IMF says region must implement reform plans

The IMF says that after preparing economic reform programmes, countries in the region, such as Saudi Arabia, must implement those plans swiftly to meet the demands of growing populations. Reforms plans across the region include introducing taxation and reducing subsidies, as well as a renewed focus on the private sector. 

“The challenge now for all of these countries will be to go from plans to implementation and to design the implementation in a careful way and to sustain that effort over a number of years to make sure it’s prioritised to reflect also institutional capacity constraints,” said Masood Ahmed, director, Middle East and Central Asia, at the IMF.

The fund projects GDP growth in the GCC will be 1.7 per cent in 2016, then rise to 2.3 per cent in 2017, signalling much slower economic expansion than in the years before 2014.

Crude settles above $50 as observers look forward to Vienna meeting

The IMF also revised down its oil price outlook to $50.1 a barrel in 2017, rising only gradually to $57.5 by 2021. While the rise in oil prices from below $30 a barrel in the first quarter to about $50 today eases the fiscal pressure on GCC governments, far-reaching reforms are still needed to balance budgets over the next five years. The World Bank also revised its forecast for oil prices and has raised its 2017 projections to $55 a barrel from $53 as Opec members prepare to limit production after a long period of unrestrained output.

Oil market observers will be looking to the 14-member oil cartel’s next meeting in Vienna on 30 November for further details on the proposed cuts and the subsequent impact on prices. If Opec can carry out its proposed cut to 32.5-33 million barrels a day, this will undoubtedly support oil prices going into the winter, when demand spikes in the West.

Kuwait facing fresh parliamentary elections

The emir of oil-rich Kuwait has dissolved the country’s parliament, citing mounting “security challenges and volatile regional developments” that require handling by a new government. The decree by Emir Sheikh Sabah al-Ahmad al-Jaber al-Sabah opens up the way for the seventh election in 10 years in the Gulf state, where the government is trying to boost the slowing economy by introducing cuts to welfare benefits and remodelling the fuel subsidy structure in the wake of lower oil prices.

Fresh elections could result in a different looking parliament. The Islamic Constitutional Movement is understood to be taking part in the next elections, after it boycotted the 2013 elections following a decree from the emir in 2012 that changed the voting law, giving each citizen one vote, instead of four. At the time, the changes were seen as an opportunity for independents to overcome the dominance of established political and religious blocs.

Saudi Arabia concludes record bond sale

Saudi Arabia has concluded the largest-ever emerging market bond sale, raising $17.5bn in its debut international debt offering as it seeks to plug the budget deficit and fund its economic transformation plan.

The issue surpassed the previous emerging market sovereign bond record sale of $16.5bn by Argentina in April. The offer racked up orders worth $67bn, almost four times the amount raised. Investor interest in the kingdom’s debt is far larger than many market participants had expected.

Riyadh managed to price the bond lower than market expectations. The pricing tightened to approximately 140 basis points (bps) over treasuries for the five-year tranche, 170 bps for the 10-year tranche and 215 bps for the 30-year paper after the order book swelled. The government managed to pull it further down and launched a $5.5bn five-year tranche at 135 bps, a $5.5bn 10-year tranche at 165 bps, and a $6.5bn 30-year tranche at 210 bps.

When Qatar, which is rated higher than Saudi Arabia by credit rating agencies, issued $9bn of bonds in May, it sold the debt at 120 bps over treasuries for a five-year tranche, 150 bps over for a 10-year paper and 210 bps over for a 30-year tranche.

Earlier reports indicated that Saudi Arabia would issue $10bn-15bn of bonds, priced at 160, 185 and 235 bps over treasuries for the respective tranches.

The kingdom hired US’ Citigroup and JPMorgan Chase, and the UK’s HSBC Holdings as global coordinators, and engaged seven other managers from Japan, China, Germany and France for the deal.

London-based Capital Economics estimated that the bond issue would finance about a third of Saudi Arabia’s budget deficit next year and almost all of the kingdom’s current account gap, meaning its foreign exchange reserves are unlikely to fall much further in coming years.

Saudi Arabia is expected to run a 13 per cent of GDP fiscal deficit in 2016, and 9.5 per cent in 2017, according to IMF figures. So far, Saudi Arabia has financed its deficit by drawing down on foreign reserves by more than $170bn over the past two years, and issuing billion of riyals of domestic debt. It tapped the international loan market earlier this year with a $10bn syndicated facility.

US moves to allow dollar transactions with Iran

The US government has updated its sanctions on business dealings with Iran to allow dollar-denominated transactions, although restrictions on US citizens and access to the US financial system remain. The US Department of Treasury updated its guidance on 7 October. It said: “Foreign financial institutions, including foreign-incorporated subsidiaries of US financial institutions, may process transactions denominated in US dollars or maintain dollar-denominated accounts that involve Iran or persons ordinarily resident in Iran….” 

