After the Arab Spring Part 3 – the outlook for car markets in the GCC
At the time, the GCC markets seemed largely unaffected by the Arab Spring, apparently insulated by oil wealth and strong sovereign wealth funds, whose proceeds need only be shared among a small population. But, if you take a closer look there are two ‘blocs’ of states within the GCC measured by income per capita: the rich, UAE, Qatar and Kuwait; and the ‘relatively poor’ – Bahrain, Saudi Arabia and Oman. Those differences have great implications as each country deals with three important – and region-wide- market undercurrents: youth unemployment and renewed emphasis on employment nationalization programmes, accelerating modernization of the transport infrastructure and a changing landscape for personal consumer credit. Each will have an impact on the size and shape of GCC car markets.
Moreover, the medium-term, region-wide political effects of the Arab Spring were also overlooked: the power struggle between Saudi Arabia and Iran; the split within the GCC over Qatar’s position; the struggle to control the entrance to the Red Sea at the Bab Al Mandab, which has underpinned the conflict in Yemen.
Covering an area of 2.46MN kilometres, the six nations of the GCC enjoy an aggregate GDP per head of $46,712 (2010), quadruple that of their closest MENA neighbour – Lebanon – at $9,500 in the same year. That income level places them on a par with the US ($48,386) and above the UK ($38,592) and Italy ($36,266). In the Eurozone, only Germany ($43,741) gets close. It’s no wonder that their car markets have one of the richest mixes of premium to volume cars in the world.
Precise government new car registration statistics are not readily available and vehicle imports are not an accurate guide, as many vehicles are re-exported out of the region. However, a reasonable estimate is that the GCC region enjoys an aggregate new car market exceeding 1 Mn units a year. Industry observers suggest that this is more skewed towards premium brands than is usual in the mature markets of Western Europe and North America; the premium sector may account for around 20% of total registrations. Within those, the mix of large-engine, highly specified – and highly profitable – vehicles is also thought to be much larger, due to the region’s present low fuel and taxation costs. But watch this space – VAT will be introduced from January 2019 and government fuel subsidies are also expected to decline – both the consequences of falling government oil revenues.
It’s unsurprising that premium car-makers take the region seriously. Audi, for example, posted sales of around 8,000 units into the GCC – in 2011. This had risen to almost 10,000 units by 2015. BMW boast that the largest single dealer in the world for their 7-Series models is in the UAE. Sales in 2011 were around 19,000 and exceeded 31,000 by 2015. And, while Europe and North America note that buyers are tending to downsize, that is not true for developing markets. In fact BMW Middle East report that their share of the profitable mid and full-size car segment grew 7% a year between 1990 and 2011. There is no evidence that the situation has deteriorated since then.
Although variants exist, the ‘Luxury’ lifestyle is synonymous with every GCC state, except perhaps Bahrain and Oman, and it’s set to expand. Deloitte Global Wealth estimated that there were around 12MN ‘millionaire households’ (Liquid Assets >$1MN) in 2011 and predict that, by 2020, the number of ‘millionaire households’ is set to double. Cap Gemini estimated the number of ‘High Net Worth Individuals’ in the Middle East to be over 600,000 by 2015. This is on target to rise to almost 670,000 in 2016. Specifically for premium car brands in the GCC, the demand for large cars may not diminish. While affluent Europeans prefer their luxury tinged with sophisticated understatement, those in the GCC are more attracted to status and extravagance. So, as long as the money doesn’t run out, all should be well for premium car brands in the GCC. But will it?
Undercurrent #1: Youth Unemployment
Employment nationalization programmes have been an enduring feature of the political landscape in the GCC but their progress has varied markedly form state to state. The issue is critical: a 2003 World Bank Report which forecast that the MENA Region needed to create 100 million new jobs between 2000 and 2020 to avert mass youth unemployment. For the GCC that means around 10MN new jobs or the re-patriation of the same number of ‘guest workers’.
Between January and April 2011 Oman experienced a wave of sporadic strikes and protests, quickly defused by promises of jobs and reforms. Some jobs resulted; the reforms did not. According to the Chicago Tribune, “Sultan Qaboos bin Said al Said is the longest serving ruler in the Arab world but tolerates no political parties or other forms of political representation and retains virtually absolute power over the government and armed forces.” Observers are watching to see if the $1 billion a year being spent by Oman on creating 40,000 government jobs for the young will maintain political stability. However, the risks of contagion remain.
