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GCC Aviation in turbulence - Quo Vadis?

Date : 18/09/2017
Author:  Marmore MENA Intelligence

Most airlines in the Gulf are not flying at 35,000 feet anymore, many are facing turbulence. It has been a watershed year for all the fliers in the recent past with reduced business travel, geo politics and oil imbroglio taking centre stage. Etihad, the national carrier of UAE recently disclosed losses to the tune of USD 1.87 billion in 2016 while Emirates reported a decline of 82% in profits during the same year. Full service carriers (FSC) in the gulf cooperation council (GCC) have either reported losses or profits that have nose-dived in FY 2016 compared to the previous year. Low cost carriers (LCC) despite reporting a decline in profits remained better off compared to the FSCs. The Gulf airlines industry had until recently been the fastest growing sector in the world surpassing North America. However with the recent turn of events, is it a turning point for GCC Aviation?

Full Service carriers facing more trouble compared to low cost carriers
Emirates, the largest airliner in GCC faced pressure from increasing competition and poor travel demand in 2016. Non-fuel cost for Emirates went up by 8% YoY in 2016 as a result of expansion of network. Many of its new routes remained under-occupied and average passenger yield declined by 7.2% in the same period.

Etihad airways started operations in 2003, with the desire of competing with Emirates Airlines which was then the regional leader. The national carrier spread its wings around the world through acquisitions. As of December 2016, it had stake in seven airlines in various countries. Air Berlin (Germany) and Alitalia (Italy) in which Etihad holds 49% and 29.2% stake respectively went bankrupt in 2016. While Etihad continues to report profits on standalone basis its investment portfolio have clearly been a drag.

Other full service carriers in the gulf, Kuwait Airways, Saudia, Gulf Air and Oman Air have been reeling under heavy losses. Oman Air faced one of its biggest loss in 2016 of USD 337mn making its net worth negative. The auditors of Oman Air have even raised concerns about the surmounting debt levels.

According to the State Audit Bureau, Kuwait Airways incurred losses to the tune of USD 422 million during the period between 2014 and 2016. Higher labour cost was one of the major reasons for the airline’s lack of profits. Kuwait Airways operates with 353 employees per fleet while Jazeera and Emirates have an employee per fleet ratio of 71 and 92 respectively. To turnaround the situation, Kuwait airways has planned to reduce its staff apart from ordering 25 new fleets and changing its livery to give a fresh feel of the airline to its customers. Privatization of the airline is expected to happen with government estimated to retain just 20% of the stake.

Saudi, the state owned airlines of Saudi Arabia has not disclosed its financial information, however, news articles indicate that the airlines has not been profitable owing to which the government has hived off the catering and ground handling divisions while it aims to complete the privatization process for civil aviation by the end of 2020.

Qatar airways was the only exception among GCC FSCs, as the addition of 13 new routes resulted in a 30% increase in profits during 2016 (YoY). However, affected by the gulf spat, it is currently facing blockade to 22 destinations. The blockade and re-routing is expected to affect the profits in 2017.

Gulf airliners, namely, Emirates, Etihad and Qatar Airways (often referred to as ME3) are tough competitors with the western airlines Delta, American and United. ME3 has opened new routes to the US and Europe, thereby increasing competition and bringing down the prices in these routes. America’s airliners have earlier raised concerns about the subsidy received by the ME3 from their respective governments, especially for oil. Middle Eastern Airliners have faced threats about restrictions on the routes permitted for operation and retracting the code-sharing agreements they share with US and European airlines. Such measures could further deteriorate the prospects for ME3 that are already confronting various other issues.

Low Cost Carriers – So far so good
While the low cost carrier (LCC) concept has been relatively new to the region, the story has mostly been of success so far. Air Arabia, Jazeera and Fly Dubai are running profitability, by rationalising routes and keeping costs low. The LCC business model is gaining popularity in Middle East also because of the cheaper prices, point to point services, lower turnaround time and strong value proposition. This has translated into a dedicated set of customers setting them apart from the long haul travellers.  As a result, LCC segment (AirArabia, FlyDubai, Jazeera and Flynas) registered a strong growth in terms of scheduled capacity of about 50% in last decade compared to Full Service Carrier segment which grew by mere 7%.

