Oil’s well that ends well ...

Franklin Templeton Investments has a positive medium-term outlook for the Mena region, and especially GCC countries, in spite of falling oil prices.

Oil workers stand at a facility site in the desert oil fields of Sakhir, Bahrain. Crude oil prices stood at US$34 per barrel at the beginning of 2009 and little more than $20 per barrel in 2000. HasanShow more

Last month as concerns related to falling oil prices grew, the International Energy Authority slashed its forecast for growth in global oil demand this year by over 20 per cent.

However, growth indicators in the main GCC countries remained positive. In Saudi Arabia, the September Purchasing Managers Index (PMI) hit 61.8, its highest level since June 2011.

The IMF upgraded its 2014 GDP growth forecast for the kingdom to 4.6 per cent, from an earlier estimate of 4.4 per cent, thanks to non-oil private-sector growth and state spending.

In the UAE, the PMI reading fell to a still-strong 57.6 in September from 58.4 in August, but major corporations continued to make progress in repaying or rescheduling debt. Some concern over the lack of visibility about government economic plans hurt the Egyptian market last month, but core inflation showed signs of slowing and Egypt stands to be a major beneficiary of falling oil prices. In Kuwait, the government accepted a ministerial report that outlined plans for drastic cuts in energy subsidies.

However, it is worth noting that the country has one of the lowest break-even prices for oil – the point where oil revenues equal annual expenditures – among GCC members, and, therefore, is relatively well positioned to adapt to recent oil price volatility.

Last month, the Citi Mena Bond Index, with a return of 1.06 per cent, did better than the Citi World index. Equity markets in the Mena region suffered as oil prices fell.

We maintain our positive medium-term outlook for the Mena region, and especially GCC countries, in spite of falling oil prices. Oil price correlations with regional markets is, in our analysis, low, and all the main GCC countries remain financially very sound, having built up substantial fiscal buffers when oil prices were elevated and rising.

In this respect, it is worth remembering that crude oil prices stood at US$34 per barrel at the beginning of 2009 and little more than $20 per barrel in 2000. The main oil producers have used the surpluses of recent years to diversify their economies away from hydrocarbons, and we expect the recent oil-market volatility to stimulate their efforts further. We thus expect robust capital programs to remain in place, but possibly stretched over longer periods. Although the fears that GCC countries are facing medium-term budget deficits is legitimate in some cases, we are heartened by the efforts being undertaken to cut back on energy subsidies. Among the main oil exporters in the region – Kuwait, Qatar, Saudi Arabia and the UAE – some have built budgets around lower break-even oil prices than others. However, all remain fiscally robust with central banks and sovereign wealth funds that have accumulated substantial foreign reserves. In October, the IMF forecast that GDP growth in GCC countries would average about 4.5 per cent in 2014-2015, with non-oil growth coming in at 6 per cent. The IMF also said that it expected inflation to remain contained in light of softening global food prices and exchange rates that are pegged to the US dollar or a basket of benchmark currencies.

The continued dynamism of financial markets in the region can be gauged by the increasing volume of new bond issues from Mena companies in non-oil sectors, while robust infrastructure projects are also driving issuance by governments and government-related entities. In spite of the lack of issuancelast month, we believe the market for bonds and sukuk in the GCC continues to be vibrant. This view was underlined by the Dubai International Financial Centre’s plan to issue an Islamic bond to pay down bank debt and drive a new phase of Dubai’s growth as a hub for trade and finance between emerging markets.

Mohieddine Kronfol is the chief investment officer for fixed income and global sukuk at Franklin Templeton Investments (ME)