Haque: UAE, Saudi Non-Oil Growth Resilient

Well, it wasn't just the IMF having discussions around the UAE. We got a figure yesterday showing that GDP actually grew 3.6% in 2023. Non oil sector up 6.2%, Oil obviously weaker, down 3.1%. Let me just start off by asking you what are the biggest non oil drivers right now for the UAE economy? So the preliminary data that was released by the authorities on the website yesterday showed financial services actually being the biggest driver of GDP on the non oil side in 2023 and that was really up sort of almost 15% year on year. So I think reflecting obviously outstanding earnings by by banks, but also the growth in the financial services sector. So we've seen a lot of family offices, hedge funds, fund managers moved to the UAE, both Abu Dhabi and Dubai. And I think that growth in those industries and also the associated services that would come with it, brokerages, insurance, all of that kind of stuff. It's interesting to see the real economy impact because we read about all of these stories of the hedge funds, asset managers relocating and moving their offices to Dubai or opening up branches in Dubai and Abu Dhabi. But also I thought interesting that out of all of the Emirates, Abu Dhabi is the fastest growing in the non oil sector and it tells you about their ability to attract some of that inflow. Absolutely, it's been the fastest growing Emirates in terms of non oil sector activity, not just in 2023 but also 2022. I think last year it was over 9% growth in non oil sector GDP for Abu Dhabi and people tend to forget, but even though half of the economy is oil and gas, their non oil sector is actually bigger than Dubai's GDP. So it is a very, very important driver of overall national growth in the non oil sector. Aside from financial services, we also saw a very strong rebound in transport and logistics, also hospitality and then of course construction and real estate, which you can see, you know, as you move around the UAE, the activity in those sectors. So I think that those are probably gonna be drivers of growth going forward as well, particularly with all the big infrastructure projects that have been announced around Etihad Rail, Machun Airport. So we're expecting public sector investment to be a big driver of growth going. I mean there has been a lot of diversification and credit where where it's due. But I do wonder about, you know, the big question mark in the room and that is the oil sector and and where the growth is going to come from from that. We have an OPEC meeting coming up. There isn't an expectation that production output is going to increase on the back of that. To what extent is lower production and prices around here going to serve as a headwind for the economies of the UAE and the Kingdom of Saudi Arabia? So our forecast for 2024 doesn't actually assume any growth in oil and gas GDP this year. So we're assuming the production cuts or restrictions that were implemented last year are going to remain in place for most of 2024. They may start to unwind some of those cuts in the fourth quarter, but we think certainly at this meeting we'll probably extend them. Look, the UAE is investing in expanding capacity in oil production, yeah, and and other hydrocarbons. So I think that is going to drive some activity in that sector. But the key, key question is how long are they willing to restrain production significantly below their their capacity. And I think this is something that OPEC Plus needs to decide. There are countries that are not able to meet their production targets and there are countries sitting with excess capacity. So it's a question of how you reallocate those targets to take into account who actually has the ability to deliver that oil. Have you done analysis on where the break even level of oil is for Saudi Arabia? I mean, I know our own Bloomberg Intelligence analysts have it sitting at around $105.00. What are the implications of of having a break even that's so high and above where the market is trading? Our analysis is similar and we're not even looking at if we're just looking at the central government budget and we're we're seeing a break even fiscal or price of just over $100 a barrel. So it means effectively that the government is going to run a deficit this year. We've got a deficit of 4.2% penciled in for Saudi. Look they have very low debt levels, right. So their ability to continue to fund infrastructure projects is there even oil prices below their break even point that we've already seen debt issuance from both sovereign and from PIF in the first quarter of this year. And of course they do have significant assets that they can leverage that they can monetize. They've got assets within PIF that are generating revenue through dividends and cash generation. They can IPO and they can sell. They can use those assets to raise bilateral syndicated loans. So I think they have the ability to continue to fund infrastructure. You know, this is a big picture question. When the UAE talks about diversifying their economy, when Saudi talks about diversifying economy, I think now the numbers, correct me if I'm wrong, but we're getting towards 5050 of oil versus non oil. What does that number look like in 20-30? So for the UAE, we're already well below 50% in terms of oil, non oil. We're sitting at around 30% oil and 70% non oil GDP. But the issue for diversification is not just about how the economy is structured, it's also how diversified our budget revenues. And the region as a whole still sees an over reliance on oil and gas sales for budget revenues. So that has implications for sustainability of budget finances. So that's key. And that would involve broadening tax bases, raising alternative taxes, using investment income. And then the other aspect of it is looking at the current accounts and how diversified are export revenues. And again, when you look at the share of oil and gas in terms of GDP and you look at the share of oil and gas in terms of export revenues, there's a big mismatch there. So the focus is not just on what does your economy look like, but it's where are you earning your export revenues? Can you diversify your exports away from oil and gas to services? And that's where tourism, I think is going to be a big driver because this is something that these economies can use to generate foreign exchange earnings outside of oil and gas to create jobs for people coming into the labor market, and also then to generate tax revenues as well from those services. And always useful in a pegged currency too.