June 2012

Saudi and GCC Opportunities 2012-16

Contents
Summary Oil and Gas Resources Development Plans and Visions Demographic Opportunities Saudi Arabia UAE Qatar Kuwait Oman Bahrain 1 2 4 4 6 18 20 22 25 27

Summary and Key Themes

This report tries to look beyond the short term gyrations in the global economy and assess the medium-term prospects for the GCC economies, focusing on likely progress with implementing government Visions and development agendas, and the associated public spending intentions. The aim is to identify public spending priorities and those nonoil sectors with particularly strong 6 growth prospects, in order to allow private sector participants to position themselves accordingly. In particular, we hope to identify those sectors where the authorities have made a public commitment to involving 20 the private sector, and where possible have outlined any incentives that might be on offer. The key takeaways from our analysis are: Revenues from hydrocarbon resources should be sufficient to support planned development spending and support private sector growth Rapid population growth will provide an incentive to push ahead with development programs and economic reforms Rising government recurrent spending is a concern and has increased the vulnerability to oil price fluctuations, but GCC economies and public finances are structurally strong enough to weather temporary dips in prices We do not expect a return to boom times, but strong and steady growth which will help contain inflationary pressures Governments across the region are keen to diversify their economies away from oil, and have made concrete efforts in this regard. However, projects have been duplicated across countries and there is a danger of overcapacity in some sectors
1

Economics Department
Samba Financial Group P.O. Box 833, Riyadh 11421 Saudi Arabia

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Oil and Gas Resources

Capital flows if remaining proved oil reserves sold at $100/b Reserves b/b US$ trillion Saudi 264.5 21.2 Kuwait 101.5 8.1 UAE 97.8 7.8 Qatar 25.9 2.1 Oman 5.5 0.4 GCC 495.2 40
Large oil and gas resources provide a solid base for growth While global growth is likely to remain sub-par for a few more years yet and subject to heightened risks (see Box), prospects for the GCC through 2016 are encouraging. A key factor in the GCCs favour is the structural strength of members economies, as reflected in healthy public and external finances, sound banking systems; increasing integration with stronger emerging market economies and, critically, their extensive hydrocarbon resources (for more analysis see our 2011 report The GCC: Prospering in Uncertain Times). These resources generate large revenues and, while endowment is mixed amongst GCC states, most have enough reserves of oil and gas to enable them to maintain output at current levels or higher for many years to come (see chart), providing a solid foundation for future revenues. The scale of such revenues will depend on prices, but they seem likely to remain large. Longer term oil price projections are always uncertain, but the likely evolution of global oil markets suggests that average prices will remain relatively high over the next five years. Risks of short-term price declines are clearly present, but the underlying trend is positive. New empirical research undertaken at the IMF points to a near doubling of the real price of oil over the coming decade (see IMF Working Paper; The Future of Oil: Geology versus Technology) while projections put out by major energy agencies suggest that prices will hold at between $100-125/b for Brent through 2016 as demand for oil continues to grow in emerging markets. Increasing global production and use of gas will divert some consumption away from oil but, barring a major technological breakthrough, oil will continue to be the dominant fuel for transportation. Even though oil output is increasing in other parts of the world, with over a third of world proven oil reserves the GCC is still seen as a major source of supply growth to meet this growing demand. Saudi Arabia, the UAE, and Kuwait will be particularly important sources of supply. While annual output levels will vary with OPEC quota developments for those GCC states which are members, average production in the GCC is thus expected to remain close to current levels or higher through 2016. Hydrocarbon revenues have surged and are likely to remain substantial This combination of production and prices will generate large oil and gas revenues ensuring that GCC finances remain robust. This in turn will allow governments to finance development and diversification programs while still running healthy fiscal and
2

Proved Oil Reserves (000 m/b, 2010; BP)

Non-OPEC 23% 314.8

OPEC 77% 1068.4

of which GCC 36% 495.2

120 100

Hydrocarbon Reserves 2010 (years of remaining production - r/p ratio; BP)

100+ 100+

94
72

96

100+

80
60 40 20 0 Kuwait UAE

45 17

26

17

Saudi

Qatar

Oman

Bahrain

oil

gas

June 2012
current account balances. In addition, a continued build up in external assets will also allow for a smoothing of spending should oil prices and revenues temporarily dip. The scale of potential capital flows to the GCC over coming years is certainly large. If remaining proved oil reserves sell for $100/b they would generate capital inflows of around $50 trillion over half accounted for by Saudi Arabia. Even at $80/b, which is probably close to the marginal cost of production, flows would still reach $40 trillion. Added to this are the capital flows from gas resources, including from related downstream industrial activity. GCC states are sitting on substantial reserves of gas (see chart), and for countries such as Qatar, and to a lesser extent Oman, exploitation of these reserves have generated wealth and driven development. Box 1: Global Economic Growth Advanced economies are still undergoing an uncomfortable period of transition in the aftermath of the bursting of housing and credit bubbles which began in 2007-08. Large debt overhangs, fiscal deficits, private sector deleveraging and bank balance sheet strains continue to present headwinds to growth and still need more time to be resolved. Aging populations make the task even harder. Dealing with these problems has heightened political disagreements in the Eurozone over the balance between austerity to control debt and deficits, and stimulus to restore growth and employment in the face of renewed recessions. In these conditions the risk of politically driven policy errors leading to another financial crisis are elevated Greece and its potential exit are a key concern - and prospects for growth are clouded. Further policy stimulus is a possibility but is likely to suffer from diminishing returns and may delay the reforms needed to restore fiscal sustainability and competitiveness in peripheral economies. Growth in the US should be more robust, although deep structural problems still need to be resolved, and these will act as a drag. With stronger public finances and more room for monetary stimulus, emerging markets should be able to generate healthy growth, although there will be some pull back from slowing trade. Under such conditions advanced economy interest rates are also expected to stay low through 2014. However, inflation risks will be a mounting concern as we head towards 2016 given the exceptional monetary easing and expansion of central bank balance sheets of recent years

Global growth is likely to remain sub-par through 2014 (which would mark 7 years since the start of the crisis) with the possibility of a stronger pick-up thereafter

6 5 4 3 2 1 0

World Real GDP ( percent change; IMF,Samba)

2004

2013

2003

2005

2006

2007

2008

2009

2010

2011

2012

2014

2015

-1

2016

June 2012

Development Plans and Visions

GCC: Development Plans ($bn) A.Dhabi Saudi Qatar Kuwait Oman GCC 160 385 226 125 31 927 2008-13 2010-14 2011-16 2010-14 2011-15

Large development programmes aim to deliver sustained growth Mindful of their heavy reliance on oil and gas sectors, all GCC states have embarked on strategies and programs designed to diversify their economies, enhance private sector activity, improve education standards and boost employment for nationals. These efforts include large public spending programs on infrastructure, education and health with supporting investments envisaged from the private sector. Not all are fully costed out, but Saudi Arabias 9th Development Plan covering 2010-14 envisages spending of $385 billion. Kuwaits development plan proposes $125 billion over the same time frame, while Omans 2011-15 plan envisages $78 billion in expenditure. Meanwhile, Abu Dhabi, Bahrain and Qatar have established Vision 2030 frameworks and national development plans/strategies to achieve those visions. The National Development Strategy (NDS)for Qatar covering 2011-16 envisages spending totalling $226 billion, while Abu Dhabis Vision 2030 report estimated spending of $160 billion during the five year period 2008-13. All GCC plans highlight investment opportunities in such sectors as transportation, power, water, utilities, health care, housing, ITC, education and training. Spending on infrastructure is expected to be particularly large in the coming years offering large opportunities in the construction sector. Transport projects are particularly prominent, with all GCC states planning to develop new interlinked train networks, as well as boosting roads, airport and port infrastructure. Demand for power is also rising strongly throughout the region as economies develop and older generating plants commissioned in the 1970s and 80s need upgrading. More country specific details are provided in the sections that follow below.

