The Gulf: investing in the future

Gianluca Salsecci, head of Intesa Sanpaolo’s International Research Network, tells Giulia Rhodes how economic diversification offers real rewards for investors in the Gulf

10/04/2017

From football and fashion to real estate and renewable energy, opportunities for investment and trade in the Gulf – a region most commonly associated with oil and gas – are varied and growing.

As Intesa Sanpaolo continues to strengthen its presence in the area, research suggests cause for optimism despite the undoubted difficulties brought about by the low oil price in recent years.

The average annual growth rate of GDP in the region is forecast to slow down to around 2 per cent over the two years from 2016-17 – from above 3 per cent in 2014-15 – but to rebound to around 3 per cent in 2018.

These predictions are made in the light of the recent OPEC agreement to reduce production of crude oil in 2017 and of fiscal consolidation measures to balance lower oil prices recently implemented by governments around the Gulf, says Gianluca Salsecci, head of the Italian bank’s International Research Network. However real GDP growth is expected to pick up in 2018 driven by the non-hydrocarbon sector. The underlying optimism is fuelled by the potential for new, exciting business. “We were expecting this more limited growth driven by the oil cycle in the short run, but there is also a story of economic diversification taking place and this merits attention with a longer-term view.”

 

“We see significant opportunities in several sectors where Italy has a real advantage”
Photo: Gianluca Salsecci, head of Intesa Sanpaolo’s International Research Network


Understanding the region’s prospects – and crucially those of the individual countries it encompasses – is not a straightforward task, he admits. “It is complex, with the need for careful, continuous monitoring and analysis of political as well as economic factors – which are not always easily predictable. For instance, conflicts in Syria and Libya are negatives, while the Iranian nuclear deal and lifting of sanctions is a positive. There are cultural, geographic, economic and structural factors to consider – and within them many variables.”

The key economic factor affecting the region remains the price of oil, which fell from a high of over $100 a barrel in the four years to 2014 to $30 at the end of 2015. It is now expected to continue a gradual recovery to around $60 in the medium term, according to the IMF and Institute of International Finance.

With countries of the Gulf Cooperation Council (GCC) holding 30 per cent of the world’s oil and 20 per cent of its gas reserves, the region remains “crucial” on the global energy market, says Salsecci. But, he points out, its significance for Intesa Sanpaolo and its clients extends beyond the hydrocarbons sector.

“The Gulf now also plays a key role in global capital markets, with $3.5 trillion massed in reserves and sovereign wealth funds. While the rate of accumulation has slowed, the stock of reserves and sovereign wealth funds still amounts to around half the world total,” he continues.

As well as significant investment overseas – including in Europe and Italy – these funds have allowed Gulf countries to underpin diversification programmes over the past decade, lessening their future dependence on hydrocarbons (exports of which fell to approximately 40 per cent of GDP in GCC countries overall in 2015).

“In the UAE – and especially in Dubai, where a lack of oil and gas made diversification obligatory – there has been a strong push that is now partly hedging the UAE from the risks of the oil-price cycle,” Salsecci says. In doing so, however, he notes that the inevitable flip-side is increased exposure to fluctuations in other sectors. Seventy per cent of Dubai’s output is now created by the service sector, in particular tourism, transport, real estate and finance.

“Other countries would like to follow this path long-term – among them Kuwait and Saudi Arabia, whose dependence on hydrocarbons is still very high (80-90 per cent of export quotas),” says Salsecci.

Numerous special economic/free zones have been designated to attract and promote development, trade and foreign investment in a range of different sectors, particularly favouring port infrastructures, advanced technology and renewable energy. Forty such zones are located in the EAU, Salsecci explains.

“These will need to be evaluated over time, but they clearly present a moment of opportunity with favourable tax regimes, less rigorous trade and financial restrictions – allowing in some cases up to 100 per cent of invested capital – and more liberal access to local markets,” he says.

“We see significant opportunities in several sectors where Italy has a real advantage,” he continues. Among these he lists infrastructure, renewable energy, sanitation, farming and food, and luxury goods – fashion, jewellery and design – demand for which reflects the region’s very high average per capita income.

Certainties are rare when considering the future of economies, says Salsecci. “We provide the elements for an analysis of the potential and the risks. Then it is about moving wisely forward to exploit the best business opportunities.”

Please read more in the research dedicated to Middle East and North Africa

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