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EMEA Perspectives - GCC’s unique position to benefit from the energy diversification trend
Feb 28, 2023
- With Western economies taking an irreversible stance to reduce energy dependency from Russia and setting energy security as a critical strategic pillar, the Gulf Cooperation Council (GCC) has been in a prime position to capitalise on increased demand. China’s reopening should reinforce this too
- Despite the retracement, global energy prices remain above historical averages and should continue to support the GCC’s state coffers. A twin surplus is expected to be recorded for a second consecutive year, while the debt/GDP ratio is likely to remain on a downward trajectory even for the lower-rated countries, such as Bahrain and Oman. This underpins the GCC’s economic resilience, and we see a brighter outlook for GCC economies compared to many other parts of the world
- But it is not all about oil and gas; the GCC has taken a more prominent role in hosting international events, with the COP28 Summit to take place later this year in the UAE. Domestic investments, structural reforms and the demographic dividends of a growing and productive labour force can help the region’s efforts to diversify beyond hydrocarbon dependency and achieve a more balanced and sustainable economic growth model
- While the natural resources position the GCC well in the current energy diversification trend, it strives to become the key player in sustainable energy production, exploring new innovative technologies to reduce pollution, enhance efficiency and enable greater energy storage. We explore these energy trends in our high-conviction themes of “Energy Transition and Independence” and “Smart Mobility”
- We expect the end of the Fed tightening cycle to arrive soon, and thus GCC central banks should pause tightening at a higher terminal rate. With markets pencilling rate cuts for 2024, we see more attractive opportunities to lock in yields in high-quality investment-grade bonds than staying in cash. The GCC fixed-income space offers positive relative value characteristics with solid fundamentals
- The economic slowdown across the West should offset the gradual rebound in oil demand from China amid its reopening. Supply uncertainty prevails due to geopolitics and OPEC sticking to its strict production policy, at least for now. We expect global oil markets to tighten in the near-term and Brent crude to trade just below USD90/barrel on average in 2023. We continue to hold a mildly positive view of the global energy sector, which still remains among the cheapest in terms of valuations