GCC: Planned Transportation Projects ($bn)

Aviation Bahrain Kuwait Oman Qatar Saudi UAE 4.9 3.4 12.6 15.2 19.6 8.7 Rail 7.9 14 2.5 36.8 40.7 17.5 Roads 1.2 8.2 10 7.2 4.1 25.8 Ports 0.9 2.66 7.9 11.5 9.1 3.8 Total 14.9 28.3 33.0 70.7 73.5 55.8

Source:MEEDProjects

750

GCC: $1.9trn of Projects Planned or Underway ($bn, MEEDProjects)

560

225

205

115

65 Bahrain

Saudi

UAE

Qatar

Kuwait

Oman

Demographic Opportunities
GCC populations are young, growing and relatively wealthy, providing both opportunities and challenges. According to IMF data, the total GCC population has grown by nearly 19 million people since 1990, with more than half of the increase in Saudi Arabia. Central bank data show that the Kingdoms total population has grown by an annual average rate of 3.4 percent since 2004 to reach 27.6 million at end-2010. This rate of growth is forecast to continue for most of the forest period, though
4

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GCC: Population Change (million) 2010 Saudi UAE Kuwait Oman Qatar Bahrain GCC 28.5 4.7 3.1 2.9 1.6 1.3 40.9 2016 33.6 5.2 3.5 3.6 2.0 1.5 49.4 increase 5.1 0.5 0.4 0.7 0.4 0.3 8.5
+72%

there might be some softening as we move into 2016 and beyond. The smaller GCC states have grown even more rapidly (see chart), but from a much smaller base. Growth has come from increases in national populations as well as large inflows of migrants. These expanding populations have been key drivers of economic development in the region, and the increasingly urbanised GCC middle class has provided a growing consumer base for businesses. Looking ahead the total GCC population is projected to grow by another 8.5 million people between 2011 and 2016, the bulk accounted for by Saudi Arabia (5.1 million). In the UAE, the past extremely rapid rate of expatriate driven growth is expected to slow significantly. A similar trend is expected in Qatar, although it is likely to see a temporary surge in expatriate numbers as workers are pulled in to implement the NDS and world cup preparations. Elsewhere population growth is expected to continue at around 3 percent pa. Growing populations will require increased provision of infrastructure and services and act as a strong incentive to GCC governments to press ahead with their development and diversification programs in order to provide employment for the growing labour force. Population profiles in the GCC are distinctly youthful (around 30 percent of Saudis are aged between 15-29), which makes job creation a pressing issue, and this has been the key principle guiding economic policy for some time Younger people also have distinctive consumption patterns and despite the brisk rate of population growth are expected to benefit from rising per capita incomes. Strong growth will create particularly wealthy consumers in the smaller oil rich states of Qatar, Kuwait and Abu Dhabi (see table).

25 20
15 10 5 0

GCC: Population Growth 1990-2010 (million; IMF)

+10.9

+174%

+131% +0.6
Bahrain

+303% +1.3 Qatar

+83% +1.4 Oman 1990

+69% +1.5 Kuwait 2010

+3.2 UAE Saudi

GCC: Per Capita Income ($,000) 2010 2011 2012f 2013f 2014f 2015f Saudi 16.2 20.2 20.3 20.2 21.3 22.7 UAE 65.3 72.6 79.5 80.4 84.3 89.0 Kuwait 41.4 55.2 61.5 59.0 59.9 62.8 Qatar 82.7 108.8 113.2 120.9 125.6 127.2 Oman 20.0 25.4 27.3 25.9 26.3 26.3 Bahrain 18.5 20.6 20.4 20.6 20.7 20.7 GCC 26.5 32.4 33.9 33.8 35.2 36.9

2016f 24.2 92.8 67.0 128.4 26.5 20.8 38.7

June 2012

Saudi Arabia
Saudi Arabia Real GDP (% change) Nominal GDP ($ billion) CPI (ave. % change) Budget Balance (% GDP) Current Account (% GDP) Oil production (mb/d) Population (million) 2010 4.1 447.8 5.4 5.2 15.4 8.24 27.6 2011 6.8 576.8 5.0 14.8 27.8 9.32 28.5 2012f 2013f 2014f 2015f 2016f 4.8 4.0 4.5 5.6 6.1 596.9 616.4 671.9 738.7 813.5 4.9 5.5 5.6 5.6 5.7 15.2 9.0 8.0 5.3 2.7 27.5 18.7 15.8 11.7 7.6 9.83 9.73 9.83 10.03 10.23 29.5 30.5 31.5 32.5 33.6

Economic Prospects
The Kingdom can expect medium term growth of 5 percent plus Saudi Arabias formidable mineral resources will form the platform for a period of strong economic growth in 2012-16. We expect real GDP growth to average 5 percent in 2012-16, with the rate of real nonoil growth averaging 5 percent. Inflationary pressures should remain manageable, with a good deal of domestic demand neutralised through the import channel. Rents will remain a source of price pressure, but efforts to expand the housing stock should help to soften this as we move through the next five years, and inflation should stabilise at around 5.5 percent per annum. Interest rates will move broadly in line with US rates (there will be no change to the currency peg) and are thus expected to remain at historic lows at least until the end of 2014. A gentle increase in rates is in prospect for 2015-16. Government spending will remain the engine of economic growth. History has shown that increased government spending feeds through rapidly and significantly to the nonoil private sector (see chart). Encouragingly, under our oil price and production assumptions we expect that the government will have plenty of money to spend during the forecast period. Overall hydrocarbon earnings are expected to stabilise at around $285 billion. Add in non-oil revenues and total government revenue is expected to hold at around $300 billion a year during 2012-16.

Saudi Arabia: Government Spending and Revenue (SR billion; MOF, Samba)
1400 1200 1000 800 600 400 200 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Spending Revenue

Wages and salaries will continue to claim the bulk of current spending With very little debt to service or pay down the main call on government revenue is wages and salaries, which tends to absorb 25-40 percent. Spending on this item varies in line with the Hijri calendar (a 13th month of salary is payable in 2013 and 2016) but the overall trend is decidedly upwards. The public
6

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Saudi Arabia: Government Spending by Type (percent of total; IMF)

Capital spending 30%

Wages 35%

Interest payments 1% Specialised credit institutions 14%

Supplies & services 16%

Subsidies 4%

sector is still the employer of first resort for most Saudis. Thus the strong population growth rate and a brisk rate of inflation (5 percent plus) means that spending on wages and salaries will likely increase by around 6.5 percent a year during the forecast period. Spending on supplies and services should increase at a similar rate, while subsidy spendingwhich encompasses domestic fuels and certain foodstuffswill grow at a brisk pace given the rate of domestic consumption of gasoline, etc. Spending on unemployment benefit is also likely to show some strength in the first part of the forecast period as more people register for the first time. Overall current spending is therefore likely to grow at an annual average rate of around 3.5 percent. Public investment growth is set to cool, but it will remain firm Despite increasing recurrent spending demands there remains room to sustain large capital spending while still keeping the fiscal accounts in surplus through 2016. Historically, capital spending has been quite volatile, tending to be cut back sharply during years of low oil prices, and recovering rapidly when oil prices bounce back. However, since 2002 when the steady ascent of oil prices began, capital spending has been exceptionally firm, reflecting in part the authorities efforts to make up the Kingdoms infrastructural deficit. From 2003-2011 capital spending grew by an annual average of 26 percent. The countrys infrastructural needs are still pressing, as we will discuss below, but the deficit in many sectors has narrowed and the overall rate of capital spending growth is forecast to cool to an annual rate of around 12 percent in 2012-16.

Saudi Development strategies and opportunities

The Ninth Development Plan will guide public investment
Sector ($ bn) Human Resources (Education) Health Economic Resources Transport & Communications Municipal & Housing Services Total Eighth Plan (2005-09) 128.0 41.1 28.2 15.1 17.5 229.9 Ninth Plan (2010-14) 195.1 73.0 60.7 29.6 26.8 385.2 % increase 52.4 75.7 115.1 96.0 53 67.2

The governments capital spending will form the basis of opportunities for private business. These in turn will be guided by the countrys Ninth Development Plan (NDP), which is worth $385 billion (some 67 percent higher than the previous plan) and runs from 2010-14. The NDP, which is prepared by the Ministry of Economy and Planning (MEP), is a general framework for capital spending, and actual capital spending (in terms of the amounts and direction) may well differ from the plan as circumstances change. Indeed, the authorities development priorities were altered somewhat in early 2011 when HM King Abdullah announced two extra budgetary spending programmes. Most of the items detailed within these programmes affected current spending, but there was also greater emphasis on the need to expand the countrys affordable housing stock.

