Saudi GCC Opportunities June 2012b

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June 2012

Saudi and GCC Opportunities

2012-16Contents

Summary 1

Oil and Gas Resources 2

Development Plans and Visions 4

Demographic Opportunities 4 Saudi Arabia 6 6

UAE 18

Qatar 20 20

Kuwait 22

Oman 25

Bahrain 27

Economics DepartmentSamba Financial Group

P.O. Box 833, Riyadh 11421

Saudi Arabia

Summary and Key ThemesThis report tries to look beyond the short term gyrations

in the global economy and assess the medium-term

prospects for the GCC economies, focusing on likely

progress with implementing government “Visions” and

development agendas, and the associated publicspending intentions. The aim is to identify public spending

priorities and those nonoil sectors with particularly strong

growth prospects, in order to allow private sector

participants to position themselves accordingly. In

particular, we hope to identify those sectors where the

authorities have made a public commitment to involving

the private sector, and where possible have outlined any

incentives that might be on offer.

The key takeaways from our analysis are:

Revenues from hydrocarbon resources should besufficient to support planned development

spending and support private sector growth

Rapid population growth will provide an incentive

to push ahead with development programs and

economic reforms

Rising government recurrent spending is a

concern and has increased the vulnerability to oil

price fluctuations, but GCC economies and public

finances are structurally strong enough to weathertemporary dips in prices

We do not expect a return to boom times, but

strong and steady growth which will help contain

inflationary pressures

Governments across the region are keen to

diversify their economies away from oil, and have

made concrete efforts in this regard. However,

projects have been duplicated across countries

and there is a danger of overcapacity in some

sectors



June 2012

2

Oil and Gas Resources

Large oil and gas resources provide a solid base for growth

While global growth is likely to remain sub-par for a few more

years yet and subject to heightened risks (see Box), prospects for

the GCC through 2016 are encouraging. A key factor in the GCC’s

favour is the structural strength of members’ economies, as

reflected in healthy public and external finances, sound banking

systems; increasing integration with stronger emerging market

economies and, critically, their extensive hydrocarbon resources

(for more analysis see our 2011 report The GCC: Prospering in

Uncertain Times). These resources generate large revenues and,while endowment is mixed amongst GCC states, most have

enough reserves of oil and gas to enable them to maintain

output at current levels or higher for many years to come (see

chart), providing a solid foundation for future revenues.

The scale of such revenues will depend on prices, but they seem

likely to remain large. Longer term oil price projections are

always uncertain, but the likely evolution of global oil markets

suggests that average prices will remain relatively high over the

next five years. Risks of short-term price declines are clearly

present, but the underlying trend is positive. New empirical

research undertaken at the IMF points to a near doubling of thereal price of oil over the coming decade (see IMF Working Paper;

The Future of Oil: Geology versus Technology ) while projections

put out by major energy agencies suggest that prices will hold at

between $100-125/b for Brent through 2016 as demand for oil

continues to grow in emerging markets. Increasing global

production and use of gas will divert some consumption away

from oil but, barring a major technological breakthrough, oil will

continue to be the dominant fuel for transportation.

Even though oil output is increasing in other parts of the world,

with over a third of world proven oil reserves the GCC is still

seen as a major source of supply growth to meet this growingdemand. Saudi Arabia, the UAE, and Kuwait will be particularly

important sources of supply. While annual output levels will vary

with OPEC quota developments for those GCC states which are

members, average production in the GCC is thus expected to

remain close to current levels or higher through 2016.

Hydrocarbon revenues have surged and are likely to remain

substantial

This combination of production and prices will generate large oil

and gas revenues ensuring that GCC finances remain robust. This

in turn will allow governments to finance development anddiversification programs while still running healthy fiscal and

OPEC

77%

1068.4

of which GCC

36%

495.2

Non-OPEC

23%

314.8

Proved Oil Reserves

(000 m/b, 2010; BP)

100+94

72

45

17

100+ 96 100+

2617

0

20

40

60

80

100

120

Kuwait UAE Saudi Qatar Oman Bahrain

Hydrocarbon Reserves 2010

(years of remaining production - r/p ratio;

BP)

oil gas

Reserves b/b US$ trillion

Saudi 264.5 21.2

Kuwait 101.5 8.1

UAE 97.8 7.8

Qatar 25.9 2.1

Oman 5.5 0.4

GCC 495.2 40

Capital flows if remaining proved

oil reserves sold at $100/b



June 2012

3

Global growth is likely to remain sub-par through

2014 (which would mark 7 years since the start of

the crisis) with the possibility of a stronger pick-up

thereafter

current account balances. In addition, a continued build up in

external assets will also allow for a smoothing of spending

should oil prices and revenues temporarily dip.The scale of potential capital flows to the GCC over coming years

is certainly large. If remaining proved oil reserves sell for $100/b

they would generate capital inflows of around $50 trillion – over

half accounted for by Saudi Arabia. Even at $80/b, which is

probably close to the marginal cost of production, flows would

still reach $40 trillion. Added to this are the capital flows from

gas resources, including from related downstream industrial

activity. GCC states are sitting on substantial reserves of gas (see

chart), and for countries such as Qatar, and to a lesser extent

Oman, exploitation of these reserves have generated wealth and

driven development.Box 1: Global Economic Growth

Advanced economies are still undergoing an uncomfortable

period of transition in the aftermath of the bursting of housing

and credit bubbles which began in 2007-08. Large debt

overhangs, fiscal deficits, private sector deleveraging and bank

balance sheet strains continue to present headwinds to growth

and still need more time to be resolved. Aging populations make

the task even harder.

Dealing with these problems has heightened political

disagreements in the Eurozone over the balance betweenausterity to control debt and deficits, and stimulus to restore

growth and employment in the face of renewed recessions. In

these conditions the risk of politically driven policy errors

leading to another financial crisis are elevated – Greece and its

potential exit are a key concern - and prospects for growth are

clouded. Further policy stimulus is a possibility but is likely to

suffer from diminishing returns and may delay the reforms

needed to restore fiscal sustainability and competitiveness in

peripheral economies.

Growth in the US should be more robust, although deep

structural problems still need to be resolved, and these will actas a drag. With stronger public finances and more room for

monetary stimulus, emerging markets should be able to

generate healthy growth, although there will be some pull back

from slowing trade.

Under such conditions advanced economy interest rates are also

expected to stay low through 2014. However, inflation risks will

be a mounting concern as we head towards 2016 given the

exceptional monetary easing and expansion of central bank

balance sheets of recent years

-1

0

1

2

3

4

5

6

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

2 0 1 3

2 0 1 4

2 0 1 5

2 0 1 6

World Real GDP

( percent change; IMF,Samba)



June 2012

4

Development Plans and

Visions

Large development programmes aim to deliver sustained

growth

Mindful of their heavy reliance on oil and gas sectors, all GCC

states have embarked on strategies and programs designed to

diversify their economies, enhance private sector activity,

improve education standards and boost employment for

nationals. These efforts include large public spending programs

on infrastructure, education and health with supporting

investments envisaged from the private sector. Not all are fullycosted out, but Saudi Arabia’s 9th Development Plan covering

2010-14 envisages spending of $385 billion.

Kuwait’s development plan proposes $125 billion over the same

time frame, while Oman’s 2011-15 plan envisages $78 billion in

expenditure. Meanwhile, Abu Dhabi, Bahrain and Qatar have

established Vision 2030 frameworks and national development

plans/strategies to achieve those visions. The National

Development Strategy (NDS)for Qatar covering 2011-16

envisages spending totalling $226 billion, while Abu Dhabi’s

Vision 2030 report estimated spending of $160 billion during the

five year period 2008-13.All GCC plans highlight investment opportunities in such sectors

as transportation, power, water, utilities, health care, housing,

ITC, education and training. Spending on infrastructure is

expected to be particularly large in the coming years offering

large opportunities in the construction sector. Transport projects

are particularly prominent, with all GCC states planning to

develop new interlinked train networks, as well as boosting

roads, airport and port infrastructure. Demand for power is also

rising strongly throughout the region as economies develop and

older generating plants commissioned in the 1970s and 80’s

need upgrading. More country specific details are provided inthe sections that follow below.