Arguably, Oman has maintained the most consistent commitment to employment nationalization, but then, depending on your point of view it has the most to gain…or lose. Its oil production has been declining since the 1970’s and is expected to be depleted by 2022, hastening its 25 year planned switch – enshrined in the 1995 economic plan, ‘Oman 2020 – Vision for Oman’s economy’ – towards a non-oil economy based on tourism, gas and industrial exports. In parallel, the explosive growth in young Omanis in the 1980’s will continue to raise demand for jobs from 20 to 30 year-olds right through the period 2010 – 2020. In 2010, over 50% of the population were under 30 and total population has more than doubled beteen 1980 and 2010. Little surpise then that, in Oman, the Omanisation programme has made strides towards replacing expatriates with trained Omani staff. By the end of 1999, the number of Omanis in government services exceeded the set target of 72%, and in most departments reached 86% of employees. The government also fixed Omanisation targets in six areas of the private sector, which accounts for more than four jobs in five in the Omani economy. But, while most companies have registered Omanisation plans, progress has been much slower. With a chronic unemployment rate of 15%, the failure to to deliver jobs fast enough may be able to destabilize the country and with it the car market.
Saudi Arabia reflects issues similar to Oman but on a larger scale and mixed with unique demographic factors . The indigenous population in 1980 was around 6.5million and 20.0 million by 2010. Under 30 year-olds accounted for 70% (4.5 Mn) of the population in 1980 and 66% (12.5 Mn) by 2010. Saudi planners, like their Omani counterparts, forecast a reduction in foreign workers and increased employment for Saudi nationals. But, young Saudis are very ‘picky’ about the jobs they’ll take on. For example, despite the exit of 1 Mn Yemenis at the start of the Iraq War – Yemen supported Iraq – there roles were not filled by Saudis. The Yemenis were mostly small shopkeepers whose empty shops offered livelihoods of little interest to young Saudis.
The Saudi population is both the countries greatest asset and its largest headache. To name just a few of its special characteristics: its indigenous population is as large as the population of the rest of the GCC combined and 450,000 new people are added each year. Women make up 45% of the people, 55% of the graduates, only 7% of the work-force and 0% of the registered car drivers. 80% of all Saudi nationals live in towns – 25% in Riyadh alone. The gap between the earnings expectations of unskilled Saudis and the actual wages paid to unskilled ex-pats is so great that few are motivated to transition through work-entry jobs in the private sector – they consider them the province of Filipino or Pakistani workers. There may be some truth in this. According to a study by Banque Saudi Fransi in 2010, foreigners employed in the private sector earned SR764 on average, while Saudis’ pay averaged SR3,137 per month.
Back in 2006, BBC Reporter Roger Hardy concluded, “An expanding pool of bored, disaffected Saudis without work can only spell trouble.” In 2011 Adel Faqih, the Saudi Minister of Labor, mentioned that the current rate of unemployment in Saudi Arabia exceeds 15%, while between 2010 and 2011 over 2 million working visas were issued by the Saudi authorities. The unemployment rate among 20 – 24 year-old’s soared to 43% in 2011 while more than 6.5 million foreigners are working in the Saudi private sector compared to only 700,000 Saudi nationals. The unemployment issue is not going away anytime soon: it is forecast to take 15 – 20 years before new entrants to the labour market start to taper off.
But won’t the oil revenues enable this problem to be ‘kicked down the road’ using government job-creation schemes and pressurising private firms to hire some more Saudi men, even at inflated salaries? Well, according to Merrill Lynch, Yes ….and No. They concluded that, even if oil prices remain over $75, by 2023, Saudi Arabia will be running chronic fiscal deficits. Oil output is flat and the current OPEC basket price has hovered between $40 – $50 since 2015. A rising population consumes 4% more of the GDP each year. To balance the budget Saudi Arabia’s ‘break-even’ price for oil will rise from $78 in 2012 to $120 by 2020.
And – to placate young people without homes and jobs – government revenue is already committed: a $131 BN package, including $66BN for new housing, has already been agreed. National Commercial Bank Capital estimates the number of households will grow from 4.6 million in 2010 to 7 million in 2020, as family sizes fall, indicating that 2.4 million new households are expected to be created over the next 10 years. Government spending has risen 13% a year for the last 40 years and oil income by 23%. Neither is sustainable. Of course, its not a crisis either. But, perhaps now – while the economy is strong is the time to get its population into work and diversify the economy away from oil dependency. Just opening the government coffers to unleash a development bonanza that will lead to economic opportunities, not only in real estate but also power, infrastructure, construction and business services, without ensuring that young Saudis get their share may ignite social woes.