June 2012
The MEP has traditionally played a low key role in economic policy and development, but following the appointment of the former SAMA Governor, Mohammed al-Jasser, as Minister in December 2011, it is expected to take a more vigorous and proactive approach. First, we will consider the main spending allocations detailed in the NDP, before drilling down to consider some of the subsectors. Education and health continue to claim large share of spending
Education 56% Health 18%

Saudi Arabia: 2004-08 Plan Spending Allocations (MOEP)

Municipal Services Transport 8% 6% Economic Resources 12%

The biggest single allocation is to education (human resources). This fits with the demographic challenge outlined above and is aimed at all levels of education, with the overall goal of making school leavers and graduates more likely to secure jobs in the private sector, although it is notable that its share of spending between the two plans declined. Health is another major area of spending. Its share of spending was increased in recognition of the Kingdoms pressing health issues, stemming largely from population growth and the increasing prevalence of lifestyle diseases (see below). Economic resources, which is dominated by utilities, sees its allocation more than doubled and its share of spending rise sharply. This reflects the pressing need to provide enough power and water for a country where demand is increasing by around 8-10 percent a year. Saudi Electricity Company (SEC) says it is committed to spending $60 billion over the next ten years. Transport also sees a near doubling of its allocation. Road building continues apace, and will remain a cornerstone of transport policy in the Kingdom, however, rail and ports are also moving up the agenda. Municipal and Housing services has often been overlooked, but this is likely to become more important over the next five years. First, urbanisation is putting significant pressure on municipal services. Second, as noted above, housing has taken on much greater importance recently. As such, more than the $26.8 billion committed will likely be allocated as the government bids to expand affordable housing. Both housing and municipal services offer good scope for private participation. The authorities are pushing to close the developmental gap between regions Comparing the Eighth and Ninth plans provides some shifts of emphasis. Achieving balanced development among regions of the Kingdom is mentioned much earlier in the preamble to the Ninth plan (objective number 4 compared to number 8 in the Eighth Plan). This appears to be tacit acknowledgement that certain regions of the country have lagged the overall development progress witnessed in the traditional commercial
8

Saudi Arabia: 2009-14 Plan Spdending Allocations (MOEP)

Municipal Services Transport 7% 8% Economic Resources 16%

Education 50%

Health 19%

The authorities are keen to encourage investment in the lesser-developed regions

June 2012
heartlands of Riyadh, Jeddah and the Eastern Province. Jizan Economic City and Prince Abdul-Aziz Bin Mousaed Economic City in Hail represent attempts to steer more investment to underdeveloped areas of the country. The Ninth Plan is explicit in stating that it will strive to implement Council of Ministers Resolution No. 359 of 2008, which grants tax incentives to investment in less developed regions. Specifically, this Resolution grants investors up to 50 percent of the cost of training and the annual wages of Saudi employees working in projects established in Hail, Northern Borders, Jizan, Najran, Baha and Jawf. The Resolution also grants industrial projects and capital expansion in these areas additional tax incentives at a rate not exceeding 15% of paid up capital. More vaguely, the Ninth Plan says that a link will be made between the provision of assistance in the Economic Cities to employment of Saudi manpower. Economic diversification is making solid progress and will continue to shape the economy A further broad priority is the effort to diversify the economy. This has been a maxim of all five-year plans, but in the preamble to the NDP it is put firmly in the context of maximising the return on competitive advantages. Saudi Arabias comparative advantage lies in hydrocarbons (it has at least 90 years worth of oil reserves) and it makes sense to exploit this by creating greater value-added. Oil refining generates value-added in its own right and also opens the door to a variety of industrial productsand jobsthrough the petrochemicals product chain. The key to this is the use of naphtha, from which can be derived a much larger variety of building blocks than ethane, which has been the feedstock of choice for the Kingdoms producers, but which is in short supply. Naphtha can produce aromatics, such as xylenes, benzene and butadiene. These in turn are the basis for products including polyurethane, solvents, nylon, styrene, polystyrene, synthetic rubber and polybutenes. These have far reaching applications, including for packaging, pharmaceuticals, construction and automotive. For investors, the close proximity to raw materials producers negates the need for large inventories; for the authorities, fostering these domestic industries opens up the possibility of significant job creation. A vertically integrated approach is also being adopted in the aluminium sector, where there are plans to harness the countrys bauxite reserves by constructing what will become the worlds largest aluminium complex at Ras al-Khair. The $10.8 billion project, which is a joint venture between Maaden and the US Alcoa, is designed to attract a large number of conversion industries to cluster around the site. Aluminium clearly has a
9

Tax incentives for regional investment are on the table

SIMPLIFIED PETROCHEMICALS PRODUCT CHAIN

ETHANE/METHANE/NAPHTHA

OLEFINS

ethylene/propylene

plastics for packaging, toys, etc; detergents, paper, textiles, polyester fibre & resins

NAPHTHA

AROMATICS

Benzene transparent sheeting, molding & extruding, pharmaceuticals, cosmetics, resins

Toluene solvents, flexible foams, coatings

Xylenes plasticizers, apparel, home furnishings, wheels, rollers, automtive parts

June 2012
host of uses, but the authorities are most keen to foster a sizeable automotive industry. Competing with established automotive manufacturers, such as China and India, might not be realistic, at least in the short- to medium-term. As such, the authorities appear prepared to protect those industries it deems a priority. The Industrial Strategy for 2020, which was prepared by the Ministry of Commerce and Industry, notes that It is commonly held that dumping by competing foreign products may be an obstacle in the way of industrial development*anti-dumping legislation] represent an important incentive [that might be used] to attract more local and foreign industrial investments. Authorities are keen to support a number of nonoil export sectors The authorities are also looking to boost the nonoil export sector more broadly in a bid to enhance diversity, reduce vulnerability to external shocks and create a platform for more sustainable and predicable growth. Evidence suggests that economies based on a single commodity will become effectively diversified only when they successfully create a robust quantity and variety of exports and world-wide purchasers for them. Norway, and to a lesser extent, Canada, provide examples of nations that have done this successfully. Norway invested labour and capital and explored knowledge and technology in industriessuch as manufacturingthat were doing well but had some dependence on oil, so that they could diversify. The Saudi authorities have identified a group of second-tier nonoil exports that have shown growth rates of between 8% and 25% during 2004-07. The government believes that these industries are ripe for additional help in terms of offering information on demand in export markets, organising export promotions, providing competitor information, technical specifications and packaging requirements of key markets. Taking appropriate measures against import dumping is also mentioned again. Fostering a knowledge based economy is given greater prominence in the NDP than in the eighth development plan. This is an important element of hydrocarbons-based economies that have successfully diversifiedagain, Norway is the best example of this. Specifically, the government wants to promote strategic alliances between private national companies and technically advanced international companies in order to foster technology transfer. In addition, the authorities are prepared to use soft loans to encourage the use of modern technologies, especially in the export sector, while simultaneously discouraging the use of unskilled foreign labour. The authorities are especially keen to make a stronger link between education and business by establishing research and development centres
10

Automotive is an industry that is likely to receive a lot of support

Saudi Arabia: Exports Targetted for Official Support Source: Ministry of Economy & Planning Agricultural products Copper Leather products Various plastics Paints and derivatives Jewellery Aluminium Glass PVC Various steel products Vehicle spare parts & accessories

