Richard Thompson, Editorial Director, MEED,

richard.thompson@meed.com

@MEEDEditor

www.meed.comrichard.thompson@meed.com

in headlinesSaudi Arabia releases payments to contractors – MEED

Saudi Arabia concludes record bond sale - MEED

Opec reaches deal to cut oil production - MEED

Saudi Arabia acts on public sector wage bill - MEED

Moody’s cuts debt rating of three GCC states – MEED

Abu Dhabi's Adnoc cuts 5,000 jobs – MEED

Saudi prince reveals economic vision – MEED

GCC banks hike provisioning – MEED

Iran sanctions lifted – MEED

Riyadh breaks off diplomatic ties with Iran – MEED

• lower oil prices have increased business uncertainty

• Government spending cut and regional liquidity reduced

• Maintaining revenues and cash flows are biggest challenge

• Increased bank caution on lending exacerbating cash crisis

• Growing number of companies struggling to access working capital

• Security and cybersecurity risk growing

OIL PRICES DOWNStockpile build up in US crude storage

Resumption in Libya oil exports Ramp up in Nigerian crude production

New Iranian capacityHigher prices bring back oil shale

$51.78/barrel

$26/barrel

OIL PRICES UPNoises about Opec production cuts Worries about global supply outagesDeclining US production – 50% rig fallWildfires in Alberta's oil sands region

$50/barrel

• Oil expected to remain stable at about $50 a barrel for the rest of year • Oil prices set to stay low as global supply is outpacing demand growth • Regional oil producers maintaining production to retain market share• IMF forecast for Brent average $50.1 a barrel in 2017, rising gradually to $57.5 by 2021

Source: ft.com

$50/barrel

Bahrain Kuwait Oman Qatar Saudi Arabia UAE

$50/barrel

“[The recovery in oil prices] does not fundamentally change the outlook for oil prices or the implication for oil exporters in the region. Oil exporters will continue to face some difficult policy choices, both to balance their budgets and to diversify their economies to become less dependent on oil.”

- Masood Ahmed, IMF Director of Middle East and Central Asia

Mena exporters lost $360bn in oil revenue in 2015 down 23% in 2015, 16% in 2016

Fiscal breakeven point ($ a barrel)

• Oil price rises have eased fiscal pressure but reforms still needed to balance budgets• Combined fiscal deficit of GCC in 2016 is estimated at $160bn, or 12.8% of GDP• Between 2016 and 2019, Bahrain, Oman, Kuwait and Saudi Arabia expected to run

average annual fiscal deficit of 10%, while Abu Dhabi and Qatar will see 4%• GCC needs to finance a combined budget deficit of $765bn between 2015 and 2021

GCC Bahrain Kuwait Oman Qatar Saudi Arabia UAE

The new policies that will drive the market

Diversify non-oil revenue streams – taxation, fees

Drive structural reform programmes – privatization, private sector

Efficiency drive – restructuring, job cuts (Abu Dhabi), wage cuts (KSA)

Energy reform – subsidy cuts, diversify energy, IPP/IWPP

PPP for infrastructure – wastewater, power, housing

Diversifying funding – borrowing, assets, IPO

Localisation of employment

Investment drive – markets, PPP, green cards

• GCC needs $560bn to finance government deficits to 2019• 60 per cent of this will be in Saudi Arabia, which needs to find $389bn to

finance government spending and investment to the end of 2021• S&P expects the kingdom to borrow as much as $180bn by 2019• Deficits financed by a mix of drawdowns on reserves, and debt• Fiscal balance after 2019 depends on the speed of implementation of

government reforms such as subsidy cuts and value added tax, and oil prices.

Source: Standard & Poor’s

• Kuwait, Abu Dhabi, Qatar and Saudi have large reserves but these are finite• Liquidity is falling and uncertainty will push up the cost of GCC borrowing• Saudi’s net asset position will decrease by 30% by 2019 and Kuwait’s by 20%• Saudi used $170bn of FX reserves from Aug 2014 peak to $562bn by Aug 2016• GCC sovereigns will choose different mixes of asset and debt funding• Qatar relying most on debt and Kuwait most on drawing down reserves

Projected gross government debt (% of GDP)

Source: IMF

GDP growth in the GCC: 2016 = 1.7%2017 = 2.3%

Mena GDP growth outside GCC: 2016 = 3.1%2017 = 2.9%

Average 2009-2013

2016 2017

Egypt 3.2 3.8 4.0

Iran 0.8 4.5 4.1

Iraq 7.8 10.3 0.5

Source: IMF

Average 2009-2013

2016 2017

Bahrain 3.6 2.1 1.8

Kuwait 1.9 2.5 2.6

Oman 4.8 1.8 2.6

Qatar 10.9 2.6 3.4

Saudi Arabia

4.1 1.2 2.0

UAE 2.6 2.3 2.5

Source: IMF

2010-2015

0

10,000

20,000

30,000

40,000

50,000

60,000

Bahrain Kuwait Oman Qatar Saudi Arabia UAE

2010

2011

2012

2013

2014

2015

• Gulf down 0.7% YoY to $3.45tn

• GCC up 0.8% to $2.82tn

• Saudi Arabia down -1.1% to $1.18tn

• UAE up 2.6% YoY to $867bn

• Iran up 17.5% to $286bn

• Qatar down -4.3% to $270bn

• Kuwait up 1.0% to $247bn

• Oman up 14.4% to $194bn

Value of projects planned or underway in the Gulf ($bn)

