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Why are the breakeven oil prices coming down for GCC countries?

Date : 15/01/2018
Author:  Marmore MENA Intelligence

Fiscal breakeven oil prices (in USD/bbl)

Source: IMF

Fiscal break-even oil price is the minimum oil price needed to meet the spending commitments of oil-exporting country while balancing its budgets [BEP = {(Government Expenditure minus Non-oil revenue)/Oil quantity produced} + per barrel cost of production] (Fiscal Breakeven Oil Price). Prior to the collapse of oil prices, fiscal break-even oil prices were rising rapidly in GCC countries, reflecting the substantial increase in government spending by an annual average of 11 per cent in real terms in 2003-2014 (Gulf News). Moreover, the increasing government expenditures were largely due to rising salaries, wages and subsidies; expenses that were hard to control given the welfare economic model that is prevalent which subsequently made it difficult for the government to lower the breakeven oil prices. This led many analysts to think that lowering of BEP would be hard. However, the new realities due to low oil price environment had led to dramatic changes including curbing of subsidies and introduction of new non-oil revenue sources.

There are three main factors which drive the movement in fiscal GCC break-even oil prices. First is the value of hydrocarbon exports, second changes in non-hydrocarbon government revenues (accounted for 30 per cent of total government revenues in the past five years) and finally change in government spending. An increase in the value of oil exports, improving non-hydrocarbon revenues and a decline in spending will all contribute to lower fiscal breakeven oil prices.

Fiscal consolidation efforts by the government including restrained spending and growth in oil revenues (compared to the previous year) due to gradual rise in oil prices led to a decline in fiscal breakeven oil prices in 2017. Whereas in 2018, improving non-oil revenues is expected to be the main factor in reducing the breakeven prices. Unlike other oil-exporting countries, GCC currencies are pegged to the dollar, and thus most of the adjustment to lower oil prices has been on the fiscal side. Reduced government spending has so far been the most prevalent measure to lower break-even oil prices in the GCC countries after crude oil prices shed by more than half in the last two years.

Source: IMF
Additional adjustment in 2018 will focus on mobilization of non-hydrocarbon revenues, including higher fees and charges, introduction of value-added tax in early 2018 and privatization moves (IIF). As a first step, countries are introducing a VAT and other consumption taxes — for example on tobacco and sugar-sweetened beverages. Over time, governments may also consider deriving additional revenues from income and property taxation. These efforts are expected to raise revenues by 1-2 per cent of GDP, assuming a VAT rate of 5 per cent (IMF).

In Saudi Arabia, this would lead to much lower fiscal break-even oil prices, a decline of 24 percent from USD 96.6 to USD 73.1 per barrel of crude oil in 2017. Kuwait and Qatar will have break-evens below the oil price, more than enough to balance the budget in 2018. Overall, the weighted average fiscal breakeven oil price for the GCC has declined steadily since it peaked at USD 87/bbl in 2014 to USD 69/bbl in 2016 and USD 66/bbl in 2017.

Source: IMF, IIF

Tags:  Economy, GCC, Oil, Price

 Current rating: 2.5 (3 ratings)

Paris Climate Accord - Which side will the GCC pick?

Date : 05/12/2017
Author:  Marmore MENA Intelligence


The Paris Accord, hailed as one of the biggest environmental treaties ever negotiated has now hit a roadblock as the U.S has stated its intention to withdraw from the agreement. In terms of size, the agreement supersedes the Kyoto protocol of 1997 signed by 41 nations that set emission targets for the participating nations. Despite countries meeting the expected target, it failed to make the desired impact as China and U.S, the world’s largest emitters of greenhouse gases were not bound by the agreement. Now with the introduction of the Paris Climate Accord, we analyze what it means for the GCC region and their stance on the deal in the aftermath of U.S pullout.

What is the Paris Climate Accord?
The Paris Agreement is a historic breakthrough for world nations with all countries penning down their compliance to the agreement in a bid to combat climate change, which remains as one of the key global issues. Signatory nations are required to take steps to ensure that the Earth’s temperature doesn’t rise above 2 degree Celsius. The highlight of the deal is that it gives freedom for the ratifying countries to independently decide on their emission targets and the course they wish to take to achieve them. This is in contrast to previous attempts that had common denominator judge individual nations without considering the economic, geographic and cultural differences between them.

The deal primarily hinges on voluntary commitments from signatory countries to reduce the emission of greenhouse gases and aims to bestow economic incentives for developing nations in order to invest in cleaner technology as cost could be a key barrier for them in migrating from conventional sources of energy that are already in place. Despite being a landmark deal in many ways, it fell short in certain areas like having mandatory emission cuts for individual countries and did not enforce any mandatory donations from participating countries to the fund. But the shortcomings were expected as it took several years to shape up a deal that was palatable enough to be agreed upon by all countries worldwide.

