HSBC's Williams: Geopolitical Uncertainty Brings Hesitancy

Summary

The 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

00:00

💼 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.

05:05

🌐 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.

Keywords

💡Diversifying Revenue

Diversifying revenue refers to the process of expanding a country's or region's sources of income beyond its traditional or primary industries. In the context of the video, it specifically addresses the shift from reliance on oil revenues to developing other sectors of the economy. This is a key theme as it highlights the economic strategies of the Gulf region, aiming to reduce vulnerability to fluctuations in oil prices.

💡Momentum

Momentum, in this context, refers to the pace or force with which a particular economic or social process is moving forward. The video discusses whether the momentum for diversification has slowed or is still progressing, which is critical for understanding the current state and future prospects of the Gulf region's economic development.

💡Generational Change

Generational change denotes the shift in leadership or societal values that occurs as newer, younger generations assume positions of power or influence. The video mentions this in relation to the Gulf, suggesting that new leadership is bringing about significant economic and structural reforms, which is a key factor in the region's evolving economic landscape.

💡Economic Landscape

The economic landscape represents the overall structure and condition of a country or region's economy, including factors like industry composition, growth rates, and employment. The video discusses how countries like the UAE and Saudi Arabia have fundamentally changed their economic landscapes, which is central to understanding the broader economic narrative of the Gulf region.

💡Capital Spending

Capital spending is the investment in assets or infrastructure intended to be used for more than one year, such as buildings, equipment, or technology. The video suggests that capital spending is a significant driver for growth in the Gulf region, indicating that investments in long-term projects are seen as a pathway to sustainable economic development.

💡Inflation

Inflation is the rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling. The video notes that inflation is low in the Gulf region, which is an important aspect of the area's economic health as it indicates price stability and can affect the cost of living and the value of currency.

💡Fiscal Position

A fiscal position refers to the financial situation of a government or region, including its revenue, expenses, and overall financial health. The video highlights a strong fiscal position in the Gulf, which implies that these countries have good financial management and are in a position to undertake economic initiatives without excessive debt.

💡Currency Peg

A currency peg is a monetary policy where a country's currency is fixed to the value of another single currency, a basket of currencies, or to another measure of value, such as gold. The video mentions the dollar peg, which means that Gulf currencies are tied to the US dollar, providing stability and making international trade and investment more predictable.

💡Geopolitics

Geopolitics is the study of how political dynamics are affected by geographic factors. In the video, geopolitical issues are discussed as a source of headwinds for the Gulf region's growth, indicating that political tensions and global power dynamics can have a significant impact on economic decisions and growth prospects.

💡Capital Markets

Capital markets are financial markets where capital is provided by savers and invested by borrowers through the sale of debt or equity. The video discusses the strengthening of capital markets in the Gulf, which is important for the region's economic growth as it allows for greater access to funding and investment opportunities.

💡Monetary Affairs

Monetary affairs pertain to the policies and actions of a government or central bank that pertain to the supply of money, interest rates, and the overall management of a country's currency. The video touches on the impact of higher interest rates and a strong dollar on the Gulf's monetary situation, which can affect economic growth and fiscal policies.

💡Saudi National Identity

Saudi national identity refers to the distinct characteristics, values, and traditions that define the people and culture of Saudi Arabia. The video suggests that there is a stronger assertion of Saudi national identity in both political and economic decisions, which is a key aspect of the country's strategy for navigating its relationships with other global powers.

💡Eastward Shift

An eastward shift refers to a strategic move towards building stronger ties with countries in the eastern hemisphere, particularly in Asia. The video mentions a shift eastward for trade and capital flows, indicating that the Gulf region, especially Saudi Arabia, is focusing on fostering economic relations with countries in the East as part of its growth strategy.

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.