Demographic Opportunities

GCC populations are young, growing and relatively wealthy,

providing both opportunities and challenges. According to IMF

data, the total GCC population has grown by nearly 19 million

people since 1990, with more than half of the increase in Saudi

Arabia. Central bank data show that the Kingdom’s total

population has grown by an annual average rate of 3.4 percent

since 2004 to reach 27.6 million at end-2010. This rate of growthis forecast to continue for most of the forest period, though

750

560

225 205115

65

Saudi UAE Qatar Kuwait Oman Bahrain

GCC: $1.9trn of Projects Planned or

Underway

($bn, MEEDProjects)

Aviation Rail Roads Ports Total

Bahrain 4.9 7.9 1.2 0.9 14.9

Kuwait 3.4 14 8.2 2.66 28.3

Oman 12.6 2.5 10 7.9 33.0

Qatar 15.2 36.8 7.2 11.5 70.7

Saudi 19.6 40.7 4.1 9.1 73.5

UAE 8.7 17.5 25.8 3.8 55.8

Source:MEEDProjects

GCC: Planned Transportation Projects ($bn)

A.Dhabi 160 2008-13

Saudi 385 2010-14

Qatar 226 2011-16

Kuwait 125 2010-14

Oman 31 2011-15

GCC 927

GCC: Development Plans ($bn)



June 2012

5

there might be some softening as we move into 2016 and

beyond.

The smaller GCC states have grown even more rapidly (seechart), but from a much smaller base. Growth has come from

increases in national populations as well as large inflows of

migrants. These expanding populations have been key drivers of

economic development in the region, and the increasingly

urbanised GCC middle class has provided a growing consumer

base for businesses.

Looking ahead the total GCC population is projected to grow by

another 8.5 million people between 2011 and 2016, the bulk

accounted for by Saudi Arabia (5.1 million). In the UAE, the past

extremely rapid rate of expatriate driven growth is expected to

slow significantly. A similar trend is expected in Qatar, althoughit is likely to see a temporary surge in expatriate numbers as

workers are pulled in to implement the NDS and world cup

preparations. Elsewhere population growth is expected to

continue at around 3 percent pa.

Growing populations will require increased provision of

infrastructure and services and act as a strong incentive to GCC

governments to press ahead with their development and

diversification programs in order to provide employment for the

growing labour force. Population profiles in the GCC are

distinctly youthful (around 30 percent of Saudi’s are aged

between 15-29), which makes job creation a pressing issue, and

this has been the key principle guiding economic policy for some

time Younger people also have distinctive consumption patterns

and despite the brisk rate of population growth are expected to

benefit from rising per capita incomes. Strong growth will create

particularly wealthy consumers in the smaller oil rich states of

Qatar, Kuwait and Abu Dhabi (see table).

+131% +303% +83% +69%+174%

+72%

+0.6 +1.3 +1.4 +1.5 +3.2

+10.9

0

5

10

15

20

25

Bahrain Qatar Oman Kuwait UAE Saudi

GCC: Population Growth 1990-2010

(million; IMF)

1990 2010

2010 2016 increase

Saudi 28.5 33.6 5.1UAE 4.7 5.2 0.5

Kuwait 3.1 3.5 0.4

Oman 2.9 3.6 0.7

Qatar 1.6 2.0 0.4

Bahrain 1.3 1.5 0.3

GCC 40.9 49.4 8.5

GCC: Population Change (million)

2010 2011 2012f 2013f 2014f 2015f 2016f Saudi 16.2 20.2 20.3 20.2 21.3 22.7 24.2

UAE 65.3 72.6 79.5 80.4 84.3 89.0 92.8

Kuwait 41.4 55.2 61.5 59.0 59.9 62.8 67.0

Qatar 82.7 108.8 113.2 120.9 125.6 127.2 128.4

Oman 20.0 25.4 27.3 25.9 26.3 26.3 26.5

Bahrain 18.5 20.6 20.4 20.6 20.7 20.7 20.8

GCC 26.5 32.4 33.9 33.8 35.2 36.9 38.7

GCC: Per Capita Income ($,000)



June 2012

6

Saudi Arabia

Economic Prospects

The Kingdom can expect medium term growth of 5 percent plus

Saudi Arabia’s formidable mineral resources will form the

platform for a period of strong economic growth in 2012-16. We

expect real GDP growth to average 5 percent in 2012-16, with

the rate of real nonoil growth averaging 5 percent. Inflationary

pressures should remain manageable, with a good deal of

domestic demand neutralised through the import channel. Rents

will remain a source of price pressure, but efforts to expand the

housing stock should help to soften this as we move through the

next five years, and inflation should stabilise at around 5.5

percent per annum. Interest rates will move broadly in line with

US rates (there will be no change to the currency peg) and are

thus expected to remain at historic lows at least until the end of

2014. A gentle increase in rates is in prospect for 2015-16.

Government spending will remain the engine of economic

growth. History has shown that increased government spending

feeds through rapidly and significantly to the nonoil private

sector (see chart). Encouragingly, under our oil price and

production assumptions we expect that the government will

have plenty of money to spend during the forecast period.Overall hydrocarbon earnings are expected to stabilise at around

$285 billion. Add in non-oil revenues and total government

revenue is expected to hold at around $300 billion a year during

2012-16.

Wages and salaries will continue to claim the bulk of current

spending

With very little debt to service or pay down the main call on

government revenue is wages and salaries, which tends to

absorb 25-40 percent. Spending on this item varies in line withthe Hijri calendar (a 13th month of salary is payable in 2013 and

2016) but the overall trend is decidedly upwards. The public

0

00

00

00

00

00

00

00

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Saudi Arabia: Government Spending and Revenue

(SR billion; MOF, Samba)

Spending Revenue

udi Arabia 2010 2011 2012f 2013f 2014f 2015f 2016f

eal GDP (% change) 4.1 6.8 4.8 4.0 4.5 5.6 6.1

ominal GDP ($ billion) 447.8 576.8 596.9 616.4 671.9 738.7 813.5

PI (ave. % change) 5.4 5.0 4.9 5.5 5.6 5.6 5.7

udget Balance (% GDP) 5.2 14.8 15.2 9.0 8.0 5.3 2.7

urrent Account (% GDP) 15.4 27.8 27.5 18.7 15.8 11.7 7.6

l production (mb/d) 8.24 9.32 9.83 9.73 9.83 10.03 10.23

opulation (million) 27.6 28.5 29.5 30.5 31.5 32.5 33.6



June 2012

7

sector is still the “employer of first resort” for most Saudis. Thus

the strong population growth rate and a brisk rate of inflation (5

percent plus) means that spending on wages and salaries willlikely increase by around 6.5 percent a year during the forecast

period. Spending on supplies and services should increase at a

similar rate, while subsidy spending—which encompasses

domestic fuels and certain foodstuffs—will grow at a brisk pace

given the rate of domestic consumption of gasoline, etc.

Spending on unemployment benefit is also likely to show some

strength in the first part of the forecast period as more people

register for the first time. Overall current spending is therefore

likely to grow at an annual average rate of around 3.5 percent.

Public investment growth is set to cool, but it will remain firm

Despite increasing recurrent spending demands there remainsroom to sustain large capital spending while still keeping the

fiscal accounts in surplus through 2016. Historically, capital

spending has been quite volatile, tending to be cut back sharply

during years of low oil prices, and recovering rapidly when oil

prices bounce back. However, since 2002 when the steady

ascent of oil prices began, capital spending has been

exceptionally firm, reflecting in part the authorities’ efforts to

make up the Kingdom’s infrastructural deficit. From 2003-2011

capital spending grew by an annual average of 26 percent. The

country’s infrastructural needs are still pressing, as we will

discuss below, but the deficit in many sectors has narrowed andthe overall rate of capital spending growth is forecast to cool to

an annual rate of around 12 percent in 2012-16.

Saudi Development strategies and

opportunities

The Ninth Development Plan will guide public investment

The government’s capital spending will form the basis of

opportunities for private business. These in turn will be guided

by the country’s Ninth Development Plan (NDP), which is worth

$385 billion (some 67 percent higher than the previous plan) and

runs from 2010-14. The NDP, which is prepared by the Ministry

of Economy and Planning (MEP), is a general framework for

capital spending, and actual capital spending (in terms of the

amounts and direction) may well differ from the plan as

circumstances change. Indeed, the authorities’ development

priorities were altered somewhat in early 2011 when HM King

Abdullah announced two extra budgetary spending

programmes. Most of the items detailed within these

programmes affected current spending, but there was also

greater emphasis on the need to expand the country’s

affordable housing stock.

Wages

35%

Supplies &

services

16%

Subsidies

4%

Specialised

credit

institutions

14%

Interest

payments

1%

Capital spending

30%

Saudi Arabia: Government Spending by Type

(percent of total; IMF)

tor

n)

Eighth Plan

(2005-09)

Ninth Plan

(2010-14) % increase

man Resources

ucation) 128.0 195.1 52.4

lth 41.1 73.0 75.7nomic Resources 28.2 60.7 115.1

nsport & Communications 15.1 29.6 96.0

nicipal & Housing Services 17.5 26.8 53

al 229.9 385.2 67.2



June 2012

8

The authorities are keen to encourage investment in the lesser-developed regions

The MEP has traditionally played a low key role in economic

policy and development, but following the appointment of the

former SAMA Governor, Mohammed al-Jasser, as Minister inDecember 2011, it is expected to take a more vigorous and

proactive approach.