Why did U.S pull out?
One of the notable talking points apart from the deal itself was U.S pullout from the agreement under the Trump administration. The U.S, which houses 4.3% of the world’s population, is responsible for about 15.5% of the world’s total CO2emissions and the decision to back-out from the agreement has drawn criticism from within and outside the country. Despite the criticism on several fronts, U.S justification towards the move was based on economic reasons as compliance to the agreement would have a direct impact on their manufacturing and fossil fuel industries. It was also stated by the U.S President that the agreement would cost America a sum of USD 3 trillion and deprive Americans of 6.5 million jobs in the industrial and manufacturing sector. This came amidst the support from several U.S and international oil companies such as Royal Dutch Shell, ExxonMobil and BP towards the Paris agreement stating that climate change would be a threat to their business.
Combating climate change in the GCC – Are they on course?
Due to heavy reliance of GCC economies on hydrocarbon revenues, combating climate change and pollution have remained a persistent challenge. Oil drilling, infrastructure development and rapid urbanization have been the primary causes for air pollution in the region. Qatar ranks 1st in the world in terms of CO2 emission per capita and contributes to 0.25% of the world’s total CO2 emissions while housing only 0.031% of the world’s population. Domestic energy consumption has also been higher in the GCC countries compared to others with Bahrain consuming more than 20,000 KWh of electricity per capita in 2015. Such high levels of consumption puts pressure on energy generation which in turn has negative effects on the environment.


Source: IEA

However, GCC countries are being increasingly aware about the situation at hand and have taken measures to comply with global emission standards. They have incorporated climate change as a key focus area in their future vision plans and have set short and long term renewable energy targets. The move to diversify the source of revenue away from Oil due to the drop in prices is also expected to have environmental benefits as it would mean that emissions could be greatly reduced. Compared to 2014, all GCC countries have improved in terms of diversification of revenues with Qatar having the least share of hydrocarbon revenues as part of total revenues in 2017.

The UAE has been taking substantial steps in addressing the issue of climate change. In 2016, it expanded the role of its environment ministry to encompass climate change and renamed it to the Ministry of Climate Change and Environment thereby signaling it’s commitment towards the cause. As per the UAE Energy Strategy 2050, the UAE targets to 27% of its total energy through clean sources by 2021 and 50% by 2050. With ambitious projects such as the 1,177MW Noor Abu Dhabi Solar Plant and the 5,000MW Mohammad Bin Rashid Al Maktoum Solar Park taking shape, UAE’s position towards climate change looks evident. Saudi Arabia as part of its Saudi Vision 2030 has been implementing measures to protect the environment which also aligns with its agenda of economic diversification. By 2040, Saudi Arabia has targeted to achieve 30% share of renewables as part of its total energy mix. Other GCC countries have also stepped foot on a similar path to achieve economic diversification in an environmentally sustainable manner.

Which side will GCC lean towards?
All GCC countries have penned down their compliance to the Paris Agreement and submitted their Intended Determined Contributions (INDCs) which outline their mitigation strategies to tackle climate change. However, it is to be seen how things would fare amidst the ongoing diplomatic crisis.

Remaining a part of the Paris Agreement also has economic benefits for GCC countries in addition to the inherent environmental benefits. Putting constraints on the usage of fossil fuels helps in cutting down the supply thereby triggering an increase in price. Due to the exit of U.S, EU-China is expected to take lead in the quest for climate change mitigation. So co-operation with EU-China, who are among the main trade partners of GCC countries, is expected to help them in future relations. Considering all above factors, there is more to gain from the Paris Agreement for GCC countries and it is expected to sway them towards compliance to the deal for the greater good.


 Current rating: 0 (3 ratings)

Emerging startups in the Arab region - Can they make it big?

Date : 28/11/2017
Author:  Marmore MENA Intelligence


Development of the start-up sector remains a key focus area for GCC economies, in their efforts to diversify away from Oil and Gas as they are expected to play a crucial role in creating new employment opportunities and helping the economy to flourish. UAE, the start-up hub of the region, has taken several measures such as passing of the bankruptcy law to improve its business environment and encourage SMEs in the country. Saudi Arabia’s PIF (Public Investment Fund) recently set up a USD 1bn fund to invest in Venture capitals and PE firms targeting the SME sector to provide them easier access to capital. While the start-up space in the Arab region is still at a very nascent stage, there have been several promising start-up stories emerging out of the GCC. Hence we take a look at the some of the top start-ups in the region, where they are from and their source of funding.