Will the current scenario be a turning point for GCC Aviation?
Full service carriers (FSC) are facing larger problems compared to the LCCs. Gulf airliners need to revisit their business models, as rapid expansionary plans through acquisitions in other airlines and fleet expansion might prove costly. Emirates and Qatar Airways were successful mainly because they offered best-in-class service to their customers, such as on-time departures (almost 90%), on-board services and airports that hosted world class infrastructure. Privatization could be a solution as it would help to rationalize costs, bring world class management to the industry and improve the quality of services offered to customers. Apart from restructuring its organization, FSCs in the gulf must focus on improving their employee skill sets that will set service quality standards.

Management of gulf airlines need to fasten their seat belts and work tirelessly to revamp their business model and face competition from within and outside the region, else some of them are surely heading for hard landing!

This article is published in "Marmore Blog"

Tags:  Aviation, FSC, GCC, LCC

 Current rating: 0 (3 ratings)

Waste to Energy in the GCC Moving beyond the cost dynamics

Date : 12/09/2017
Author:  Marmore MENA Intelligence

Waste to Energy (WTE) provides an environmentally sustainable route for waste disposal while carrying the added benefit of producing clean energy. It is high time for the GCC countries to wake up and take note of their Solid Waste Management strategy as rapid urbanization has led to an increasing waste pile up year over year. Per capita waste generation in most GCC countries exceed the global average of 1.2 kg per day with Bahrain and Kuwait producing 2.5 and 1.9 kg of waste per day respectively. Despite these growing concerns, Waste to Energy has not taken off in the GCC yet with investments starting to made only during the past few years. We analyze the reasons why the governments have taken so long to unearth WTE.

Globally, the value of WTE market is estimated to be USD 28 Billion and expected to reach USD 37 Billion by 2023. WTE technologies based on thermal energy conversion is widely preferred and accounted for approximately 88.2% of total market revenue. Europe is the largest and most sophisticated market for WTE technologies, accounting for 47.6% of the total market. Despite the increase in industrial waste, strict waste management legislation in the EU have been responsible for the growth in Europe’s WTE market.  In the case of other developing economies the key challenge has remained the large up-front cost for implementation and hence the option of low-cost landfilling is widely preferred.

Source: Enerdata, IRENA
Firstly, from the perspective of power generation, the amount of electricity produced through WTE is miniscule as compared to the solid waste utilized for the purpose. In the case of Qatar, currently, 0.37% of its total electricity is produced by WTE plants. Even when we assume that the total annual solid waste produced domestically is converted to electricity, it is estimated to produce only 735 GWh which accounts for 1.78% of the total electricity produced. The power generation capacity through WTE can’t be increased beyond the threshold value since the raw material required for power generation in this case is solid waste, which is in limited supply. This is one of the key shortcomings of WTE when considered as a source for power generation.
 Secondly, when viewed from a financial angle, the investment required for WTE technology remains on the higher side. Qatar invested USD 1.7 Billion to complete the Domestic Solid Waste Management Centre. This is huge in comparison to other renewable/ environment friendly power generation technologies like solar. Solar PVs is witnessing a downward trend and in comparison the case looks weaker for WTE to be considered as an energy source.
However, a key dynamic which favors WTE is the limited land availability in the GCC. Excluding Saudi Arabia and Oman, the total land area available in the other countries is only 113,756 km2 which is three times lesser than the land area of Norway. But in comparison, Norway produces nearly 5 times lesser waste than the 4 countries combined showing the enormity of waste produced in relation to the land availability. Hence, landfill burial would not be a sustainable technique in the long run, especially when rapid urbanization is taking shape in the region and the city scape continues to grow.
Most of the GCC countries are cognizant of the situation and have taken initial steps towards waste management albeit still at a nascent stage. Only Qatar has thus far produced substantial amount of electricity from waste while other GCC countries continue to procrastinate this problem. Nevertheless, investments are beginning to flow in the past few years.

Waste disposal is a problem that has to be tackled with urgency. Leeching due to the landfill is highly hazardous and in most cases irreversible. Electronic and plastic waste is again a matter of deep and growing concern. Governments should take the initiative and involve private players to manage this issue and push the needle before time runs out. Providing subsidy, easy loans and strict regulations could be the measures taken. Investment in new technology and research should also be promoted by governments as pursued in the case of other non-conventional power generation mechanisms such as solar and wind. Countries should move beyond the cost dynamics of WTE and rather emphasize on the socio economic benefits to build on a better and sustainable future.