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(such as technology incubators and centres of excellence) that can serve the needs of business. The NDP provides grants for strategic research centres to the tune of $240 million a year, and also speaks of providing an annual $80 million to government agencies and $53 million to private sector firms. The NDP is also explicit in linking the incentives offered to national and foreign private investment with the extent of their contribution to the training and qualifications of national employment. ICT is deemed to be an important sector, though its allocation is small ICT is an important adjunct of the effort to deepen and widen the knowledge-based economy, and has strong potential growth prospects. The Ministry of Economy expects demand for fixed line services to increase by 4.4 percent a year, while demand for mobile services is expected to climb by 5.6 percent a year, with the penetration rate reaching about 194 percent by 2014. Broadband demand is forecast to grow even more briskly, by about 10 percent, with the number of subscribers climbing from 2 million to 3.25 million by 2014 (total penetration will reach 11.4 percent, while residential coverage will reach 47.4 percent). The government wants to narrow the digital divide between the regions. To do this, it has established the Universal Service Fund, which aims to provide full coverage in areas where the market does not provide ICT services. The government also plans to extend broadband networks to all schools, universities, hospitals, government agencies and civil society institutions. Beyond this, it wants to expand e-government services and envisages a shared role for the private sector in this. Various incentives (unspecified) are mooted in the 9th Plan to attract FDI to the ICT sector. Despite the prominence given to ICT and the Knowledge Economy more generally, financial allocations to ICT under the 9th Plan amount to a comparatively meagre $239 million, with a far larger amount of $2.3 billion given over to developing the Saudi postal service. This presumably reflects the advanced liberalisation of the ICT sector and the large role envisaged for the private sector, both domestic and foreign. Box 2: Contracting Spans All Sectors This report has sought to identify those areas of investment that the authorities deem to be priorities and, where possible, the amounts of money that might be allocated to them. Contracting is an activity that spans sectors and benefits from most types of fixed investment. In fact, contracting represents the main transmission mechanism between government spending and the private economy. Saudi contractors are almost always involved in providing at least some of the materials and labour for many
11

There are grants available to support the establishment of strategic research centres

ICT is given prominence in the Ninth Development Plan, but its financial allocation is relatively small

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different types of construction projects. In highly technical and complex industrial projects, this might be confined to civil works, whereas in civil infrastructure projects (such as transport, health or education) they might provide most of the inputs. Contracting is a key activity and its outlook is extremely positive The general outlook for contracting is extremely positive. This report has confined itself to the nonoil sector, but Saudi Aramcos investment seems set to pick up again given the pressing need to source and supply more natural gas. In the nonoil industrial sector, downstream petrochemicals will provide plenty of scope for Saudi contractors, largely on the civil side. A challenge here is the rise of Chinese firms, which appear willing to import all labour and materials themselves. Beyond this, the contracting environment will be supported by government investment in infrastructure of all types, and with the potential for much stronger growth as the push to develop more affordable real estate moves into high gear. Nevertheless, the real estate developer segment is very fragmented, and is hampered by a lack of finance and high land prices. SMEs gain support, but the authorities would like to see more M&A Support for SMEs is a staple of Saudi development plans, though it is notable that this appears lower in the list of objectives in the preamble of the NDP compared to the Eighth Plan. There is recognition of the important economic role that SMEs play in Saudi Arabia, particularly with regard to employment (they are the main source of employment in the private sector), and there is a restated commitment to remove obstacles to the development of SMEs, with a focus on supporting and developing the Kafalah Programme run by the Saudi Industrial Development Fund1. However, there is also recognition that the small scale of many Saudi firms is a constraint in terms of putting in place the most effective technological or corporate governance systems, and also in accessing finance to allow investment growth. Consequently, the Ninth Plan speaks of encouraging enterprises to merge to allow more competitive outfits that can benefit from economies of scale, as well as listing on the stock market to facilitate capital raising. The authorities are especially eager to see mergers and acquisitions in the construction sector, which suffers from fragmentation, particularly in residential housing. Housing is now near the top of the economic agenda Indeed, housing has become a critical social (and hence political) issue and we expect the government to devote increasing

SMEs are a key economic building block, but the authorities would like to see more consolidation in the sector

Under the Kafalah Programme the state underwrites up to 75 percent of the value of a loan extended by banks to SMEs (to a maximum of SR1.5 million).

12

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resources to the problem. King Abdullah made this plain when he pledged, in March 2011, that the government would build 500,000 housing units over an unspecified time period. In fact, the NDP estimated that the number of additional housing units needed during the time frame of the plan is 1.25 million. The Plan identifies an important constraint to an expansion of the housing stock: the provision of buildable land supplied with adequate infrastructure and public services (the Plan estimates that the 1.25 million units will require 350m sq metres of land). The Plan notes that such land is at a premium and advocates the vertical expansion of cities, and re-development of so-called brownfield land within urban areas, as well as the redevelopment of old residential areas and unplanned settlements. Funding constraints are affecting housing on the supply and demand sides The other main constraint is funding, which affects both supply and demand. On the supply side, many real estate developers especially the smaller onescomplain that bank credit is hard to come by, and requires significant collateral to secure. Off plan selling is still officially bannedan understandable reaction to the lessons from Dubaithough the authorities appear willing to consider the issue on a case-by-case basis. Financing is more problematic on the demand side. The NDP makes reference to strengthening the financial resources of the Real Estate Development Fund (REDF), which provides interest free loans to Saudi nationals for home purchases, and the REDF duly had its capital increased by $10.7 billion in the Kings speech. We think further financing will be made available, though the REDFs institutional capacity will also need to be expanded and improved if waiting lists that stretch into decades are to be reduced. Funding sources will also need to be expanded beyond the REDF if the government is to make meaningful progress in reducing the Kingdoms housing deficit. A mortgage law is still awaiting approval. Banks have in the meantime stepped up mortgage lending, though this has mainly targeted the upper and uppermiddle segments, where large down payments are the norm. Passage of the long-awaited mortgage law will become the motor for a sustained period of real estate expansion Despite the long wait for the mortgage law, we are confident that it will be passed and will provide the basis for substantial growth in the countrys housing sector over the next five years and beyond, and will in time become one of the main drivers of the construction/contracting sector. This will also foster ancillary services, such as real estate, surveying, and insurance.
13

300 200 100

Saudi Arabia: Housing Construction: Planned vs Actual ('000 units per year; Saudi Arabia Five Year Plans, MOEP)

0 2000-04 2005-09 2010-14

Demographic based demand (nationals) Government's construction target

Actual construction

There are significant funding constraints to be overcome on the supply and demand side

We expect the mortgage law to be passed and this should herald a period of major real estate expansion

June 2012

Box 3: Housing and Consumption Home ownership has a significant influence on consumer spending. Currently, the dearth of affordable housing means that many young people tend to stay at home with their families for extended periods of time, in the process delaying marriage. Without mortgages or rent to pay, or children to raise, more disposable income can be devoted to items such as cars, clothes, and electronic items. If the mortgage market took off and affordable housing became much more widely available, then young Saudis would be able to leave the family home and marry and start families earlier. This would therefore accelerate the shift away from electronics, cars, etc, towards consumer durables, furniture and financial services. One might also expect a softening of overall spending by this segment as mortgage payments began to eat into disposable income. In the long term however, the demographic cycle might turn again: it is possible that the liberalisation of home ownership would in turn encourage a fresh baby boom, which would point to a new youth bulge in the decades to come. Health is another big ticket area, and one where the government is keen to encourage greater private participation: the Kingdom clearly supports expansion of the role of the private sector in providing healthcare services, according to the NDP. Expatriates are already obliged to have health insurance, and that has spurred considerable competition in an overcrowded sector. The sheer volume of infrastructure projects set to be built over the next five years suggest that demand for expatriatesand associated health insuranceis likely to keep expanding rapidly. Compulsory health insurance for nationals would be a fillip for the health sector A major additional catalyst would be the introduction of compulsory insurance for Saudi nationals. In March of this year, the Chairman of the Shura (Advisory) Councils Medical Insurance Committee Dr Al-Eneizi said that the authorities are studying a health insurance program that is expected to be implemented in the next four years. The authorities are probably uneasy about placing a financial burden on the population, but the hard-pressed Ministry of Health is struggling to provide all the services that Saudis demand in a timely manner. Consequently, we think that is just a matter of time before some sort of compulsory insurance schememost likely heavily subsidised by the authoritiesis passed. Islamic insurance (Takaful) would appear to offer substantial potential growth opportunities in this regard.
14

There is potentially a large role for the private sector in the Health sector, though an important catalyst would be the introduction of compulsory health insurance for Saudi nationals

