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GCC economies already on a recovery path, but where do opportunities lie?

This is a cautious good news story for GCC businesses. Certain metrics are showing recovery signs, with the UAE and Saudi primed to offer investment opportunities

The Saudi Arabian non-oil economy is well on the path to recovery The restoration of the Gulf Cooperation Council’s relationship with Qatar will improve cooperation The UAE offers greater scope than most of its neighbors for expansionary fiscal policy in the shorter term

This is a cautious good news story for GCC businesses. Certain metrics are showing recovery signs, with the UAE and Saudi primed to offer investment opportunities.

Positive end 2020 signs   

Business activity in the Arab world’s two largest economies improved at the end of last year, with Saudi Arabia seeing its strongest expansion in 13 months.

After 2020 setbacks caused by the spread of Covid-19 and lower crude prices, non-oil private sector economies in the United Arab Emirates and neighboring Saudi still faced job losses as firms adjusted to the challenges of the global pandemic.

Purchasing Managers’ Index surveys compiled by IHS Markit in December for the two Gulf nations rose above the threshold of 50 that separates growth from contraction. In Saudi, the gauge rose to the highest since November 2019, driven by an increase in output and new business.

The Saudi Arabian non-oil economy is well on the path to recovery,” said David Owen, an economist at IHS Markit. “The PMI is now (just) above its series trend level, suggesting the economy is growing at a relatively normal pace, albeit with a lingering output gap to recover.”

Read: Big changes are coming to Oman in 2021, aimed at fixing economy, employment

An inviting UAE business climate

The UAE has always striven to attract business but today it is turning into a haven for investment. 

UAE’s Federal Decree-Law 26 of 2020 (Amendment Decree) was issued on September 27, 2020 and introduced significant amendments to Federal Law 2 of 2015 (Commercial Companies Law) and repealed Federal Law 19 of 2018 (FDI Law). 

The Amendment Decree will remove longstanding foreign ownership restrictions, including the requirement for “onshore” local companies to be 51% owned by UAE nationals, but these changes will not take effect until 6 months from when the Amendment Decree was published in the Official Gazette.

It will also remove requirements for a majority of directors of a joint-stock company to be UAE nationals (other than companies carrying on “strategic impact” activities). 

The Amendment Decree will also remove the requirement by foreign companies, who are establishing a branch or representative office in the UAE, to maintain a local agent.

These are important developments for attracting FDI into the UAE and are expected to substantially reduce registration and administration costs for businesses.

Qatar truce to rekindle cooperation 

The restoration of the Gulf Cooperation Council’s relationship with Qatar will improve cooperation but the damage done by the rift is likely to remain, says S&P.

However, the agency foresees no rating impact on the countries at present, saying they would remain as follows: Qatar (AA-/Stable/A-1+), Saudi Arabia (A-/Stable/A-2), Bahrain (B+/Stable/B), and Egypt (B/Stable/B). The UAE is not rated by the agency.

The resolution will support improvement in the region’s broader business and investment environment, S&P said.

“Trade between member states is relatively limited given the almost uniform concentration of GCC member states’ exports on hydrocarbons and the lack of strong agriculture or manufacturing sectors in the region,” S&P said.

Read: Gulf leaders bury the hatchet

Where do opportunities lie?

Despite positive news for markets globally from the likely COVID-19 vaccines, sentiment in the GCC remains cautiously optimistic, according to Aberdeen Standard Investments (ASI).

Emirates NBD’s latest monthly insights predicts a recovery in 2021 to be slower and uneven compared with many developed markets. This stems from governments across the region providing liquidity via central banks, rather than directing fiscal stimulus into households and businesses.

The report forecasts only a modest rebound in oil prices over the next 12 months – with Brent oil to average $50/barrel in 2021, well below the budget break-even price in GCC countries.

Edris Alrafi, Head of Middle East & Africa for Aberdeen Standard Investments (ASI), said: “Based on measures to date, such as hikes in tax on goods and services in Saudi Arabia, or efforts in Oman to boost revenue and reduce budget spending, it seems the general priority in the region will be deficit reduction, not growth.”

However, the UAE offers greater scope than most of its neighbors for expansionary fiscal policy in the shorter term. Evidence of this includes structural reforms such as extending visa schemes and allowing 100% foreign ownership for onshore companies in some sectors.

There is also a bright fintech future, given that the UAE has created a dedicated Minister of State for Digital Economy and AI, and allocated a cybersecurity chief

Edris continued: “More broadly, there is a good reason for optimism about the UAE’s overall creditworthiness. In terms of public finances, for instance, Abu Dhabi offers an unconditional guarantee for the timely service of the federal government’s debt.

At the same time, supportive structural features include the focus on eradicating oil dependence, strengthening governance in the business environment, and maintaining strong fiscal and external balance sheets.”

The Saudi Public Investment Fund (PIF) was awarded another $40 billion in government reserves in the first half of 2020 to tap into various opportunities

In recent months, efforts have been underway across the GCC to diversify supply chains to prevent overreliance on foreign suppliers. This has fostered stronger regional ties – including the adoption of a Kuwaiti proposal to create a joint food supply network across the GCC

Other sectors offering investment potential include healthcare, construction, and transport.

A report by Alpen Capital predicts a boost in investments to meet the growing pandemic-led demand and the possibility of future outbreaks. These will include research activities and digitization in a bid to drive the growth of services and improve operational efficiencies. Alpen Capital noted that Saudi represents just over half (56%) of the region’s healthcare, followed by the UAE.

Meanwhile, investors can look to the $1 trillion of construction and transport projects, planned or in progress, as an enticing segment within the GCC. 

There are also a further $1.2 bn of developments promised through long-term transformational masterplans and megaprojects, including Saudi Arabia’s $500 billion NEOM.