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The Burgeoning Entertainment Industry in Saudi Arabia

Date : 19/06/2018
Author:  Marmore MENA Intelligence

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As a part of its broader economic diversification plans, Saudi Arabia took an unprecedented policy move by framing a new entertainment policy. In line with the Kingdom’s Vision of 2030 of creating a vibrant society, General Entertainment Authority (GEA) has been established and an investment of US$ 64 Bn has been planned (BBC News 2018). GEA is part of the subprogram, Quality of Life under the Vision 2030 which aims for improving lifestyle by increasing entertainment and cultural avenues.
Entertainment policy area witnessed sudden jerk in recent times in Saudi Arabia, because a formal institution (GEA) overlooking entertainment industry with broad and clear objectives took shape. It signifies role of entrainment and culture in economic diversification and how it can impact auxiliary sectors such as tourism, construction, entertainment, parks and establishments in the economy.
 

Entertainment Policy Key Pillars


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Source: Gulf State Analysis, 2018

 
Saudi Arabia Entertainment Industry Fast Facts
  • Approximately 50% of the population is under age of 30
  • Annually US$ 26 Bn spent aboard for entertainment
  • Licensed Cinemas: 1
  • US$ 2 Bn is expected to invest in developing entertainment projects
Source: Invest Saudi Website
 
Quality of Life Program
It’s a gigantic plan targeted towards revolutionizing the entire lifestyle equation in the country, which anchors both private and public investments. It operates on 2 basic indices, Liveability and Lifestyle.

Funding By Source for Quality of Life Program in SAR Bn
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Source: Quality of Life Document, 2018
 
Factors backing for Formalization of Policy

Firstly role of private sector in Saudi Arabian entertainment industry is small (mostly non-existent) thus huge initial public investment worth US$ 64 bn is being offered by the Government for development of entertainment sector. Secondly, nationals currently spend billions of dollars annually for entertainment purposes in neighbouring countries which causes massive outflows of money from the country (New York Times, 2018), authorities think can be prevented. Finally, Vision 2030 aspires to grow household spending on entertainment from current 2.9% to 6% which is expected to develop a SAR 30 Bn market (Ibid). (US$ 8 Bn) Vision 2030 has three thematic flavours, a vibrant society, a thriving economy, and an ambitious nation where policymakers (for Vibrant Society theme) are focused for the promotion of physical, psychological social well-being of every citizen (General Entertainment Authority Website).

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Myriad economic and social issues are associated with Vision 2030 and its sub-programs like Quality of Life. These programs are initially driven by huge public investment (essentially construction led) and aspires to attract private capital in the later stage, (as sector develops) but policy as a whole misses certain critical issues (which might act as an impediment) such as availability of adequate labour, technical expertise, ability of domestic private sector to take off as expected under the plan and what would be the socio-cultural response to such herculean modernization programs.
 
Potential Socio-Economic Impact


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Source: Marmore
 
The Policy aims to perfectly address the problems that were associated with cultural and social life in Saudi Arabia; which naturally stretches beyond economic diversification and employment creation. Earlier there was an apparent lack of a platform for cinema and theatre for utilizing talent, an absence of avenues for cultural, entertainment and leisure activities. Moreover, there was an absence of institutions and bodies promoting arts, cultural and sporting activities.

Cinemas, theatre and arts are social and economic necessities; primarily because of their consumption value and additionally because employment it creates, the technology it utilizes and thereby accelerator effect that it sets in.

On this account, the GEA is entrusted with host duties for expansion of the entertainment sector. GEA acts as the licencing authority and designated authority for setting standards and implementing plans. This helps in augmenting investments and talent in desired channels for the development of the sector. Additionally, GEA is mandated to encourage investments and promote collaboration and deliberations between different government and private agencies (General Entertainment Authority Website, 2018). These two are the critical functions of the agency, because it provides the unified and independent platform for cooperation across organizations and firms.