The relaxed regulations allow dollar-denominated trading with Iranian institutions such as National Iranian Oil Company (NIOC) and the Central Bank of Iran (CBI). The loosening of sanctions comes at an important time for Tehran as it plans to invite international oil companies (IOCs) to bid on the development of its South Azadegan field in late October.

GCC deficits to reach $765bn by 2021

GCC countries will need to finance a combined budget deficit of $765bn between 2015 and 2021, according to IMF estimates. This is after the beginning of reforms to balance the budget, including subsidy cuts, measures to contain the public sector wage bill and the introduction of value-added tax (VAT). 

“There is a lot of work needed to manage the challenge of bringing down the deficit further and finance it,” says Masood Ahmed, director of the IMF’s Middle East and Central Asia department. “But the consequence is that growth rates are down in 2016 and 2017.” 

Cutting too fast is risky, however, as GCC economies are still driven to a large extent by government spending. Non-oil GDP growth in the GCC has fallen from more than 5 per cent in 2014 to average 1.8 per cent in 2016, and should recover to 3.1 per cent in 2017, according to IMF estimates. The rebound in 2017 will be due to the slowing pace of fiscal consolidation.

New deal not yet a breakthrough for Iran’s oil sector

The signing of the first deal under the new Iran Petroleum Contract (IPC) has been hailed as a breakthrough for Iran’s oil sector, which is aiming to revive itself after the lifting of international sanctions. National Iranian Oil Company (NIOC) signed a heads of agreement (HoA) with Iranian Persian Oil & Gas Industry Development Company (POGIDC) to develop production capacity at the North Yaran, South Yaran, Koupal and Maroon fields. The Ministry of Petroleum’s news service Shana said it was the first deal signed under the IPC, a new contract model designed to improve terms for companies developing oil and gas fields in the country. The ministry hailed the deal as a breakthrough for the IPC model, but it may be premature to mark the agreement as the start of a revival in Iran’s oil and gas sector. 

Firstly, the IPC was drawn up largely to attract international oil companies (IOCs) that could provide investment and advanced technology to improve the efficiency of the country’s oil sector, whereas the new deal is with a local group. Secondly, the HoA signed does not represent a binding contract, leaving room for doubts over a solid timeline for developing the fields.

Iraqi forces advance on Mosul

Iraqi government forces and the Kurdish peshmerga have started their campaign to retake the city of Mosul from the jihadist group Islamic State in Iraq and Syria (Isis). Mosul is by far the largest city held by Isis, and is a key battleground in the Iraqi government’s attempt to oust Isis fighters from the north of the country. 

“The hour of victory has come. The operation to liberate Mosul has started,” Iraq’s Prime Minister Haider al-Abadi said in an address broadcast on state television. “Today I declare the start of the heroic operations to liberate you from Daesh (Isis)”. 

Al-Abadi said that only government forces would be allowed to enter Mosul, with the peshmerga advancing on villages to the north of the city. The move to only use government forces is thought to be an attempt by the premier to avoid the battle descending into a sectarian conflict between Shia militias and the city’s majority-Sunni inhabitants. Al-Abadi has utilised Shia Popular Mobilisation Forces and Iran’s Quds Force for previous assaults on Isis territory, but has faced criticism over the treatment of Sunni civilians and captured Isis militants. 

Isis seized control of Mosul in early June 2014 as part of a campaign that saw it take large areas of northern and western Iraq. It is estimated there are 700,000 people still living in Mosul, compared with a peacetime population of more than 2 million. There are thought to be between 4,000 and 8,000 Isis fighters in the city.

Egypt prepares new investment law

Egypt’s cabinet is set to finalise the draft of its new investment law by mid-November, according to a statement from Prime Minister Sherif Ismail.

The long-awaited law, which has been in progress for over six months, will be sent to parliament for a vote within a matter of weeks, said the statement.

“We have already started reviewing the draft and will send it to parliament next month. We will be done with it by mid-November at maximum,” Ismail said.

Cairo passed a revised version of its investment law in March 2015 in a bid to bolster investor confidence, eliminate bureaucracy, ease procedures to obtain licences for projects and attract foreign investment. The law was then amended in December 2015 following complaints from investors.

Analysts have previously told MEED that commercial and investment laws in Egypt are set up in such a way that new laws and improvements are simply applied on top of those already in existence.

“You are left with a situation where old laws could still pose barriers despite the introduction of improved legislation,” says Farouk Ahmed, a retired solicitor who specialised in land disputes between the private sector and the armed forces.

Cairo has said the new investment law promises to create a genuine one-stop shop for investors to secure licences, procure land and obtain utility connections. It will also set up a standard framework for dispute resolution, including a clause that will make arbitration rulings binding on the government, but not on investors.

Global upstream oil spending expected to drop 22 per cent

Exploration and production (E&P) spending in the global oil and gas sector is expected to drop 22 per cent in 2016, as companies react to lower crude prices, according to the UAE’s Opec governor. 

