Beyond commodities – how the Middle East markets are diversifying by investing in new sectors

The GCC is looking to make sectors like tech and renewable energy ‘the new oil’, as it makes finding new private sector sources of wealth and employment an urgent priority.

Eyeing the volatility of oil prices and seeking to reduce youth unemployment, the GCC is seeking to rebalance economies away from hydrocarbons and the public sector. The International Monetary Fund estimates that 27 million youths will enter the region’s labour market over the next five years, with 60% of the population aged under 30^[1].  Governments are introducing incentives and reforms to boost the growth of private companies in sectors such as technology, renewable energy, tourism and areas related to oil, like petrochemicals – focusing, for instance, on support for small and medium-sized enterprises.

Saudi Arabia and the United Arab Emirates are leading the drive to diversify economies. Both countries have introduced modernization programmes – notably Saudi Arabia’s Vision 2030, which aims to raise the private sector’s contribution to GDP from 40% to 65% by 2030^[2]. There have also been specific initiatives, such as the March 2019 announcement by Abu Dhabi’s Mubadala sovereign wealth fund of Hub 71^[3], a tech hub partnership with SoftBank intended to attract some of the world’s most valuable start-ups.

Saudi Aramco’s $12 billion bond issue in April showed that, in the capital markets at least, transformation is working. The order book attracted $100 billion of demand, a new record for emerging markets^[4].  Further, investors were reportedly drawn towards the parts of the deal with the longest maturities, seizing the chance to buy 20- and 30-year bonds at relatively high yields. The bond issue’s success has helped to open the way for the company’s IPO, planned for 2020 to 2021^[5]. 

When oil prices started to fall in 2014, going from over $100 a barrel to lows of below $40 in 2016^[6], this economic cloud had a silver lining. Facing escalating fiscal deficits^[7],  the Gulf region’s oil-exporting governments started to tap capital markets to balance the books, with the result that they now have the capacity to help fund economic diversification.

In the past five years, the size of the region’s capital markets has almost tripled. Aside from the quantity of issuance, the market’s quality is also developing at a fast pace as it broadens out beyond just sovereigns, and secondary market liquidity improves. In a market dominated by sovereign issuers, financial institutions are also issuing more and the groundwork is ready for corporates to follow. 

While 2014 saw $38.8 billion of issuance in the Middle East and North Africa (MENA), by 2018 that had increased to $107.4 billion. In just the first seven months or so of 2019, issuance stood at approximately $74 billion^[8].  Based on our estimates, overall issuance is now expected to moderate in 2020 as sovereign issuance slows, however an uptick in new issue supply from financial institutions is expected to take up some of the slack.

Figure 1. MENA Issuance (2014-2019YTD)

_{Source: Bloomberg}

This is an important year for MENA bond markets. From January, Saudi Arabia, the United Arab Emirates, Bahrain and Kuwait were included in JPMorgan’s emerging market bond indexes for the first time, in recognition of the fact that the countries have issued a sizeable amount of the debt sold by emerging market countries in recent years^[9].  This could bring some $40 billion in flows over the next year or so, according to market analysts^[10],  helping to temporarily keep a lid on borrowing costs.

While sovereign borrowers have dominated the growth in issuance, the region’s banks have also become more prolific, more than doubling issuance from $16 billion in 2014 to $39.7 billion in 2018 (Figure 1). We have also seen one of the leading banks from the region issue the first green bond, the proceeds of which were used to fund sustainable finance projects in the UAE. Corporates, however, have lagged behind, with volumes peaking at just over $17 billion in 2018, scarcely above 2014’s level of $16.7 billion (Figure 1). 

Even so, we have seen a sharp rise in corporate issuance this year with volumes already approaching $18 billion (Figure 1) and a number of corporate issuers expected to access the market before the end of the year. The success of the Saudi Aramco offer illustrates the strength of latent demand for the right corporate. With infrastructure finance loans growing – some of them related to Chinese “Belt and Road” projects – it is likely that the companies will seek to tap the bond markets a few years from now in order to refinance their project loans.