Source: www.meed.com

• Oil prices hit government finances• Investment plans under review • Revised master planning• New delivery models - PPP, TODs• Efficiency focus• Big Data/technology• Security –physical, cyber• Costs – subsidy cuts, fuel costs, tax• Transport integration

• $164.8bn of project contract awards in the GCC in 2015

• Down 3% on $170.6bn of awards in 2014

• Saudi Arabia and Kuwait saw an increase in awards in 2015

• The UAE and Qatar saw the value of project contract awards fall in 2015

2015 contract awards ($bn)

Source: MEED Projects

$3.2bn

$31.5bn$13.6bn

$29.3bn

$49.8bn$37.4bn

$164.8bn

0

20

40

60

80

100

120

140

160

180

Bahrain Kuwait Oman Qatar SaudiArabia

UAE GCC

Pro

ject

co

ntr

act

awar

ds

($b

n)

• GCC awards forecast to be down about 16% in 2016 to just over $140bn

• This could fall to $120bn – 27% down on 2015

• Worst affected will be Saudi Arabia

• Iran and Egypt offer strong potential, but depend on the political situation

• UAE, Kuwait, Qatar and Oman will be marginally down

2016 contract awards ($bn)

$2.8bn

$24bn

$13bn

$22bn

$41bn

$37bn

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

Bahrain Kuwait Oman Qatar Saudi Arabia UAE

Pro

ject

aw

ard

s ($

m)

Total GCC awards forecast at start 2016 = $140bn

Source: MEED Projects

Total GCC awards forecast mid-2016 = $120bn

Source: MEED Projects

pipeline

By marketSaudi Arabia has biggest pipeline of planned projects, about $800bn

The UAE is second, with $600bn

Qatar at $200bn of planned projects

Kuwait at about $175bn

By sectorConstruction sector – buildings, property and real estate – offers the biggest segment of future projects, with a pipeline of about $1tn

GCC power and transport projects each have about $400bn-worth of schemes planned

UAE is one of the best placed to rebalance its budget and adjust to low oil

Economy diversified and supports large and experienced corporations active in regional and global markets$500bn-worth of public and private savings

Banking system liquid and well-managed

The economy will recover robustly in 2017 on rebound in the oil price and increased public and private sector activity

This will be supported by preparations for Expo 2020 in Dubai and increasing trade with Iran

Annual real GDP growth (%)

Average 2009-2013

2016 2017

UAE 2.6 2.3 2.5

Source: IMF

Cut spending fast and hard

Acted to end or reduce energy and other subsidies; and preparing for the introduction of value-added tax (VAT) and other forms of taxation for the first time to increase public sector revenue

UAE as a whole will post deficits of just 3.9% of GDP in 2016 and 1.9% in 2017

The sharp cut in government spending will reduce non-oil GDP growth to just 1% in 2016 and 1.3% in 2017

This has been reflected in slowing projects and real estate markets

A new CEO has been appointed at Abu Dhabi National Oil Company (Adnoc) and radical changes were announced in May

More diversified than the rest of the GCC and less-reliant on oil revenue

Expected to maintain GDP growth of 3.3% in 2016, rebounding slightly to 3.6% in 2017

It has kept government spending relatively high, partly due to the upcoming Expo 2020. By mid-2016, Dubai had awarded more than $16bn-worth of deals.

Real estate remains the key driver of the emirate’s projects market, although the importance of transport growing in line with efforts to develop city rail networks and improve airport infrastructure. Power schemes have also become a focus of activity as Dubai looks to establish itself as a world leader in solar energy.

The largest sectors for future projects are construction, followed by

transport.

In addition to Abu Dhabi’s metro and light rail plans, there is the expansion

of Dubai’s Al-Maktoum International airport and further phases of Etihad

Rail’s federal railway to execute.

$507bn Contracts awarded in the UAE between 2006 and 2015

$154bn Value of projects of under construction in the UAE

$629bn Project pipeline in the UAE

$22.6bn Value of projects awarded in the UAE in the first half of 2016

$16bn Value of projects awarded in Dubai in the first half of 2016

Source: MEED Projects

pipeline

Tendering$69bn

Execution$571bn

On Hold$165bn

Sudy/Design$222bn

Private sector activity in the kingdom slowed sharply in 2016, following delayed payments on government contracts and reduced spending

Non-oil GDP growth is projected to slow to 2.3% in 2016, then 1.1% in 2017

Saudi needs to follow through on plans to finance and reduce its budget deficit, following a successful $17.5bn international bond issuance last week

This represents a GCC-wide move towards diversifying budget financing including drawing down on assets, domestic debt, and increasingly from international markets to reduce excessive reliance on domestic market, which can aggravate low banking sector liquidity and crowd out private sector

Riyadh has sold local banks a total of $28bn-worth of bonds in the 12 months ending August. Their capacity to buy more is limited, but at least $10bn could be comfortably placed with domestic investors annually

Kingdom expected to run a 13% fiscal deficit in 2016, declining to 9.5% in 2017

Source: MEED Projects

pipeline

Tendering$107bn

Execution$485bn

On Hold

$179bn

Sudy/Design$588bn

Source: MEED Projects

The slowing projects market and more difficult environment for the construction sector will lead to rising non-performing loans and higher provisioning costs, according to US-based Moody’s Investors Service last week

Moody’s expects NPLs to rise to around 2.5 per cent of gross loans in 2017, from around 1.5 per cent estimated as of June 2016.”

