For the Mena markets 2016 was a volatile year. But the year ended quite well as most of the regional markets closed in positive territory.
The volatility was primarily a result of Mena markets adjusting to the macro environment of low oil prices and the reformist approach of regional governments. Dubai was the best performing market, up by 12 per cent, followed by Abu Dhabi at 6 per cent and the Saudi market at 4 per cent.
Global equity markets continue to perform well as expectations remain high with regard to growth prospects in the US as Donald Trump takes office on January 20.
Overall, the recent set of macro numbers has been skewed towards the positive. The US dollar continues to strengthen on relative yield differentials; the dollar index is currently at 103. Generally, a stronger dollar impacts emerging markets from a macro and flow perspective. As per the Institute of International Finance data, emerging market portfolio inflow for 2016 at US$28 billion is the weakest since 2008 and 90 per cent below the 2010-14 average. Overall EM equities did better than EM debt as higher US rates and higher commodity price outlook dilute the dovish monetary outlook for many EM countries.
The Brent price is stable around $56 per barrel even as US inventory levels have come in higher for the last two weeks of December and US oil rig count moving higher. The market focus has now shifted to implementation of the Opec deal. Kuwait and Oman have announced that they have reduced their oil production. The first meeting of a committee of Opec and non-Opec nations responsible for monitoring global agreement to reduce oil production is expected to take place in Abu Dhabi on Friday. We expect the global oil market to gradually balance this year.
The Saudi Arabian budget for 2017 was better than market expectation. Despite continuous fiscal consolidation, the pace of fiscal austerity is expected to be slower this year. The budget paints a more stable outlook for the economy. The expenditure is expected to increase by 8 per cent to 890bn Saudi riyals compared with 2016, with increased allocation for health care, infrastructure and public programme sectors.
However, including the money paid out to settle overdue bills of 105bn riyals in the fourth quarter of 2016, the 2017 budgeted expenditure is 4 per cent lower compared with 2016 actuals.
The government has guaranteed to settle future bills within 60 days upon receiving them; a positive for the cash-strapped construction sector. The budget deficit for 2016 came in at 16.8 per cent of GDP and is expected to be 7.7 per cent of GDP in 2017, driven largely by better revenue realisation pursuant to the recent Opec deal and energy price reform later during the year; the oil revenues are expected to increase by 46 per cent this year.
The budget deficit would be financed through a combination of reserve drawdown and debt issuance; total debt now stands at 12.3 per cent of GDP ($56.8bn local debt and $27.5bn international debt) and the self-imposed debt/GDP ceiling of 30 per cent to meet current AA2 rating requirement stands.
The borrowing headroom, in addition to $540bn of foreign assets, demonstrates the balance sheet strength to steer the economy. But the focus ultimately is on diversifying the economy from government spending. The commitment to the National Transformation Plan is clearly evident as allocation towards the cost of NTP initiatives has been increased four-fold to 42bn riyals for 2017; this is further expected to increase to 72bn riyals annually through 2020.
Looking ahead, we think margins for UAE banks can get better, driven by lower funding costs. We expect banks to benefit from Expo 2020 spending. The UAE real estate sector was broadly weak in 2016. But real estate companies are expected to deliver high single-digit growth in earnings on the back of existing backlog of development properties.
The November bulletin from the Saudi Arabian Monetary Authority showed a 1 per cent month-on-month decline in credit driven by short-term loans, possibly on account of reduction in working capital loans after the government cleared overdue payments. We are cognisant of a possible credit growth vacuum that could show up on account of this factor but see the diluted asset quality concerns as a bigger relief for Saudi banks.
Mostly companies pay an annual dividend in the UAE and Qatar, currently many companies in the UAE are trading at an attractive dividend yield of about 5 per cent. We think it could be a good entry point for investors, particularly for investing in those companies having stable cash flow and attractive valuations.
Saleem Khokhar is the head of fund management at National Bank of Abu Dhabi.
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