First, we will consider the main spending allocations detailed in

the NDP, before “drilling down” to consider some of the

subsectors.

Education and health continue to claim large share of spending

The biggest single allocation is to education (“human

resources”). This fits with the demographic challenge outlined

above and is aimed at all levels of education, with the overall

goal of making school leavers and graduates more likely tosecure jobs in the private sector, although it is notable that its

share of spending between the two plans declined. Health is

another major area of spending. Its share of spending was

increased in recognition of the Kingdom’s pressing health issues,

stemming largely from population growth and the increasing

prevalence of “lifestyle” diseases (see below).

Economic resources, which is dominated by utilities, sees its

allocation more than doubled and its share of spending rise

sharply. This reflects the pressing need to provide enough power

and water for a country where demand is increasing by around

8-10 percent a year. Saudi Electricity Company (SEC) says it iscommitted to spending $60 billion over the next ten years.

Transport also sees a near doubling of its allocation. Road

building continues apace, and will remain a cornerstone of

transport policy in the Kingdom, however, rail and ports are also

moving up the agenda.

Municipal and Housing services has often been overlooked, but

this is likely to become more important over the next five years.

First, urbanisation is putting significant pressure on municipal

services. Second, as noted above, housing has taken on much

greater importance recently. As such, more than the $26.8

billion committed will likely be allocated as the government bids

to expand affordable housing. Both housing and municipal

services offer good scope for private participation.

The authorities are pushing to close the developmental gap

between regions

Comparing the Eighth and Ninth plans provides some shifts of

emphasis. Achieving “balanced development among regions” of

the Kingdom is mentioned much earlier in the preamble to the

Ninth plan (objective number 4 compared to number 8 in the

Eighth Plan). This appears to be tacit acknowledgement that

certain regions of the country have lagged the overalldevelopment progress witnessed in the traditional commercial

Education

56%

Health

18%

Economic

Resources

12%

Transport

6%

Municipal

Services

8%

Saudi Arabia: 2004-08 Plan Spending Allocations

(MOEP)

Education

50%

Health

19%

Economic

Resources

16%

Transport

8%

Municipal

Services

7%

Saudi Arabia: 2009-14 Plan Spdending Allocations

(MOEP)



June 2012

9

Tax incentives for regional investment are on the

table

SIMPLIFIED PETROCHEMICALS PRODUCT CHAIN

heartlands of Riyadh, Jeddah and the Eastern Province. Jizan

Economic City and Prince Abdul-Aziz Bin Mousaed Economic City

in Hail represent attempts to steer more investment to under-developed areas of the country. The Ninth Plan is explicit in

stating that it will strive to implement Council of Ministers

Resolution No. 359 of 2008, which grants tax incentives to

investment in less developed regions. Specifically, this

Resolution grants investors up to 50 percent of the cost of

training and the annual wages of Saudi employees working in

projects established in Hail, Northern Borders, Jizan, Najran,

Baha and Jawf. The Resolution also grants industrial projects and

capital expansion in these areas “additional tax incentives at a

rate not exceeding 15% of paid up capital”. More vaguely, the

Ninth Plan says that a link will be made between the “provision

of assistance in the Economic Cities to employment of Saudimanpower”.

Economic diversification is making solid progress and will

continue to shape the economy

A further broad priority is the effort to diversify the economy.

This has been a maxim of all five-year plans, but in the preamble

to the NDP it is put firmly in the context of “maximising the

return on competitive advantages”. Saudi Arabia’s comparative

advantage lies in hydrocarbons (it has at least 90 years’ worth of

oil reserves) and it makes sense to exploit this by creating

greater value-added. Oil refining generates value-added in itsown right and also opens the door to a variety of industrial

products—and jobs—through the petrochemicals product chain.

The key to this is the use of naphtha, from which can be derived

a much larger variety of “building blocks” than ethane, which

has been the feedstock of choice for the Kingdom’s producers,

but which is in short supply. Naphtha can produce “aromatics”,

such as xylenes, benzene and butadiene. These in turn are the

basis for products including polyurethane, solvents, nylon,

styrene, polystyrene, synthetic rubber and polybutenes. These

have far reaching applications, including for packaging,

pharmaceuticals, construction and automotive. For investors,the close proximity to raw materials producers negates the need

for large inventories; for the authorities, fostering these

domestic industries opens up the possibility of significant job

creation.

A vertically integrated approach is also being adopted in the

aluminium sector, where there are plans to harness the

country’s bauxite reserves by constructing what will become the

world’s largest aluminium complex at Ras al-Khair. The $10.8

billion project, which is a joint venture between Maaden and the

US’ Alcoa, is designed to attract a large number of conversion

industries to cluster around the site. Aluminium clearly has a

solvents, flexiblefoams, coatings

XylenesToluene

plasticizers, apparel,home furnishings,

wheels, rollers,automtive parts

transparent sheeting,molding & extruding,

pharmaceuticals,cosmetics, resins

Benzene

AROMATICS

plastics for packaging,toys, etc; detergents,

paper, textiles, polyesterfibre & resins

ethylene/propylene

OLEFINS

ETHANE/METHANE/NAPHTHA

NAPHTHA



June 2012

10

Automotive is an industry that is likely to receive a

lot of support

host of uses, but the authorities are most keen to foster a

sizeable automotive industry.

Competing with established automotive manufacturers, such asChina and India, might not be realistic, at least in the short- to

medium-term. As such, the authorities appear prepared to

protect those industries it deems a priority. The Industrial

Strategy for 2020, which was prepared by the Ministry of

Commerce and Industry, notes that “It is commonly held that

dumping by competing foreign products may be an obstacle in

the way of industrial development…*anti-dumping legislation]

represent an important incentive [that might be used] to attract

more local and foreign industrial investments”.

Authorities are keen to support a number of nonoil export

sectors

The authorities are also looking to boost the nonoil export

sector more broadly in a bid to enhance diversity, reduce

vulnerability to external shocks and create a platform for more

sustainable and predicable growth. Evidence suggests that

economies based on a single commodity will become effectively

diversified only when they successfully create a robust quantity

and variety of exports and world-wide purchasers for them.

Norway, and to a lesser extent, Canada, provide examples of

nations that have done this successfully. Norway invested labour

and capital and explored knowledge and technology in

industries—such as manufacturing—that were doing well but

had some dependence on oil, so that they could diversify.

The Saudi authorities have identified a group of second-tier

nonoil exports that have shown growth rates of between 8% and

25% during 2004-07. The government believes that these

industries are ripe for additional help in terms of offering

information on demand in export markets, organising export

promotions, providing competitor information, technical

specifications and packaging requirements of key markets.

Taking appropriate measures against import “dumping” is also

mentioned again.

Fostering a “knowledge based economy” is given greater

prominence in the NDP than in the eighth development plan.

This is an important element of hydrocarbons-based economies

that have successfully diversified—again, Norway is the best

example of this. Specifically, the government wants to promote

“strategic alliances between private national companies and

technically advanced international companies” in order to foster

technology transfer. In addition, the authorities are prepared to

use “soft loans” to encourage the use of modern technologies,

especially in the export sector, while simultaneously

discouraging the use of unskilled foreign labour. The authoritiesare especially keen to make a stronger link between education

and business by establishing research and development centres

Saudi Arabia: Exports Targetted for Official Support

Source: Ministry of Economy & Planning

Agricultural products

Copper

Leather products

Various plastics

Paints and derivatives

Jewellery

Aluminium

Glass

PVC

Various steel products

Vehicle spare parts & accessories



June 2012

11

There are grants available to support the

establishment of strategic research centres

ICT is given prominence in the Ninth Development Plan, but its financial allocation is relatively small

(such as technology incubators and centres of excellence) that

can serve the needs of business. The NDP provides grants for

strategic research centres to the tune of $240 million a year, andalso speaks of providing an annual $80 million to government

agencies and $53 million to private sector firms. The NDP is also

explicit in “linking the incentives offered to national and foreign

private investment with the extent of their contribution to the

training and qualifications of national employment”.

ICT is deemed to be an important sector, though its allocation

is small

ICT is an important adjunct of the effort to deepen and widen

the knowledge-based economy, and has strong potential growth

prospects. The Ministry of Economy expects demand for fixed

line services to increase by 4.4 percent a year, while demand formobile services is expected to climb by 5.6 percent a year, with

the penetration rate reaching about 194 percent by 2014.

Broadband demand is forecast to grow even more briskly, by

about 10 percent, with the number of subscribers climbing from

2 million to 3.25 million by 2014 (total penetration will reach

11.4 percent, while residential coverage will reach 47.4 percent).

The government wants to narrow the “digital divide” between

the regions. To do this, it has established the Universal Service

Fund, which aims to provide full coverage in areas where the

market does not provide ICT services. The government also

plans to extend broadband networks to all schools, universities,

hospitals, government agencies and civil society institutions.

