DIVERSE OPPORTUNITIES & RISKS

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The countries of the Middle East are a diverse group. Topping the list of differences: The countries vary in the required fiscal break-even price of oil per barrel (meaning the price at which the country can balance its budget). According to RBC Capital, using data sourced from the International Monetary Fund via Bloomberg, the break-even price varies from $54 per barrel for Kuwait to $127 per barrel for Bahrain, with Saudi Arabia in between at $106 per barrel. Outside the Gulf states, Libya needs a staggering $184 per barrel.

Thus the effect of falling revenues will vary dramatically. According to Moody’s Investors Service in its 2015 Sovereign Outlook Report and in keeping with the break-even price statistics, Oman and Bahrain are the most vulnerable Gulf states. Kuwait and Qatar are the most resistant to a negative impact.

With few exceptions, banks in the Gulf states take a business-as-usual attitude toward the drop in oil prices.  Notwithstanding the importance of the fiscal break-even figures and the possibility of budget shortfalls, the break-even cost of production is much lower than fiscal break-even, according to César González-Bueno, CEO of Kuwait’s Gulf Bank. The price “is relevant for considering the budget, but it’s not relevant from an investment perspective. If you produce oil at one of the cheapest rates in the world, it’s worth investing,” he argues, adding that consumption spending might be more at risk “if the budget was to hit restrictions and deficits …that could affect the private spending.”

Some other risks—such as the age of current rulers—also vary across the region. A ruler’s death can lead to political shake-ups and, with them, changes in business practices. After the death of Saudi Arabia’s king Abdullah bin Abdulaziz in January, his sibling, Salman bin Abdulaziz, took the throne, quickly replacing a number of ministers and dissolving a number of committees supported by his predecessor. Salman is in his seventies and reportedly has health issues, realities that leave open the possibility of another upheaval within the near future. However, Salman has prioritized matters of succession, appointing a crown prince shortly after his accession. Several rulers in the UAE and Oman are advanced in years, whereas Qatar’s ruler, sheikh Tamim bin Hamad bin Khalifa Al Thani, was reportedly born in 1960.

The political makeup of the Gulf countries presents a risk that cuts across the region, explains Henry Smith, senior consultant at Control Risks, during an interview at the company’s offices in Dubai. “The political economies of all of the monarchies in the Gulf are structured in such a way that the political fortunes of projects and business partners are often tied up in the political fortunes of families and their relationships with the royal family,” he says. This means that companies seeking contracts must choose partners who can help secure and maintain business arrangements.

With those differences and a lingering wariness of the aftermath of the financial crisis as backdrop, Global Finance spoke to Middle Eastern bank CEOs and other Gulf financial executives about the big risks and key opportunities in the region.

BANK PRIORITIES

Taking a leadership role in promoting increased acceptance of renewable forms of energy, such as wind and solar, and creating innovative financing instruments to enable projects in these areas, is a key focus of development for the region’s banks, according to National Bank of Abu Dhabi—and one that NBAD embraces wholeheartedly, says Alex Thursby, group chief executive officer at NBAD. On March 1, the bank released a report entitled “Financing the Future of Energy: The Opportunity for the Gulf’s Financial Services Sector,” which makes a strong case for what it terms a low-carbon future and discusses the expertise required and new financing opportunities.

“We’re starting to develop the expertise, and our role is [mani]fold,” explains Thursby. He defines that role as educating individuals about renewable energy, developing a capability to advise clients initially in the debt and debt-structuring side about distinguishing between viable and non-viable projects and making short-term financial instruments such as trade finance and price hedging available. Ahead of that, however, it is critical, Thursby says, to educate regulators and policymakers about the advantages of renewable energy. “This is what the banks have to do over the period of the next five or ten years,” he says. “We believe right now that our focus is very much on debt structuring and advising on the appropriate financial models.”

At the International Bank of Qatar, there is an emphasis on infrastructure development. Jabra Ghandour, the bank’s managing director, says that he sees reassurance in the Qatar government’s commitment to continuing infrastructure plans.