JEDDAH — Gulf countries continue to contend with weak oil prices, and began introducing reforms and new measures to diversify government revenue streams, such as the GCC-wide value added tax that is set to come into effect by 2018, Alkhabeer Capital, the asset management and investment firm based in Jeddah, said in its ‘2016 Second Quarter Update’ report.
Also in a bid to meet budgetary shortfalls, many Gulf countries have increased their debt levels, with the UAE, Qatar and Saudi Arabia raising a combined $24 billion just since late April, the report said.
Saudi Arabia’s diversification plans, Vision 2030 and the National Transformation Plan 2020, drew significant attention as stakeholders assessed potential opportunities for the public and private sector. The Kingdom also announced the implementation of 2.5% tax on the value of any white land, undeveloped residential and commercial plots within urban boundaries.
The World Bank this quarter lowered its 2016 growth forecast for the GCC nations to 2.0%, the slowest pace since 2009 and compared to a 2.9% growth in 2015. Nevertheless, the reforms initiated by the GCC nations are likely to help these economies to realign their strategies to ease their dependence on hydrocarbons. The increase in debt levels and lower oil revenues resulted in many rating agencies downgrading their outlook and ratings for many GCC countries.
Analyzing separate asset classes, Alkhabeer highlighted that while global equity markets staged a significant rally at the beginning of the quarter, these gains quickly dissipated and ended in negative territory before the end of the second quarter, after the UK’s vote to leave the EU. Investors reduced their exposure to riskier assets and flocked to safe haven assets, causing a large outflow of funds from equity markets.
GCC bourses finished mixed for the quarter, as investors weighed the impact of the rally in oil prices and rising interest rates on corporate performance. Equity markets in Saudi Arabia, Kuwait, Oman and Abu Dhabi ended in the green, while indices in Qatar, Bahrain and Dubai nudged lower for the quarter. Alongside other global equity markets, the Gulf exchanges witnessed a selloff near the end of the quarter, in the immediate aftermath of the UK’s secession vote.
Sovereign bond markets across the globe also rallied this quarter, with yields on fixed income securities in advanced economies falling sharply amid a weakening global economic perception. In addition to a plunge in yields after the Eurozone following the UK’s referendum, US treasuries were also significantly impacted by the Federal Reserve’s recent tone, with the yield curve shifting noticeably lower compared to the start of the year. Following the disappointing jobs data for May, the central bank held off raising rates as widely expected. However, the details of the FED statement largely surprised markets as six officials now expect a single rate hike in 2016, compared to one official in March.
Alkhabeer presently regards currency markets as the most volatile asset class following the UK referendum, with the British Pound plunging to the lowest level against the US Dollar since 1985, which encountered increased selling pressure in the run up to the referendum, and rebounded sharply in response to the UK's vote to exit the EU. The Euro showed remarkable resistance against the US Dollar this year despite the ECB’s negative interest rate policy and increased asset purchases.
Commodities showed a faint sign of recovery, with oil prices ending the first half of the year just under the $50 per barrel. Oil prices rose after violence in Nigeria pushed the country’s oil production to near-three decade lows. — SG