Beyond this, it wants to expand “e-government” services and

envisages a “shared role” for the private sector in this. “Various

incentives” (unspecified) are mooted in the 9 th Plan to attract

FDI to the ICT sector.

Despite the prominence given to ICT and the Knowledge

Economy more generally, financial allocations to ICT under the

9th Plan amount to a comparatively meagre $239 million, with a

far larger amount of $2.3 billion given over to developing the

Saudi postal service. This presumably reflects the advanced

liberalisation of the ICT sector and the large role envisaged for

the private sector, both domestic and foreign.

Box 2: Contracting Spans All Sectors

This report has sought to identify those areas of investment that

the authorities deem to be priorities and, where possible, the

amounts of money that might be allocated to them. Contracting

is an activity that spans sectors and benefits from most types of

fixed investment. In fact, contracting represents the main

transmission mechanism between government spending and the

private economy. Saudi contractors are almost always involved

in providing at least some of the materials and labour for many



June 2012

12

Contracting is a key activity and its outlook is

extremely positive

SME’s are a key economic building block, but the

authorities would like to see more consolidation in

the sector

different types of construction projects. In highly technical and

complex industrial projects, this might be confined to civil works,

whereas in civil infrastructure projects (such as transport, healthor education) they might provide most of the inputs.

The general outlook for contracting is extremely positive. This

report has confined itself to the nonoil sector, but Saudi

Aramco’s investment seems set to pick up again given the

pressing need to source and supply more natural gas. In the

nonoil industrial sector, downstream petrochemicals will

provide plenty of scope for Saudi contractors, largely on the civil

side. A challenge here is the rise of Chinese firms, which appear

willing to import all labour and materials themselves. Beyond

this, the contracting environment will be supported by

government investment in infrastructure of all types, and withthe potential for much stronger growth as the push to develop

more affordable real estate moves into high gear. Nevertheless,

the real estate developer segment is very fragmented, and is

hampered by a lack of finance and high land prices.

SME’s gain support, but the authorities would like to see more

M&A

Support for SMEs is a staple of Saudi development plans, though

it is notable that this appears lower in the list of objectives in the

preamble of the NDP compared to the Eighth Plan. There is

recognition of the important economic role that SMEs play in

Saudi Arabia, particularly with regard to employment (they arethe main source of employment in the private sector), and there

is a restated commitment to “remove obstacles to the

development of SMEs”, with a focus on supporting and

developing the Kafalah Programme run by the Saudi Industrial

Development Fund1.

However, there is also recognition that the small scale of many

Saudi firms is a constraint in terms of putting in place the most

effective technological or corporate governance systems, and

also in accessing finance to allow investment growth.

Consequently, the Ninth Plan speaks of encouraging enterprises

to merge to allow more competitive outfits that can “benefitfrom economies of scale”, as well as listing on the stock market

to facilitate capital raising. The authorities are especially eager

to see mergers and acquisitions in the construction sector,

which suffers from fragmentation, particularly in residential

housing.

Housing is now near the top of the economic agenda

Indeed, housing has become a critical social (and hence political)

issue and we expect the government to devote increasing

1 Under the Kafalah Programme the state underwrites up to 75 percent of the

value of a loan extended by banks to SMEs (to a maximum of SR1.5 million).



June 2012

13

There are significant funding constraints to be

overcome on the supply and demand side

We expect the mortgage law to be passed and

this should herald a period of major real estate

expansion

resources to the problem. King Abdullah made this plain when

he pledged, in March 2011, that the government would build

500,000 housing units over an unspecified time period. In fact,the NDP estimated that the number of additional housing units

needed during the time frame of the plan is 1.25 million. The

Plan identifies an important constraint to an expansion of the

housing stock: the provision of buildable land supplied with

adequate infrastructure and public services (the Plan estimates

that the 1.25 million units will require 350m sq metres of land).

The Plan notes that such land is at a premium and advocates the

“vertical expansion” of cities, and re-development of so-called

brownfield land within urban areas, as well as the

redevelopment of old residential areas and unplanned

settlements.

Funding constraints are affecting housing on the supply and

demand sides

The other main constraint is funding, which affects both supply

and demand. On the supply side, many real estate developers —

especially the smaller ones—complain that bank credit is hard to

come by, and requires significant collateral to secure. Off plan

selling is still officially banned—an understandable reaction to

the lessons from Dubai—though the authorities appear willing

to consider the issue on a case-by-case basis.

Financing is more problematic on the demand side. The NDP

makes reference to strengthening the financial resources of the

Real Estate Development Fund (REDF), which provides interest

free loans to Saudi nationals for home purchases, and the REDF

duly had its capital increased by $10.7 billion in the King’s

speech. We think further financing will be made available,

though the REDF’s institutional capacity will also need to be

expanded and improved if waiting lists that stretch into decades

are to be reduced.

Funding sources will also need to be expanded beyond the REDF

if the government is to make meaningful progress in reducing

the Kingdom’s housing deficit. A mortgage law is still awaiting

approval. Banks have in the meantime stepped up mortgage

lending, though this has mainly targeted the upper and upper-

middle segments, where large down payments are the norm.

Passage of the long-awaited mortgage law will become the

motor for a sustained period of real estate expansion

Despite the long wait for the mortgage law, we are confident

that it will be passed and will provide the basis for substantial

growth in the country’s housing sector over the next five years

and beyond, and will in time become one of the main drivers of

the construction/contracting sector. This will also foster ancillary

services, such as real estate, surveying, and insurance.

0

100

200

300

2000-04 2005-09 2010-14

Saudi Arabia: Housing Construction:

Planned vs Actual

('000 units per year; Saudi Arabia Five Year Plans,

MOEP)

Demographic based demand (nationals)

Government's construction target

Actual construction



June 2012

14

There is potentially a large role for the private

sector in the Health sector, though an important

catalyst would be the introduction of compulsory

health insurance for Saudi nationals

Box 3: Housing and Consumption

Home ownership has a significant influence on consumer

spending. Currently, the dearth of affordable housing means

that many young people tend to stay at home with their families

for extended periods of time, in the process delaying marriage.

Without mortgages or rent to pay, or children to raise, more

disposable income can be devoted to items such as cars, clothes,

and electronic items. If the mortgage market took off and

affordable housing became much more widely available, then

young Saudis would be able to leave the family home and marry

and start families earlier. This would therefore accelerate the

shift away from electronics, cars, etc, towards consumer

durables, furniture and financial services. One might also expecta softening of overall spending by this segment as mortgage

payments began to eat into disposable income. In the long term

however, the demographic cycle might turn again: it is possible

that the liberalisation of home ownership would in turn

encourage a fresh baby boom, which would point to a new

“youth bulge” in the decades to come.

Health is another “big ticket” area, and one where the

government is keen to encourage greater private participation:

“the Kingdom clearly supports expansion of the role of the

private sector in providing healthcare services”, according to the

NDP. Expatriates are already obliged to have health insurance,

and that has spurred considerable competition in an

overcrowded sector. The sheer volume of infrastructure projects

set to be built over the next five years suggest that demand for

expatriates—and associated health insurance—is likely to keep

expanding rapidly.

Compulsory health insurance for nationals would be a fillip for

the health sector

A major additional catalyst would be the introduction of

compulsory insurance for Saudi nationals. In March of this year,the Chairman of the Shura (Advisory) Council’s Medical

Insurance Committee Dr Al-Eneizi said that the authorities are

studying a health insurance program that is expected to be

implemented in the next four years. The authorities are

probably uneasy about placing a financial burden on the

population, but the hard-pressed Ministry of Health is struggling

to provide all the services that Saudis demand in a timely

manner. Consequently, we think that is just a matter of time

before some sort of compulsory insurance scheme—most likely

heavily subsidised by the authorities—is passed. Islamic

insurance (Takaful) would appear to offer substantial potentialgrowth opportunities in this regard.



June 2012

15

Subsidies for agriculture and power will need to be

adjusted in order to attract major private sector

investment, though IPPs will continue to have an

important role

The issue of insurance aside, the country’s demographics, along

with the increasing prevalence of “lifestyle diseases” such as

type 2 diabetes and heart disease, will remain powerful driversof health care spending by the government.

Water demand set to grow by an annual 8.5 percent over next

five years

Power and water are two sectors that require substantial

investment to keep pace with demand. In the NDP it is assumed

that total water demand will decline by around 2.5 percent a

year from 18.5 billion cu metres a year to 16.3 million cu m/y

largely as a result of the withdrawal of subsidies for agriculture.

However, we think this is optimistic, and that an increase in

demand is more likely as a result of water consumption for

industrial and residential use, powered by population growth of around 2.5 percent a year; independent forecasts suggest that

water consumption will rise by almost 8.5 percent a year over

the next five years. However, although subsidies to agriculture

are indeed being (gradually) withdrawn, there is no sign yet that

subsidies will be lifted on residential and industrial water use.