There is scope for bond issuance from large real estate companies, independent regional hotel companies and even government-related entities.

But the MENA capital markets have some way to go before they efficiently finance private companies. For example, the region lacks a high-yield bond market, although this might now be a possibility as many fixed-income investors now hold MENA bonds, and so have an appetite for relative value plays. 

There is certainly growing interest and comfort among investors. Anecdotally, more than 50 international investors joined Standard Chartered’s annual investor trip to the Gulf in 2019, up from 20 to 30 in previous years. They are learning to understand and become comfortable with the region’s geopolitics and are witnessing the improvements in financial disclosure and corporate governance, which extend from sovereigns to banks and corporates.

After five years of spectacular growth, as evidenced by the upsurge in issuance referred to above, MENA’s bond markets are now established. They have helped the region’s governments to fund diversification programmes and are increasingly helping to fund local banks, which in turn lend to local companies. 

If corporate issuance now starts to grow, then capital markets will fund the private sector more directly, helping businesses from a range of sectors to decrease the region’s reliance on the public sector and oil.

^{[1] Financial Times, Middle East jobs crisis risks fuelling unrest, IMF warns, July 12, 2018, paragraph 6
[2] Arab News, Pace of Saudi Arabia’s private sector sell-off accelerates, April 2018, paragraph 3
[3] Financial Times, Mubadala sets up tech hub in Abu Dhabi with SoftBank, March 2019, paragraph 7
[4] Financial Times, Orders for first Saudi Aramco bond smash $100bn, April 9, 2019, paragraphs 1, 2
[5] Aramco IPO on track for 2020-2021, says Saudi crown price. The National. June 16, 2019, paragraph 1
[6] Macrotrends, WTI Crude Oil Prices - 10 Year Daily Chart, graph shows daily oil prices
[7] Why Gulf economies struggle to wean themselves off oil. Economist. June 21, 2018, paragraphs 3,5
[8] Source: Bloomberg MENA Issuance (see Figure 1).
[9] Saudi Arabia, four other Gulf states to enter key JP Morgan bond indices. Reuters. September 26, 2018, paragraph 3
[10] IMF, Regional Economic Update. Middle East, North Africa, Afghanistan and Pakistan. April 2019, page 9 paragraph 4}

About the Authors

Nade Ali Shah, Executive Director, Head, DCM Sovereigns and Supranationals, Standard Chartered 
Nade is an Executive Director and heads Standard Chartered’s DCM, Sovereigns and Supranationals team based out of Dubai.

Nade has worked on numerous landmark and high-profile benchmark transactions within the sovereign, supranational and agency asset class across Africa, Europe, Asia and US. He has also been involved in numerous structured and derivative transactions in relation to public sector financing and liability management. In addition, he has worked with a number of high profile sovereign issuers, advising them on issuance of capital market transactions, positioning their credit story with global investors, marketing their bonds to global investors and executing benchmark transactions. In his current role, Nade is responsible to originate and execute bond and Sukuk transactions in Standard Chartered’s key footprint markets of Asia, Africa and the Middle East. Within the Middle East sovereign space, Nade has worked on issuances for State of Kuwait, State of Qatar, Sultanate of Oman, Govt. of Dubai, Govt. of Sharjah, Kingdom of Bahrain, Govt. of Ras Al Khaimah, Republic of Tunisia, Lebanese Republic and the Arab Republic of Egypt. Nade holds a BSc degree in Economics and Mathematics from Saint Lawrence University, NY.

Ali Ahmad – Managing Director, Head Capital Markets FIG, Africa & Middle East, Standard Chartered 
Ali Ahmad is the Managing Director and Head of Capital Markets FIG of Standard Chartered, focusing on Africa and Middle East. He has had a long and successful career in investment banking for 25 years in which he has held various roles in capital markets. Ali has led more than 130 deals for clients across the product spectrum (Senior, Tier 1 and Tier 2) including several key, innovative and “first ever” deals in various markets. At Standard Chartered, Ali has established a highly successful FIG capital markets franchise in the region that has consistently ranked No. 1 in the league tables and won numerous industry awards and deal recognitions over several years. 

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