“The Saudi construction sector has been negatively affected over the

last two years by slowing economic activity and fiscal consolidation

measures, stemming from a lower oil prices environment. We expect the

pressures to continue as the Saudi government aims to reduce its large

fiscal deficit”

- Olivier Panis, senior credit officer at Moody’s

On 25 April, Deputy Crown Prince Mohammed bin Salman al- Saud unveiled much-anticipated Vision 2030 plan, which outlines economic reforms that will wean the country’s oil-dependent economy off hydrocarbons

• Grow private sector to 65% of GDP from 40%• Implement transparency reforms• Structural reforms of mining sector• Privatise government services• Government becomes regulator• Private investment in healthcare, municipal services, housing, finance and

energy sectors• About 146 state assets that could be privatised or sold to the public• Less than 5% of Saudi Aramco to be sold in IPO• Transfer Aramco to PIF• PIF assets rising from SR600bn to more than SR7tn• Localisation of oil & gas sector from 40% to 75%• Launch the King Salman Renewable Energy Initiative

National Transformation Plan is hitting all areas of public spending

• Min of Electricity & Water split between two Ministries • Replacing multiple key ministers• New heads of Aramco, the Saudi Arabian Monetary Agency, the Saudi

Railway Company and the National Water Company• Restructuring General Authority for Civil Aviation (GACA)

Many plans postponed and new consultants being hired to set new strategies and to advise on new privatisations

Confusion for developers, contractors and banks

Project pipeline will return with emphasis on private investment.

Contract awards in Saudi fell 60% between H1 2015 and 2016

The National Transformation Plan (NTP) aims to reduce Saudi Arabia’s public sector wage bill from 45% of government spending to 40% by 2020

• 27 Sept: Cabinet issues decree cutting ministers’ pay by 20% and suspending public sector bonuses or pay rises

• Stipends paid to the Shura Council members were cut 15 per cent.

• The decree also freezes public sector hiring, and indicates that foreigners in non-essential positions should be terminated

• Existing public sector employees should be recycled to fill key vacancies.

• Benefits such as allowances, phones and cars have also been cut, as well as allowances to students studying abroad, diplomats and health workers.

• Saudi Aramco is also asking foreign firms to hire more Saudi Nationals

Ministry of Economy seeking advisor to develop pipeline of public private partnership (PPP) projects

National Transformation Plan (NTP) aims to carry out five PPP projects by 2020, without specifying sectors or projects.

The PPP model is also expected to be applied in transport, health and education.

Taif airport PPP has been put on hold, due to a concerns over revenue streams

Saudi Arabia is expected to go ahead with PPP projects without a dedicated legal framework, using existing commercial law

• Sale of up to 5% of Aramco shares worth est. $100bn. Even 1% would be biggest IPO

• Aramco working on IPO options, including dual listing could also consider listing on the Tokyo Stock Exchange – 5 Sept

• Final proposal to be presented to the country’s Supreme Council. Could see listing in 2017

• Transfer remaining ownership to Public Investment Fund which will inflate to $2 trillion and help it invest at home and abroad

• Tokyo has no plans to be a strategic investor in Saudi Aramcobut may invest in industrial ventures in kingdom - Yasutoshi Nishimura, 18 Sept

Source: MEED Projects

pipeline

Tendering$45bn

Execution$169bn

On Hold$40bn

Sudy/Design$56bn

Source: MEED Projects

pipeline

Tendering$25bn

Execution$112bn

On Hold, $9.8bn

Sudy/Design$111bn

Source: MEED Projects

pipeline

Tendering$34bn

Execution$86bn

On Hold$22bn

Sudy/Design$75bn

Source: MEED Projects

pipeline

Tendering$9.5bn

Execution$31bn

On Hold$14bn

Sudy/Design$29bn

2016 is a tough year for GCC projects with delays and late payments squeezing cash flow, and banks tightening lending in preparation for rise in non performing loans

2017 will be another challenging year but project spending will resume in albeit at lower levels than before and using new models. 2018 will be stronger recovery

The most important task for the GCC in 2017 is implementing change programmes

Implementation of spending cuts and revenue measures will get progressively harder as the GCC moves from `low-hanging fruit’ such as cutting capital spending to more politically charged cuts to public sector wages. Breaking the social contract

Delivery and assertive programme management is key

Financing will be a primary challenge as market conditions harden

Contradiction between cutting spending, which drives private sector activity, and encouraging the private sector to hire to reduce unemployment

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