Consequently, capital investment will remain intensive: the

state-owned National Water Company has already announced

that it will fund $66.8 billion worth of water and wastewater

developments through 2020; around $30.1 billion of this will be

capital expenditure, with much of the spending targeted at

wastewater projects as water recycling is a major focus.

Power demand is also robust, and a stream of IPPs are

expected

Power demand is witnessing growth of some 8-10 percent.

State‐owned Saudi Electricity Company’s (SEC’s) work program

includes 33 tenders between 2010 and 2018 for new or

expanded power plants, which will boost total capacity by

21.065GW. Saudi Arabia also has 11 new projects under way or

due to start in 2012, valued at $8.6 billion, including the $2

billion Al Qurrayah Independent Power Plant (IPP). More IPPs

are expected, with one well-placed observer suggesting that SEC

will place at least one IPP with the market every year.

SEC has not said that any of this additional capacity will come

from renewables. Nevertheless, this form of energy is being

pursued with vigour by other government agencies because

under current projections in 20 years’ time around half of the

country’s electricity output will be powered by hydrocarbons—

oil that could be sold on international markets or gas that could

be used as feedstock for petrochemicals plants. The King

Abdullah City for Atomic and Renewable Energy (KA-CARE) is

advising the government to diversify its energy mix by adding 41

udi Arabia: Selected Industrial and Infrastructure Projects

urce: BNP Paribas, Samba Estimated capital cost ($ bn)

rochemicals

Yanbu Integrated Refinery & Petrochem. Complex 20.0

Jubail (Sadara) New Petrochem. Complex 10.0

Saudi Aramco-Sinopec JV 10.0

Jizan Refinery 7.0

Ma'aden Phosphates Mining Complex 7.0

Petro-Rabigh 2 Extension 7.0

Sabic-Exxon Mobil JV (KEMYA) 4.5

Sipchem 0.7

Aramco Refineries Upgrade

wer

Pan-Arab Grid (KSA-Egypt Undersea Link) 8.5

Rabigh IPP2 5.8

newables

KA-CARE 82.0

w Economic Cities

King Abdullah Economic City 93.0

rts

King Abdulaziz Port (Dammam) 0.4

King Fahd Industrial Port (Yanbu) 0.2

Jizan Port

ports

King Abdulaziz International Airport 8.2

ads

KSA Road Network 4.0

l

Landbridge Rail Scheme 7.0

Al-Haramai High-Speed Rail Link 6.8



June 2012

16

IPPs could also play role in renewable energy,

though again the tariff system will require

adjustment

Finding a way of enticing private investment into

the Transport sector will also prove tricky

GW of solar, 17GW of nuclear, 4GW of geothermal and waste-to-

energy capacity over the next 20 years. KA-CARE says that

installing that much solar would meet a third of projected powerdemand in 2032, leaving a sixth for nuclear and cutting oil and gas

demand in half. According to KA-CARE the capital cost of installing

the 41GW would be $81.9 billion, with $26.7 billion for operational

costs. KA-CARE officials are confident these plans will be approved,

and competitive bidding will be started with 2GW in the first

quarter of 2013. The strategy includes new regulations and

unspecified “financial incentives” for private investors according to

KA-CARE.

IPPs could also form the basis of development in the solar sector

KACARE has devised a procurement scheme under which solar‐

powered independent power producers (IPPs) sell electricity to anoff‐take organization called Sustainable Energy Procurement

Company (SEPC). However, the purchase price will need to be

higher than the prevailing power price charged by SEC of around 4

cents/kilowatt‐hour (kwh). Saudi Arabia has raised the price of

power to industry users, but is unlikely to end the subsidy to

residential users any time soon. A mechanism will also have to be

found to allow solar to compete with the price that SEC pays Saudi

Aramco for gas, reckoned to be $0.75/btu.

Transport is a big sector which is intimately tied to economic

growth

Transport is an area that has received a good deal of funding in the

NDP. The report acknowledges this, but also says that dependence

on public funding should “be avoided”, particularly given the

inherent volatility of oil revenues. Hence, the sector should be

opened up to the private sector by “liberalising transport markets

and promoting competition within them” while also “taking into

account the social dimension in the provision of public transport

services”. As other Gulf states have discovered, the latter is a

difficult tension to overcome, and it is not clear how the

authorities will attract private investors to the transport sector

unless prices are fully liberalised. The Medina airport extension is

an important exception, though this is on a comparatively small

scale. For the moment, the government seems willing to finance

large transport projects, such as the rail Landbridge project and the

Riyadh metro scheme, itself. With the populations of the

Kingdom’s major cities and new industrial hubs requiring cargo

links, the demand for transport links of all types are likely to grow

substantially.

Finally, municipal services is an area that the authorities are

actively seeking to involve the private sector in. Privatisation of the

following areas is on the agenda:

Operation of public gardens and parks

Municipal transport services



June 2012

17

Implementation of well-intentioned schemes

has often been lacking, but we are more

confident now about the authorities’

willingness to press ahead with its ambitiousdevelopment agenda

Collection of municipal revenues

Cleaning services

Waste management

Generally speaking, municipalities are unable to cover their

running costs. Municipal revenues have grown significantly in

recent years, but still constitute no more than 30 percent of

operating expenses, and this is why privatisation is being pushed.

Implementation prospects are better than in previous years

As with any five year plan in any country, the reality of

implementation often differs markedly from the objectives. Saudi

Arabia, like many developing countries, has institutional capacity

constraints in some areas that might inhibit effectiveimplementation. The Ministry of Economy and Planning’s will have

to work hard to ensure that its writ is respected by different

government agencies.

Yet despite these caveats, we feel that the government as a whole

recognises that diversifying the economy, improving infrastructure,

and equipping Saudi nationals with the necessary skills are the

most appropriate routes to economic sustainability.



June 2012

18

The UAE as a whole should grow steadily at

around 3-4 percent p.a. through 2016

United Arab Emirates

Economic Prospects We expect that the UAE as a whole will grow steadily at around 3-4

percent p.a. through 2016, although Dubai is likely to lag as debt

problems and real estate weakness prevent a more rapid

expansion. The emirate is currently doing well in restructuring and

refinancing its GREs, but still has some way to go and faces a surge

in repayment obligations in 2014 and beyond when restructured

debt falls due. For some GREs this is likely to be a struggle (those in

traditionally strong sectors such as transport, trade and hospitality

should fare OK), and with the government running a deficit it

seems likely that Abu Dhabi will be asked to roll over the $20bn orso in funding it has provided the emirate.

Abu Dhabi’s fiscal position is robust

Fortunately, offsetting the more strained position in Dubai is the

positive outlook for Abu Dhabi where rising oil revenues have

restored public finances to rude health following exceptionally

large outlays in 2009-10 to support the economy in the wake of the

global crisis. Funds should be available for Dubai as necessary and,

following the recent decision to push ahead with its development

program, Abu Dhabi should benefit from strong public spending

with positive spill over effects for the whole UAE economy.Meanwhile, Dubai’s established trade and services sector should

also show steady growth, although they will be vulnerable to global

developments.

The UAE’s consolidated fiscal accounts and current account

balance will remain in surplus, albeit declining and vulnerable to oil

price fluctuations. But Abu Dhabi in particular will be able to call on

large holdings of external assets if needed. Domestic bank lending

will take time to revive strongly given still rising NPLs and the need

to digest more GRE restructuring, but the financial system remains

sound and well capitalised and should start to contribute more

positively further out. Inflation is expected to pick up from itscurrent lows, but should remain contained at less that 5 percent.

UAE Development Strategies and

Opportunities

Abu Dhabi Vision 2030 underway but trimmed down

The Abu Dhabi Economic Vision 2030 report was published in

January 2009 and indicated that some $160 billion of development

projects were on the table over the next five years, including a

major airport expansion, large new port and several mega real

2010 2011 2012f 2013f 2014f 2015f 2016f

GDP (% change) 0.9 4.9 3.4 3.0 3.1 3.6 3.7

i nal GDP ($ bi ll ion) 303.2 344.2 384.3 395.5 421.6 454.0 482.7

ave. % change) 0.9 1.0 1.5 2.5 3.0 4.0 4.0

get Balance (% GDP) -1.4 2.9 7.4 5.8 5.6 5.9 5.7

ent Account (% GDP) 7.6 10.4 11.6 5.5 3.3 4.7 4.9

production (mb/d) 2.30 2.48 2.53 2.50 2.50 2.51 2.54

ulation (million) 4.6 4.7 4.8 4.9 5.0 5.1 5.2

Infrastructure & Economy Housing & community

Khalifa Port & Industrial Zone Numerous residential projects

Abu Dhabi International Airport 7,608 vill as for nationals i n 2012

2 major road projects 24 new schools

Draina ge systems Healthcare

2 new industr ial zones 14 new healthcare faci l i ties

Auto City Rehabilitation centres

Renewabl e energy proj ects Cl evel and Cl ini c

Museums

Zayed, Louvre, Guggenheim

Development Projects Approved by Abu Dhabi

Executive Council January 2012



June 2012

19

estate projects. However, following the global crisis and its knock

on effects on the UAE, which prompted a slump in Abu Dhabi’s real

estate as well as Dubai’s, progress has stalled as the authoritieslooked to review the development program.

