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Milan, June 20 2007

Is MENA the Hot Spot?. Milan, June 20 2007. Lorenza Chiampo. Key issues. Is growth in the MENA region sustainable? How vulnerable are MENA economies to oil shocks? Are there other sources of risk? Which are the most vulnerable countries?. Recent trends Oil prices and production

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Milan, June 20 2007

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  1. Is MENA the Hot Spot? Milan, June 20 2007 Lorenza Chiampo

  2. Key issues • Is growth in the MENA region sustainable? • How vulnerable are MENA economies to oil shocks? • Are there other sources of risk? • Which are the most vulnerable countries?

  3. Recent trends • Oil prices and production • Vulnerabilities and downside risks

  4. Growth remains strong in 2006 Oil exporters • Robust performance both in the oil and non-oil sectors. • Prudent fiscal management. Oil revenues have mainly been saved or used to reduce debt. Non-oil exporters • Benefited from the recovery of agricultural output and from increased tourism receipts. • Fiscal balance under pressure, due to increasing fuel subsidies.

  5. Strengthening of the external position • The region’s current account surplus doubled since 2004, boosted by oil revenues. • Non-oil exporters affected by high oil prices. Inflationary pressures result in real exchange rate appreciation. • Strong flows of remittances help balancing c/a deficits. • Booming foreign-exchange reserve position of oil-exporters, that could become more important than Asia in holding net savings outside USA.

  6. Huge investment plans • Saudi Arabia has a stated commitment to increase output to 12.5 million bpd by 2009 (possibly beyond 13 million bpd within 2013)and is also investing heavily in expanding export-oriented refinery capacity and petrochemicals. • The Kuwait Petroleum Corporation (KPC) plans to spend 66 billion dollars) in the upstream and downstream sectors by 2020. The aim is to increase crude production capacity from 2.6 million to 4 million bpd. In addition, Kuwait wants to expand its refining capacity from about 940,000 bpd to 1.5 million by 2010. • The Omani 2007 budget foresees investment for oil&gas exploration, to balance the expected decline from 2009.

  7. Recent trends • Oil prices and production • Vulnerabilities and downside risks

  8. Will the oil windfall last? • Oil prices slumped in 2006 Q4, due to warm weather in the US and to adjustments in speculative positions. • Forecasts for 2007 have been revised, but still point to 60-65$. • OPEC: no need for intervention if prices stay above 55$. • “Upward” factors: OPEC discipline; stronger demand (US, China); supply bottlenecks; political tensions; disruptive catastrophic events (Katrina-like). • “Downward” factors: high stock levels and increase in spare capacity; decline in global growth; warm weather.

  9. How would oil-exporters cope with lower oil revenues? • Most OPEC producers have raised oil prices assumptions in their budgets, to embark on major spending projects and debt repayment. • However, in many cases assumptions are still conservative. • Little of the excess revenue from oil exports is estimated to have been spent. • No systemic risk if prices don’t fall below 30-35$. POLITICAL RISK REMAINS THE MAIN FACTOR THAT COULD KEEP OIL PRICES AT RECORD LEVELS

  10. Political risk and sanctions • OPEC has about 2m bpd of spare capacity, not enough to compensate a sudden disruption. • However, only a prolonged turmoil would cause major disorders. Importers could turn to their oil stockpiles, and other oil exporters would rush to fill as much of the gap as possible.

  11. Is there a strong investment appetite from oil exporters to increase production? • Resource nationalism is spreading to the region. • International oil companies are facing shrinking access to MENA resources. • National oil companies may have little incentive to invest in new production capacity. SAUDI ARAMCO’S PROVED RESERVES COULD KEEP THE WORLD SUPPLIED FOR SEVERAL DECADES!

  12. Recent trends • Oil prices and production • Vulnerabilities and downside risks

  13. Oil dependency still high • Good performance of non-oil sector in the last years, but its share on total GDP is decreasing. • Non-hydrocarbon export share declining in GCC. • Non-oil c/a and government balance show heavy deficits.

  14. Signs of overheating? • No room of manoeuvre for monetary policy, due to currency peg. • Interest rates remain too low, inflation is accelerating.

  15. Housing and asset bubbles • Stock markets fuelled by oil revenues and capital inflows. • Sharp correction in stock prices in 2005-06, affecting small investors. • Lack of transparency and disclosure, insider trading. • Progress in supervision and regulation, that should attract more serious and experienced investors.

  16. Institutional weakness • Private sector development hindered and crowded out by large public sector. • Unproductive management of oil funds: oil revenues are used to finance public sector wages, creating labour market distortions. • Bureaucracy, corruption and weak rule of law. • Inefficiencies in oil companies: overstaffing, underinvestment, bureaucracy, corruption, political interference, lack of transparency.

  17. Demographic trends • The region's population has doubled in the last 30 years and will double again by 2030. 1/3 of the population is under the age of 14. • Unemployment is a major issue in MENA countries, ranging between 18% and 25%. • Growth is not enough to reduce unemployment: at least 8% would be needed. • Social tensions may arise, threatening political stability. • Increasing subsidy bill for central government.

  18. Conclusion • Growth in the region is still heavily dependent on energy. There are signs of overheating. • A higher fraction of oil wealth has been saved, or used to repay debt and to boost non-oil sectors. • Institutional weaknesses, social tension and geopolitical uncertainty are the main downward risks. • Need for a more relevant role of the private sector, transparency and governance. • Positive outlook for GCC countries. Non-oil exporters remain vulnerable.

  19. Contacts Thank you for your attention Lorenza Chiampo Head of country risk Tel. 06.6736535 E-mail: l.chiampo@sace.it Tel.: +39 06.6736264 - 267 business.school@sace.it

  20. Disclaimer This presentation has been prepared solely for information purposes and should not be used or considered as an offer to sell or a solicitation of an offer to buy any insurance/financial instrument mentioned in it. The information contained herein has been obtained from sources believed to be reliable or has been prepared on the basis of a number of assumptions which may prove to be incorrect and, accordingly, SACE does not represent or warrant that the information is accurate and complete.

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