This article is published in "Marmore Blog"

Tags:  Electricity, Energy, GCC, Power, to, Waste

 Current rating: 5 (3 ratings)

Is GCC a good place to hunt for yield?

Date : 09/08/2017
Author:  Marmore MENA Intelligence


Bond investors across the globe have been left high and dry over the past few years driven by ultra-low interest rates. The current scenario is a result of the consorted efforts by Central banks around the world to pump in low cost money in order to invigorate their respective economies. After a long hiatus the Fed has decided to increase rates very gradually in the US starting second half of 2016, however other important markets such as the UK, Eurozone and Japan continue to have abysmally low levels of bond yields. This has created a dearth of investment opportunities for bond investors. The desperation to invest in better yielding quality papers has wooed investors towards the emerging bond markets of the GCC.

Sizable issuances

The emergence of GCC bond markets have been a fallout of the low oil prices and decline in foreign reserves, which has forced the regional governments to look for alternative routes to fund their diversification plans. Recently, debt issuances has been an important avenue for fund raising activities of the government. Out of the USD 38.5Bn that has been raised in the Middle East region since the beginning of 2017, 61% has come from the GCC countries. Saudi Arabia has raised close to USD 9Bn in 2017, while Kuwait, Oman and Bahrain came out with bond issuances close to USD 8Bn, USD 7Bn and USD 1.6Bn respectively(CBonds). In 2016 alone, the GCC region raised close to USD 71Bn. Favourable financing conditions and significant investor demand encouraged a rebound in bond issuance throughout the MENA region, and particularly in GCC countries. This could be inferred from the fact that most of the government and commercial issuances from the region have been oversubscribed consistently. Oman’s recently issued USD 5Bn bond issuances was oversubscribed by almost four times (NBAD).

Rising investor interest

GCC region has found quite a bit of interest from the Asian investment community mainly owing to the low interest rate environment prevailing in the developed economies. This new sprouted interest for GCC issues from Asian investors has been due to the familiarity of GCC markets.  Asian investors have become better attuned to GCC credit and their institutional knowledge has grown considerably; roadshows conducted by GCC countries in major Asian financial hotspots like Hong Kong and Singapore have received brisk investor interest. The strengthening of US currency has also led lot of investors to choose dollar denominated bonds. Close to USD 9Bn of bonds issued in the USD dollar denomination were subscribed by Asian investors during 2016, twice the amount of funds that were placed in 2015 (The National).

High credit rating and better yields

GCC countries offering local currency issuances have also increased in the recent years; Korean won-denominated paper leads Asian currency sector lately, with a 43% share (USD 1.3 billion equivalent) of such paper issued since 2015. The offshore Chinese renminbi market is also a good indicator of the increasing interest for GCC companies to issue local currency bonds, currently equivalent to USD 796 million. The local currency issuances of GCC papers/ bonds grew by more than 25 percent in the year 2016. Year to date, it is seven times that of the same-period volumes last year.
GCC nations for their part offer better yields than other developing economies of similar credit rating. For example, Kuwait and Abu Dhabi’s ten-year sovereign bonds have Yield to Maturity (YTM) that is higher by 20 and 45 basis points respectively compared to South Korean government bonds (NBAD).  Similarly, Qatar’s ten-year bonds which is rated as AA- yields almost as much as China’s ten year bonds despite the fact that latter’s rating being one level below at A+. Attractive yields and relatively safe economies make it even more appealing from an investor point of view.  The GCC region currently offer a mix of credit ratings – Abu Dhabi and Kuwait have the highest AA rating while Qatar, Saudi Arabia, Dubai and Oman have ratings that range from AA- to BBB- providing investors with wide investment opportunity. 


Outlook for bond I in the region

Funding requirement in the region by sovereigns and corporates is on the rise and bank liquidity is not enough to absorb the entire demand. Moreover, as the countries look for diversification of the economy there is impetus on growth. In addition to the sovereign issues, there is ample scope for private company issuances in the region that will offer higher yields. Spending by corporates on M&A and investment projects will grow and have a direct impact on fixed income issuances. From 2007 alone, there has been 225 corporate issues that has hit the GCC market with more than half of that (137 issues) coming up after 2013.  There has been 17 companies that have come up with bond issuances in 2017 double the number of companies that issued bonds in 2016.
GCC region has been trying to harmonize the regional banks’ capital requirements to be in line with BASEL – III. In 2016 alone the size of the bonds issued by banks in the region increased by 36% to USD 11.7Bn. This trend is expected to continue in the near future. One advantage that GCC banks have is that they have been relatively conservative in their business and operational strategy, as a result they have strong balance sheets which is expected to be positive for such issuances. Basel III implications for liquidity are fairly significant in GCC countries as banks have a substantial contractual maturity mismatch between medium-term lending and very short-term customer deposits. Some banks have started to issue longer-tenor debt to reduce this mismatch, but this remains limited (Fitch Ratings).

