HSBC's Williams: Geopolitical Uncertainty Brings Hesitancy
Summary
TLDRThe video script discusses the economic diversification efforts in the Gulf Cooperation Council (GCC) region, particularly focusing on the UAE and Saudi Arabia. Despite the uneven progress, there is a generational change and a shift towards a fundamentally different economic landscape with increased potential growth rates. The speaker remains constructive about the region's growth, highlighting strong employment, demographic growth, and investment as key drivers. Capital spending is expected to play a significant role in the upcoming years. The quality of growth is deemed strong, especially in the non-oil sectors of the two largest economies in the region. Demographic advantages and capital market developments are also noted, with the region becoming a key member of emerging market indices. However, concerns are raised about maintaining growth momentum, geopolitical headwinds, and the impact of a strong dollar on export competitiveness. The speaker also touches on Saudi Arabia's balancing act in its relations with China and the US, and the potential long-term impact of geopolitical events like the Israel-Hamas conflict on the region's economies.
Takeaways
- 📈 Economic diversification efforts in the Gulf region are showing mixed results, with some areas experiencing substantial changes and growth.
- 🏙️ The UAE and Saudi Arabia are leading the way in economic transformation, lifting potential growth rates and setting a new economic landscape.
- 🔄 There are signs of a potential slowdown in momentum as oil prices recover post-COVID, but the overall outlook remains constructive.
- 💹 The Gulf region is expected to maintain a growth rate of around 4-4.5%, which is double the pace of global growth, driven by consumption, employment, and demographic growth.
- 💰 Investment is seen as a key driver for growth in the region in the current year and beyond, with access to funds and confidence to finance large capital spending programs.
- 🌐 The region's growth is well-balanced with low inflation, strong fiscal positions, and robust currencies due to the dollar peg.
- 🤔 The quality of growth is dependent on how it is judged, but non-oil growth is a significant factor, especially in the region's two largest economies.
- 📊 Capital markets in the region are strengthening, with equity market development and IPO programs contributing to progress.
- 🌟 The region's demographic profile is a key strength, with a young, growing, and wealth-creating population that is open to expatriate workers.
- 🚀 Capital markets are a work in progress, but there has been substantial growth, and the region has become an important part of emerging market indices.
- 🌍 Geopolitical factors, strong dollar environments, and interest rates are concerns that could impact growth, but the region's strong fiscal position provides some insulation.
Q & A
What is the current state of diversification efforts in the Gulf region from oil to non-oil sectors?
-The diversification efforts are uneven, with substantial changes and generational shifts in countries like the UAE and Saudi Arabia, fundamentally changing their economic landscapes and lifting potential growth rates.
How has the economic cycle in the Gulf region been different compared to previous cycles?
-The current cycle is different due to the momentum in diversification and the less marked movement in some areas, with signs of pick-up as oil prices recovered post-COVID.
What is the general growth rate across the Gulf region, and how does it compare to global growth?
-The normal growth rate across the Gulf region is around four to four and a half percent on a weighted average basis, which is double the pace of global growth.
What factors are driving the growth in the Gulf region?
-Growth is broadly driven by consumption growth due to strong employment numbers and demographic growth, as well as investment, which is a big driver for the year and in 2025.
How is the quality of growth in the Gulf region, especially considering the investments made by countries?
-The quality of growth is strong, particularly in the two biggest economies in the region, which are driven by non-oil growth. It is increasingly supported by capital spending and broader structural reform programs.
What demographic changes are occurring in the Gulf region, and how do they contribute to the economic growth?
-The Gulf region has a strong demographic profile with wealth and openness to inflows of new people and expatriate workers, bringing skills and capital, which contributes to domestic demographic expansion and economic growth.
Are capital markets in the Gulf region strengthening, and how do they support the economic growth?
-Capital markets are a work in progress, with equity market development gaining pace and the region becoming a key member of emerging market indices, providing access to global markets for funding.
What are the main concerns regarding the region's growth and economic stability?
-Concerns include maintaining momentum as growth becomes harder to generate, geopolitical headwinds, uncertainty affecting spending choices, strong dollar environments, and higher interest rates due to the Gulf's monetary affairs being tied to the dollar.
How does Saudi Arabia navigate its relations with other countries, such as China and the US, to maintain good relations with both?
-Saudi Arabia focuses on looking after its own interests and asserts a clear national identity in its political and economic decisions, positioning itself to be part of both China and the US's political and economic landscapes.
Is the Israel-Hamas conflict impacting growth rates in the region, and what are the potential long-term effects on regional economies?
-While the conflict has some impact on growth outlook and spending choices due to increased geopolitical uncertainties, the region's strong balance sheet and commitment to long-term development plans have helped maintain stability and sentiment.
How does the appreciation of the dollar affect the Gulf region's ability to export non-oil goods and services?
-The appreciation of the dollar, which drives Gulf currencies higher, makes it easier for the region to export non-oil goods and services on a price basis, potentially boosting trade.
