CGI Gulf Insights of the Week

  • ByCGI Gulf Insights of the Week
  • Monday, 27 May 2019
  • Published inMay 2019
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Country Risk Update - Kuwait 

Risk Indicator  -  DB3d
Risk Level       -  Slight
Ratings Trend -  Stable

The first month of oil cuts saw strong compliance, contributing to a partial revival in oil prices that boosts the outlook for Kuwait. Business opportunities should increase as the government targets a more diverse economy with its national development plan. A pending resolution of the Divided Zone dispute with Saudi Arabia will boost oil production capacity.
Market Overview
Manufacturing sector records 6% growth in Abu Dhabi for 2018 
The manufacturing sector in Abu Dhabi witnessed a growth of 6 per cent in 2018 with 42 new industries starting production with an investment of Dh12.3 billion to boost non-oil GDP, according to the latest report released by the Industrial Development Bureau of the Department of Economic Development (DED) on 26 May 2019. New industries were set up in metals, food, building materials, chemicals and electrical equipment among others. In 2017, 37 new industrial facilities were established in Abu Dhabi with a total investment of Dh5.2 billion, the report shows. “The growth of 5.9 per cent in the manufacturing sector reflects the vital role of this major sector in the emirate’s non-oil economy. Within the past five years, its contribution in non-oil GDP increased from 11.5 per cent in 2017 to 12.1 per cent in 2018,” said Ahmad Hilal Al Baloushi, acting executive director of the Industrial Development Bureau at DED, Abu Dhabi.  He also said that the bureau is implementing a number of initiatives to boost the industrial sector by improving business improvement, reducing operational costs and increasing the demand for local products. “We are trying to develop a new ecosystem for the industries to thrive in Abu Dhabi in different industrial zones like Zones Corp, Kizad through joint venture companies.” The report also showed that the value of exports from the manufacturing sector touched Dh24.8 billion in 2018 from Dh22.8 billion in 2017 with a growth of 8.8 per cent. On the other hand, imports of manufacturing industries in 2018 reached Dh41 billion from Dh39 billion in 2017. The number of new licenses issued last year also went up to 118 licenses from 86 licenses in 2017.
The funding crunch for NBFCs likely to linger on
Funding of NBFCs from commercial banks increased significantly upon the Infrastructure Leasing & Financial Services (IL&FS) distress event and remains substantial, helped by Reserve Bank of India Policies. However, data on mutual fund holdings of shadow bank commercial paper suggest funding pressure continue to exist according to the Institute of International Finance (IIF). “Mutual funds are steadily reducing their exposure to shadow banks. Non-resident portfolio flows to shadow banks, a useful sentiment indicator, dipped late last year but staged a recovery in recent months, despite broadly weak capital flows to emerging markets. However, the weight of shadow-bank debt in Indian portfolios of non-resident investors remains below mid-2018 levels, suggesting markets still take a somewhat cautious approach to shadow banks,” said Reza Siregar, Head of ASEAN & India Research at the IIF.  Analysts say the failure of leading NBFCs could have a domino effect of on the financial markets and the economy, starting with banks, financial institutions and mutual funds losing money while, businesses, especially small and medium enterprises finding it difficult to raise money as NBFCs retrench lending. According to the IIF, while stable, the funding situation of shadow banks appears tighter than in recent years. This is having an impact on the total flow of credit to the commercial sector. Credit from banks and foreign sources was relatively stable last fiscal year, but shadow banks retrenched.
Saudi Arabia, Iran tensions to support oil prices
