There Won’t Be Oil: The Future Of The Middle East And Capital Markets
The week we’re exploring the outlook for capital markets in the Middle East. This complex region is in a state of transition, undergoing a profound shift in attitudes towards modern finance, motivated by pressure from oil markets and unpredictable geopolitical events.
Economic power in the region still lies with sovereign wealth funds, but their influence is slowly being eroded as a new breed of leaders begin to look beyond dependency on petrodollar revenues to secure their financial futures. This is good news for capital markets. Opportunities abound.
For decades, banking in the Middle East – dominated by the UAE, Qatar, Kuwait, Bahrain and Saudi Arabia – has been controlled almost entirely by state-owned financial institutions, who have acted as both investors and lenders, fuelling infrastructure-led development.
The downward shift in oil prices has significantly disrupted this dynamic. Revenues have been slashed by a third across the region. As long as the oil price was high, governments looked no further than oil income to stabilise their economies. But the collapse in prices has changed that.
This has led to engagement with international fixed income markets, a rush that began with Saudi Arabia’s oversubscribed, record-breaking $17.5 billion sovereign issuance last autumn, injecting a huge flow of international cash into a liquidity-strapped system. Other Gulf nations have followed. At present, debt capital markets activity is dominated by benchmark issuance, but will likely prove to become an important funding channel for public and private issuers in the Middle East.
It would be remiss to talk about the Middle East and capital markets without mentioning the impending IPO of Saudi ARAMCO, expected to carry a $2 trillion value, and aiming to sell shares representing up to 5% of the new listed company. Significantly, proceeds from the sale are being earmarked for investment into projects that will diversify the Saudi economy and make it less dependent on oil. This listing is another significant step in the right direction for capital markets in the Gulf, as Saudi Arabia shows other regional players what the future could look like. Those other Gulf nations will be watching the IPO with interest.
A shift in attitude has also given rise to huge opportunities for capital markets in the Middle East. State-owned lenders and financiers are, for the first time in history, no longer considered the only resource. Foreign financial institutions are now being welcomed, too, and there is a focus on bringing modern finance and Islamic Finance closer together, facilitating more deal flow.
Saudi Arabia is a case in point. This year, Muhammad bin Nayef, the heir to the throne, was replaced by his cousin, 29-year old Muhammad bin Salman. MBS, as he is called, hopes to move the kingdom’s economy away from a reliance on oil and intends to bring down its vast budget deficits. His Saudi Vision 2030 encourages foreign investment and was welcomed by international economists as a bold, progressive move for the region.
But it’s not all set to be plain sailing. Saudi Vision 2030 has limitations and shifting away from a reliance on oil will take decades, not years. Optimism should be tempered by the fact that the largest economy in the region – Qatar – remains controlled by leadership still intertwined with its behemoth sovereign wealth fund, the QIA. Like all change in the Middle East, change will be slow, but it’s coming.
Insecurity remains, too. The wars in Syria and Iraq rumble on, as does political uncertainty in Turkey, and America’s geopolitical policy towards the region is, at best, muddled. So any optimism should be tempered with caution, as has been the state of play in the region for generations.
The Middle East – specifically the Gulf States – is a complex, slow moving market. But, as a result of events both beyond their control – the oil price – and within their control – shifting attitudes – the region is changing and looking to progress.
We are optimistic about the outlook for the region and the development of its capital markets. If the current trend continues, and the region opens further to foreign investment and interaction, there will be significant opportunities for foreign institutions, and this means significant opportunities for global fixed income participants.