Big Push to Private Sector
The crux of this mega policy is the intertwined benefits of promoting entertainment, sports, leisure, health sectors and strengthening the private sector thus create more sustainable job opportunities. In the current backdrop of crawling private sector; as business conditions improved at the slowest pace for nearly last nine years as Saudi Arabia Purchasing Managers Index (PMI) rounded off to weakest quarter recorded since March 2009 (Arabian Business News Website 2018), entertainment policy acts as a big boon in a sense that it attracts huge private investment.
 
Growth Rate of Private Non-Oil GDP, Saudi Arabia 2014-2017
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Source: Jadwa Investment 2017
 
Public Investment Fund (PIF) is actively involved in the Qiddiya project with a commitment of SA 10 Bn (Quality of Life Document) and at the broader level the fund is at the forefront of diversification plans in line with Vision 2035. The Private sector is expecting a strong return on investments based on business-friendly environment and strong social demand (for entertainment) in the country. Liberal stand by the government on private (domestic and international) investments in the sector is creating a host of lucrative avenues.

Private investments are set to thrive and policy aims seem fairly achievable given that fact that delivery mechanism (for the policy) tends to be more private oriented. On the other hand, entertainment had been a long societal preference given the fact that Saudi nationals used to enthusiastically travel to neighbouring countries for the purpose of entertainment and leisure activities.

Potential Investment Opportunities
Construction has already began for the new Entertainment City near capital Riyadh (Qiddiya Project-an entertainment, sports and cultural destination). GEA expects that during the next two years, Quality of Life generates 300,000 jobs and most of in the private sector. (First Abu Dhabi Bank Markets Insights 2018)

Saudi Arabian Public Investment Fund and Six Flags (US based entertainment corporation) agreed to build a new city focusing on theme parks, wheels and wings, scenic and animal encounters, water and snow sports, education, culture and host of other events (Gulf State Analytics website 2018). With respect to the development of Cinemas in the country, the construction industry is expected to see a robust growth in the years ahead because the Saudi Government plans to build approximately 2,000 cinemas in 13 regions of Saudi Arabia.

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Furthermore, according to latest statistics around 500 entertainment companies established during 2017 created as much as 22,000 job opportunities (Invest Saudi 2018). Moreover, the retail sector (especially malls) are likely to be buoyed by the new entertainment policy, as more and more cinemas will most probably be constructed in large malls. For example, Saudi Arabia’s biggest mall operator, Arabian Centre, has allocated space for cinemas in 10 of its upcoming malls (Arabian Business 2018). Development of theme parks, opera houses, concert places, resorts, museums, art galleries, and theatres could be a catapult for the economy leading to growth in sectors such as tourism, hospitality, associated public transportation, etc.

Finally, the biggest impact is expected to be in the technology sector. For example, Artificial Intelligence (AI) is helping in writing scripts with complete stage instructions for a science fiction movie. Moreover, Immersive technologies (virtual reality, augmented reality) are becoming cheaper and it could herald a new era into content (World Economic Forum Creative Disruption 2018), media, film industry, entertainment, amusement parks in Saudi Arabia with its wide applications. These hold promise of allowing a creative industries ecosystem to develop and thrive in the Kingdom as a long-term consequence of the current policy posture.

Development of proposed parks and entertainment zones will be able to utilize current and upcoming technological developments and can deliver more robust growth. In summary, it can be said that entertainment policy and its objectives of creating a vibrant society in Saudi Arabia, is a step that will push entertainment, technological sector, cultural tourism and other sectors to greater levels of advancement in the years ahead.

 

Tags:  Arabia, Entertainment, Investment, Saudi

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 Current rating: 0 (3 ratings)

Saudi Aramco's India Investment -To where is the oil flowing to?

