Saudi Arabia and the UAE are restructuring and opening up their economic activities, rethinking the role of foreign investors as they look to ease fiscal burdens and do away with dependence on oil, with a strong focus on technology, entertainment and foreign direct investment.
The introduction of value added tax (VAT) is believed to be are part of a broader strategic shift on the part of respective governments to prepare for an after-oil future, where oil’s global dominance is set to die down owing to adoption of electric cars and clean sources of energy such as solar and wind power.
In its report, Middle East Economy Watch 2019, PwC stated that whatever happens at a macroeconomic level, 2019 is likely to be an active year for corporate transactions in the GCC region. Last year was the best for Saudi and UAE economies due to rising oil prices and increased government spending.
Richard Boxshall, the Senior Economist at PwC Middle East, said that the combination of stronger prices as well as fiscal and structural reforms put Saudi Arabia and the UAE economies on a solid footing for 2019, despite a weaker final quarter in 2018—which was marked by increased geopolitical risks and falling oil prices.
Mergers and acquisitions
Several mergers and acquisitions in the banking sector have been reported in both Saudi Arabia and the UAE— the two main overbanked territories in the GCC. Banks across the region are rapidly consolidating, with more than a dozen tie-ups projected to be closed this year alone, a move which is expected to boost the sector’s capacity to finance projects and businesses at the same time supporting economic growth.
Rating agencies, Moody’s, S&P as well as Fitch concurred that the outlook of the UAE’s banking sector will remain stable, reflecting a gradually recovering economy and banks’ strong capital, resilient profitability as well as solid funding. The UAE banking sector is leading a wave of mergers across the Gulf.
The merger of First Gulf Bank (FGB) and National Bank of Abu Dhabi (NBAD) in 2017—which resulted in the formation First Abu Dhabi Bank (FAB), the largest bank in the UAE and one of the largest after Qatar National Bank in GCC region, marked the beginning of synergies in the UAE banking industry.
Similarly, Abu Dhabi Commercial Bank (ADCB) and United National Bank (UNB) agreed to merge and together acquire Al Hilal Bank. The tie-up will create the third largest bank in the UAE, with total assets of AED 420 billion and the third largest Islamic banking franchise in the country.
The new entity will carry the ADCB identity and Al Hilal Bank will retain its existing name, brand as well as operate as a separate Islamic banking entity within the group. Additionally, Abu Dhabi Islamic Bank (ADIB) is reportedly weighing strategic options for its business, including a potential merger.
The lender is said to be planning to acquire another banking entity rather than being taken over—although a formal process has not started.
In Saudi, the Saudi British Bank (SABB) and Alawwal Bank entered into a binding merger agreement in the second half of 2018 having started discussions on a potential merger in April 2017. Alawwal Bank and SABB merger will create the Kingdom’s third-largest bank, a top-tier retail and corporate bank with SAR 271 billion in assets.
On completion of the merger, SABB will continue to exist and Alawwal bank will cease to exist as a legal entity and its shares will be cancelled and new shares in SABB will be issued to shareholders of Alawwal Bank.
Additionally, Saudi Arabia’s National Commercial Bank (NCB) and Riyad Bank have reached an advanced stage on the proposed merger that will create the Gulf’s third-largest lender with $182 billion in assets.
NCB hired JPMorgan Chase and Riyad Bank said that it is working with Goldman Sachs to advise on the potential tie-up. The Kingdom’s sovereign wealth fund owns a 44 per cent stake in NCB and about 22 per cent of Riyad Bank, which is likely to make the consolidation process easier.
PwC said that the introduction of VAT in Saudi Arabia brought in more funds than the expat levy and excise taxes combined, and it tripled the amount from taxes on income and capital gains.
The Kingdom managed to contain the inflationary impact of VAT as well as limiting its impact on growth—ultimately raising more revenue than was initially expected. Overall, the new tax policy has been relatively successful in diversifying government revenue without producing excessive inflation.
Under Crown Prince Mohammed bin Salman’s Vision 2030, Saudi Arabia introduced a series of economic transformation reforms aimed at reducing the Kingdom’s high reliance on oil. According to the Arab Monetary Fund’s Outlook Report of September 2018, reforms being implemented across the GCC region to improve the business climate will support economic activities during the forecast horizon.