June 2012
The issue of insurance aside, the countrys demographics, along with the increasing prevalence of lifestyle diseases such as type 2 diabetes and heart disease, will remain powerful drivers of health care spending by the government.
Saudi Arabia: Selected Industrial and Infrastructure Projects Source: BNP Paribas, Samba Estimated capital cost ($ bn) Petrochemicals Yanbu Integrated Refinery & Petrochem. Complex 20.0 Jubail (Sadara) New Petrochem. Complex 10.0 Saudi Aramco-Sinopec JV 10.0 Jizan Refinery 7.0 Ma'aden Phosphates Mining Complex 7.0 Petro-Rabigh 2 Extension 7.0 Sabic-Exxon Mobil JV (KEMYA) 4.5 Sipchem 0.7 Aramco Refineries Upgrade Power Pan-Arab Grid (KSA-Egypt Undersea Link) 8.5 Rabigh IPP2 5.8 Renewables KA-CARE 82.0 New Economic Cities King Abdullah Economic City 93.0 Ports King Abdulaziz Port (Dammam) 0.4 King Fahd Industrial Port (Yanbu) 0.2 Jizan Port Airports King Abdulaziz International Airport 8.2 Roads KSA Road Network 4.0 Rail Landbridge Rail Scheme 7.0 Al-Haramai High-Speed Rail Link 6.8

Water demand set to grow by an annual 8.5 percent over next five years Power and water are two sectors that require substantial investment to keep pace with demand. In the NDP it is assumed that total water demand will decline by around 2.5 percent a year from 18.5 billion cu metres a year to 16.3 million cu m/y largely as a result of the withdrawal of subsidies for agriculture. However, we think this is optimistic, and that an increase in demand is more likely as a result of water consumption for industrial and residential use, powered by population growth of around 2.5 percent a year; independent forecasts suggest that water consumption will rise by almost 8.5 percent a year over the next five years. However, although subsidies to agriculture are indeed being (gradually) withdrawn, there is no sign yet that subsidies will be lifted on residential and industrial water use. Consequently, capital investment will remain intensive: the state-owned National Water Company has already announced that it will fund $66.8 billion worth of water and wastewater developments through 2020; around $30.1 billion of this will be capital expenditure, with much of the spending targeted at wastewater projects as water recycling is a major focus. Power demand is also robust, and a stream of IPPs are expected Power demand is witnessing growth of some 8-10 percent. Stateowned Saudi Electricity Companys (SECs) work program includes 33 tenders between 2010 and 2018 for new or expanded power plants, which will boost total capacity by 21.065GW. Saudi Arabia also has 11 new projects under way or due to start in 2012, valued at $8.6 billion, including the $2 billion Al Qurrayah Independent Power Plant (IPP). More IPPs are expected, with one well-placed observer suggesting that SEC will place at least one IPP with the market every year. SEC has not said that any of this additional capacity will come from renewables. Nevertheless, this form of energy is being pursued with vigour by other government agencies because under current projections in 20 years time around half of the countrys electricity output will be powered by hydrocarbons oil that could be sold on international markets or gas that could be used as feedstock for petrochemicals plants. The King Abdullah City for Atomic and Renewable Energy (KA-CARE) is advising the government to diversify its energy mix by adding 41

Subsidies for agriculture and power will need to be adjusted in order to attract major private sector investment, though IPPs will continue to have an important role

15

June 2012
GW of solar, 17GW of nuclear, 4GW of geothermal and waste-toenergy capacity over the next 20 years. KA-CARE says that installing that much solar would meet a third of projected power demand in 2032, leaving a sixth for nuclear and cutting oil and gas demand in half. According to KA-CARE the capital cost of installing the 41GW would be $81.9 billion, with $26.7 billion for operational costs. KA-CARE officials are confident these plans will be approved, and competitive bidding will be started with 2GW in the first quarter of 2013. The strategy includes new regulations and unspecified financial incentives for private investors according to KA-CARE. IPPs could also play role in renewable energy, though again the tariff system will require adjustment IPPs could also form the basis of development in the solar sector KACARE has devised a procurement scheme under which solar powered independent power producers (IPPs) sell electricity to an offtake organization called Sustainable Energy Procurement Company (SEPC). However, the purchase price will need to be higher than the prevailing power price charged by SEC of around 4 cents/kilowatthour (kwh). Saudi Arabia has raised the price of power to industry users, but is unlikely to end the subsidy to residential users any time soon. A mechanism will also have to be found to allow solar to compete with the price that SEC pays Saudi Aramco for gas, reckoned to be $0.75/btu. Transport is a big sector which is intimately tied to economic growth Finding a way of enticing private investment into the Transport sector will also prove tricky Transport is an area that has received a good deal of funding in the NDP. The report acknowledges this, but also says that dependence on public funding should be avoided, particularly given the inherent volatility of oil revenues. Hence, the sector should be opened up to the private sector by liberalising transport markets and promoting competition within them while also taking into account the social dimension in the provision of public transport services. As other Gulf states have discovered, the latter is a difficult tension to overcome, and it is not clear how the authorities will attract private investors to the transport sector unless prices are fully liberalised. The Medina airport extension is an important exception, though this is on a comparatively small scale. For the moment, the government seems willing to finance large transport projects, such as the rail Landbridge project and the Riyadh metro scheme, itself. With the populations of the Kingdoms major cities and new industrial hubs requiring cargo links, the demand for transport links of all types are likely to grow substantially. Finally, municipal services is an area that the authorities are actively seeking to involve the private sector in. Privatisation of the following areas is on the agenda: Operation of public gardens and parks Municipal transport services
16

June 2012
Collection of municipal revenues Cleaning services Waste management

Generally speaking, municipalities are unable to cover their running costs. Municipal revenues have grown significantly in recent years, but still constitute no more than 30 percent of operating expenses, and this is why privatisation is being pushed. Implementation prospects are better than in previous years Implementation of well-intentioned schemes has often been lacking, but we are more confident now about the authorities willingness to press ahead with its ambitious development agenda As with any five year plan in any country, the reality of implementation often differs markedly from the objectives. Saudi Arabia, like many developing countries, has institutional capacity constraints in some areas that might inhibit effective implementation. The Ministry of Economy and Plannings will have to work hard to ensure that its writ is respected by different government agencies. Yet despite these caveats, we feel that the government as a whole recognises that diversifying the economy, improving infrastructure, and equipping Saudi nationals with the necessary skills are the most appropriate routes to economic sustainability.

17

June 2012

United Arab Emirates

UAE Real GDP (% change) Nominal GDP ($ billion) CPI (ave. % change) Budget Balance (% GDP) Current Account (% GDP) Oil production (mb/d) Population (million) 2010 0.9 303.2 0.9 -1.4 7.6 2.30 4.6 2011 2012f 2013f 2014f 2015f 2016f 4.9 3.4 3.0 3.1 3.6 3.7 344.2 384.3 395.5 421.6 454.0 482.7 1.0 1.5 2.5 3.0 4.0 4.0 2.9 7.4 5.8 5.6 5.9 5.7 10.4 11.6 5.5 3.3 4.7 4.9 2.48 2.53 2.50 2.50 2.51 2.54 4.7 4.8 4.9 5.0 5.1 5.2

Economic Prospects
We expect that the UAE as a whole will grow steadily at around 3-4 percent p.a. through 2016, although Dubai is likely to lag as debt problems and real estate weakness prevent a more rapid expansion. The emirate is currently doing well in restructuring and refinancing its GREs, but still has some way to go and faces a surge in repayment obligations in 2014 and beyond when restructured debt falls due. For some GREs this is likely to be a struggle (those in traditionally strong sectors such as transport, trade and hospitality should fare OK), and with the government running a deficit it seems likely that Abu Dhabi will be asked to roll over the $20bn or so in funding it has provided the emirate. Abu Dhabis fiscal position is robust

The UAE as a whole should grow steadily at around 3-4 percent p.a. through 2016

Fortunately, offsetting the more strained position in Dubai is the positive outlook for Abu Dhabi where rising oil revenues have restored public finances to rude health following exceptionally large outlays in 2009-10 to support the economy in the wake of the global crisis. Funds should be available for Dubai as necessary and, following the recent decision to push ahead with its development program, Abu Dhabi should benefit from strong public spending with positive spill over effects for the whole UAE economy. Meanwhile, Dubais established trade and services sector should also show steady growth, although they will be vulnerable to global developments. The UAEs consolidated fiscal accounts and current account balance will remain in surplus, albeit declining and vulnerable to oil price fluctuations. But Abu Dhabi in particular will be able to call on large holdings of external assets if needed. Domestic bank lending will take time to revive strongly given still rising NPLs and the need to digest more GRE restructuring, but the financial system remains sound and well capitalised and should start to contribute more positively further out. Inflation is expected to pick up from its current lows, but should remain contained at less that 5 percent.