This review has now been completed and it has been decided to

press ahead with many of the planned large scale projects. The

emphasis of state spending has shifted more clearly towards

social services, housing, health and education. But high profile

projects such as the branches of the Guggenheim and Louvre

museums, as well as a host of infrastructure developments have

also got the go ahead (see table).

This decision ends more than a year of uncertainty and stalled

projects, and will usher in a new period of heightened construction

activity which will have positive multiplier effects throughout theUAE providing numerous opportunities for business. Little

information is available on budgets and timings, but official

statements note that work on Khalifa port and the Shams solar

power plant will proceed this year, and that 7,608 villas will be

built over the next 12 months.

Box 4: Abu Dhabi 2030 Economic Vision: Key Agenda

- Strengthening downstream capabilities (expanding petrochemical

output, and using hydrocarbon resources to diversify into new

industrial activities).

- Developing high-end tourism – aiming for 3 million visitors per

year by 2015.

- An Urban Framework Plan that sets forth the enabling agenda for

infrastructure and utilities for the city of Abu Dhabi and its

surrounding areas.

GREs will continue to play key role

Government related enterprises (GREs) spearheaded by the

Mubadala Development Company will continue to be used to

diversify the economy using equity and loans from the governmentand funds raised in capital markets to invest in local infrastructure,

real estate, hospitality, advanced manufacturing, and supporting

services. However, the proposed scope of future investment

appears more restrained and stretched out than the ambitious

plans being discussed following the launching of the Abu Dhabi

Vision 2030. This reflects a prudent prioritisation of projects at a

time of increasing financial commitments and financial strains in

GRE, including at Mubadala which recorded a loss of $1.5 billion in

2011. That said, the company still expects capital and investment

expenditure will remain at around $5 billion in 2012, in line with

the average for the past three years. Its committed capital andinvestment expenditure stood at $8 billion at end-2011 according

to its latest bond prospectus, down somewhat on the $8.9 billion

2437

-86 -1480

2009 2010 2011

Abu Dhabi: Mubadala Total

Comprehensive Loss/Income

($ million; Bond Prospectus)

Abu Dhabi Vision 2030

12 drivers of growth

1. Oil & gas2. Petrochemicals

3. Metal s

4. Aviation, aerospace & defences

5. Pharmaceuticals, biotechnology

& li fe sciences

6. Tourism

7. Healthcare equipment & services

8. Tansportation, trade & logistics

9. Education

10. Media11. Financial services

12. Telecommunications

Corporate/Acquisitions 1,373

Healthcare 1,279

Oil, gas & energy 1,050

Industry 947

Renewable energy 779

Real estate & hospitality 642

Aerospace 587

Infrastructure 519

Semiconductor tech. 398

ICT 314

Services ventures 182

Total 8,070

Mubadala Commited Capital &

Investment Expenditure end-2011

($ million)



June 2012

20

Abu Dhabi sees a prominent role for the private

sector in its diversification process, while the

government’s commitment will be supported by

robust oil revenues

Dubai’s real estate overhang suggest that role of

construction will be downplayed in revised

economic plan

recorded at end-2010 (this sum reflects the amount it is legally

committed to expend in future years).

Implementation prospects are positive

Abu Dhabi remains committed to its long term strategy of

diversifying its economy away from its reliance on oil and gas, and

in encouraging the private sector as well as GREs to drive this

process. Its healthy public finances will ensure that progress will

continue to be made and that it will be able to support its GREs as

necessary, although the pace of development is now likely to be

more restrained. The government has already raised its spending

sharply in the wake of the global crisis and it seem unlikely that

further large increases are pending, although current levels should

be maintained. Project activity in the UAE as a whole remains

large. While likely to be overstated, MEED Projects estimates thatthe value of projects currently planned and underway stands at

around $560 billion.

Dubai Strategic Plan (2015) under review

The real estate and associated credit boom and bust in Dubai has

been well documented. While the authorities have done well in

implementing a widespread restructuring at its GREs, the process is

not yet complete and continues to act as a headwind to

investment and growth. Meanwhile there remains a glut in real

estate and, with most critical infrastructure projects already

completed or initiated, there appear to be limited opportunities inconstruction and development beyond the completion of already

started projects. This will include further development of Dubai

International Airport as part of the emirate’s aviation master plan.

Under the circumstances Dubai is scaling back its growth ambitions

and is in the process of reviewing its development strategy and

preparing a revised Medium Term Economic Plan. Previous

assumptions of double digit real GDP growth in its Strategic Plan

(2015) are being scrapped, and we would expect the adoption of a

more modest trajectory of around 4 percent p.a. Expectations of

population growth are also likely to be scaled down with greater

attention paid to the temporary nature of many expatriates whoare likely to leave on the completion of construction projects.

Dubai’s initial Strategic Plan focused on six core sectors (see table).

Following the review we would expect that the emphasis on

construction/real estate will be substantially diminished, but that

efforts will continue on developing Dubai’s services sector which

has done so well and still offers scope for expansion (retail, trade,

transportation and logistics, tourism, financial services). Attempts

will be made to attract international companies to establish

headquarters in Dubai and encourage Dubai based companies to

expand globally. With the authorities focusing on providing an

attractive regulatory, investment and lifestyle environment,opportunities are likely to exist for trade and services companies.

Dubai Strategic Plan 2015

6 building blocks

1. Travel & tourism

2. Financi al s ervices

3. Profess ional Services

4. Transport & logistics5. Trade & storage

6. Construction



June 2012

21

Inflationary pressures are likely to mount but with

overcapacity in the real estate sector, price pressures should remain manageable

However, the government will also look to develop the domestic

economy to lessen the emirate’s exposure to external

developments.Dubai capital spending has been scaled back

With most GREs financially stretched, their spending plans within

Dubai have been scaled back and are primarily focused on

completing unfinished projects. Similarly capital spending by the

Dubai government has declined and is aimed at completing

infrastructure projects. Development spending has fallen from

around $4 billion in 2008 to a budgeted $1.6 billion for 2012. Given

the government’s weak finances, it seems unlikely that it will be

looking to increase capital spending much through 2016, and levels

may dip further as projects are completed.

Qatar

Economic Prospects

Economic growth is set to slow, but capital spending will remain

brisk

Qatar is in the process of transitioning from exceptionally rapid

growth driven by development of new LNG capacity, towards a

more modest trajectory driven by expanding non-hydrocarbonsactivity. The five year outlook for the latter is positive as the

government is committed to pursuing its well-articulated National

Development Strategy (NDS), backed by large financial resources

and an experienced administration which has successfully guided

Qatar’s extraordinary development to date. Non-hydrocarbons

growth is expected to grow at around 9 percent a year, boosted by

the large public infrastructure investment program. Overall real

GDP growth is likely to slow to around 5 percent, but nominal GDP

will rise to over $250 billion by 2016, overtaking Kuwait and

providing one of the highest per capita incomes in the world.

Reported fiscal surpluses will decline as spending accelerates, but

overall state finances will remain strong on the back of large

hydrocarbon revenues which will ensure sustained current account

surpluses and allow for a further accumulation of foreign assets.

Meanwhile, the domestic banking sector is gearing up to provide

finance for the impending surge in investment and activity. Given

the scale of planned spending over the next five years, inflationary

pressures are expected to mount. However, with price recovery in

the real estate sector likely to be stretched out and muted, the

overall inflation rate should hold in the 4-8 percent range.

3.6

7.5

6.46.8

3.93.7

2.41.9

0

2

4

6

8

2008 2009 2010 2011

UAE: Government Capital Spending

($bn; IMF, national authorities

A.Dhabi Dubai (development spending)

tar 2010 2011 2012f 2013f 2014f 2015f 2016f

al GDP (% change) 16.3 14.1 6.0 4.6 4.5 5.0 5.5

mi nal GDP ($ bil li on) 127.3 174.0 186.8 205.5 219.9 235.3 251.7

(ave. % change) -2.5 1.9 3.0 4.0 5.0 6.0 8.0

dget Balance (% GDP) 2.9 8.0 5.8 3.2 2.5 2.5 2.0

rrent Account (% GDP) 17.1 28.7 31.7 23.8 18.2 17.9 13.9

production (mb/d) 0.81 0.84 0.84 0.83 0.83 0.83 0.83

pulation (million) 1.5 1.6 1.7 1.7 1.8 1.9 2.0



June 2012

22

Qatar Development Strategies and

OpportunitiesNational Development Strategy 2011-16

2

Qatar is embarked on a 5-year National Development Strategy

(NDS) covering 2011-16 which aims to deliver on the goals outlined

in Qatar’s Vision 2020. Having spent the last 20 years building up a

world class gas industry, the aim is now to broaden the

development focus with an emphasis on four key Pillars: Human,

Social, Economic and Environmental Development.