The demographic dilemmas in Oman and Saudi Arabia are broadly similar for the rest of the GCC but worst for the UAE and Qatar, the richest states in the GCC. As can be seen from the table, no other region in the world is so directly and continually reliant upon such high ratios of “temporary” non-national labor. While this has, for the most part, been mutually beneficial, it is now, perhaps more than ever before, also giving rise to an array of genuinely felt concerns. Indeed, in terms of domestic challenges (Bahrain’s indigenous sectarian discord aside), the imbalance now arguably supersedes all other concerns for both governments and nationals alike.
You could argue that the policies adopted by ruling families in response to the “Arab Spring” is likely to worsen the demographic imbalance; many raised the salaries of government employees, in some instances by 100 percent, irrespective of competence or merit, and/or “created” thousands more public-sector jobs. Even some of the beneficiaries recognize that – in the long term – this is a regressive, not a progressive policy solution. The unintended, but highly probable, consequence will be an even greater tendency for newly graduating nationals and those currently “unemployed” to hold out for public-sector jobs – which is close to employment saturation – when they should be competing in the private sector.
It is no surprise that the least well off states in the GCC – Bahrain, Oman and Saudi Arabia – were the ones who felt the most after-shocks from the ‘Arab Spring’. It is likely that these will face the most serious political pressures to supplant migrants with nationals and – possibly – the most serious backlash if they fail. And, the protests may not come just from nationals. Many migrants are ‘wannabe immigrants’. They’re in the region for years and some have more incentive to bring their families to the GCC instead of returning home to them. On the other hand, the situation in the three richest states is more acute. Even fewer of their young people are willing to work in production jobs to fuel their material life-style.
Existing policies – education, labour ‘nationalization and sponsorship system changes – have had very limited success. GCC governments need to find some new prescriptions before social turmoil becomes endemic.
Undercurrent #2:Transport Infrastructure – The 21st Century Spice Route
According to Dubai’s Roads & Transport Authority when the $3.89BN Dubai Metro opened in September 2009, it had carried 6.9 MN passengers by year-end. In 2010 that figure jumped to 39MN and in 2011 it hiked again to 69MN, after the opening of the Green Line in September of that year. Two extensions – one of 20 kms in Dubai and another of 10kms down to Abu Dhabi are already in the pipeline for completion within 5 years. On top of that a $675MN has been announced for a 14km tram project which will interconnect with the Metro. Abu Dhabi is even more ambitious. They approved funding for 131km of metro, 300km of tram routes and a 30km underground light railway – all to be operational by 2017. All this is the realization of the Transport Master Plan unveiled in May 2009. That also included 590km of high speed rail to link the entire GCC states.
Hidden in the small print are three other revealing items: Abu Dhabi envisages a 5-fold increase in daily travel by 2030. The projects will shift people out of cars and into mass transit systems. To incentivise them, they will introduce high parking charges and progressive road tolls, presumably on the Salik model (automated number plate recognition).
Kuwait announced in February 2012 that it too has a Metropolitan Rapid Transit System Project in the pipeline. Phase 1 includes approximately 50 km of metro with 28 stations, around a third of which will be underground. Subsequent phases will expand the network to 160 km and 69 stations, 11 of which will be underground.
Not to be outdone the Government of Qatar announced a 213 route-km metro in greater Doha in February 2012 with initial contracts of $2BN and $3BN to launch a US$35BN programme to construct an integrated rail network across the Gulf state by the time it hosts the FIFA World Cup football tournament in 2022. The metro network will have 80 stations to facilitate commuting by 1 million people in the country. It will include long-distance and high-speed trains to connect the northern and western parts of Qatar, providing a fast rail link to Bahrain and GCC countries. The speed of the trains will be 200 km per hour and the journey from Qatar to Bahrain will be completed in one and a half hour. In total the long-distance network will cover 473 kilometres connecting all the industrial areas in Qatar as well as integrating with Saudi Arabia and Bahrain.
