Cross-regional investment in the GCC has been “very weak” even as the region lacks a co-ordinated strategy that can leverage its current strengths and future potential, Standard Chartered has said in a report.
“Projects such as an integrated GCC railway system have not made significant progress, and cross-border trade flows could be smoother, particularly regarding customs regulations,” StanChart said in its “Global Focus-Q3, 2014” report. According to StanChart “the diversification of investment in the GCC (Gulf Co-operation Council) is encouraging”.
The report said, “We see a clear distinction in diversification strategies, which is positive. Saudi Arabia, which has a large population, is investing in labour-intensive sectors such as petrochemicals.” Abu Dhabi, with its smaller population, is directing investment towards high-value sectors (high-tech, alternative energies). Dubai is investing in and expanding its strong core sectors of trade, transport and tourism.
Growth rates in oil-exporting economies have so far been strong in 2014, StanChart said. Yet, this growth is happening in the absence of real growth in the hydrocarbon sector, as oil and gas output remains flat. Rather, what is driving growth has been the non-oil sector, largely government spending on infrastructure and diversification projects, the StanChart report said.
Spending levels in the GCC have risen over the last five years and pressures are beginning to build up. Inflation is a risk and is starting to accelerate, driven by housing-market pressures. Bottlenecks are also increasing: many places in the GCC have gone from overcapacity in the construction sector to capacity tightness. Governments need to be vigilant that in the absence of monetary policy, interventions of different sorts are needed, StanChart said.
Here co-ordination is very important. Since most projects in the region are government-driven, aligning project execution and delivery with resource availability should not be too challenging. Abu Dhabi is leading the way, co-ordinating nearly all government projects and finance decisions via its Executive Council. This enables organised project execution and reliable delivery calendars. More countries in the region could benefit from this strategy, the report said.
GCC credits have performed strongly so far in 2014. Higher-beta names such as Dubai Inc credits have outperformed, highlighting the search for carry in a market where strong liquidity is chasing a shrinking supply of paper, and the re-rating of Dubai given improving fundamentals, StanChart said.
Lower net supply, combined with a strong local bid, is likely to lead to a further tightening of credit spreads in the region. GCC credits are now trading tighter than comparable credits from other EM regions; as a result, international investor involvement has declined. “While the region is not particularly attractive from a relative-value perspective, we believe it offers good diversification benefits and is particularly defensive during market down-cycles owing to its relatively low volatility.” StanChart said.
“The Dubai complex remains our preferred pick in the region. Abundant liquidity in the region and improving fundamentals have led to the re-rating of Dubai Inc credits, and they are now trading close to low-single-A credits from elsewhere in EM. We see room for further spread tightening in Dubai credits relative to higher-rated pockets of the region, such as Abu Dhabi, Qatar and Saudi Arabia. In our view, these higher-rated pockets do not offer attractive e carry,” StanChart said. Source: Gulf Times