Fi­nance turns green

MENA re­gion’s fixed in­come mar­kets plan a much greener fu­ture

Middle East Business (English) - - FRONT PAGE -

For many years, the Mid­dle East has been home to many of the largest car­bon diox­ide emit­ters in the world rel­a­tive to the size of their economies. These mar­kets, es­pe­cially the coun­tries in the Gulf Co­op­er­a­tion Coun­cil (GCC) – Bahrain, Kuwait, Oman, Saudi Ara­bia, Qatar and the United Arab Emi­rates – have also re­mained off of the radar of fixed in­come in­vestors be­cause large re­sources from oil meant there was lit­tle need for com­pa­nies and gov­ern­ments to is­sue bonds.

Al­though is­suance was small for both com­pa­nies and gov­ern­ments, the sov­er­eign pipe­line was par­tic­u­larly small prior to the fall in oil prices where gov­ern­ments have turned to cap­i­tal mar­kets to fill bud­get deficits. In 2016, the re­gion ac­counted for nearly one­sixth of global emerg­ing mar­ket bond is­suance. With the in­creased is­suance, there is a new pri­or­ity to broaden the po­ten­tial in­vestor base. Ac­cord­ing to Na­tional Bank of Abu Dhabi, is­suance by sov­er­eigns in the GCC mar­kets ac­counted for $29.3 bil­lion dur­ing the whole 2010 -15 pe­riod be­fore soar­ing to $40 bil­lion in 2016 alone. Sov­er­eign is­suance in the GCC is ex­pected to reach $29.6 bil­lion for 2017, hav­ing al­ready crossed $20 bil­lion by mid-April. As oil prices tum­ble, the ac­cel­er­at­ing shift in the re­gion’s econ­omy away from oil and to­ward other in­dus­tries may also shift ex­pec­ta­tions among in­vestors. Whereas in the past the un­der­ly­ing nat­u­ral re­source wealth has been a buf­fer for in­vestors, there is now in­creas­ing con­cern about stranded as­set risks. The risk fac­ing in­vestors in the GCC and broader MENA re­gion is that the Paris Cli­mate Agree­ment, if fully im­ple­mented, will limit global us­age of fos­sil fu­els in favour of cleaner al­ter­na­tives low­er­ing the value of the oil and gas re­sources re­main­ing in the ground. The shift in view­ing the wealth of nat­u­ral re­sources as an as­set to one that is po­ten­tially a vul­ner­a­bil­ity will not hap­pen overnight. How­ever, in­vestors will in­creas­ingly con­sider the pos­si­bil­ity that the ex­pected fu­ture value of oil and gas re­serves will re­quire sig­nif­i­cant val­u­a­tion dis­counts if the 2 de­gree tar­get (for global av­er­age tem­per­a­ture in­creases over pre-in­dus­trial lev­els) is met. In this sce­nario, some large pro­por­tion of all fos­sil fuel en­ergy re­sources will have to re­main un­used which will dra­mat­i­cally re­duce their value as re­serves. GCC coun­tries, to a greater or lesser de­gree, are pre­par­ing for this fu­ture through sov­er­eign wealth funds which have ac­cu­mu­lated a share of their past earn­ings from fos­sil fuel rev­enue. These sov­er­eign fund as­sets will act as a buf­fer against stranded as­set risk by pro­vid­ing an al­ter­na­tive source fu­ture in­come for re­gional gov­ern­ments for the post-oil fu­ture that most coun­tries have been plan­ning for through their ef­forts at eco­nomic di­ver­si­fi­ca­tion. The size of the stranded as­set risk will de­pend not only on the size of the sov­er­eign funds to­day and their ex­pected fu­ture value based on pro­jected in­vest­ment per­for­mance. There will also be an im­por­tant fac­tor cre­ated by the speed at which the re­gion’s economies can use their en­ergy re­sources more ef­fi­ciently while still grow­ing their non-oil sec­tor. As the ta­ble shows, the GCC coun­tries are along­side the large in­dus­trial and in­dus­tri­alised economies as be­ing sig­nif­i­cant CO2 emit­ters rel­a­tive to their eco­nomic size.

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