On an even grander scale is China’s One Belt; One Road strategy. Funding for fast-track rail links between China, West Asia (Middle East) and onward to Europe is to be provided by the newly-established Asia Infrastructure and Investment Bank (AIIB). Headquartered in Beijing, the AIIB has been initially endowed with paid-up capital of US$10 billion, almost double the amount of the Asia Development Bank, which is led by Japan and the USA. In October 2014, representatives from 21 Asian countries had signed the Memorandum of Understanding on Establishing the AIIB, and by the end of March 2015, almost 50 countries from all around the world had filed applications to join as founding members. These include arch-enemies Israel and Iran, with both of which Beijing currently enjoys warm relations. Middle Eastern states, notwithstanding US antipathy to the idea, have piled in and the list that are either members or would-be partners of the AIIB now includes Kuwait, Saudi Arabia and Egypt, all of which share close security ties with Washington.
Undercurrent #3:The Outlook for Consumer Credit – Managing Credit and Concentration Risk
Banks within the GCC – and there are around 100 of them (2016) serving 50 MN people – are all sizeable and well-capitalized. Many have government as a shareholder…but they do a face a considerable challenge – they enjoy a limited and slow growing domestic market which is already well penetrated with credit products. The mergers that have been seen – the Emirates Bank International and National Bank of Dubai merger in 2007 to create Emirates NBD; the merger of Dubai Bank and Emirates Islamic Bank (EIB) merger into the re-branded as Emirates Islamic Bank; and the merger of National Bank of Abu Dhabi (NBAD) and First Gulf Bank (FGB) – are all driven by the search for market share in the MENA region. And more may be on the cards.
But, the intensity of competition in a small geographic market opens many of the banks to credit risk. Credit risk is the key risk faced by banks in the GCC and MENA region – the risk that individuals and companies do not re-pay loans given to them. More than most, borrowers tend to borrow from more than one bank – so called, concentration risk – so, if they do default, it affects a number of banks. The concentration effect is magnified due to the economic dependence on one one key sector – oil – which, coupled with geographic concentration, increases the difficulty for any bank to find large enough non-oil lending opportunities. Does the credit risk apply to individuals as well as corporates? Often it does because banks lend primarily to nationals – who are employed by the public sector – which is exposed almost entirely to the oil market. Put simply, high government wages fuels consumer credit which in turn, fuels exposure to the oil sector. In both cases – corporate and individual borrowers – are often inter-dependent. They have cross-holdings in businesses or are families with inter-dependent allegiances: Put simply, if one party falls into financial difficulty it affects the others.
What is the outlook for consumer credit…and the car market? The technical term is…it all depends on the GCC’s macro-prudential policy: the policy in place to limit consumer’s indebtedness in the first place.
On the supply side credit rating and credit scoring is of significant help to the lenders. Since 2010 government supported Credit Registries have been upgraded in Lebanon, Oman and Tunisia while privately run Credit Bureau’s – ratings agencies have been established in Bahrain, Egypt, Jordan, Kuwait, Morocco, Saudi Arabia, and the UAE. Public credit registries (CR) or private credit bureaus (CB).
On the demand side the banks have to manage two specific exposures – one is to real-estate price risk; the second is to government borrowing. Real estate prices fell in the UAE in 2009 -2010. In the absence of reliable and comparable real estate indices in the region the estimates were of 40% drop for Abu Dhabi, 60% for Dubai, 50% for Kuwait, 35% for Qatar as well as growth of 8% for Saudi Arabia and 10% for Oman. Real estate prices could fall again unless care is taken about creditworthiness. Government borrowing to finance deficits will take cash from local banks – where many are shareholders – and, in turn, constrain the banks ability to lend to consumers. This could be of particular importance where retail lending is the main growth opportunity open to banks. A.T. Kearney commented in 2014 that, ” In contrast to the pre-crisis period when corporate banking was the fastest-growing segment,retail banking is now increasing faster in four of the six GCC countries, the exceptions being Qatar and the UAE.”
Of course, there are new – to the region – financial products, such as leasing and variable ownership products which could still enable willing car buyers, individual consumers or SME’s, to enter the market but, so far, few banks appear to have an appetite to expand the range of financial products they have on offer. One piece of good news is, however, that the UAE ended prison sentences for expat loan defaulters in 2012.
GDP Stats – IMF World Economic Outlook 2012 The GCC’s “Demographic Imbalance: perceptions, Realities and Policy Options by Ingo Forstenlechnerand Emilie Jane Rutledge Dec 2011