Development Projects Approved by Abu Dhabi Executive Council January 2012 Infrastructure & Economy Khalifa Port & Industrial Zone 2 major road projects Drainage systems 2 new industrial zones Auto City Renewable energy projects Museums Zayed, Louvre, Guggenheim Housing & community Numerous residential projects 24 new schools Healthcare 14 new healthcare facilities Rehabilitation centres Cleveland Clinic

Abu Dhabi International Airport 7,608 villas for nationals in 2012

UAE Development Strategies and Opportunities

Abu Dhabi Vision 2030 underway but trimmed down The Abu Dhabi Economic Vision 2030 report was published in January 2009 and indicated that some $160 billion of development projects were on the table over the next five years, including a major airport expansion, large new port and several mega real

18

June 2012
Abu Dhabi Vision 2030 12 drivers of growth 1. Oil & gas 2. Petrochemicals 3. Metals 4. Aviation, aerospace & defences 5. Pharmaceuticals, biotechnology & life sciences 6. Tourism 7. Healthcare equipment & services 8. Tansportation, trade & logistics 9. Education 10. Media 11. Financial services 12. Telecommunications

estate projects. However, following the global crisis and its knock on effects on the UAE, which prompted a slump in Abu Dhabis real estate as well as Dubais, progress has stalled as the authorities looked to review the development program. This review has now been completed and it has been decided to press ahead with many of the planned large scale projects. The emphasis of state spending has shifted more clearly towards social services, housing, health and education. But high profile projects such as the branches of the Guggenheim and Louvre museums, as well as a host of infrastructure developments have also got the go ahead (see table). This decision ends more than a year of uncertainty and stalled projects, and will usher in a new period of heightened construction activity which will have positive multiplier effects throughout the UAE providing numerous opportunities for business. Little information is available on budgets and timings, but official statements note that work on Khalifa port and the Shams solar power plant will proceed this year, and that 7,608 villas will be built over the next 12 months. Box 4: Abu Dhabi 2030 Economic Vision: Key Agenda - Strengthening downstream capabilities (expanding petrochemical output, and using hydrocarbon resources to diversify into new industrial activities). - Developing high-end tourism aiming for 3 million visitors per year by 2015. - An Urban Framework Plan that sets forth the enabling agenda for infrastructure and utilities for the city of Abu Dhabi and its surrounding areas.

Mubadala Commited Capital & Investment Expenditure end-2011 ($ million) Corporate/Acquisitions Healthcare Oil, gas & energy Industry Renewable energy Real estate & hospitality Aerospace Infrastructure Semiconductor tech. ICT Services ventures Total 1,373 1,279 1,050 947 779 642 587 519 398 314 182 8,070

GREs will continue to play key role Government related enterprises (GREs) spearheaded by the Mubadala Development Company will continue to be used to diversify the economy using equity and loans from the government and funds raised in capital markets to invest in local infrastructure, real estate, hospitality, advanced manufacturing, and supporting services. However, the proposed scope of future investment appears more restrained and stretched out than the ambitious plans being discussed following the launching of the Abu Dhabi Vision 2030. This reflects a prudent prioritisation of projects at a time of increasing financial commitments and financial strains in GRE, including at Mubadala which recorded a loss of $1.5 billion in 2011. That said, the company still expects capital and investment expenditure will remain at around $5 billion in 2012, in line with the average for the past three years. Its committed capital and investment expenditure stood at $8 billion at end-2011 according to its latest bond prospectus, down somewhat on the $8.9 billion
19

2437

Abu Dhabi: Mubadala Total Comprehensive Loss/Income ($ million; Bond Prospectus)

-86
2009 2010

-1480 2011

June 2012
recorded at end-2010 (this sum reflects the amount it is legally committed to expend in future years). Implementation prospects are positive Abu Dhabi remains committed to its long term strategy of diversifying its economy away from its reliance on oil and gas, and in encouraging the private sector as well as GREs to drive this process. Its healthy public finances will ensure that progress will continue to be made and that it will be able to support its GREs as necessary, although the pace of development is now likely to be more restrained. The government has already raised its spending sharply in the wake of the global crisis and it seem unlikely that further large increases are pending, although current levels should be maintained. Project activity in the UAE as a whole remains large. While likely to be overstated, MEED Projects estimates that the value of projects currently planned and underway stands at around $560 billion. Dubai Strategic Plan (2015) under review
Dubai Strategic Plan 2015 6 building blocks 1. Travel & tourism 2. Financial services 3. Professional Services 4. Transport & logistics 5. Trade & storage 6. Construction

Abu Dhabi sees a prominent role for the private sector in its diversification process, while the governments commitment will be supported by robust oil revenues

The real estate and associated credit boom and bust in Dubai has been well documented. While the authorities have done well in implementing a widespread restructuring at its GREs, the process is not yet complete and continues to act as a headwind to investment and growth. Meanwhile there remains a glut in real estate and, with most critical infrastructure projects already completed or initiated, there appear to be limited opportunities in construction and development beyond the completion of already started projects. This will include further development of Dubai International Airport as part of the emirates aviation master plan. Under the circumstances Dubai is scaling back its growth ambitions and is in the process of reviewing its development strategy and preparing a revised Medium Term Economic Plan. Previous assumptions of double digit real GDP growth in its Strategic Plan (2015) are being scrapped, and we would expect the adoption of a more modest trajectory of around 4 percent p.a. Expectations of population growth are also likely to be scaled down with greater attention paid to the temporary nature of many expatriates who are likely to leave on the completion of construction projects. Dubais initial Strategic Plan focused on six core sectors (see table). Following the review we would expect that the emphasis on construction/real estate will be substantially diminished, but that efforts will continue on developing Dubais services sector which has done so well and still offers scope for expansion (retail, trade, transportation and logistics, tourism, financial services). Attempts will be made to attract international companies to establish headquarters in Dubai and encourage Dubai based companies to expand globally. With the authorities focusing on providing an attractive regulatory, investment and lifestyle environment, opportunities are likely to exist for trade and services companies.
20

Dubais real estate overhang suggest that role of construction will be downplayed in revised economic plan

June 2012
However, the government will also look to develop the domestic economy to lessen the emirates exposure to external developments. Dubai capital spending has been scaled back With most GREs financially stretched, their spending plans within Dubai have been scaled back and are primarily focused on completing unfinished projects. Similarly capital spending by the Dubai government has declined and is aimed at completing infrastructure projects. Development spending has fallen from around $4 billion in 2008 to a budgeted $1.6 billion for 2012. Given the governments weak finances, it seems unlikely that it will be looking to increase capital spending much through 2016, and levels may dip further as projects are completed.

UAE: Government Capital Spending ($bn; IMF, national authorities

8 6 4 7.5

6.4 3.6 3.9

6.8

3.7

2.4 2
0 2008 A.Dhabi

1.9

2009 2010 2011 Dubai (development spending)

Qatar
Economic Prospects
Qatar Real GDP (% change) Nominal GDP ($ billion) CPI (ave. % change) Budget Balance (% GDP) Current Account (% GDP) Oil production (mb/d) Population (million) 2010 16.3 127.3 -2.5 2.9 17.1 0.81 1.5 2011 2012f 14.1 6.0 174.0 186.8 1.9 3.0 8.0 5.8 28.7 31.7 0.84 0.84 1.6 1.7 2013f 4.6 205.5 4.0 3.2 23.8 0.83 1.7 2014f 4.5 219.9 5.0 2.5 18.2 0.83 1.8 2015f 5.0 235.3 6.0 2.5 17.9 0.83 1.9 2016f 5.5 251.7 8.0 2.0 13.9 0.83 2.0

Economic growth is set to slow, but capital spending will remain brisk Qatar is in the process of transitioning from exceptionally rapid growth driven by development of new LNG capacity, towards a more modest trajectory driven by expanding non-hydrocarbons activity. The five year outlook for the latter is positive as the government is committed to pursuing its well-articulated National Development Strategy (NDS), backed by large financial resources and an experienced administration which has successfully guided Qatars extraordinary development to date. Non-hydrocarbons growth is expected to grow at around 9 percent a year, boosted by the large public infrastructure investment program. Overall real GDP growth is likely to slow to around 5 percent, but nominal GDP will rise to over $250 billion by 2016, overtaking Kuwait and providing one of the highest per capita incomes in the world. Reported fiscal surpluses will decline as spending accelerates, but overall state finances will remain strong on the back of large hydrocarbon revenues which will ensure sustained current account surpluses and allow for a further accumulation of foreign assets. Meanwhile, the domestic banking sector is gearing up to provide finance for the impending surge in investment and activity. Given the scale of planned spending over the next five years, inflationary pressures are expected to mount. However, with price recovery in the real estate sector likely to be stretched out and muted, the overall inflation rate should hold in the 4-8 percent range.

