The combination of weaker oil prices and geopolitical and global security events weighed on overall market sentiment in the GCC region, last month.
As commodity prices continued to be a concern last month, the IMF reiterated its view that most GCC oil exporters would need to take serious steps through their economic policies to tackle the effect of lower oil prices. As well as discussions over tax and subsidy reforms, countries are exploring world bond markets as a way to deal with the current financial reality.
Reports indicated that Saudi Arabia would start selling bonds in international markets as early as next year. In addition, the cabinet announced a 2.5 per cent tax on undeveloped land in urban areas, a measure aimed at addressing the kingdom’s overall housing shortage. In other reform measures, the deputy crown prince Mohammed bin Salman said that the kingdom may raise domestic energy prices, privatise and tax mines, and consider a tax on cigarettes and sugary drinks.
Meanwhile, the UAE unveiled a US$82 billion plan to develop a knowledge-based economy.
This week the US Federal Reserve could finally raise its benchmark rate. We continue to believe that a hike in US interest rates will provide a measure of clarity for global markets about the state of the US economy.
In addition, the start of past hiking cycles by the Fed has actually been accompanied by a decline in the US dollar, as markets had already priced in the future path of the Fed rate. Given the pace of increase in the US dollar since the summer last year, history might prove to be a valuable lesson for the year to come. With the subdued sentiment in oil markets and emerging-market currencies, stabilisation in the value of the US dollar could have material implications for some of these emerging and oil-exporting markets.
We have gone through a period of thinning volumes and diminished investor confidence in GCC countries, driven in part by lower hydrocarbon prices and in part by higher credit spreads globally.
However, we note that the effect on GCC fixed income and international sukuk has been subdued in comparison with emerging-market and developed credit markets.
We also believe that GCC countries remain in strong financial health and exhibit sufficient strength to weather these challenging conditions for much longer periods than pessimistic observers would expect.
There are also continued movements towards economic diversification and much-needed reforms. A meeting of government ministers last month made further progress towards the possible introduction of a GCC-wide value-added tax, and at the same meeting the countries agreed to a 100 per cent selective tax on tobacco and related products. Corporate taxes may also be introduced as a way of tackling the fiscal shortfalls that GCC countries are facing.
With the benefit of lower volatility and lower correlations to different asset classes – most importantly oil – our outlook for GCC fixed-income markets is constructive, supported by attractive valuations not seen in several years.
Mohieddine Kronfol is the chief investment officer for fixed income and global sukuk at Franklin Templeton Investments ME