads to an “overshooting” with investors speculatively bidding up securities prices and returns prior to the actual reclassification event, leading to almost no impact post-reclassification. Additionally, too much emphasis is placed on a potential market reclassification, with many forgetting that reclassifications are best viewed as signaling a confirmation of policy reforms and changes in market conditions, which trigger the reclassification. Thus, there is an identification effect whereby improved market conditions, which are a result of policy actions and reforms (leading to a reclassification), could empirically be attributable to the reclassification itself.