Arab Region's Top Start-ups

Top 10 from GCCemerging-startups-in-the-arab-region-fig2.jpgSource: Forbes, Marmore research

UAE – Start-up hub of the GCC
 UAE has been the prime destination for budding start-ups in the Arab region offering a plethora of opportunities for prospective business owners. It is one of the most diversified economies in the GCC and home to some of the most highly valued start-ups in the region like Careem and Fetchr. Prime reasons to it are the measures taken by the government to improve the regulatory and policy frame work to encourage SMEs.
Currently, there are over 350,000 SMEs in the country which contribute to 40% of the GDP while employing 72% of the total working population (Bloovo). The proactive steps taken by the policymakers have helped UAE attain the 26th rank in the ‘Ease of doing business index’ for 2017 according to the World Bank and 35th rank in the Global Innovation Index. Also the presence of several startup accelerators and incubators in the country have helped entrepreneurs build on their ideas and get the support necessary to make their business a reality.
GCC start-ups – rising global investments
 Investments in MENA start-ups have been seeing an uptrend over the past few years. Funding activity in the first nine months of 2017 (169 deals) have already surpassed the levels seen in the whole of 2016 (164 deals) (MAGNiTT Q317 MENA funding report card). Excluding Souq and Careem, start-up funding in the MENA region for YTD 2017 is at USD 254mn and on course to surpass the 282mn raised in the previous year.
The global outreach of GCC startups have also been on the rise, drawing attention from investors worldwide. When profiling the investors of top GCC 10 start-ups from the Forbes list, it is observed that more than half of them are based outside the base country with the majority being Venture Capitals.

Investor Profile - Top 10 GCC Start-ups


Source: Forbes, Crunchbase, Marmore Research

The trend is seen in exits as well with companies based outside the MENA region showing interest to acquire GCC start-ups. Some of the major acquisitions in the past few years include by China’s Miteno (USD 900mn), Souq by global e-commerce giant Amazon (USD 680mn) and Talabat by US based Rocket Internet (USD 170mn).
Fetchr – The next unicorn start-up from GCC?
 Fetchr is one of many emerging start-ups in the region which show immense promise. It is a Dubai based startup founded in 2012, which uses a smartphone’s location tracking capabilities in order to make product deliveries. The lack of clear addresses and postal codes for many areas in the UAE have made traditional deliveries a tedious process. Therefore, by allowing users to geo-locate the pick-up and drop-off points, Fetchr has come up with an innovative solution to make things simpler for package deliveries. Speed and accuracy of deliveries have been improved with the help of their patented technology in a region where getting things delivered could be quite complicated.
The logistics start-up has had a stellar year in 2017 as it raised USD 41mn worth funding in May, adding to its existing funds which will allow them to venture into other areas across the MENA region in addition to UAE, Bahrain, Egypt and Saudi Arabia where they are currently present. Fetchr was one of the first companies in the region to be backed by a top tier Silicon Valley Venture Capital as it raised USD 11mn in its Series A funding round backed by New Enterprise associates based out of the US.
Providing innovative solutions and understanding the local business landscape have helped Fetchr grow leaps and bounds while there is still scope for scaling up. Learnings from Fetchr’s case is that businesses need to view the pain points of the customer as opportunities and come up with solutions that will make their lives simpler.
Can they make it big?
 Although the business environment in the GCC is not the most conducive for start-ups at the moment, steps have been taken by policymakers to encourage the development of SMEs. Considering the need for GCC economies to move away from Oil, more such steps are expected from governments to aid the development of the start-up space. With the emergence of global investments, startup activity has considerably risen in the GCC and going by the trend witnessed in the last decade, GCC start-ups are on the right track and several unicorn start-ups can be expected from the region.

Tags:  Economy, GCC, SMEs, Startups

 Current rating: 0 (3 ratings)

GCC Air quality - Are government measures sufficient?

Date : 16/10/2017
Author:  Marmore MENA Intelligence


Quality of Air is a key focal area for nations worldwide since the lack of it poses serious threats to human health and bio diversity. The need to balance economic progression and environmental sustainability has finally come to the fore as more nations are now aware of the adverse effects of environmental degradation. With 4 out of the top 10 most polluted countries in the world hailing from the GCC, the gravity of this issue in the region can’t be overstated. Lack of sufficient measures and negligence in enforcing stricter norms have led to Qatar and Saudi Arabia finding the top two spots globally in terms of particulate pollution. The Oil and Gas industry, which has been a major contributor for the economic development of GCC countries has also been the major cause for degradation of their air quality. Considering the serious nature of the situation, we analyze what the GCC governments need to do to bring down pollution to permissible levels.