Still near zero interest rates have made investors (not only in Asia, but also in US and Europe, where interest rates are low) willing to increase their exposure to GCC sovereigns and banks. They are gradually becoming cognizant of the high quality papers available in the GCC region, and the interest is set to continue for good part of 2017. GCC nations have also reached out to investors in the Asian market by offering issuances in Asian bond markets. Formosa market in Taiwan is a notable example of quality bank issuances released abroad; QNB raised USD 625 Mn in 2016 and both NBAD (USD 1.5Bn) and ADCB (USD 230Mn) have followed suit this year. GCC banks have also tapped the international syndicated loan market to refinance maturing debt and are expected to continue to raise money throughout the year. In the current environment, GCC region remains the sole bright spot that promises to give higher yields with relative stability.

This article is published in "Marmore Blog"

Tags:  Bond, GCC, Markets

 Current rating: 4 (3 ratings)

Home bias among GCC Funds - Preference for Domestic Stocks in Regional Funds

Date : 19/07/2017
Author:  Marmore MENA Intelligence

Home is where the heart is….
Strong bias in favour of domestic market stocks/securities among international equity funds in developed markets is well documented through various academic studies. For instance, U.S investors in international markets allocate nearly 70% per cent of their fund to domestic securities despite the fact that U.S equity market comprises only 60% per cent in the benchmark index (MSCI World). Though such behaviour is inefficient from a diversification standpoint; the phenomenon, dubbed as “home bias” is widely witnessed globally.
Institutional constraints such as barriers to invest across boundaries, limitations on repatriation of investment income, varying corporate governance standards, higher transaction costs and currency risk have been put forth as possible reasons. Interestingly, closer to home regional mutual funds in GCC markets suffer from home bias as well, despite the region being largely homogenous and frictional costs to invest across the region are largely non-existent.
The primary goal of a fund manager is to maximize returns while minimizing risk. However, the presence of varying country-level exposures among fund portfolios in achieving a common goal – to outperform the benchmark index (S&P GCC Composite Index for conventional equity funds and S&P GCC Composite Sharia Index for Islamic equity funds) – is puzzling, as this bias is a result of conscious and intentional move made by the fund manager. Indeed by overweighting domestic exposure the fund managers are adding on to the risk that they could have diversified away.
Possible explanation for such behaviour could be attributed to the perceived informational advantage of fund managers over their country stocks. Fund managers are more familiar with domestic stocks and thus have a higher degree of confidence in their ability to generate outperformance through active management. For instance, local fund managers could talk with employees, managers, and suppliers of the firm, they could obtain key information from local media, social events, and the close personal ties with senior management, all of which could provide them with better information than their regional peers and provide a distinct advantage. In part, home bias could also be an extension of “confirmation bias” as fund managers may simply feel more comfortable about their domestic investments when they keep hearing about them in local media. Country specific systemic risk factors such as political risk or poor corporate governance practices could also influence the fund manager allocations resulting in home bias.
An analysis of the GCC funds
In our analysis we observe that the level of home bias among GCC mutual funds (equity) is heterogeneous in nature. Funds in markets such as Saudi Arabia and Kuwait exhibit significant home bias (greater than 10% overweight to home market) while United Arab Emirates (UAE) funds have been observed to exhibit moderate home bias (greater than 5% but less than 10% overweight of home market). Funds based out of Qatar and Oman exhibit relatively minimal home bias. Based on our observation, Bahrain funds did not exhibit any home bias. In fact, GCC funds domiciled in Bahrain had underweighted their domestic country.