Inflationary pressures are likely to mount but with overcapacity in the real estate sector, price pressures should remain manageable

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Qatar Development Strategies and Opportunities

Qatar: Spending considered for the NDS ($ bn)
Central Government Infrastructure power, water, Doha port, airport, roads ITC & national fibre optic network Rail and metro Non-Hydro Q Companies Barwa & Qatar Diar residential & business construction projects inc. Doha festival city, Bawra city Sidra Hospital & Education City Real estate under construction The Pearl Lusail Specific World Cup Expenditures Stadiums Accomodation Qatar Petroleum & related cos. QP/Exxon Barzan gas project 95.0 66.0

27.0 36.0 27.0

5.0 14.0 5.5 3.0 12.4 23.0 8.6

National Development Strategy 2011-16 2 Qatar is embarked on a 5-year National Development Strategy (NDS) covering 2011-16 which aims to deliver on the goals outlined in Qatars Vision 2020. Having spent the last 20 years building up a world class gas industry, the aim is now to broaden the development focus with an emphasis on four key Pillars: Human, Social, Economic and Environmental Development. Implementation of the NDS will open up numerous opportunities for businesses, perhaps most notably through the sizeable investments planned to improve infrastructure and expand the industrial base by leveraging the available cheap energy and domestic feedstock. However, there will also be opportunities in services sectors such as health, education, environmental consultancy, management consultancy, training, and labour management as the state looks to bring in hundreds of thousands of workers to deliver the infrastructure and personnel requirements of the NDS and hosting the 2022 world Cup. Scenarios presented in the NDS suggest that gross domestic investment could total $226 billion over the five year period, although much of this is envisaged to come from the private sector and represents assumptions rather than firm plans. More concrete are the spending plans of the government and its related companies (Q companies). Detailed officially sanctioned project lists are not available (although extensive projects lists are compiled by the likes of MEED and Zawya) but the NDS states that the government will spend $65 billion on infrastructure through 2016 focusing on transportation (ports, airports, roads, trains,) power, water, and the information and technology sector. Its nonhydrocarbon related Q companies will spend a further $36 billion, the bulk ($27.5 billion) accounted for by Barwa and Qatar Diar for residential and business construction projects. Planned investments by Qatar Petroleum and its related companies are put at $23 billion, of which $2 billion will come from Qatar Industries to expand petrochemical capacity, including in low density polyethylene, ammonia and urea. There will be no significant new investments in the upstream gas sector until the moratorium on North Field projects is lifted, which the NDS indicates will not occur before 2015. Implementation outlook is positive Qatars public finances are extremely healthy and it is not expected to run into problems funding its planned spending, including through its Q companies. Measures are being put in place to
2

Qatar: Government Capital Expenditure ($bn; IMF, Samba)

14.8 9.3 4.8

9.2

10.8

12.1

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12

See also our 2011 report Qatar: National Development Strategy & Economic Update

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June 2012
manage direct government spending through adoption of multiyear budgets and a public investment program tied in to the NDS. This bodes well for implementation, although there is also a sense that the authorities are prudently proceeding with some caution, mindful of the boom and bust experienced in Dubai. This may have contributed to the slippages seen in the schedule (the NDS had expected public sector investment to peak in 2011-12), but momentum now seems to be gathering pace with the planned hosting of the 2022 world cup providing added incentive. The latter will also lead to additional investment in stadia and hotels, although some of this is likely to take place beyond the 2016 NDS time frame. Capital spending in the budget exceeded $12 billion in fiscal 2010/11 and is estimated to have approached $15 billion in 2011/12 with similar levels expected over the next few years.

Development momentum is gathering pace and will likely reach a peak in the run up to the 2022 football World Cup

Kuwait
Economic Prospects
Kuwait Real GDP (% change) Nominal GDP ($ billion) CPI (ave. % change) Budget Balance (% GDP) Current Account (% GDP) Oil production (mb/d) Population (million) 2010 2.4 124.3 4.1 22.3 30.8 2.30 3.0 2011 2012f 2013f 2014f 2015f 2016f 8.3 6.6 2.0 3.5 3.5 4.0 171.2 195.3 192.0 200.0 215.0 235.0 4.7 4.5 4.5 4.5 4.0 4.0 30.6 31.0 25.0 18.0 18.0 18.0 41.4 44.2 40.0 35.0 30.0 30.0 2.43 2.44 2.40 2.40 2.42 2.43 3.1 3.2 3.3 3.3 3.4 3.5

Finances are robust Kuwaits public finances are one of the strongest in the GCC. Since the late 1990s the state has consistently posted large fiscal and current account surpluses, and is projected to continue doing so through 2016. However, the governments rising recurrent spending commitments are a concern and the economy remains largely dependent on the oil sector, while diversification and growth prospects have been hampered by political disputes. Encouragingly, an ambitious Development Plan was put forward in late 2010 aimed at reviving the non-oil economy and reforming policies to encourage greater private sector investment, supported by large scale public spending. But this too has fallen hostage to political disputes and weak implementation capacities. but development plans will remain subject to delay While some progress can be expected, it is likely to be patchy and stretched out, suggesting that growth will remain steady but unspectacular at between 3-4 percent a year with inflation holding at around 4 percent. The banking sector remains sound and able to support growth, but many of Kuwaits investment companies are likely to continue to struggle given their exposure to still fragile regional and international equity and real estate markets, and their dependence on short-term foreign lending.

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Kuwait Development Strategies and Opportunities

Kuwait Five-Year Plan (2010-14) sets out familiar goals
Kuwait: Selected Mega Projects ($bn) Silk City Bubiyan Island Port Kuwait University City Residential projects Airport expansion Railway & metro Source: Mega Projects Agency 77.0 1.5 5.6 13.0 1.2 13.0

Kuwaits democratic process has proved a hindrance to development and this is unlikely to change any time soon

In 2010 the Kuwait national assembly approved a five year (201014) development plan aimed at restoring the economy to growth following the economic crisis post 2008. The plan forms the first phase of a larger program known as Kuwait Vision 2035 that will run in five-year blocks over the next 25 years, and includes 1,100 projects with an estimated value of $125 billion focused on both the oil and non-oil sectors. Similar to other GCC development strategies the plan focuses on economic diversification, including turning Kuwait into a regional trade and financial hub. The proposed development of a new port on Bubiyan Island is key is this regard, and is aimed at serving the import/export requirements for the reconstruction of Iraq for the next 20 year. Large scale investments are also planned in the hydrocarbons sector, both upstream and downstream. Private sector involvement is envisaged mainly through buildoperate-transfer (BOT) schemes which should, through government support for the project, ensure the banking sector is happy to provide finance. In this way it is hoped that private investors will meet almost half of the cost of the development plan. Implementation constraints are significant While Kuwait public finances are exceptionally strong, implementation of the development plan has been stalled both by political disagreements and institutional capacity constraints. The government has limited experience in implementing major projects while at the same time needs to get parliament to approve and execute new laws aimed at supporting private sector engagement. Strains in the relationship between the government and parliament have long been an obstacle to reform, and are likely to continue to be under the current parliament elected in February this year. This is evidenced by its rejection of the bill that covers the development plan in 2012/13 (the plan requires parliamentary approval each fiscal year). Lawmakers have described the plan as unrealistic, and have criticised the government for lagging in its implementation of projects. Opportunities in Kuwait are thus likely to remain hostage to political wranglings which are hard to predict. The state clearly has the financial resources to push ahead with its major infrastructure projects, but implementation will probably remain halting. State spending has certainly increased and topped $62 billion in 2011, but much of this represents larger government transfers in the

24

June 2012
form of grants and subsidies to appease any social unrest in the wake of the Arab Spring. This has bolstered consumption, and may offers opportunities in retail and some services, but private sector activity has remained muted in the absence of large development spending. Capital spending is estimated to have been around $7.3 billion in 2011/12 and seems unlikely to rise much more than this in 2012/13, with future levels depending on political developments. With a small population, vast wealth and extensive oil reserves, the incentive to move quickly ahead with economic reforms and diversification is not so pressing in Kuwait as in other states. Arguments instead tend to focus on how the nations wealth is divided amongst its small national population which are provided a cradle-to-grave welfare state. That said, even stop-start progress with its development plan will provide significant opportunities in construction and related businesses. Box 4: Kuwait Infrastructure Projects Awaiting Approval Some of the long-discussed but yet-to-be concluded key infrastructure projects include: Silk City in Subiyah, Boubyan Island container terminal, the Kuwait City-Subiyah causeway, construction of several new cities, and increasing the quality and quantity of infrastructure in the health, education, water, power, and transport sectors (to include a metro system). Increasing oil production capacity and upgrading hydrocarbons infrastructure are other incomplete aspirations (source IIF).

