MANAMA, 20 November 2007 — The GCC countries have produced about 32 billion barrels of oil since 2004 equivalent to worth about $2 trillion at spot prices.
Based on every dollar per barrel of oil above $30 is surplus, then $750 billion of surplus has been generated over that time, a number is expected to rise to $1.1trillion by the end of next year. This is equal to $30 million per GCC resident, Citigroup’s report released yesterday revealed.
The report titled “Investing in the Middle East” said oil exporters have taken an increasingly active approach to investing these surpluses into their domestic economies, generating an economic stimulus that shows little sign of relenting.”
The report said: “We live in an exceptional time for emerging markets investing. Against a backdrop of a strong global economy, buoyant commodity prices and low interest rates, equities in emerging markets worldwide have moved sharply higher. As this has happened, correlations between emerging and developed markets have risen. However, there is one region that has remained remarkably out of synch with other emerging equity markets: the Middle East.”
At a time of increasing market synchronization, the MENA region — the six GCC countries plus Egypt, Jordan and Morocco — witnessed a bull market in 2003-04, then turned speculative in 2005, then fell into a sharp tailspin in 2006, all with little apparent impact on the underlying economy.
It added: “However, we believe MENA is showing signs of joining the emerging markets mainstream. Equity indices are turning up again, and the markets are becoming less isolated from global market forces than in the past. There are a number of factors at work here. A reform impulse has swept across MENA over the past decade, with leaders more focused on the role of markets in the economy. As has happened in other emerging markets, barriers to investment have come down, regulatory frameworks have been improved and more companies are going public — forcing them to open up as they seek capital from international as well as domestic sources. Global banks and asset managers are moving to set up shop in the region, and the launch of MSCI GCC indices — which are likely to join the EM benchmark eventually — mean that MENA is on the global investing “map” more than ever before. High oil prices help; but the boom is about much more than oil.
MENA’s move toward the mainstream presents an opportunity for EM investors. In this strategic overview of MENA equity markets, we find that there is plenty to like about the region: strong economies, an investment drive that is likely to underpin earnings growth in many sectors, and reasonable valuations, particularly in light of the high level of liquidity in the system. As global investors eye the region more closely, the conditions appear in place for multiple expansion — and, while valuations may not reach the lofty levels of 2005, they could move back into premium territory.
“At a time of record commodity prices, it may seem self-evident that commodity exporters should be experiencing good economic times. Nevertheless, a glance at the economic performance of the Middle East, home to some of the world’s top oil and gas exporters, cannot fail to impress.”
Average real GDP growth for the GCC economies over the past three years is 5.8 percent. Average nominal GDP growth (perhaps more relevant given the US dollar peg) is 14 percent.
“As befits a strongly-growing economy, corporates in MENA have been prospering in recent years. The top 150 MENA firms have grown earnings by 40 percent per year, on average, since 2003. Although earnings growth declined significantly from 2005 (56 percent) to 2006 (16 percent), it is reaccelerating in most MENA markets and sectors.
It added: “Consensus estimates point to earnings growth at close to 20 percent for the region in 2008. Growth comes from a variety of sources. As the largest sector, banks have seen expansion of activities in corporate, retail and investment banking, as well as newer areas such as project finance and Islamic banking. Telecoms growth has resulted from rising tariffs and usage, as well as subscriber growth in less penetrated neighboring countries. Real estate and capital goods companies have participated in ongoing large-scale residential, commercial and infrastructure build-out under way in the region. MENA macro fundamentals are strong with high levels of GDP growth coupled with robust twin surpluses.”