Output cuts by Opec and its allies as well as tensions between Saudi Arabia and Iran following attacks on the kingdom’s oil installations and oil tankers are expected to support oil prices, analysts said. Oil prices trended lower last week due to concerns pertaining to growth following the escalation of tensions between China and the US on trade-related issues. International benchmark Brent was trading at $68.69 per barrel when markets closed on 24 May 2019. Brent saw a decline of 4.5 per cent last week, the biggest weekly drop of the year pressured by rising inventories and worries about the global economy. West Texas Intermediate was at $58.63 per barrel. “Middle East tensions and the Opec+ group of producers maintaining and potentially extending current production cuts have supported the flat price of oil. This despite concerns about slowing demand growth as the negative impact on the global economy of the US-China trade war continues to spread,” said Ole Hansen, head of the commodity strategy at Saxo Bank. Opec and its allies including Russia are currently cutting production by about 1.2 million barrels per day to boost oil prices and Saudi oil minister Khalid Al Falih last week indicated that oil producing countries are likely to extend the output agreement till the end of 2019. Oil jumped to more than $71 per barrel earlier this month due to rising tensions in the Middle East following attacks on Saudi Arabia’s oil installations and oil tankers off the coast of the UAE earlier this month. Regarding the recent escalation of tensions in the Middle East, Hansen said the risk of it leading to an armed conflict and a subsequent spike in crude oil prices is very unlikely.
Shadow banking crisis to continue to haunt India’s financial system
The euphoria on Indian stock markets following the landslide election win of the National Democratic Alliance (NDA) could be short-lived if the government and the Reserve Bank of India (RBI) do not urgently address crisis brewing in the non-banking financial services sector (NBFCs), according to analysts. NBFCs are plagued by a credit squeeze, over-leveraging, excessive concentration, and massive mismatch between assets and liabilities. A crisis-like situation began to emerge in the second half of 2018 when the Mumbai-based Infrastructure Leasing & Financial Services (IL&FS) ran out of money. The government had to step in and supersede the board to avert a total collapse. At the time, it appeared that near-term risk from shadow banks was contained as some funding sources remained available and policy support was put in place. However, the funding trends in the industry shows, despite the government intervention in IL&FS, the sector continues to face a crisis of confidence and liquidity crunch. Analysts say, if left unchecked, the crisis could lead to massive credit defaults with wide-ranging ramifications for the financial service sector and the economy.“The funding situation remains relatively stable, with comfortable bond rollover rates and ample support from commercial banks. However, shadow banks are under pressure to deleverage and are scaling back lending significantly. We think tightening financial conditions will weigh on growth this year,” said Sergi Lanan, Deputy Chief Economist of Institute of International Finance (IIF). 
Dubai, Saudi stocks fall ahead of Eid Al Fitr holidays
The Saudi market slipped early on 26 May 2019, while other Gulf markets were mixed, as investors monitored geopolitical tensions in the region and some liquidated positions ahead of a long public holiday next week. Saudi Arabia’s King Salman will host two emergency summits on May 30 for Gulf and Arab leaders to discuss the implications of attacks against the kingdom and neighbouring United Arab Emirates earlier this month.  Riyadh has accused Tehran of ordering the recent drone strikes on two oil pumping stations in the kingdom, claimed by Yemen’s Iran-aligned Houthi group. The attack came two days after four vessels, including two Saudi oil tankers, were sabotaged off the coast of the United Arab Emirates. Iran has denied the claims. Saudi Arabia has said it wants to avoid war but will respond “with all strength and determination” if the other party chooses one. The Saudi index fell 0.5 per cent, with most banks and petrochemical shares extending the losses that sent the market 1.4 per cent lower on 23 May 2019  The index fell 8.6 per cent from the beginning of May until Thursday’s close, in a sell-off triggered by global trade disputes and regional geopolitical tensions. The market, however, is still up 8.8 per cent year-to-date, driven mainly by foreign capital flows into Saudi stocks. Many investors prefer to cash in their stock holdings ahead of the long Eid Holiday that officially starts by the end of trading on Thursday, lasting for a week in Saudi Arabia and at least three days in other Gulf countries.
Commodity Tracker
Business Events this Week In UAE
Ramadan 2019
Date: 06 May To 05 June 2019
Business Updates

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