The Crown Prince’s grand vision to diversify the economy include the futuristic city, NEOM, which is expected to start taking shape in the first quarter of 2019, with the main city opening five years later. The $500 billion-Red Sea coast planned city which revolves around artificial intelligence (AI), one of Saudi Arabia’s mega-projects that is projected to attract billions of foreign investors.
The ambitious 26,500 square kilometre NEOM city will link Saudi Arabia, Egypt and Jordan and it is imagined as a futuristic hub for both industry and citizens. To attract foreign talent and investment, the futuristic city will have a free zone with its own customs system, special taxation as well as labour legislation and an independent judicial system subject to independent regulations—which will be drafted hand-in hand with local and foreign business entities.
Similarly, the UAE has already started the implementation of regulations to stimulate non-oil economic growth. Last year, the President of UAE, HH Sheikh Khalifa bin Zayed Al Nahyan issued a new investment law which is expected to boost and retain foreign investment in the UAE. The UAE authorities seek to focus on the manufacturing sector, transport, renewable energy, agriculture and water.
The new FDI law will be integrated with several supplementary laws and a list of incentives to lead future FDI trends with an aim to reach between $11-11.5 billion. Additionally, the granting of long-term visas to the country’s largely expatriate population will benefit investors and people with specialised expertise like doctors, researchers and those in the technology field.
The new visa law—which saw the first batch of recipient receiving their visas in January this year is set to go hand in glove with the FDI law which allows foreigners to hold 100 per cent ownership of business in specific zones in the country as well as certain industries of the economy.
The UAE introduced support for the industrial sector by agreeing to reduce electricity fees for UAE factories. Under the plans, larger factories would receive a 29 per cent reduction in tariffs while small and medium-sized units would have fees reduced by between 10 and 22 per cent.
Likewise, the Dubai International Financial Centre Courts (DIFC) and Abu Dhabi Global Markets Courts (ADGM) provides a legal framework that assures foreign investors rules and regulations that guarantees investor rights, property rights as well as arbitration, insolvency and corporate laws.
The UAE’s new debt law is set to deepen the financial markets, allowing the Emirates to tap a wider pool of financing options and create a government yield curve. The new Public Debt Law enables the UAE to issue sovereign bonds, enabling the country to tap a wider pool of financing options and creating a government yield curve to bolster secondary debt market in the country.
Recently, Emirates Development Bank (EDB) announced plans to sale $750 million bond, becoming the first lender to utilise the new debt law by selling its first bond since the bank was launched in 2015.
MSCI and FTSE Index’s classification of Saudi Stock Exchange, Tadawul, from standalone market to an emerging market is expected to attract billions of dollars of passive funds. The listing will solidify the strength of the Kingdom’s financial markets as well as the expected participation of international investors, which will contribute significantly to the growth of the of the economy.
Recently, Tadawul and the MSCI jointly launched a tradeable index in a move that is expected to spur the growth of derivatives and exchange-traded funds. The MSCI Tadawul 30 index will provide investors with a useful benchmark of the largest liquid companies in Saudi and serve as the basis for development of an index futures contract listed on Tadawul.
Similarly, Nasdaq Dubai launched futures trading on the MSCI UAE equity index last month, in the latest expansion of the exchange’s futures market. The introduction of the MSCI UAE index futures came a week after Nasdaq Dubai launched single stock futures trading on 12 Saudi Arabian companies.
The duo also signed a licence agreement for the exchange to launch derivatives on FTSE Russell’s Saudi Arabia equity indices. The futures, together with other derivatives which are set to be launched in the first quarter of 2019 under the licence, will be designed to attract global and regional market participants including the many funds that use FTSE Russell’s indices as benchmarks for investing in Saudi equities.
Saudi Arabia and the UAE are embarking on an economic transformation journey which is set to bolster their respective economies against the shocks in the oil market. The duo has advanced infrastructure such as free zones and ports that are spread across the country, well-established road networks and faster communication systems, all of which are technologically advanced to harness competitiveness and attractiveness for investors.
The classification of the Tadawul as an emerging market on the MSCI and FTSE index is attracting international banks to the Kingdom. Japan’s SMBC recently announced the opening of first branch in the Kingdom, while SocGen authorities said that they were in the process of acquiring the necessary licences from SAMA to start operations in Saudi.
Similarly, earlier in February, Citigroup opened a new branch in the ADGM and Swiss-based private bank Lombard Odier announced plans to open a new branch in Abu Dhabi respectively expanding their existing footprint in the UAE.