Date : 24/10/2017
Author:  Marmore MENA Intelligence


Saudi Aramco’s India investment is one part of its global strategy that encompasses expanding its downstream operations, oil trading and marketing and petrochemicals. This investment follows deals which took place earlier this year wherein it had signed contracts worth USD 13Bn with Pertamina and Petronas to ensure long-term oil supply to both countries. The former is an Indonesian state-owned oil company while the latter is Malaysia’s.  These tie-ups reflect Saudi Aramco ambitions to cement its ties with its Asian clients that goes deeper than just being a supplier of oil. It also comes at a time when US oil has reached Asian shores for the first time since the US lifted its restrictions on exports in late 2015. This sent shock waves across the already nervous top echelons of the traditional oil-supplying companies. From a strategic point of view, moving closer to its key customers would help Aramco cater to and customise the products that would better suit the local demand and also forecast future growth in the market with far greater accuracy.

Saudi Aramco is arguably one of the world’s largest Oil and Gas Company in terms of revenues and reserves that they control. To give an idea of its size, Aramco produces close to 10.3Mn barrels per day and its closest rival, the Russian state-owned Rosneft produces a third of that. Given their relative dominance in this space, it is surprising that only recently Saudi Aramco has opened its office in India and plans to invest in India’s downstream opportunities including refining, pipeline, marketing, and technology know-how. To put things into perspective, Saudi Arabia has been a key supplier of crude to India over the years. As of 2016, imports of crude oil from Saudi Arabia accounted 20% of the total crude imports in India followed by Iraq at 16% and Iran at 11%. Even the strong economic growth witnessed in India during the pre-2007 era was not enough to entice Aramco to open an office in India. Only in 2016 did it establish a skeletal presence in the country which is now being expanded.

South East Asian countries including the likes of India and China have hitherto been most lucrative markets for Middle East countries owing to their size and their geographical proximity. Together, these countries account for four of every 10 people in the world, combined making them one of the largest consumers of oil and natural gas. India’s oil demand, especially, is forecast to grow from 135,000 barrels a day in 2017 and 275,000 barrels a day in 2018, according to the International Energy Agency (IEA). IEA also estimates that India’s refining capacity would lag behind the demand making the country a priority for companies such as Aramco that is trying to expand its global reach and diversify its assets.

New suppliers rock the Asian boat
Asian buyers, owing to their higher dependence on crude from Middle East on an average pay more than their Western counterparts. An issue that has largely been under the radar except for occasional requests from Asian government and limited studies undertaken by some governments that put the Asian oil  premium at $1-$1.5 higher than their Western counterparts. In light of this, the emergence of new shale supplies from across the Atlantic has put “Asian Premium” issue in the limelight. In March 2017, India’s oil minister had asked OPEC to look at rationalizing the oil pricing for Asian buyers since they are the major consumers now, also a sign that is reflective of OPEC’s declining clout in fixing oil prices.

India was one of the latest nations to make a purchase from US after China and Japan. India’s first purchase of oil from the US has been on ex-ship basis (Delivered ex ship (DES) is a trade term requiring the seller to deliver goods to a buyer at an agreed) making their prices very competitive vis-à-vis Middle East. Trade data from Bloomberg shows that, there are 11 full-laden tankers that is expected to arrive Asia during November 2017 with more expected to tank up late October and early November (Reuters). This coupled with the increasing price differential for Middle Eastern oil have prompted India and other countries in the region to diversify their supply sources and look at the US as an alternative supplier. US exporters have happily obliged to such increased demand, it’s per day exports reached 1.98Mn barrels by late September and is expected to reach 2.2 Mn barrels in the coming weeks.
 
Two large –scale investments in Indonesia, Malaysia and potentially another one in India may probably point to Aramco’s efforts at mitigating these price concerns among key clients in key markets and to ensure that future commercial deals are not unduly endangered owing to the price premium.  Besides, these investments also open up opportunities for signing long-term oil supply contracts increasing the revenue visibility.