Kuwait: Government Capital Expenditure ($bn; IMF) 11.2

5.8

7.2
5.4

8.6

5.0 2.6 3.1

Oman
Economic Prospects
Oman Real GDP (% change) Nominal GDP ($ billion) CPI (ave. % change) Budget Balance (% GDP) Current Account (% GDP) Oil production (mb/d) Population (million) 2010 2011 2012f 2013f 2014f 2015f 2016f 4.8 5.0 6.0 5.5 4.0 4.5 4.5 57.9 73.6 82.0 83.0 87.0 90.0 95.0 3.3 3.8 3.5 4.0 4.0 5.0 5.0 5.2 10.0 7.0 3.0 3.0 4.0 5.0 8.8 10.6 10.5 5.0 3.0 2.0 3.0 0.74 0.76 0.78 0.80 0.81 0.82 0.83 2.9 2.9 3.0 3.2 3.3 3.4 3.6

Omans economy has grown at a consistently healthy pace over the past decade and is expected to maintain solid growth through 2016. There appears to be scope for further small gains in oil production and this will combine with increasing non-oil activity to sustain average real GDP growth at close to 5 percent a year during 2012-16. The non-oil sector now accounts for around 70 percent of real GDP, and looks set to benefit from sustained public investment. Meanwhile inflationary pressures are expected to be modest, picking up to around 5 percent as spending rises. The recent strength of oil prices has allowed the government to raise spending in support of its diversification and development agenda while a running a large fiscal surplus. However, this surplus is expected to decline steadily over the next five years as recurrent pending commitments have increased. Nonetheless, funds should still be available to support the development agenda, including

25

June 2012
from the State General Reserve Fund if necessary. In addition, Omans debt levels are low and its economic management reasonably effective, suggesting access to external funds would not be difficult if needed.

10

Oman: Government Capital Expenditure ($bn; IFS)

2.4 4.8 3.2

2.8 4.2

2.3 4.4

5.1

Development Strategies and Opportunities

Development spending on the rise Oman suffered some minor disturbances in early 2011 in the wake of Arab Spring movements in North Africa. These did not last long but have had a galvanising effect on the authorities who have moved quickly to accelerate state spending under the 8th National Development Plan covering 2011-15. With oil production and prices at record highs the authorities have boosted both current spending (mainly through wage increases, job creation in the public sector and the introduction of unemployment benefit), and capital spending. The latter rose to an estimated $7.2 billion in 2011 and is expected to rise further this year. With oil prices and production projected to remain relatively high over the next five years, the government is expected to press ahead with spending consistent with the goals of the development plan. These focus on improving infrastructure needed to develop and expand industrial estates and free zones, with an emphasis on airports, roads and ports, as well as investment in education, healthcare, housing and water, and support for sectors such as tourism, agriculture and fishing. Large investments will also continue to be made in support of the strategy of deploying gas resources to diversify economic activity and expand the industrial base. Oman has already had success in developing large-scale gas based industries and related downstream activities Much of this success has been based on the strategy of ensuring that the private sector becomes the main source of economic activity. As efforts accelerate to provide improved physical infrastructure more business opportunities should emerge. The existing free trade zones offer foreign investors a range of incentives and the government often takes an initial equity stake in large industrial projects to help finance start-up operations. Steady progress expected Omans hydrocarbon resources are more limited than other GCC states, but are still sufficient to generate fiscal and current account surpluses (excepting in 2009 when oil prices crashed) and allow a build-up of external assets. Under our assumptions for future oil prices finances should remain healthy and we expect that the authorities will make good progress in implementing the latest development plan. In terms of amounts to be spent, the oil and gas sectors are expected to account for the lions share during 2011-15
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0 2009 2010 2011 Oil/gas development 2012

8.9

8.3

Oman: Planned spending 2011-15 ($ billion)

4.3 3.2 1.4

1.3

1.2

0.7

0.6

0.4

0.4

Oman will continue to make steady progress on economic diversification, though its fiscal resources will remain comparatively limited

April 2012
at $8.3 and $8.8 billion respectively. Outside oil and gas, the largest expenditures are focused on airports and roads, followed by water and sewage, seaports and housing (see chart for figures).

Bahrain
Economic Prospects
Bahrain Real GDP (% change) Nominal GDP ($ billion) CPI (ave. % change) Budget Balance (% GDP) Current Account(% GDP) Oil production (mb/d) Population (million) 2010 2011 4.0 2.0 22.7 26.4 2.0 1.0 -6.6 -2.5 4.9 8.0 0.18 0.18 1.23 1.28 2012f 2.5 27.3 1.5 -1.0 8.0 0.18 1.34 2013f 2.5 29.0 2.0 -3.0 6.0 0.18 1.41 2014f 2.5 30.0 2.0 -2.0 6.0 0.18 1.45 2015f 2.5 31.0 2.5 -2.0 5.0 0.20 1.50 2016f 3.0 32.0 2.8 -2.0 6.0 0.20 1.54

Bahrains economy has shown considerable resilience in difficult circumstances since early 2011, and has begun to revive again. However, growth has been driven primarily by measures to boost oil and gas production, while the non-hydrocarbons sectors continue to struggle. Real GDP is estimated at 2 percent in 2011 and seems unlikely to grow more than 2-3 percent a year through 2016. In these conditions, inflation will remain low. Bahrains public finances are likely to remain strained, despite high oil prices, following moves to take on more employees and boost subsidies in the wake of the civil unrest. However, the state does benefit from strong support from Saudi Arabia, and is to receive $10 billion over the next 10 years to invest in infrastructure. As a result spending levels will be maintained offering some support to growth, although the budget is likely to remain in deficit.

Bahrain: Government Project Expenditure ($ million; Finance Ministry)

2041
1037

Development Strategies and Opportunities

Political headwinds are stiff
1862 804

1689
917

2009

2010

2011 budget 2012 budget

Infrastructure

Bahrain, which has only small oil resources, is already the most diversified economy in the GCC having early on developed an offshore financial sector, tourism, and industries based on gas feedstock. As such its Vision 2030 is primarily focused on ensuring that the economy remains competitive and encouraging further private sector development and job creation to promote sustainable growth. Medium-term prospects will depend on a timely resolution of the current political impasse that has eroded confidence. The economy is reviving following the dislocations in 2011, but growth is expected to remain modest and more reliant

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June 2012
on positive developments in raising oil production. Confidence is likely to remain fragile dampening private investment activity. Nonetheless, the next five years are still likely to offer some business opportunities, including for service orientated activities aimed at supporting growth in the rest of the GCC. In addition, Bahrain is to receive $10 billion from the GCC to invest in infrastructure projects over the next 10 years. These will be primarily aimed at alleviating social concerns, such as construction of low cost housing, and improving access to education and health facilities. The construction sector should thus benefit from a steady flow of government contracts, despite the relatively weak outlook for public finances which will struggle to return to surplus given the surge in current spending commitments and the governments relatively low level of oil revenues. Project spending by the government hit $2 billion in 2010, although this was budgeted to drop back in 2011-12 with planned infrastructure spending put at between $800-900 million pa.

Medium-term prospects will depend on a timely resolution of the current political impasse

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June 2012 James Reeve Senior Economist James.Reeve@samba.com Andrew Gilmour Senior Economist Andrew.Gilmour@samba.com

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2. 3.

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