Markaz: Oil price, Banking mergers, bond issuances and competitiveness are top economic and investment themes in 2019

15/01/2019

Kuwait Financial Centre “Markaz”, recently released a report highlighting the top economic and investment themes that will shape the economic landscape of GCC in 2019 namely, 1. Oil Prices: Lower for longer? 2. GCC Banking M&A Wave, 3. Gulf Bonds: Coming of Age and 4. How Competitive are the GCC Economics?

Markaz report stated that GCC countries are set to grow at a strong pace in 2019. Combined growth in the region is expected to be at 3.0% in 2019. Oman and Kuwait will be the leaders in terms of real GDP growth, registering 5.0% and 4.1% growth rate in 2019. Kuwait is also well positioned in terms of fiscal balance which is expected to be at 12% of GDP in 2019.

Oil Prices: Lower for longer?

2018 witnessed significant volatility in oil prices particularly during the second half of the year. The oil price breached USD 86 per barrel in October, 2018 before retreating to close at USD 60 per barrel mark. Various investment banks have forecasted their expectation on oil price in 2019 varying between USD 61 to 73 per bbl. The extension of production cut may ease the pressure on oil price in the short-term. Still any possibility of upward movement in oil prices beyond USD 80 per bbl remain bleak as the production continues to rise elsewhere. According to EIA data, U.S. production in 2018 has averaged 1.5mb/d above 2017 levels and U.S. production is likely to surpass 12 million barrels a day by mid-2019.

GCC Banking M&A Wave

GCC countries have witnessed a surge in high-profile merger announcements in recent times, especially in the banking sector. The presence of unusually high number of banks and the fall in profitability linked to low oil price environment have triggered the need for consolidation. Consolidation would provide them with better pricing power and reduce the pressures on funding costs. It would also help in scaling up operations and widening the geographic scope for these banking institutions. The merger between First Gulf Bank and National Bank of Abu Dhabi has triggered a series of announcements regarding mergers within the industry across GCC countries. Likelihood of another high-profile merger between Kuwait Finance House and Ahli United Bank is expected to result in largest Islamic bank in Kuwait and second biggest Islamic bank in the GCC.

Gulf Bonds: Coming of Age

J.P. Morgan announced the inclusion of GCC countries bonds to its Emerging Market Bond Index (EMBI) from January 2019. Upon inclusion GCC countries are expected to have a weightage of 13.8% with Saudi Arabia having the highest weight of approximately 3.1%. Kuwait is expected to have a weightage of just below 1%. Passive investment by index-tracking funds could range anywhere between USD 30bn to USD 45bn or about 30% of the value of outstanding GCC sovereign issuance. Investor interest subsequent to inclusion could help lower the sovereign spreads of the GCC bonds. GCC countries combined have issued a quarter of all new debt sold by emerging markets (EM) in the last three years. Currently, GCC countries share is approximately 14% in the total outstanding EM debt stock. The JPMorgan’s EMBI inclusion will widen the investor base and could lead to increased liquidity of GCC bonds and Sukuk. The EMBI diversified weighting approach which reduces the weight of the largest issuers relative to their amount outstanding will benefit Kuwait. Flows could amount to nearly 50% of Kuwait's outstanding external bonds. Large issuers such as Saudi Arabia and Qatar will have relatively smaller share in terms of percentage-of-debt outstanding.

How Competitive are the GCC Economies

The countries in the GCC region have made significant efforts to reform and increase investments to improve their level of competitiveness. Bahrain, Kuwait, Qatar, Saudi Arabia, and the UAE are in the process of implementing policies to ease the time and cost of starting a business. Kuwait has been ranked 7th globally by World Bank in paying taxes category in its doing business report. The region contains some of the world’s most competitive economies, such as the UAE, Qatar, and Saudi Arabia, ranked 17, 25, and 30 out of 137 countries on the Global competitive index. With a growing youth population in GCC region, creating employment opportunities in the private sector is crucial to ensuring a prosperous future. The macroeconomic environment and labor market efficiency are the two areas where GCC region still lags behind. Efficiency and productivity could be improved by continued privatization, reducing regulatory barriers to entry for domestic companies, and making business environments more welcoming for foreign direct investment and more conducive to the growth of small- and medium-sizes enterprises.

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About Kuwait Financial Centre “Markaz”

Established in 1974, Kuwait Financial Centre K.P.S.C “Markaz” is one of the leading asset management and investment banking institutions in the MENA region with total assets under management of over KD 1.06 billion as of 30 September 2018 (USD 3.51 billion). Markaz was listed on the Boursa Kuwait in 1997.