What is the general sentiment towards the economic outlook in the Gulf region, considering the various geopolitical and economic factors?
-Despite uncertainties, the sentiment has held together with capital markets performing well since the initial shock of geopolitical events. Consumer sentiment and currency values remain good, and there is a strong commitment to long-term development plans among governments and policymakers.
Outlines
💼 Economic Diversification and Growth in the Gulf
The first paragraph discusses the efforts and progress of diversifying revenue from oil to non-oil sectors in the Gulf Cooperation Council (GCC) countries. It highlights the uneven pace of change, with significant shifts in the UAE and Saudi Arabia, leading to a fundamentally altered economic landscape. The speaker remains constructive about the region's growth, which is expected to be around 4-4.5% on average, double the pace of global growth. This growth is attributed to strong employment numbers, demographic growth, and investment. The quality of growth is debated, but there is a focus on non-oil growth, capital spending, and structural reforms. The UAE and Saudi Arabia are positioning themselves differently in the global economy, with significant domestic economic changes and a strong demographic profile. Capital markets are seen as a work in progress, with equity market development and IPO programs gaining pace. Geopolitical concerns, a strong dollar, and interest rates are mentioned as potential challenges, but the speaker is optimistic about the region's ability to navigate these issues.
🌐 Shifting Trade and Geopolitical Impacts in the Gulf
The second paragraph addresses the increasing economic links and a shift towards the east for fair trade and capital flows in the region, particularly in Saudi Arabia. There is strong governmental support for this shift. The Israel-Hamas conflict is discussed in terms of its potential impact on growth rates and decision-making in the region, including aid to Egypt. The speaker notes that while there is an initial shock to sentiment and capital markets, there is a subsequent recovery. The region's strong balance sheet allows it to absorb geopolitical uncertainties with low risks to stability. However, the geopolitical environment and uncertainties do affect spending choices. Despite awareness of these uncertainties, there remains a strong commitment to long-term development plans among governments and policymakers in the region.
Mindmap
Keywords
💡Diversifying Revenue
💡Momentum
💡Generational Change
💡Economic Landscape
💡Capital Spending
💡Inflation
💡Fiscal Position
💡Currency Peg
💡Geopolitics
💡Capital Markets
💡Monetary Affairs
💡Saudi National Identity
💡Eastward Shift
Highlights
Efforts to diversify revenue from oil to non-oil sectors are showing uneven progress across the Gulf region.
Generational changes and shifts in economic landscapes in the UAE and Saudi Arabia are lifting potential growth rates.
The current economic cycle is different from previous ones due to changes in the Gulf region.
Signs of economic momentum fading post-COVID oil price recovery are being observed.
The speaker remains constructive about the Gulf Cooperation Council (GCC) with normal growth rates averaging around 4.5%.
Growth in the Gulf is driven by consumption, strong employment numbers, and demographic growth.
Investment is expected to be a significant driver for growth in the region for the current year and 2025.
The region's growth is well balanced with low inflation, a strong fiscal position, and a robust currency due to the dollar peg.
The quality of growth is strong, particularly in the region's two largest economies, with a focus on non-oil growth.
Capital spending increases and structural reforms are supporting the current economic cycle.
Demographic growth and the influx of expatriate workers are contributing to the region's economic expansion.
Capital markets in the region are strengthening, with equity market development and IPO programs gaining pace.
The region has access to global markets for funding, which is crucial for continued growth.
Geopolitical headwinds and a strong dollar environment are creating challenges for the region's growth.
High interest rates due to the dollar peg are tightening monetary policy, increasing reliance on fiscal support.
Saudi Arabia's focus on its national interests and a stronger national identity are influencing its political and economic decisions.
There is a noticeable shift towards the east for trade and capital flows, with strong government support.
The Israel-Hamas conflict has had some impact on the region's growth outlook and spending choices.
Despite geopolitical uncertainties, the region's strong balance sheet and consumer sentiment have helped maintain stability.
Governments and policymakers remain committed to long-term development plans despite current uncertainties.
Transcripts
Bit more about this. So, Simon, we have seen diverging
performances, particularly as it pertains to diversifying revenue from
oil to non-oil sector. How is that effort going?
Has momentum slowed across the JCC? I think it's uneven and there have been
very substantial changes in some parts of the Gulf things, generational change
in some parts of the Gulf. The shifts here in the UAE, also in
Saudi Arabia, I think are fundamentally changed.
The economic landscape. They've already lifted potential normal
growth rates. I think that's why this cycle is
different to cycles that have been before elsewhere in the region.
And the movement is is less marked. And then I can already see some signs of
the pick up. Any company mentioned that the world as
oil prices recovered post-COVID, I see signs of that momentum beginning to
fade. You are still constructive, though.
Is it just that the time frame will be a little bit longer than originally
thought? No, no, I'm still constructive.
I'm on the GTC. Reasonable.
