In October, equities in the MENA region did not partake in the uptick in global equities, with the S&P Pan Arab Composite Large Mid-Cap Index (Saudi Arabia capped at 30 per cent) declining by over 2 per cent in October.
A revival in oil prices early in the month soon petered out, so that by the end of the month Brent oil prices were below $50 (Dh183.64) per barrel again.
Questions about how Gulf Cooperation Council states intended to adjust their budgets to confront the challenge of low prices continued.
Overall, October was generally characterised by thin volumes and low investor interest as market participants awaited answers, although the decline in key markets was far less pronounced than previous months. The month saw admonitions delivered by the IMF to various oil-exporting countries to initiate further fiscal consolidation and shore up finances. The IMF also lowered its growth forecasts for GCC countries this year and next, driven mainly by lower capital expenditure.
As in previous months, Saudi Arabia bore the brunt of market unease. The Saudi and the UAE components of the S&P/pan-Arab index each dropped by about 4 per cent in October. As these two markets constitute around 47 per cent of the S&P/pan-Arab index (Saudi Arabia capped 30 per cent), they were an important drag on the index’s performance.
Saudi Arabia’s insistence on preserving market share has been a notable contributor to depressed oil prices. The Saudis’ efforts to counteract the effect of low oil prices on the domestic economy through rises in public spending has led to an increase in the kingdom’s trade and budget deficit, a leap in debt ratios and a drop in currency reserves (which remain ample).
In spite of increased public spending, the IMF said it expected Saudi Arabia’s GDP growth to slow from 3.5 per cent in 2014 to 2.8 per cent this year and 2.2 per cent in 2016. The organisation also warned that the kingdom could run out of financial reserves within five years if it fails to tackle its fiscal deficit, set to top 20 per cent this year and next.
There is much speculation that spending plans for the coming years will be cut and new revenue-generating measures introduced. Energy subsidies are also in the firing line. Uncertainty over prospects for the Saudi equity market may well remain until the authorities actually spell out their spending plans.
On the corporate front, the challenges facing the petrochemical sector weighed on third-quarter results, whereas earnings at Saudi banks actually rose by 4 per cent compared with the same period of 2014. The domestic Saudi economy remained relatively buoyant, with the purchasing managers’ index (PMI) standing at 56.5 in September, down from 58 in August, but still well above the 50 mark that separates expansion from contraction.
The Capital Market Authority (CMA) revealed that just 11 “qualified foreign institutional investors” (QFII) had been granted access to the Tadawul since its official opening in July. Faced with such relatively lukewarm interest, the CMA has begun to explore some loosening of the structures governing foreign involvement.
It has suggested, for example, that the requirement for QFIIs to have assets of at least $5 billion might be dropped, and that total foreign investment in a single Saudi company may exceed 49 per cent. The setting up of a central cleaning house has also been mooted.
The UAE suffered from signs of continued softness in construction and in property prices as well as renewed declines in hydrocarbon prices. Banking liquidity has shifted downwards, while in their third-quarter results certain banks revealed an increase in provisioning charges. The PMI for September dropped to 56.0 from 57.1 in August.
We remain somewhat cautious about the outlook for the global economy ahead of a Fed rate hike, although we believe that such a hike will provide a measure of clarity for global markets about the state of the US economy. We are hopeful that the extra liquidity being provided by central banks in Europe, China and Japan will help global stock markets, at least in the short term.
We are also trying to form a clearer idea of how some GCC governments intend to adapt their budgets to depressed hydrocarbon prices. A meeting of ministers in November may pave the way for the introduction of a GCC-wide value-added tax.
Corporation tax may also be strengthened as a way of tackling the fiscal shortfalls that GCC countries are facing. We are especially interested in understanding how the Saudi government intends to deal with its rising fiscal deficit in the upcoming state budget.
— The writer is Head of Investment, MENA Equities, Franklin Templeton Investments (ME) Ltd.