Liquidity, Trade Costs & Home bias
In general, home bias, especially by Saudi Arabia and UAE fund managers could be justified due to their larger size and presence of multiple sectors. Greater size and diversified nature of their markets enable them to be relatively liquid in comparison with other markets in the region. Higher liquidity would also reduce direct transaction costs and market impact costs. On the other hand, fund managers based in Kuwait and Oman with home bias should reassess their portfolio allocation due to illiquid nature of their markets on account of relatively smaller market size and concentrated sector exposures.
Impact on Performance
All the funds considered in our study that exhibit home bias has underperformed their respective benchmark in the past 1year. Though GCC markets are largely inefficient and have greater scope for alpha generation through active management, the results suggest that excessive home bias could take a toll on the fund performance. Interestingly, the Qatar-based fund with least home bias had also underperformed the benchmark.

As per our analysis, funds exhibiting home bias have underperformed the benchmark index. In light of this finding, fund managers of GCC funds should avoid the temptation of overweighting their country of domicile as they run the risk of being over-run by foreign funds that need not have home bias. Additionally, fund investors especially the institutional investors could have home bias as an additional parameter of analysis while selecting regional fund managers.

 This article is published in "Marmore Blog" 

Tags:  Capital, Funds, GCC, Market, Stock

 Current rating: 5 (3 ratings)

Fintech in GCC

Date : 19/02/2017
Author:  Murtaza Pattherwala

Fintech in GCC - Blog

Fintech is yet to find its feet in the GCC, despite several digital transformation drives initiated by the regional governments. In the west, the governments play the role of a facilitator in terms of policy and regulation, and in providing the right environment for innovation to flourish, leaving it to the private sector to come up with modernized solutions. However, in the GCC, with the regulations lagging behind in most sectors and private sector wary of joining in, the governments play a more central role in fostering innovation.

Despite this, Fintech has permeated across the region, in peer-to-peer lending (Beehive), crowdfunding (Eureeca, Aflamnah, and Durise), payment solutions (CashU, Payfort, Telr, PayTabs), insurance
(compareit4me, Democrance) and online/mobile banking and online trading.

PayPal MENA is now spread across the Middle East, focusing on growing e-commerce markets, such as the UAE, Qatar, and Saudi Arabia. PayFort tailored its payment system to take into consideration the lack of credit card ownership in various markets, while Telr has modelled itself as a payment gateway that is not only multi-lingual, but also multi-currency, offering online payments solutions for merchants across social media channels and other websites. Funded by Saudi Aramco’s Wa’ed program, PayTabs has also entered the payment solution race in the region, and has an e-Commerce API plugin that can easily be integrated on any website.

Fintech could potentially increase the reach of Islamic financial services, and provide more choices that suit individual needs at competitive cost

GCC’s first crowdfunding platform, UAE-based Aflamnah, allows individuals from the Middle East region to raise funds for fresh ideas in films, games, television, art, music, etc. Another UAE platform, Eureeca calls itself a crowd-investing arena, as it allows interested investors to view profiles of available projects to invest. In return, the investors will gain shares in the businesses, in which they make their investments. launched an endto-end car insurance comparison platform that allows users to compare instant car insurance quote and buy online; a first in the MENA region. The new product has already generated more than 20,000 quotes, and sold more than 600 car insurance policies. Democrance plans to disrupt the insurance market by collaborating with insurance companies and mobile operators, to make insurance affordable and accessible to the people who need it the most. It distributes, administers and services insurance policies only through the mobile phone, which results in considerable cost savings. Finerd, an automated investment and wealth management company, is expected to unveil their much-awaited Sharia- compliant products sometime in 2016.

According to Marmore’s report on ‘Fintech in GCC’, one of the biggest potential impacts of Fintech will be on Islamic finance. Fintech could potentially increase the reach of Islamic financial services, and provide more choices that suit individual needs at competitive cost. SMEs that find it hard to obtain sharia-compliant bank funding from Islamic Financial Institutions (IFIs) could look to Fintech firms to fill that gap. Beehive is a Dubai-based sharia compliant P2P lender, and is the UAE’s first online marketplace for lenders and borrowers. It caters low cost finance to SMEs, while providing investors a direct access to alternative asset classes that can generate higher returns in an environment, where risks are shared.

The GCC has a large, youthful retail customer base that is receptive to new and disruptive financial technologies, as evidenced by the increasing penetration of e-commerce and online payment systems.
The region already has a strong foundation in the financial services sector, and a quicker adoption of Fintech would solidify its position as a financial hub.

This article is published in "Engage Q4, 2016" - click to view the publication


Tags:  FINTECH, GCC, technology

 Current rating: 5 (3 ratings)
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