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| 05 August, 2018

Weekly Q&A: "I don't think many people realise that Bahrain's economy has actually outperformed most of its peers across the GCC in recent years"

Jean-Paul Pigat is the Founder of Lighthouse Research, which provides independent macro and market research services on the economies of the Middle East and North Africa. He previously worked as a Senior Economist at Emirates NBD, the largest bank in Dubai, in the Global Markets & Treasury and Wholesale Banking departments. He holds an MSc. from the London School of Economics and a BA from the University of British Columbia.

Website: www.lighthouseresearch.me

Jean-Paul Pigat- Head of Research at Lighthouse Research

Weekly Q&A: "I don't think many people realise that Bahrain's economy has actually outperformed most of its peers across the GCC in recent years"

Welcome to Zawya Markets. Each Sunday we will be featuring an interview with a different analyst or markets expert from around the region.

If you would like to participate please email gerard.aoun@thomsonreuters.com.

1) What is your view for oil prices?
I would characterise my view on oil prices as “stable with a downward bias”, with a range of $65-70 over the next year. Many of the supply disruptions (e.g. Venezuela and Iran) now seem to have been priced into the market. A stronger dollar, and a slight deceleration in growth in key developed markets are likely to put downside pressure on prices, while I can only see OPEC increasing output from this point forward as well.

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2) How do you think the Saudi non-oil economy will perform for the remainder of this year and next? Is there much evidence of Vision 2030 policies filtering through in terms of economic growth yet?
The worst of the downturn is past, and we are now in the very early stages of recovery. Overall growth is likely to accelerate, but we are not heading back to pre-2014 rates of expansion anytime soon. To put specific numbers on it, non-oil GDP growth is likely to come in between 1.5-2.5 percent this year. There is certainly evidence that the policies of Vision 2030 are filtering through the economy, but I wouldn’t say it is resulting in stronger growth. Saudization policies are the most dominant policy being implemented, and there is an abundance of evidence that this is actually undermining sectors such as retail trade through the loss of expat jobs.

3) What’s your view on the prospects for Bahrain’s economy over the next 12 months?
I don’t think many people realise that Bahrain’s economy has actually outperformed most of its peers across the GCC in recent years. The reason for this outperformance – and the reason I think we are now going to start seeing a deceleration in growth over the coming years – is the fiscal stance. Simply put, Bahrain hasn’t been as aggressive in restraining spending as other governments have been. We know that several GCC allies are now set to extend emergency financial assistance, but there is now clarity on what reforms, if any, will be sought. Personally I expect this aid to be tied to greater progress in cutting public spending, which will almost guarantee a slower pace of non-oil economic growth.

4) Oman is reportedly looking at further bond issuance having recently reported cuts to its budget deficit. How well do you think this would be received by investors, and what do you think the short-term prospects are for its economy?
The macro outlook for Oman is not great. The non-oil economy is being supported by higher government spending, but similar to Saudi Arabia, the loss of expat employment is having a fairly significant impact on a range of sectors such as residential real estate and consumer durables. The outlook isn’t all bad however, as there are some sectors such as the transport industry which continue to benefit from the ongoing blockade on Qatar – i.e. Oman has benefitted from the re-routing of regional trade and aviation patterns.

I can’t imagine that Oman will have any easier time tapping bond markets than Bahrain had earlier this year. Yes – the budget deficit has narrowed sharply, but this is almost entirely the result of higher oil revenues. It’s also come as government spending on wages has increased. So repayment capacity is still very much dependent on global oil prices, and Oman does not have the benefit of being able to seek financial assistance from its neighbours in the GCC like Bahrain did.

5) What is your view on Egypt? How successful have they been in their multi-year reform program?
The Egyptian economy is actually outperforming across the Middle East at the moment. Headline growth is running above 5 percent, and I’m expecting this to remain the case over the next 18 months. Progress on certain reform areas has been incredible, particularly with regards to lifting energy subsidies. I think the key issue to strengthening long-term growth is in implementing what you might call structural supply-side reforms, which basically means making the allocation of land, labour and capital more efficient, while also reducing the government’s massive role in the economy.

6) What are the biggest risk factors both for MENA markets and global markets in the coming weeks?
The U.S. Federal Reserve is always the biggest risk factor for global markets. This is still true today, and it will only take one or two months where wage growth surprises on the upside that we might all start to reassess our views on the pace of tightening, which will clearly have spillovers across developed and emerging markets alike.

7) What do you think of the Abraaj’s case, from a strategic point of view does this affect investor sentiment?
Well it certainly doesn’t help investor sentiment, that’s for sure. The ‘animal spirits’ in local markets were already quite weak before this case broke out into the public domain. There have always been concerns over corporate governance in this region, but I guess this case seems to have justified those concerns. The silver lining is that this might spur greater regulatory reform, which will be beneficial for everyone over the long term.

8) What are your views for the Aramco IPO?
The potential IPO of Aramco is the biggest red herring in the entire regional reform agenda, particularly with regards to its potential spillovers into Saudi Arabia’s non-oil economy. Whether or not it happens this year or next, or is shelved entirely, matters very little, in my view. Saudi Arabia’s economic development has never been hindered by a lack of capital (they are still sitting on $500 billion in reserves). Reforming the economy isn’t about partial privatisations of state companies or mega projects such as NEOM. It is about making the allocation of land, labour and capital more efficient. It is about creating an even playing field for companies in the private sector.

9) What is your view for Kuwait’s economy, and the possible emerging market upgrade by MSCI?
Oil production and government spending is what matters for the outlook for Kuwait’s economy. On both fronts, we should expect to see higher growth in H2 2018 and likely 2019. The fiscal stance across the entire GCC is loosening thanks in part to higher oil revenues and a degree of ‘reform fatigue’. Sure – if history is any guide then an upgrade to EM status by MSCI will help facilitate an uptrend, at least until the actual date of inclusion.

10) What is your view for the U.S. dollar?
I think the dollar has a lot of room to move higher, particularly with growth in the Eurozone starting to disappoint. Interest rates in the U.S. still seem extraordinarily low for how hot the economy is running and with the employment market looking incredibly tight in some sectors.

(Editing by Gerard Aoun and Shane McGinley)
(gerard.aoun@thomsonreuters.com)

Any opinions expressed here are the author’s own.

If you would like to participate in the Zawya Markets Weekly Q&A please email gerard.aoun@thomsonreuters.com.


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