Aramco’s larger play
Saudi Aramco already has downstream operations in South Korea (majority equity interest in S-oil), the US (through takeover of erstwhile Motiva), Netherlands (joint venture with German LANXESS) and in China (Fujian Refining and Petrochemical Company). Aramco’s signing agreements with Malaysia and Indonesia will add two more locations to its downstream operations. During market downturns, such as the one taking place in the oil market now, upstream earnings suffer significantly more than downstream businesses do. Integrated companies on an average exhibit less earning volatility and high value addition through specialized product developments resulting in higher margins. Aramco’s talks with top India refiners for a stake in a refinery located on the West coast with an annual capacity of 60Mn tonnes fits very well into its downstream play.

Aramco also stated that its goal is to increase its global refining capacity to 8m-10m b/d and it has been scouting for investment opportunities across the globe. Inherent local demand and given Saudi Arabia’s position as a leading supplier of oil for India, Aramco’s talk with Hindustan Petroleum Corporation Ltd., Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd. to invest in a West Coast Refinery could be a win-win for all the parties involved.

The project on the West coast is planned to be developed in two phases – the first phase would involve building a 40Mt plant with aromatic complex, naphtha cracker unit and a polymer complex while the second phase would be a 20Mt refinery. If the deal takes shape it would help Aramco to cement its position as an important player in the Indian market despite it being a late entrant to India.

Other long-term opportunities in India
Saudi Aramco can also benefit from India’s huge agricultural base contributing for 14% of India’s GDP; it is the second largest urea importer in the world. The total demand for urea is 32Mn tons out of which India managed to produce 24.5 Mn tons importing the rest. To reduce the dependence on foreign sources, the Government of India has been pushing to increase domestic production and improve fertilizer availability in the country. It has announced plans to revive some of its old fertilizer units as a well as upgrading the current ones. While the feedstock is currently expected to be sourced locally, the demand for food and productivity improvements (through use of fertilizers) could open up a long-term natural gas supply contracts for these plants which Aramco could capitalize on.

Besides that India’s appetite for specialised chemicals such as coatings, adhesives, sealants, elastomers etc. is rising with growth in the economy. Its elastomers market alone is worth USD 900Mn driven by the robust automobile demand.  Regulatory intervention by environmental agencies aimed at carbon emission reduction through an increase in fuel efficiency has also made major automotive OEMs in India to increasingly opt for plastics as a substitute to metals and alloys in automotive components.

Saudi Aramco’s IPO, when it arrives, would be a game changer for the global investment community going by the expected valuation. With this IPO being a centrepiece of the economic reform currently being undertaken, its entry into new and growing markets, and shedding its secrecy-bound image no doubt sends a very positive and welcoming message to potential investors.


This article is published in "Marmore Blog"
 

Tags:  ARAMCO, ECONOMY, INDIA, INVESTMENT, KSA, SAUDI

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 Current rating: 0 (3 ratings)

Brexit’s multi-level impact on GCC

Date : 28/06/2016
Author:  Marmore MENA

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The outcome of the vote and the resultant decision of Britain to leave the European Union (EU) caught the financial markets by surprise. The broad sell-off across continents and asset classes could be because of misplaced initial expectations for a “Remain” victory. Following the results, global markets lost USD 2.1 trillion in value while British pound dropped from a high of (GBP/USD) 1.50 to a low of 1.32 (fall of 13%), a new 30-yr low before recovering to close at 1.37 (loss of 8.1%).

GCC markets remained relatively unscathed except for UAE markets; Dubai index lost 3.3% while Abu Dhabi lost 1.8%. Dubai being largely a service economy driven by trade & services, tourism and real estate witnessed a fall as British pound lost 7.2% in value against UAE Dirham. Investor’s feared the depreciation of pound against AED would affect real estate investments and tourist’s inflow from Britain. Among non-GCC investors in Dubai, after Indians nationals, British nationals had invested AED 10billion (USD 2.7bn) in Dubai real estate in 2015 according to data from Dubai Land Department. Tourism inflow from Britain to the GCC would also get impacted on account of the depreciating GBP. 
 