Air Quality – Cause for concern
 The extent of air pollution is higher than the global average in all GCC countries with Qatar and Saudi Arabia having alarming levels of PM2.5. As per a study by WHO, Saudi Arabia accounted for 4 among the top 50 cities having the highest average yearly air pollution with Riyadh and Jubail making it to the top 10. The situation is equally worse in terms of CO2 emissions as Qatar ranks 1st in the world in terms of CO2 emission per capita and contributes to 0.25% of the world’s total CO2 emissions while housing only 0.031% of the world’s population.
Oil drilling and rapid urbanization have been the primary causes for air pollution in the region and as the GCC economies are heavily dependent on income from oil, pollution control has remained a persistent challenge. Rapid infrastructure development over the last two decades have also aggravated the situation.


What can be done?
 Stricter emission norms and transparency in disclosure of industrial emissions must be encouraged by policy-makers for better pollution management. Rigorous implementation is as important as setting up a regulatory framework to make sure that the industries fall in line in accordance to the required standards. Also incentives have to be provided so that industries find it cost effective to comply with environmental standards.
 GCC countries are among the highest per capita consumers of water and electricity in the world. This increases the need for fuel and energy, subsequently affecting air quality. Hikes in tariff and reduction of subsidy along with creation of awareness regarding minimal energy consumption would go a long way to reduce the level of pollution.
Renewables and Electric Vehicles – The way to surge forward
 Use of renewables would be a step in the right direction. It will reduce the need for oil drilling and also help reduce emissions. The potential for solar power generation is high as GCC countries have the advantage of being geographically located in a region receiving regular sunlight with solar insolation levels (measure of solar radiation energy received on a given surface area in a given time) as high as 6.5 kWh/m² per day. Costs associated with renewable energy have also come down making it a cost effective alternative to fossil fuels. All GCC nations have incorporated the use of renewable energy in their long term visions and have been taking steps towards achieving their targets. However, the commitment needs to stay in the longer term backed by necessary investments.
The Auto industry worldwide is undergoing a major change with the emergence of commercial electric vehicles, a change which could bring about massive reduction in vehicular emissions in the long run if embraced. Dubai has been aggressively promoting the usage of EV (electric vehicles) by offering incentives to users. New EV buyers will be able to charge their vehicles for free until 2019 and use free designated green parking spots across Dubai.
Dubai has also been taking measures to promote the concept of green buildings (The concept of creating sustainable structures which have minimal negative impact on the environment) by giving permits to buildings only if they are compliant to required environmental standards. 1433 green building projects have been completed in Dubai since 2010 helping UAE reach 9th rank globally for green buildings outside the US according to a report from the GBC (Green Building Council).
Outlook – Still hazy as it stands
 Despite the current measures taken by the governments, air quality remains appalling with 100% of the GCC population living in areas exposed to particulate pollution higher than WHO guideline level. Such deterioration of the environment would lead to several health hazards thereby affecting the livability of the region. Although UAE has been in the forefront among GCC nations in the push towards a cleaner future, initiatives taken by its neighbors so far leave much to be desired. Most of all, the concept of sustainable development needs to be incorporated in every sector with a view towards causing minimum hazard to the environment. This can be achieved only if the regulatory authorities are proactive in their cause and efficient in their enforcement. Until then, the situation is unlikely to improve and is susceptible to further degradation.

This article is published in "Marmore Blog"




Tags:  Concerns, Environmental, GCC, Pollution, Renewables

 Current rating: 4 (3 ratings)

Is education still a good business in the GCC?

Date : 10/10/2017
Author:  Marmore MENA Intelligence

The education sector is known to be an anti-recession industry making it a major draw after the recent oil crisis. The GCC education sector offers USD 90 billion in infrastructure opportunities alone, based on government budgets on building schools, colleges and universities. Over the past decade, a growing market for education in GCC has attracted large numbers of foreign institutions in addition to regional players entering the market. This trend will likely continue given the regional growth in student enrolment in educational institutions, governmental privatization initiatives and increasing government education spending. A growing inclination toward private schools providing international curriculum also opens the door for a truck load of investment opportunities in the GCC education industry. GCC’s K-12 education market stood at USD 67 Bn of which the share of private schools accounted for USD 8.1 Bn (GFH).


