Why 2019 and 2020 will be great vintage years for investing in the UAE and KSA
Why 2019 and 2020 will be great vintage years for investing in the UAE and KSA. To survive and thrive, consumer-facing businesses in the UAE and KSA will need to be managed much more professionally and tightly than they were in the past.
Four years ago, I wrote an article calling the peak in the investment cycle in the consumer sector. Today, I am calling the end of the prolonged downturn we have been in since oil prices peaked in 2014.
The broader economic indicators are already signaling a rebound. This can be seen in the purchasing managers indices, as well as in the foreign direct investment (FDI), which was up by 126% in the Kingdom of Saudi Arabia (KSA) in 2018. In the capital markets, the massive oversubscription of the international bond issues of the KSA government and of Saudi Aramco is also a sign of investors’ confidence in the region increasing.
In terms of our own data at Awad Capital, our clients are reporting “marginal improvements” in demand for their products and services in 2019 so far, on a like-for-like basis relative to last year. These are clients in the food and beverage sectors, diversified retail, and the broader consumer sector. The acid test will once again be the summer, and the religious holidays in terms of their impact on consumption.
This year will be the first one in a while where Eid Al Fitr finished during the school year, with consumers in the UAE going back to the country for a few weeks before the summer holidays officially kicked off. On the other side of the summer, Eid El Adha will fall in August instead of September, hence juxtaposing summer holidays and Eid holidays, and bringing the consumers back home a few days or even weeks earlier. The cumulative effect of these two seasonal factors willbe, in my view, supportive of local demand, and dampen the negative effect of the holidays on business activity.
Our forecast is that the real turnaround will start to be seen in the numbers in Q4 2019- read on for more on why we expect this to happen.
THE SLOWDOWN
No news is good news
The difficult years we saw since 2015 were not induced by external factors, such as was the case in the great financial crisis
of 2008. Indeed, these were the result of mostly local and regional factors, in addition to the oil prices fluctuations, which are always the biggest drivers of our regional economies. Just a look at the events which had a negative effect on the regional economies puts into perspective how idiosyncratic this recent slowdown has been:
The fall in oil prices
It all started in the second half of 2014 when oil fell from a peak of US$115 per barrel in June 2014, to under $35 at the end of February 2016. It then stayed between $45 and $55 for a year. Since 2017, we have seen the oil price trending higher, reaching an average of $65 in 2018, versus an average of $50 in 2017. It is now forecasted to be stable between $55 and $65 in 2019 and to average $63.
The war in Syria and Iraq
The war in Syria started in 2011, and reached its most extreme point in 2016, with it now thought to be in its final stages. Much like was the case with Iraq, the economic impact of this war should not be underestimated. Syria and Iraq
are substantial markets with 56 million consumers. These consumers were rising, and these countries have the potential to be great markets for GCC exporters as well as trading partners. The reconstruction of Syria and Iraq opens great avenues for companies across the region.
Introduction of VAT
While this was a long-awaited and expected move, it’s timing further hit the consumer, and retailers’ margins. More than a year on, VAT is now part of everyday life, and its financing of the government budgets should benefit the broader economy at some stage.
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