Implementation of the NDS will open up numerous opportunities

for businesses, perhaps most notably through the sizeable

investments planned to improve infrastructure and expand the

industrial base by leveraging the available cheap energy anddomestic feedstock. However, there will also be opportunities in

services sectors such as health, education, environmental

consultancy, management consultancy, training, and labour

management as the state looks to bring in hundreds of thousands

of workers to deliver the infrastructure and personnel

requirements of the NDS and hosting the 2022 world Cup.

Scenarios presented in the NDS suggest that gross domestic

investment could total $226 billion over the five year period,

although much of this is envisaged to come from the private sector

and represents assumptions rather than firm plans. More concrete

are the spending plans of the government and its relatedcompanies (Q companies). Detailed officially sanctioned project

lists are not available (although extensive projects lists are

compiled by the likes of MEED and Zawya) but the NDS states that

the government will spend $65 billion on infrastructure through

2016 focusing on transportation (ports, airports, roads, trains,)

power, water, and the information and technology sector. Its non-

hydrocarbon related Q companies will spend a further $36 billion,

the bulk ($27.5 billion) accounted for by Barwa and Qatar Diar for

residential and business construction projects.

Planned investments by Qatar Petroleum and its related

companies are put at $23 billion, of which $2 billion will come from

Qatar Industries to expand petrochemical capacity, including in low

density polyethylene, ammonia and urea. There will be no

significant new investments in the upstream gas sector until the

moratorium on North Field projects is lifted, which the NDS

indicates will not occur before 2015.

Implementation outlook is positive

Qatar’s public finances are extremely healthy and it is not expected

to run into problems funding its planned spending, including

through its Q companies. Measures are being put in place to

2 See also our 2011 report Qatar: National Development Strategy & Economic

Update

Central Government 95.0

Infrastructure 66.0

power, water, Doha port, airport, roads

ITC & national fibre optic network

Rail and metro 27.0

Non-Hydro Q Companies 36.0

Barwa & Qatar Diar 27.0

residential & business construction projectsinc. Doha festival city, Bawra city

Sidra Hospital & Education City 5.0

Real estate under construction

The Pearl 14.0

Lusail 5.5

Specific World Cup Expenditures

Stadiums 3.0

Accomodation 12.4

Qatar Petroleum & related cos. 23.0

QP/Exxon Barzan gas project 8.6

Qatar: Spending considered for the NDS ($ bn)

4.8

9.3 9.210.8

12.1

14.8

2006/07 2007/08 2008/09 2009/10 2010/11 2011/12

Qatar: Government Capital Expenditure

($bn; IMF, Samba)



June 2012

23

Development momentum is gathering pace and

will likely reach a peak in the run up to the 2022 football World Cup

manage direct government spending through adoption of multi-

year budgets and a public investment program tied in to the NDS.

This bodes well for implementation, although there is also a sensethat the authorities are prudently proceeding with some caution,

mindful of the boom and bust experienced in Dubai. This may have

contributed to the slippages seen in the schedule (the NDS had

expected public sector investment to peak in 2011-12), but

momentum now seems to be gathering pace with the planned

hosting of the 2022 world cup providing added incentive. The

latter will also lead to additional investment in stadia and hotels,

although some of this is likely to take place beyond the 2016 NDS

time frame. Capital spending in the budget exceeded $12 billion in

fiscal 2010/11 and is estimated to have approached $15 billion in

2011/12 with similar levels expected over the next few years.

Kuwait

Economic Prospects

Finances are robust…

Kuwait’s public finances are one of the strongest in the GCC. Since

the late 1990s the state has consistently posted large fiscal and

current account surpluses, and is projected to continue doing so

through 2016. However, the government’s rising recurrent

spending commitments are a concern and the economy remainslargely dependent on the oil sector, while diversification and

growth prospects have been hampered by political disputes.

Encouragingly, an ambitious Development Plan was put forward in

late 2010 aimed at reviving the non-oil economy and reforming

policies to encourage greater private sector investment, supported

by large scale public spending. But this too has fallen hostage to

political disputes and weak implementation capacities.

…but development plans will remain subject to delay

While some progress can be expected, it is likely to be patchy and

stretched out, suggesting that growth will remain steady but

unspectacular at between 3-4 percent a year with inflation holding

at around 4 percent. The banking sector remains sound and able to

support growth, but many of Kuwait’s investment companies are

likely to continue to struggle given their exposure to still fragile

regional and international equity and real estate markets, and their

dependence on short-term foreign lending.

it 2010 2011 2012f 2013f 2014f 2015f 2016f

GDP (% change) 2.4 8.3 6.6 2.0 3.5 3.5 4.0

nal GDP ($ bi ll ion) 124.3 171.2 195.3 192.0 200.0 215.0 235.0

ve. % change) 4.1 4.7 4.5 4.5 4.5 4.0 4.0

et Balance (% GDP) 22.3 30.6 31.0 25.0 18.0 18.0 18.0

nt Account (% GDP) 30.8 41.4 44.2 40.0 35.0 30.0 30.0

oduction (mb/d) 2.30 2.43 2.44 2.40 2.40 2.42 2.43

ation (million) 3.0 3.1 3.2 3.3 3.3 3.4 3.5



June 2012

24

Kuwait’s democratic process has proved a

hindrance to development and this is unlikely to

change any time soon

Kuwait Development Strategies and

OpportunitiesKuwait Five-Year Plan (2010-14) sets out familiar goals

In 2010 the Kuwait national assembly approved a five year (2010-

14) development plan aimed at restoring the economy to growth

following the economic crisis post 2008. The plan forms the first

phase of a larger program known as Kuwait Vision 2035 that will

run in five-year blocks over the next 25 years, and includes 1,100

projects with an estimated value of $125 billion focused on both

the oil and non-oil sectors. Similar to other GCC development

strategies the plan focuses on economic diversification, including

turning Kuwait into a regional trade and financial hub. The

proposed development of a new port on Bubiyan Island is key is

this regard, and is aimed at serving the import/export

requirements for the reconstruction of Iraq for the next 20 year.

Large scale investments are also planned in the hydrocarbons

sector, both upstream and downstream.

Private sector involvement is envisaged mainly through build-

operate-transfer (BOT) schemes which should, through

government support for the project, ensure the banking sector is

happy to provide finance. In this way it is hoped that private

investors will meet almost half of the cost of the development

plan.Implementation constraints are significant

While Kuwait public finances are exceptionally strong,

implementation of the development plan has been stalled both by

political disagreements and institutional capacity constraints. The

government has limited experience in implementing major projects

while at the same time needs to get parliament to approve and

execute new laws aimed at supporting private sector engagement.

Strains in the relationship between the government and

parliament have long been an obstacle to reform, and are likely to

continue to be under the current parliament elected in February

this year. This is evidenced by its rejection of the bill that covers

the development plan in 2012/13 (the plan requires parliamentary

approval each fiscal year). Lawmakers have described the plan as

unrealistic, and have criticised the government for lagging in its

implementation of projects.

Opportunities in Kuwait are thus likely to remain hostage to

political wrangling’s which are hard to predict. The state clearly has

the financial resources to push ahead with its major infrastructure

projects, but implementation will probably remain halting. State

spending has certainly increased and topped $62 billion in 2011,

but much of this represents larger government transfers in the

Kuwait: Selected Mega Projects ($bn)

Silk City 77.0

Bubiyan Island Port 1.5

Kuwait University City 5.6

Residential projects 13.0

Airport expansion 1.2

Railway & metro 13.0

Source: Mega Projects Agency



June 2012

25

form of grants and subsidies to appease any social unrest in the

wake of the ‘Arab Spring’. This has bolstered consumption, and

may offers opportunities in retail and some services, but privatesector activity has remained muted in the absence of large

development spending.

Capital spending is estimated to have been around $7.3 billion in

2011/12 and seems unlikely to rise much more than this in

2012/13, with future levels depending on political developments.

With a small population, vast wealth and extensive oil reserves, the

incentive to move quickly ahead with economic reforms and

diversification is not so pressing in Kuwait as in other states.

Arguments instead tend to focus on how the nation’s wealth is

divided amongst its small national population which are provided a

cradle-to-grave welfare state. That said, even stop-start progresswith its development plan will provide significant opportunities in

construction and related businesses.