The fall in E&P spending would create an imbalance in supply and demand going forward as less new assets are discovered and developed, said Ahmed Mohamed al-Kaabi, speaking at the World Steel Association conference in Dubai on 10 October. “Global E&P spending declined by about 26 per cent in 2015 and a further drop of 22 per cent is anticipated in 2016,” Al-Kaabi said, citing Opec forecasts. “If we combined both years together, the decline is expected to be more than $300bn. This will affect not only the new projects coming on stream but new discoveries too,” added Al-Kaabi, who was appointed as the UAE’s new Opec governor in May.

Libyan fund loses $1.2bn suit

The Libyan Investment Authority (LIA) has lost a $1.2bn court case against the US’ Goldman Sachs in the London High Court. The sovereign wealth fund filed a suit in 2014, alleging that Goldman Sachs took advantage of LIA employees’ lack of financial expertise to make undue profits. The case related to nine complex derivatives trades in 2007 and 2008, worth a total of $1.2bn. The LIA lost its entire investment when stock markets crashed in 2008, while the bank made a $200m profit. 

The judge ruled that the bank did not have undue influence or make excessive profits. LIA also alleged that a Goldman Sachs employee acted improperly by offering a paid internship to the brother of Mustafa Zarti, a senior official at the fund, and took him on holidays to Morocco and Dubai, including paying for prostitutes. The judge criticised his actions, but found they “did not go beyond the normal cordial and mutually beneficial relationship that grows up between a bank and client”.

US suspends Syria talks with Russia

The US has suspended talks with Russia over Syria after accusing Moscow of failing to live up to its commitments agreed in August. Washington has blamed Russia and the Syrian government for continuing to attack civilian targets following the collapse of the ceasefire that was agreed in August. In a statement, state department spokesman John Kirby said: “The US is suspending its participation in bilateral channels with Russia that were established to sustain the cessation of hostilities.” The US also said it would withdraw personnel “that had been dispatched in anticipation of the possible establishment of the Joint (US-Russian) Implementation Centre”.

Abu Dhabi to merge two largest offshore oil groups

Abu Dhabi National Oil Company (Adnoc) will combine its two largest offshore oil producers into one entity by early 2018, creating a new company with an estimated capacity of 1.2 million barrels a day (b/d). State-owned Adnoc said the merger will “enable efficiencies and synergies” across the offshore concessions and fields operated by Abu Dhabi Marine Operating Company (Adma-Opco) and Zakum Development Company (Zadco). 

Adnoc holds a 60 per cent stake in both companies, with the remainder held by international oil companies (IOCs), which together operate the various offshore oil fields. “The existing rights of our partners in the concessions currently operated by Adma-Opco and Zadco will not be affected by the consolidation,” said Adnoc CEO Sultan al-Jaber. “Looking ahead, Adnoc will continue to review and consider all options, and pursue partners for concessions expiring in 2018.”

Dubai aims to conclude metro financing this year

Dubai’s Roads & Transport Authority (RTA) plans to raise $2.5bn by the end of this year to fund the construction of the Route 2020 metro link. The line will connect to the Expo site in the Jebel Ali area. 

“I hope it will be before the end of this year as we have started construction,” news agency Reuters quoted Mattar al-Tayer, chairman and director-general of the RTA, as saying. He said the government had already made an advance payment of AED600m ($165m) to the consortium of contractors that won the deal to build Route 2020 in June 2016. The team includes France’s Alstom, Spain’s Acciona and Turkey’s Gulermak. 

In August, MEED reported that Dubai’s Department of Finance had been tasked with arranging the financing and that it was speaking to banks for the commercial loan tranche. The project, which will cost about $2.9bn, will have a debt component of $2.5bn, of which about $1.5bn is backed by export credit agencies (ECAs) and the rest by a commercial loan. The agencies backing the financing are France’s Coface and Spain’s Compania Espanola de Seguros de Credito a la Exportacion (CESCE), according to the news report, which added that the commercial loan has a 10-year tenor, while the ECA-backed financing has a maturity of about 18 years.

Adia acquires Scottish gas assets

Abu Dhabi Investment Authority (Adia) has acquired a 16.7 per cent stake in Scotia Gas Networks (SGN) from the UK’s SSE. The stake is worth £621m ($760m). 

The transaction will be completed by the end of October 2016, and will be settled in cash. SSE will retain a 33.3 per cent share. It acquired a 50 per cent equity stake in SGN in 2005 for a total of £505m. 

Adia aims to invest between 1 and 5 per cent of its portfolio in infrastructure. SGN manages the network that distributes natural and green gas to 5.9 million consumers in Scotland and the south of England. SGN manages £5bn-worth of assets and had a turnover of £1.1bn in the year ending March 2016. It had an operating profit of £512m.