Above, an employee welds a pipeline in the desert oil fields of Sakhir in Bahrain. A number of GCC countries have indicated they could introduce taxes or reduce generous energy subsidies.
Expectations of a decline in US oil production have boosted hydrocarbon prices in recent weeks and put a more positive sheen on financial markets in GCC countries.
There still exist geopolitical overhangs, but military intervention in Yemen seems to have been contained for the moment. A prospective nuclear deal with Iran would lower tensions further and could give a significant boost to the region over the medium term, particularly to Dubai and Oman.
We are also encouraged by the decision of the Saudi authorities to open their stock market to direct foreign investment, and we expect that to be a precursor of future reforms that should benefit the region’s financial markets.
While currency reserves in GCC countries are, broadly speaking, sufficiently strong to absorb the steep decline in oil prices from the second half of last year, a number of GCC countries have indicated they could introduce taxes or reduce generous energy subsidies.
While these efforts to place state finances on a more solid long-term footing are unlikely to transpire in the immediate future, they do signal the direction GCC financial policies are heading.
In the immediate term, Saudi Arabia’s drawing down of foreign reserves to support spending and growth is an example of the commitment the region has to the growth of its non-oil sector.
While the debate on the US Federal Reserve’s next move heats up in the months ahead, we think the GCC region’s fixed-income market will continue to benefit from its strong credit and growth fundamentals, the shorter duration of issues relative to other global fixed income sectors, the region’s US dollar peg and a dedicated domestic investor base that should support strong risk-adjusted returns.
With regards to developments last month, commodity prices, especially crude, marked their largest advance since May 2009, and progress in the P5+1 nuclear talks with Iran were broadly positive for GCC assets.
The month was dominated by news from Saudi Arabia – the Capital Markets Authority’s announcement that it would open the Tadawul to direct foreign investment on June 15.
There were also highly significant political changes as King Salman, elevated to the throne in January, appointed a new heir to the throne and successor to that heir. These appointments are seen as an important generational shift in the structure of Saudi royal power and came on top of other changes, including the replacement of the current foreign minister and the economy and planning minister.
It was also announced that the state oil company, Aramco, would be separated from the oil ministry as part of a wider restructuring, and that Aramco’s chief executive was replaced.
The Saudi manufacturing purchasing managers’ index reading slowed in April to a three-month low as the $29 billion supplementary spending programme announced earlier this year lost steam.
The UAE continued, however, continued to demonstrate its resilience to the low oil-price environment. Its PMI picked up last month to 56.8 points from 56.3 in March on an increase in non-oil private sector activity. The industrial output element of the PMI index jumped to 62 last month from 60.7 in March and new orders picked up to a robust 62.1.
Mohieddine Kronfol is the chief investment officer of fixed income and global sukuk at Franklin Templeton Investments Middle East.