We've got normal growth running around four, four and a half percent on average
on a weighted average basis across the across the Gulf.
That's what double the pace of global growth.
I think that growth is is broadly driven.
There's consumption growth off the back of strong employment numbers and strong
demographic growth. I think it's investment.
This can be the big driver for this year and in 2025 as well means nowhere else
in the world sufficiently confident there's access to funds in this kind of
scale to be able to finance, to be able to consider a capital spending program
of this kind. That's also that growth is still pretty
well balanced. Inflation is low, fiscal position is
strong, and the currency because the dollar peg.
Well, that's robust to well, exactly what are the quality of the growth
though? We just heard Ziad talk about the
various investments that some of the countries are making.
Maybe not all are paying off in the way that the countries would like.
Is the quality of the growth strong? It depends how you judge it.
But yes, I think certainly in the two biggest economies in the region is a
non-oil growth driven, driven story. I think it is increasingly going to be
drawn along by the increase in capital spending and other areas.
And I do see this cycle as being supported by this broader structural
reform program. Look, the changes here in the UAE, the
way in which UAE positions itself and the global economy, look at those
enormous domestic economic changes in Saudi Arabia is a fundamentally
different economic growth model to that which was there before.
How are we seeing those changes demographically?
So are populations responding? I think they are.
Look at the demographics is one of the things that marks this region out.
You know, there are other parts of the world which have strong demographic
growth, amenable populations, but none really that can offer that kind of
demographic profile with the wealth that the GCC already commands, the openness
to inflows of new people to new expatriate workers, bringing their
skills in the capital alongside that domestically driven demographic
expansion. Yeah, I think it works.
You mentioned capital. Are the capital markets strengthening?
Are they as robust as they need to be for this growth to continue?
It's it's it's a working work in progress.
Some parts of the region clearly are ahead of others.
Equity market development is gaining pace.
The IPO programme that there's been over the last two or three years is is part
of that. And certainly I'm talking to many more
international equity investors about the Gulf that have been in the past.
But that market as well, this region is now a key member of the emerging market
indices. It does have access to global markets
for funding at a time when other parts of the world are struggling.
So yeah, I think it's it's ongoing, but the gains there have been substantial.
Yeah, well, clearly we're seeing huge amounts of efforts being put into
regulation here in the UAE. When it comes to Saudi, we're seeing a
lot of effort being put into the capital markets and strengthening those and so
on. What concerns you about the region,
which of course there are there are headwinds.
I think part of it is what happens when you've has growth, which has been so, so
strong. Incremental growth could become a little
harder to generate a hard and to maintain momentum.
Obviously, the geopolitics creates headwinds as well.
Uncertainty brings hesitancy and inevitably reflects on the kind of
spending choices that get made. Also in very strong dollar environments,
the appreciation of the dollar driving Gulf currencies higher.
That makes it easier to export non-oil goods and services on a on a price
basis. And interest rates, I mean, interest
rates are significantly higher than they would be if the Gulf run its own
monetary affairs. That means that monetary sense is tight,
which means a reliance on fiscal support is greater than it would otherwise have
been. My forecasts are running of oil at $80 a
barrel is quite a conservative number given where prices are today.
And I think that does give the reason the fiscal space to offset some of that
monetary tightening. Otherwise, if you hold the growth story
back, let's take one example. It's Saudi Arabia.
How does it navigates relations with other countries?
China and the US is really what I'm aiming at here.
How does it keep both happy and also sort of warm relations with both?
I think Saudi's size prime focus is looking after its own, its own
interests, and I think what you are seeing is a much stronger assertion of a
clear Saudi national identity that's apparent in the political decisions
again in May, but also increasingly in the economic choices I was.
While Sandy can be part of both of us. Both camps are both parts of that new
political landscape, but that's clearly key to its economic fortunes.
What I do see increasingly, though, in the region as a whole, particularly in
Saudi Arabia for those economic links, is a shift east for fair trade, for
capital flows. And that's clearly got very strong
government to government backing as well.
Absolutely. The Israel-Hamas war.
Is that impacting growth rates in the region or, you know, decision making in
terms of aiding Egypt, for example? Will it have long term impact on the
economies of the region? A few different questions.
I know in terms of near-term and performance.
I'm looking for we track sentiment as closely as we as we can.
So far, sentiment has held together what kind of capital markets have performed
since October seven? Clear the initial moment of a shock, but
then a recovery. I think in terms of the capacity that
this region has to absorb those kinds of geopolitical uncertainties with balance
sheet so, so strong. I think the risks to stability are low.
Clearly, it has some impact on the kind of growth growth outlook because, you
know, we're in a very different geopolitical environment that the one we
expected to be in on October, October six.
And those uncertainties now have some impact on the spending choices that get
made. But say so far what I'm seeing is
sentiment holding together while the consumer sentiment and currency looks
good. The conversations I have with
governments and other policymakers around around the region, awareness of
the uncertainty, but also still a very strong commitment to those long term
development plans.
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