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March 2017

Shifting tides in the gulf

After years of low oil prices, several oil-dependent Gulf States are accelerating their agendas toward diversifying their economies. Saudi Arabia’s plan, “Vision 2030” is perhaps one of the most ambitious. With game-changing implications for markets, these developments suggest a potential longer-term opportunity worth watching.

Waves of reform across the region

Countries in the Gulf Cooperation Council (GCC) have recognized in the past decade the need for structural reforms to bolster macro stability. Low oil prices since June 2014 have had far-reaching implications, accelerating a wave of sweeping economic reforms designed to mitigate dependence on oil revenues, spur economic diversification and private investments, and foster capital liberalization. Collectively, these reforms seem to signal a potential sea of change in the region’s economic and social landscape.

Case study: Transformational reform
in Saudi Arabia

In 2016, the Deputy Crown Prince announced a sweeping reform package – “Vision 2030” – designed to wean the Saudi economy off its dependence on oil, increase economic diversification and advance the country as a new player in international markets.

In under a year, progress is starting to show across some key objectives, including government subsidy and salary cuts to promote fiscal consolidation and the launch of a $30-50bn investment program into renewable energy. One of the areas of progress that is attracting interest is the opening of the country to international investors.

  • Foreign capital: In October 2016, the government raised $17.5B in a sovereign bond sale – a record for an emerging market, according to Bloomberg. This was a success for the country as the large order book indicated strong interest from foreign investors.
  • Tadawul: Authorities have been working towards opening the Saudi stock exchange (Tadawul). The expectation is that a more liquid and accessible market will lead to the inclusion of Saudi into the MSCI EM Index (potentially as early as 2018). With Qatar and UAE already incorporated, Saudi’s inclusion could represent unprecedented access to the region for international investors.
  • Saudi Aramco IPO: Investors are also eagerly anticipating the IPO of the massive state-owned firm. With up to 5% of the company in the line for listing, the offering has the potential to be one of the largest IPOs in history. Furthering the reform plans, the proceeds of such a sale will be used to finance a sovereign wealth fund that will invest in assets uncorrelated to oil. (Note there is no guarantee that any iShares funds will invest in the IPO).

Preparing for a post-oil world?

The moves in Saudi Arabia represent a broader shift in the region. In recent years, we’ve seen encouraging developments in some of the countries - particularly in the UAE and Qatar – although the ambitious nature of these programs means they will take years to fully implement.

  • UAE has consolidated fiscal efforts and implemented structural reforms to adjust to low oil prices, promote economic diversification and boost productivity. In a sign of that progress, the IMF’s Christine Lagarde recently applauded their efforts.
  • Qatar adopted austerity measures in 2016 in an effort to stabilize its finances. The government’s diversification efforts have helped support the expansion of its non-hydrocarbons economy.

Oil drives the majority of GCC government revenue today

The GCC is more dependent on oil than other producers with more traditionally-diversified economies

Oil drives the majority of GCC government revenue today

Source: Federal Reserve Economic Database of St. Louis Fed, CIA World Factbook, Bloomberg, Norwegian Petroleum, as of February 28, 2017. Green bars indicate GCC member countries and blue bars represent non-members. Data reflects 2015 results.