The Gulf’s Gritty Graduation Gradients

Gulf stock markets braced for the May MSCI reshuffling with the UAE and Qatar in the core and Kuwait a residual frontier heavyweight, as Bahrain and Oman anticipated increased attention from both dedicated regional and global investors. Hydrocarbon and private sector-driven GDP growth will average 4 percent on inflation around the same level mainly due to housing costs. Fiscal and current account surpluses will continue in double-digits as a share of output as net foreign assets held in sovereign wealth funds and accounts reach $2.5 trillion. Bank credit should again expand over 10 percent on loose monetary policy reflecting the US dollar pegs, and value added taxes may be considered to raise revenue, according to a recent IIF forecast. With high unemployment in the GCC foreign worker participation will fade over the medium-term as migrants are sent home and discouraged at the same time nationals are recruited for skilled positions and trained for productivity gains. In 2013 $2.5 billion in IPOs went ahead after a prolonged lull and in February dual London-listed Gulf Marine completed a $300 million deal. The UAE has led the pack with a near 40 percent increase through April, although merger talks have been shelved indefinitely between the constituent Abu Dhabi and Dubai exchanges, and capital inflow momentum has slowed with relative calm in Arab Spring neighbors. After Dubai World’s recent $20 billion refinancing from the main emirate, another government-linked company offered unprecedented balance sheet disclosure to support a sukuk. Property prices have roughly returned to post-crash ranges, but mortgage loan limits and transaction taxes have pre-empted another bubble. The world’s tallest tower has become a big tourist draw despite early skepticism and Expo 2020 is shaping up as a future milestone with officials thus far confident of crowds and infrastructure funding. Saudi Arabia’s 20 percent advance was behind, as it remains closed to foreign portfolio investors who can enter through promissory note programs sponsored by global houses like HSBC. Riyadh is a construction hub with citizen residences, a new airport terminal, subway and financial center going up as part of $1 trillion in planned projects. The state has stepped in with multiple mortgage sources to fill the gap left by commercial banks, and mortgage-backed securities may soon be launched. Labor force “Saudization” has resulted in the exit of hundreds of thousands of expatriate workers and may raise wage pressure as the fiscal blueprint assumes a breakeven oil price of $90/barrel.

Qatar will again be the GDP growth leader at 6 percent but breakneck World Cup spending has forced controls on future borrowing as gas production falls short of targets. Kuwait’s 2 percent showing in contrast has been due to political standoff which eased after parliamentary elections a year ago. Electricity shortages have hurt business and angered the small population, and after serial debt restructurings Kuwait Finance House may have passed its post-crisis test.