How significant is Brexit?
In order to assess the significance of Brexit event we compare the equity volatility levels over the years. As seen in the figure, the equity volatility index implies an anxiety level that is much lower than the ones witnessed recently such as Chinese yen devaluation or the scare in February, 2016 when U.S Fed announced they wouldn’t rule out negative interest rates after Bank of Japan introduced negative rates.
 
Impact on GCC’s Economy 
Britain exit from European Union has added an element of uncertainty that could further dampen global economic growth by delaying capital expenditures and sapping global consumer confidence. Impact on oil would be minimal since Britain consumes only 1.6% of global consumption and ranks 15 among global consumers. The more serious impact would be if there is contagion to the rest of the European Union. Further, as capital shifts into safe haven assets such as U.S treasuries, it would lead to further strengthening of U.S dollar. . Stronger U.S dollar would make imports from Britain cheaper as most of the GCC currencies are pegged to U.S dollar. GCC imports a lot of luxury cars from UK manufacturers such as Bentley, Aston Martin etc. which would all become cheaper. Capital equipment imports from Britain for other sectors such as telecom, power etc. would also become cheaper.
 
The uncertainty caused by Brexit outcome would act as a headwind to global growth, particularly in the U.S, and as a result U.S Fed could delay increasing their interest rates. Lower interest rates for longer bodes well for GCC economies as it helps to revive their economies which are bruised by the fall in oil prices. GCC governments could act swiftly to raise capital from international bonds before the rates start rising again.

Protectionist policy to the fore
One of the important implications of the vote is that the positive effects of globalization have not trickled down to all. The growing inequality as a result of stagnating incomes, especially for low skilled workers, due to technological advances resulting in plateauing of labour productivity has led to displeasures among the voting majority. They largely feel threatened by trade and immigration policies and fear their jobs are either being replaced by immigrants or outsourced to people in emerging countries. Backlash on globalization doesn’t bode for emerging markets and in particular GCC economies as they have largely benefitted from free flow of capital, labour and goods.
 
Impact on GCC's Investments in British Real Estate
Realty agents and analysts opine the exit from EU would end the housing boom in Britain bringing the price rises to an abrupt halt. Realty transactions are bound to be thin as buyers would prefer to ‘wait and watch’. Commercial real estate, especially office spaces, would be hit as multinational organizations reassess their strategy to stay in London, which so far had served as a gateway for EU markets. It is estimated that over 100,000 jobs could be relocated out of London and as a result office rents could drop by as much as 18% in the next two years (Jefferies (Mike Prew), sourced from Financial Times).
 
Sovereign Wealth Funds (SWFs) and HNIs in GCC are known to invest heavily in London's real estate. For instance, Investors from the UAE accounted for more than 20% of buy-to-let property sales in the UK in 2015. Qatar Investment Authority (QIA) is among the high-profile investors in London real estate, snapping up landmarks such as the Shard skyscraper, Harrods department store and Olympic Village (Reuters). Value of their holdings would be marked down due to the fall in pound value. The ensuing uncertainty would lead to investors demanding a premium, subsequently, the prices could further decline. 
 
On the other hand, a steep fall in real estate prices in Britain (especially London) may also see fresh investments from GCC into the country on account of bottom fishing.
 
Impact on Trade with GCC
GCC region has been in talks with EU region for over 25 years and the Free Trade Agreement (FTA) between the regions is still pending. Having lost of access to EU, Britain to sustain its exports would be aggressive to sign bilateral trade deals. This presents an opportunity for GCC regions, especially Dubai, as it acts as a trading hub for MENA region as well as a gateway for African continent. Establishing bilateral trading agreement with Britain would be possible and this is a positive for GCC economies
 
Impact on GCC Equities
GCC equities may continue to fall in the short-term, in line with global trends, as risk aversion engulfs investor sentiments. However, we feel the direct impact of Brexit is minimal on GCC equities as their earnings prospects are little affected by the event. As a result, we expect equities to gradually recover as their movements are largely dictated by domestic factors and oil prices.

Tags:  Brexit, Economy, estate, EU, GCC, Investment, Real

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 Current rating: 4 (3 ratings)

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