Challenges faced by GCC education industry

 Despite the growing government spending on education by gulf countries averaging 15.8% of government expenditure in GCC, the quality of education remain below par to global standards. It is reflected in high level of unemployment among youths with an unemployment rate as high as 27% (World Economic Forum).
While Gulf governments may be eager to prioritize the hiring of nationals particularly in the private sector, a significant gap in skillsets and cultural and structural barriers continue to hinder women’s economic inclusion. Women in the Gulf are nearly invisible from workforce in some sectors. Unemployed young women holding higher education indicate an abundance of wealth in human capital that is not being utilized to its full potential. In Saudi Arabia, as much as 80 percent of female job-seekers hold university degrees (Oxford Gulf & Arabian Peninsula Forum). In Qatar even though 60% of graduates are women, they represent less than 37% of the workforce as of 2016.
The shortage of teachers in the region is also the second highest in the world as teaching profession is of less interest to the locals who prefer to work in highly paid public sector jobs. Although region has a lower pupil-teacher ratio of 17 compared to the world average, the countries face challenges in recruiting highly qualified teachers. Growing demand for teachers at international schools in the UAE of at least 14,000 over the next five years and in Saudi Arabia of 183,600 by 2030 will pose further problems. Low availability of highly qualified teacher also result in lower level of knowledge transfer to students, which is clearly visible in poor ranking for GCC countries in skill diversity of graduate category, a component of Competitive index measurement. Effectively addressing these challenges together with tapping into the growth opportunities discussed below highlights the attractiveness of education industry in the region.

Improving the quality of education and increasing institutions offering international curriculum
 The GCC governments have been trying to enhance the quality of education through a number of measures like establishing quality assurance authorities, setting up guidelines, and encouraging technology-driven education. The government’s commitment to improve the quality of higher education and closing the skill gap between graduates and industry, could open opportunities for more private and foreign universities to come up in GCC.
However, in the past four schools including Oxford English School were closed down by SEC in Qatar as they did not meet the education standards in line with the country's drive to ensure the best learning conditions and levels for students. In addition, few foreign higher education institutions in Qatar and Saudi also had to face a setback due to recruitment challenges and government control in fees structure.
 But growing enrollments ratio and government understanding the need of quality private institutions points to much more optimism. Subsequently domestic access to high-quality education will also contain the migration of citizens and expatriates seeking education abroad to an extent. Currently, educational projects worth over USD 50Bn are in different stages of development across GCC nations, with the Saudi Arabia on top of the leaderboard. King Faisal University in Saudi Arabia is the largest project with an estimated value of USD 14.7Bn followed by The Sabah Al-Salem University in Kuwait, worth USD 3.0Bn.The popularity of international schools in the GCC region is also on a rise due to the presence of a large number of expatriates coupled with the desire of the local residents to send their children to institutions offering high-quality education. In 2015, the UAE international schools have generated a revenue of USD 2.5 Bn annually, accounting for 7% of the global tuition fees (The National).
 Growing Youth population base and number of Enrollments
 The region is experiencing growing base of youth population with people in age group less than 15 years expected to reach 13.5Mn by 2020 representing 23% of the entire population while one third of the population will be below 25 years (United Nations Population Division). The above conditions have translated into enrollment growth across the GCC’s education sector, particularly in private enrolments which grew at CAGR of 7% from 2010 to 2015. In 2015, private schools accounted for as much as 70% and 57% of primary and secondary enrolments in UAE and Qatar respectively.

Increasing M&A deals and high margins a sign of huge growth potential

The growth prospects has already attracted significant interest in the education industry investment landscape as the number of announced private equity and M&A transactions has increased to 24 transactions in the period from 2014 to 2016.
Amanat Holdings has acquired a 16 percent stake in the UAE education provider Madaares in 2016, aiming to cash in on the booming sector. Dubai based Gems Education purchased stakes in four academic institutions during 2013-2014. One of the major cross-border deal was the acquisition of National Training Institute in Oman by Babcock International Group of the UK. GEMS Education that runs 88 schools in UAE and abroad, registered a profit of USD 131.5 Mn in 2016, more than doubling the profit from previous year.

 Going forward, the rising awareness among parents regarding the importance of quality pre-primary education is going to be the key driver of growth. Saudi Arabia aims to build 1,500 nurseries by 2020 and UAE aims to increase pre-primary gross enrollment ratio to 95% under its Vision 2021. The tertiary segment is another promising segment for which enrolments are forecasted to grow at a CAGR of 5% from 2015-20 to 2.47mn in 2020, with Qatar and UAE expected to grow the fastest at a CAGR of 9% each during the period (GFH). This will subsequently convert into rise in enrollment rates for higher education thus providing huge scope for both private and public institutions.

This article is published in "Marmore Blog"


Tags:  Business, Education, GCC

 Current rating: 0 (3 ratings)
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