Box 4: Kuwait Infrastructure Projects Awaiting Approval

Some of the long-discussed but yet-to-be concluded key

infrastructure projects include: Silk City in Subiyah, Boubyan Island

container terminal, the Kuwait City-Subiyah causeway,

construction of several new cities, and increasing the quality and

quantity of infrastructure in the health, education, water, power,

and transport sectors (to include a metro system). Increasing oil

production capacity and upgrading hydrocarbons infrastructure are

other incomplete aspirations (source IIF).

Oman

Economic Prospects

Oman’s economy has grown at a consistently healthy pace over

the past decade and is expected to maintain solid growth through

2016. There appears to be scope for further small gains in oil

production and this will combine with increasing non-oil activity tosustain average real GDP growth at close to 5 percent a year during

2012-16. The non-oil sector now accounts for around 70 percent of

real GDP, and looks set to benefit from sustained public

investment. Meanwhile inflationary pressures are expected to be

modest, picking up to around 5 percent as spending rises.

The recent strength of oil prices has allowed the government to

raise spending in support of its diversification and development

agenda while a running a large fiscal surplus. However, this surplus

is expected to decline steadily over the next five years as recurrent

pending commitments have increased. Nonetheless, funds should

still be available to support the development agenda, including

2.6 3.1

5.05.8 5.4

7.28.6

11.2

Kuwait: Government Capital Expenditure

($bn; IMF)

n 2010 2011 2012f 2013f 2014f 2015f 2016f

GDP (% change) 4.8 5.0 6.0 5.5 4.0 4.5 4.5

nal GDP ($ billion) 57.9 73.6 82.0 83.0 87.0 90.0 95.0

ve. % change) 3.3 3.8 3.5 4.0 4.0 5.0 5.0

et Balance (% GDP) 5.2 10.0 7.0 3.0 3.0 4.0 5.0

nt Account (% GDP) 8.8 10.6 10.5 5.0 3.0 2.0 3.0oduction (mb/d) 0.74 0.76 0.78 0.80 0.81 0.82 0.83

ation (million) 2.9 2.9 3.0 3.2 3.3 3.4 3.6



June 2012

26

Oman will continue to make steady progress on

economic diversification, though its fiscal

resources will remain comparatively limited

from the State General Reserve Fund if necessary. In addition,

Oman’s debt levels are low and its economic management

reasonably effective, suggesting access to external funds would notbe difficult if needed.

Development Strategies and

Opportunities

Development spending on the rise

Oman suffered some minor disturbances in early 2011 in the wake

of Arab Spring movements in North Africa. These did not last long

but have had a galvanising effect on the authorities who have

moved quickly to accelerate state spending under the 8th National

Development Plan covering 2011-15. With oil production andprices at record highs the authorities have boosted both current

spending (mainly through wage increases, job creation in the

public sector and the introduction of unemployment benefit), and

capital spending. The latter rose to an estimated $7.2 billion in

2011 and is expected to rise further this year.

With oil prices and production projected to remain relatively high

over the next five years, the government is expected to press

ahead with spending consistent with the goals of the development

plan. These focus on improving infrastructure needed to develop

and expand industrial estates and free zones, with an emphasis on

airports, roads and ports, as well as investment in education,healthcare, housing and water, and support for sectors such as

tourism, agriculture and fishing. Large investments will also

continue to be made in support of the strategy of deploying gas

resources to diversify economic activity and expand the industrial

base. Oman has already had success in developing large-scale gas

based industries and related downstream activities

Much of this success has been based on the strategy of ensuring

that the private sector becomes the main source of economic

activity. As efforts accelerate to provide improved physical

infrastructure more business opportunities should emerge. The

existing free trade zones offer foreign investors a range of

incentives and the government often takes an initial equity stake in

large industrial projects to help finance start-up operations.

Steady progress expected

Oman’s hydrocarbon resources are more limited than other GCC

states, but are still sufficient to generate fiscal and current account

surpluses (excepting in 2009 when oil prices crashed) and allow a

build-up of external assets. Under our assumptions for future oil

prices finances should remain healthy and we expect that the

authorities will make good progress in implementing the latest

development plan. In terms of amounts to be spent, the oil and gassectors are expected to account for the lions share during 2011-15

8.98.3

4.33.2

1.4 1.3 1.2 0.7 0.6 0.4 0.4

Oman: Planned spending 2011-15

($ billion)

4.2 4.4 4.8 5.1

2.8 2.3 2.43.2

0

5

10

2009 2010 2011 2012

Oman: Government Capital Expenditure

($bn; IFS)

Oil/gas development



April 2012

27

at $8.3 and $8.8 billion respectively. Outside oil and gas, the

largest expenditures are focused on airports and roads, followed

by water and sewage, seaports and housing (see chart for figures).

Bahrain

Economic Prospects

Bahrain’s economy has shown considerable resilience in difficult

circumstances since early 2011, and has begun to revive again.

However, growth has been driven primarily by measures to boost

oil and gas production, while the non-hydrocarbons sectors

continue to struggle. Real GDP is estimated at 2 percent in 2011and seems unlikely to grow more than 2-3 percent a year through

2016. In these conditions, inflation will remain low.

Bahrain’s public finances are likely to remain strained, despite high

oil prices, following moves to take on more employees and boost

subsidies in the wake of the civil unrest. However, the state does

benefit from strong support from Saudi Arabia, and is to receive

$10 billion over the next 10 years to invest in infrastructure. As a

result spending levels will be maintained offering some support to

growth, although the budget is likely to remain in deficit.

Development Strategies and

Opportunities

Political headwinds are stiff

Bahrain, which has only small oil resources, is already the most

diversified economy in the GCC having early on developed an

offshore financial sector, tourism, and industries based on gas

feedstock. As such its Vision 2030 is primarily focused on ensuring

that the economy remains competitive and encouraging further

private sector development and job creation to promotesustainable growth. Medium-term prospects will depend on a

timely resolution of the current political impasse that has eroded

confidence. The economy is reviving following the dislocations in

2011, but growth is expected to remain modest and more reliant

1037

2041 1689 1862

917804

2009 2010 2011 budget 2012 budget

Bahrain: Government Project

Expenditure

($ million; Finance Ministry)

Infrastructure

ain 2010 2011 2012f 2013f 2014f 2015f 2016f

GDP (% change) 4.0 2.0 2.5 2.5 2.5 2.5 3.0

nal GDP ($ bill ion) 22.7 26.4 27.3 29.0 30.0 31.0 32.0

ave. % change) 2.0 1.0 1.5 2.0 2.0 2.5 2.8

et Balance (% GDP) -6.6 -2.5 -1.0 -3.0 -2.0 -2.0 -2.0ent Account(% GDP) 4.9 8.0 8.0 6.0 6.0 5.0 6.0

roduction (mb/d) 0.18 0.18 0.18 0.18 0.18 0.20 0.20

lation (million) 1.23 1.28 1.34 1.41 1.45 1.50 1.54



June 2012

28

Medium-term prospects will depend on a timely

resolution of the current political impasse

on positive developments in raising oil production. Confidence is

likely to remain fragile dampening private investment activity.

Nonetheless, the next five years are still likely to offer somebusiness opportunities, including for service orientated activities

aimed at supporting growth in the rest of the GCC. In addition,

Bahrain is to receive $10 billion from the GCC to invest in

infrastructure projects over the next 10 years. These will be

primarily aimed at alleviating social concerns, such as construction

of low cost housing, and improving access to education and health

facilities. The construction sector should thus benefit from a steady

flow of government contracts, despite the relatively weak outlook

for public finances which will struggle to return to surplus given the

surge in current spending commitments and the government’s

relatively low level of oil revenues. Project spending by thegovernment hit $2 billion in 2010, although this was budgeted to

drop back in 2011-12 with planned infrastructure spending put at

between $800-900 million pa.



June 2012

James Reeve

Senior Economist

[email protected]

Andrew Gilmour

Senior Economist

[email protected]

Disclaimer

This publication is based on information generally available to the

public from sources believed to be reliable and up to date at the time

of publication. However, SAMBA is unable to accept any liability

whatsoever for the accuracy or completeness of its contents or for the

consequences of any reliance which may be place upon the

information it contains. Additionally, the information and opinions

contained herein:

1. Are not intended to be a complete or comprehensive study or to

provide advice and should not be treated as a substitute for

specific advice and due diligence concerning individual situations;

2. Are not intended to constitute any solicitation to buy or sell any

instrument or engage in any trading strategy; and/or

3. Are not intended to constitute a guarantee of future performance.

Accordingly, no representation or warranty is made or implied, in fact

or in law, including but not limited to the implied warranties of

merchantability and fitness for a particular purpose notwithstanding

the form (e.g., contract, negligence or otherwise), in which any legal or

equitable action may be brought against SAMBA.

Samba Financial Group

P.O. Box 833, Riyadh 11421

Saudi Arabia

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