By Robin Amlôt
Barclays’ latest Emerging Markets Quarterly notes that GCC oil production in Q2 13 reversed the cuts of the first quarter, but the year-to-date (YTD) average remains lower than in 2012, confirming almost flat oil growth in 2013 to date. The US recovery, China’s slowdown and Rouhani’s elections as Iran’s president constitute downside risks, however. Non-oil growth continues to strengthen in UAE, Saudi Arabia and Qatar, supported by robust domestic demand and improved banking sector liquidity.
Generally GCC credit should remain well supported, in Barclays’ view. “Given strong balance sheets and local investors’ ownership support, we do not think that the region will be at the forefront of investors’ concerns about the effects of less ample global liquidity. Hence, we think that the market correction has provided an opportunity to take a more positive view on the GCC credit space. We upgrade Qatar sovereign to Overweight in our Global EM sovereign credit portfolio, with a preference for the long end of the curve. For investors looking to increase exposure in Abu Dhabi, we highlight that quasi-sovereigns screen as cheap versus the sovereign based on historical and cross-regional comparisons. In the GCC senior bank bond/sukuk space, QNB 20s and QIIK 17s are our top picks as both names offer a decent pickup over the sovereign and look attractive relative to peers, in our view. Moreover, following their spread widening of c.60bp over the past few weeks, we think that ADIB tier 1 perps offer an attractive entry level: ADIB has a strong credit profile and would very likely benefit from Abu Dhabi government support, should the need arise.
Saudi Arabia reverses production cuts…
“Contrary to our expectations, GCC oil production increased in April and May, reversing the cuts that took place in Q1 13. However, average GCC oil production rose only to 15.7 million barrels per day (mbpd) in April-May, up from 15.5 mbpd in Q1 13, and the 2013 YTD average of 15.6 mbpd remains below the 2012 annual average of 15.9 mbpd. So far, most of the increases have come from Saudi Arabia, whose production rose from an average of 9.1mbpd in Q1 13 to 9.3 mbpd and 9.5 mbpd in April and May, respectively. So far, these trends remain in line with our 2013 forecasts: we expect average production to slip from 9.8 mbpd in 2012 to around 9.4 mbpd in 2013 in Saudi Arabia and to marginally increase in UAE and Kuwait.
“However, we think downside risks to hydrocarbon growth have increased as recent data point to moderate GDP expansion in the US and a sharper-than-expected slowdown in Chinese growth. Our economists have downgraded their Chinese GDP growth forecast from 7.9% to 7.4% for 2013 and from 8.1% y/y to 7.4% y/y in 2014.
“While the Barclays Commodities Research team still expects Chinese demand to strengthen in the short term, the lower GDP forecast and an apparent lack of momentum in manufacturing may see Chinese oil demand growth softening towards end- 2013 and into 2014.
“Another possible downside risk to production and prices is the recent election of Mr. Rouhani as Iran’s new president. The sanctions-driven shortfall in Iranian crude exports is large (lower by 0.9 mbpd from average levels produced in 2011); combining this with the other geopolitical event-led outages among OPEC suppliers (Libya, Nigeria and Iraq) brings the tally close to 2 mbpd. Accordingly, we think the return of Iranian crude to the market following an easing of international sanctions is likely to produce a bigger catalyst (to the downside for prices) rather than the status quo creating upward pressure (where stricter sanctions rolling in over the coming months would remove more barrels from the market).
…while GCC non-oil growth is in expansion mode
“In contrast, May Purchasing Managers Index (PMI) in Saudi Arabia and UAE confirm that the non-hydrocarbon activity remains in expansionary mode, despite diverging trends across countries. In the UAE, May PMI registered 56.1 up from 54.8 and 53.9 in April and March, respectively, highlighting strong domestic demand-driven growth. This is in line with recent 2012 GDP data releases which point to an acceleration of non-hydrocarbon growth in UAE. The latter expanded by 3.5% y/y up from 2.6% y/y in 2011, while the key driver was the oil sector which grew by 6.2% y/y, bringing overall growth to 4.4% y/y, higher than our original forecast of 4% y/y. Notable is the acceleration in Dubai’s recovery, where growth registered 4.4% (Barclays 3.8% y/y) on the back of expansion in manufacturing (13.1% y/y), strong growth in the hospitality sectors (16.9% y/y) as well as in transport and logistics, which contributed a full percentage point to Dubai’s overall growth rate. In 2013, we expect the latter trends to persist and services sectors to lead growth, notably the tourism, trade and real estate sectors. As for the construction sector, much hinges on whether Dubai will be selected for hosting the 2020 World Expo, this should be decided in November.
Saudi Arabia’s May PMI reading also remains expansionary, reaching 58.7, slightly down from 59.7 in March. This slowdown, which seems to be driven by a retreat in the export orders’ component, reflects a contraction of non-oil exports which fell by 10.2% y/y and 5.9% y/y in February and March, respectively. However, domestic demand remains robust as reflected in proxy indicators: point of sales transactions grew by an average of 24.4% y/y during the first four months of the year, while credit growth to the private sector remains robust, at 15.7% y/y since the beginning of the year, compared with 12.6% y/y during the same period last year. We also expect residential investment to accelerate, as a number of implementation regulations for mortgage lending were approved in May. Moreover, an April royal decree should help to advance a SAR250bn (USD66.7bn) housing construction programme, which originally was announced as part of a fiscal package in 2011: the Ministry of Housing was tasked with building infrastructure on municipal land and subsequently distributing it.
“Similarly, in Qatar, hydrocarbon growth has been muted since Q2 12, while nonhydrocarbon growth has led the way, registering 11.85% y/y in Q4 12 and more than 10% y/y for full-year 2012, supported by a sustained increase in public spending and credit growth. With Liquified Natural Gas (LNG) production and exports running at full capacity, we think non-hydrocarbon activity is likely to continue to dominate the drivers of growth in 2013, on the back of increases in public spending in line with Qatar’s revised National Development Strategy (NDS).
“Sustained credit growth remains a key driver of non-oil growth, despite some regional slowdown in the past few months. Credit to the private sector averaged 39.1% y/y in Qatar during the first four months of the year, down from 58.3% y/y during the same period last year. In Saudi Arabia as well, the monthly average remains at 15.7% y/y. Strong growth in both public and private sector deposits in both countries and moderating credit growth led Loans to Deposits Ratios (LDR) to ease further, while in UAE, weak credit growth reflecting banks’ cautious approach to lending helped to improve liquidity. In Dubai, the large exposure of most banks to sovereign-related entities, and ongoing restructuring, will likely see banks stay on the sidelines, despite a resurging demand for mortgage lending and accelerated recovery in the real estate sector."