16 Dec 2022
It’s almost four years since the remaining five members of the GCC – Bahrain, Kuwait, Qatar, Saudi Arabia and the United Arab Emirates (UAE) – joined Oman in the leading EM hard currency debt index.1 They now account for over a fifth of the index, but GCC markets’ relevance to EM debt investors has a longer history – the majority enjoy an investment-grade rating, and in recent years they have been the source of some of the largest bond issues since the oil price collapse in 2014.
Fast forward to 2022 and with the average price of Brent Crude hitting US$100 a barrel, the countries I visited are booming. This is something that we touched on in our 2023 outlook piece and is reflected in IMF growth forecasts of 6.5% for the region in 2022. Against this positive economic backdrop, my trip revealed some encouraging developments from a sustainability perspective that could be overlooked by investors when they consider the region.
While GCC countries may be starting from a low level on various sustainability metrics, what matters to us as debt investors is whether a nation is heading in a positive direction in terms of policies and implementation and at what pace – this is, we believe, the key driver of long-term investment returns.
Here are my key takeaways and some additional reflections on the region.
In the context of global energy transition, the region’s starting point is very low. Emissions per capita are high, with the energy mix skewed heavily towards oil and gas. Despite tangible progress and welcome pledges with respect to emissions targets, we believe climate action overall remains insufficient. But various meetings with policymakers lead me to expect efforts to intensify in the coming year.
Oman recently committed to net-zero emissions by 2050, in line with the UAE and ahead of Saudi Arabia and Bahrain, which target 2060. In our view, the UAE remains the regional leader in climate efforts – it was the first country to revise its green-house-gas emissions reduction target from 23.5% to 31%, compared to a business-as-usual (BAU) scenario for the year 2030. While this may still fall short of what is needed, it is clearly setting the tone in the region; Saudi Arabia quickly followed in the UAE’s footsteps, revising its own nationally determined contribution (NDC) target to a 35% reduction compared to 2030 BAU.
The recent deal signed by the US and the UAE – Partnership for Accelerating Clean Energy (PACE) – highlights the UAE’s intentions on climate transition efforts. PACE aims to invest US$100 billion in developing 100GW of clean energy projects around the world by 2035. We now expect the UAE to prioritise low-carbon investments with the greatest economic significance and highest potential to reduce emissions and energy intensity.
Other GCC member states I visited have also set their own near-term targets vs. BAU projections, but they lack urgency and ambition. However, based on my discussions on the ground, I expect these nations to intensify their efforts and revise their national climate targets further, ahead of COP28 to be held in the UAE.
Another key takeaway from my trip is a focus on increasing renewables capacity. This has been helped by technological improvements, for instance, with cheaper sand-resistant solar panels. Oman has raised its game in terms of targets in the power mix, aiming for 20% of energy to come from renewables by 2030 and 35%-39% by 2040. In this regard, it is playing catch up with the UAE (44% by 2050), but Saudi Arabia’s targets remain the most ambitious (50% by 2030) in the region. In contrast, Bahrain’s target (10% by 2035) looks out of date and rather inconsistent with the country’s net-zero targets. While actual installed renewable energy capacity – still only a small proportion of total electricity generation requirements – needs to catch up with ambitious targets, this should happen relatively quickly. The UAE is the clear regional leader, with electricity generation from renewable energy rising to 4% from 0% just a few years ago. The decarbonisation of its energy use has also recently taken a major step forward with the launch of the first nuclear power station in the region. Saudi Arabia’s target may ultimately prove overly ambitious, but here too we are seeing encouraging signs of an acceleration in renewable energy projects underway over the last year or so.
The real ‘talk of the town’ in the countries I visited related to the much riskier but very promising (from an energy transition perspective) green hydrogen sector, where various governments are making significant investments. Saudi Arabia and the UAE remain the undisputed leaders in the area with various sizeable projects already operational or at a final investment decision stage. Oman is following a well-thought-out strategy via the recently established state-owned entity Hydrom; a highly ambitious venture which, while laudable, will take many years to produce results, especially considering the significant capital spending requirements (estimated at US$150 billion by 2050).
Developments in the socio sphere were a highlight of my trip and a real cause for optimism.
The Gulf region has long had a higher share of female graduates than male, but it has struggled to translate this into a higher share of skilled female workers in the labour force, either in the private or public sector. Over the last few years this has started to change, helped by meaningful reforms across the region.
In Saudi Arabia, the pace of social and cultural transformation is remarkable. Enviable demographics are no doubt providing a helpful impetus to socio-economic reforms as two-thirds of the Saudi population is under 35 years old. The jump in female labour participation rate stands out, doubling over the past five years to over 35% - this was in evidence on my trip to Riyadh, where many of the finance and public sector professionals I met were women. There was a clear sense of excitement and optimism stemming from the almost unimaginable socio-cultural change that has taken place in the country over the past few years. This broad cultural shift will undoubtedly have profound implications for activity in certain parts of the economy, such as the thriving entertainment industry.
Another Gulf state seeing a big improvement in the female labour participation rate is Oman. Over the last two decades, this has grown from 23% to 35% in 2021, driven by improved educational attainment among Omani women, demographic changes, and government initiatives. Despite this, Oman still lags many of its GCC peers in terms of overall female participation and the share of Omani women in managerial positions has remained almost flat, so there is significant room for further improvement.
Elsewhere, Bahrain has been commended on its efforts to advance education, which means it now has the highest literacy rates in the region. While more needs to be done, a national model of equality has been adopted to ensure equal opportunities. Women occupy 55% of key posts and account for 35% of the work force in the private sector.
The shift in perception of women’s role in society is by far the most important social dynamic I identified which, if continued, will certainly strengthen the region’s social fabric and generate substantial economic dividends in the future.
Governance is another area where I saw tangible improvements. In general, I found a strong commitment to enhancing regulatory frameworks, adopting best business practices, and leveraging technology and digitalisation.
In Oman, authorities have made significant progress on fiscal transparency while also recognising the importance of a coordinated approach to managing the budget across various sovereign entities. To this end, policymakers are developing a public debt law to regulate and manage debt operations and adopting a centralised approach to managing government assets via a national register.
Saudi Arabia has taken significant steps to improve the regulatory and business environment, with the aim of attracting foreign investment and creating private sector employment; the Public Investment Fund is instrumental in setting governance standards and rolling out the Saudi green initiative. Meanwhile, the structural fiscal reforms initiated under the Saudi Vision 2030 framework are already bearing fruit and authorities appear determined to continue reform efforts on the tax system. However, much more needs to be done to improve fiscal transparency.
In the UAE, reforms under the 2050 Strategy aim to diversify the economy and ensure a balanced energy transition and sustainable long-term economic growth. The envisaged fiscal reforms include the introduction of a corporate income tax – a first in the region - and gradual phasing out of business fee structures – these steps will be essential for maintaining fiscal sustainability. An important challenge for the UAE is the coordination of emirate-specific fiscal anchors and rules to ensure a unified national fiscal stance.
The tailwinds helping GCC economies have facilitated some positive dynamics on the ESG front, especially relating to socio and governance developments. Coupled with tentative steps in the right direction on environmental issues, this points to a positive trend from a sustainability perspective. If policymakers manage to translate intentions into concrete action on the climate-risk and renewable energy front over the next few years, the implications for the global energy transition are significant. Such steps would also give investors greater confidence over the long-term outlook for these economies even after current tailwinds eventually recede.
1 JP Morgan EMBI.
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