Views on MENA News

MSCI: Nigeria on the list for possible reclassification

Abu Dhabi, 2 October 2016
Morgan Stanley has announced that it will keep Nigeria within its MSCI Frontier Markets Index for now, but warned that it has put the country on the list for possible reclassification to standalone status at its annual review next year, if the FX liquidity and accessibility situation for investors worsened and/or new EXCON restrictions were implemented. Morgan Stanley has kept Nigeria on watch since April, when it first threatened to remove it from its benchmarks due to a lack of liquidity in the local FX market, making it difficult for foreign investors at the time to buy and sell securities - the CB abandoned its US$-peg and instituted a more flexible FX regime in June. Other countries currently holding standalone status include Ukraine and Jamaica.

As mentioned in our previous commentaries, sharply reduced oil and gas revenues has been the primary cause behind the squeeze on hard currency availability with this sector accounting for 87.6% (2014) of the country’s total exports, and 95% of its foreign exchange earnings followed by incoming remittances from Nigerians living overseas. On top of low oil prices, Nigeria is still struggling to maintain reasonable crude production levels due to ongoing separatist activity in the Niger Delta and infrastructure issues, both the primary causes behind a plunge in output over the past 9 months. Meanwhile many potential foreign investors continue to sit on the fence due to expectations that the Naira will weaken further in the near term.

USD/NGN hit a fresh high of 490.00 in the unoffical parallel market last Friday before recovering somewhat to close around 475.00. Conversely the official spot rate remained steady at 305.00 due to CB intervention. Meanwhile the country’s FX reserves fell to US$24.59 bio at the end of September against US$25.45 bio in August. We continue to expect the official interbank market rate to be allowed to edge towards our near term target of 350.00, a level which may just be enough to start attracting more foreigners seeking yield and local equity market opportunities.

Glenn Wepener
Executive Director & Geopolitical Analyst - Middle East & Africa

Oil: Saudi Arabia offered to lower its oil production in exchange of Iran cap

Abu Dhabi, 23 Sept 2016
Sept 23 (Reuters) - Saudi Arabia has offered to lower its own oil production if rival Iran agrees to cap its output this year, in a major compromise ahead of talks in Algeria next week, three sources familiar with the discussions told Reuters. The offer, which has yet to be accepted or rejected by Tehran, was made this month, the sources told Reuters on condition of anonymity. Riyadh is ready to cut output to lower levels seen early this year in exchange for Iran freezing production at the current level, which is 3.6 million barrels per day, the sources said. "They (the Saudis) are ready for a cut but Iran has to agree to freeze," one source said.

With regards to the Reuters article above which was published earlier today, getting Iran to agree to freeze its own production at their present level will likely be at tough sell especially bearing in mind recent official Iranian comments on the matter, on the other hand it’s unlikely they can produce much more than 4mio bpd in the near term anyway without substantial upgrades to their infrastructure, they also are still struggling to attract overseas financing and expertise to do so, due to concerns by banks and companies over the ongoing lack clarity on the remaining US financial sanctions. So there may just be a possibility of an temporary agreement on this for a fixed period of time, (eg : 6mths to 1 year).
Once we hear more on this subject we will update you,

Glenn Wepener
Executive Director & Geopolitical Analyst - Middle East & Africa

Supersized Eurobond: have Qatar’s finances been hit harder than we thought?

Abu Dhabi, 26 May 2016
Qatar sold $9bn of Eurobonds in a 3-tranche deal yesterday marking the biggest-ever bond issue from the Middle East (Click here to read more). The fact that Qatar was able to 'supersize' this deal on the basis of a huge order book is indeed impressive, although investors may have been wondering if they would get a larger portion of fries and a bigger drink as part of the deal too! To some extent the transaction shows that investors still have appetite for high quality paper from this region.

However the flip side of this is that some people are likely to question why the sovereign needed to upscale the deal by almost 100% from the planned 5bn - does it imply that the nation’s finances are more severely impacted by the oil price decline than we had assumed? Why else would a sovereign as financially robust a Qatar need to take 9bn off the table in one single deal? Of course it is possible to put both positive and negative spin on this deal, but the underlying reasoning for why Qatar decided to go big on this occasion will certainly be of interest to investors and other market participants alike. It will be interesting to see how this situation pans out. Watch this space…

Chavan Bhogaita, NBAD's Head of Market Insights & Strategy

Saudi Aramco Said to Appoint JPMorgan, HSBC for Debut Bond Sale

Abu Dhabi, 25 May 2016
Despite being speculation at this stage, today's Bloomberg article is certainly noteworthy and while the initial focus seems to be on a Riyal denominated deal, there is also talk about Aramco setting up a USD based program which could lead to USD denominated sukuk being issued in the international markets.

Of course, many would argue that we’ve heard all this before and nothing has yet materialised, however when taken in conjunction with recent announcements regarding a planned IPO of a minority stake in Aramco, various Ministerial changes, and other broad reforms within KSA, we would argue that the probability of Aramco finally doing a hard currency sukuk issue is higher than it has been before. Watch this space for further updates.

Chavan Bhogaita, NBAD's Head of Market Insights & Strategy


Perspective: Have Abu Dhabi Spending Cuts Exacerbated Oil-Led Slowdown?

Abu Dhabi, 18 May 2016
In a recent article - ‘Abu Dhabi Spending Cuts May Have Exacerbated Oil-Led Slowdown’ – the international news agency Bloomberg suggested that AD may have hit the brakes too hard. Given the sheer magnitude of the oil price shock, dropping from a peak of circa $147 to below $30 per barrel, surely the reaction that we have seen from Abu Dhabi, and indeed other Gulf states such as KSA, is understandable. In fact shouldn’t we be welcoming many of the tangible steps being taken to adapt to the challenging environment as they will put the Emirate and indeed the country in a far stronger and more sustainable financial position in the longer term? I certainly do.

The people who criticise Abu Dhabi for putting the brakes on too hard, ask why the returns generated by ADIA’s investments are significantly lower than many other SWFs around the world, etc, don’t in my opinion understand that prudence is a key element of Abu Dhabi’s DNA. It is such prudence, combined with great vision, that has put Abu Dhabi in the position of being one of the strongest sovereigns in the world. And frankly, given the huge uncertainties that surround us – not just in this region but globally – I would rather have the leadership here be prudent and focus on capital preservation than overextend themselves and end up in the fiscal mess that may other nations find themselves in.

The observers who criticise Abu Dhabi for being too prudent also criticise Dubai for being too ambitious and too aggressive with its growth plans. Bottom line is that while commentators find it easy to criticise regardless of the direction being taken, the leaders of such Emirates and nations have a real challenge on their hands in terms of balancing growth and ambition with financial prudence and capital preservation. There is no simple answer and no magic wand that can be waved that leads to a 'happily ever after' scenario.

Chavan Bhogaita, NBAD's Head of Market Insights & Strategy