MENA countries need to invest more than $500 Billion in urban regeneration programs to unlock sustainable debt and inclusive economic development
A PRESS RELEASE in Al Bawaba Published on 4 July 2023, covered the need for all MENA countries to invest $500 Billion in their respective urban regeneration programs as per a Strategy& Middle East report, part of the PwC network.
Fady Halim
Countries across the Middle East and North Africa region must integrate environmental, social and governance (ESG) principles into their urban regeneration strategies to build inclusive economic development and preserve cultural heritage, according to the latest research by Strategy& Middle East, part of the PwC network.
The necessity for urban regeneration is seen across the region, with unplanned or so-called ‘informal settlements’ continuing their rapid growth: 40% of the populations of both Cairo and Makkah live in such settlements. Meanwhile, emissions from new construction activity and ongoing building operations represent 37% of energy-related emissions and 34% of global energy demand.
“As recently as 2018, roughly 31 per cent of those in the Arab world living in cities did so in decaying neighborhoods and dwellings. Our analysis shows that it would cost the region US$500 billion to regenerate a sample of 15 densely populated cities – such as in Saudi Arabia, the UAE, Qatar, Egypt, Iraq, Syria, and Jordan. This injection of capital and urban planning has enormous potential to transform the livelihoods of millions of people, directly or indirectly,” said Karim Abdallah, Partner with Strategy& Middle East.
While economic growth delivers social and economic benefits, rapid and unplanned urbanization can create economic, environmental and social issues, from sprawl and decay, to displaced communities and neglected cultural and historical sites.
The Strategy& report points out that several Middle East urban regeneration efforts are already underway, notably Jeddah’s Al Balad district and downtown Sharjah in the UAE. However, these programs must strike a balance between improvement without gentrification, meet housing demands while preserving neighborhood aesthetics, and enhance socio-economic conditions while safeguarding their historical heritage and social fabric.
Unlike traditional development, urban regeneration must not only breathe new life into old districts that helps improve quality of life and economic opportunity, but also be financially viable for the government agencies, developers and financial institutions sponsoring these projects.
An ESG-based strategy therefore can ensure that programs conform to growing demand for ESG compliance from investors and banks while opening up further investment and financing avenues. In 2021 alone, over $1.6 trillion in sustainable debt was issued, with a third of that specifically linked to ESG targets. Additionally, by reviving decaying districts, an ESG-based strategy can also restore much-needed housing stock, commercial space and support with tourism development that many Middle East countries are seeking.
“When linked to ESG principles, urban regeneration acts as a powerful tool to mitigate the common challenges of regeneration. Whether we’re talking about better infrastructure, construction efficiencies or energy efficiency, sustainability is integral to the environmental goal,” commented Charly Nakhoul, Partner with Strategy& Middle East.
Several nations, including Bahrain, Saudi Arabia, and the UAE, have set out net-zero strategies recognizing the significance of preserving the social fabric and engaging with communities to maintain cohesive and healthy societies.
“Urban regeneration is integral to the effective management of the MENA region’s population growth,” said Fady Halim, Partner with Strategy& Middle East. “By implementing a ‘LIFE’ approach, which integrates ESG principles into urban regeneration projects, a variety of sustainability, socio-economic, cultural and quality of life goals can be achieved. These outcomes will have a lasting impact; including providing better life opportunities, fostering thriving communities, and creating financial incentives for continuous urban revival and development,” he added.
For GCC countries to achieve sustainable financing and inclusive socio-economic development, they must embed ESG principles in a series of L-I-F-E phases for urban regeneration. Learn (and listen): Projects must begin with a period of listening and learning from residents, businesspeople, and property owners. Sponsors must understand the area’s socio-economic, cultural, and historical characteristics and the community’s needs. Effective communication among all stakeholders is vital to ensure the project aligns within the context of the overall city. Integrate: ESG principles must be seamlessly integrated into every aspect of the project, from exploratory conversations and planning to design and implementation; and from ongoing operations to managing the assets over the long term. Fix: It is important to fix ESG targets and other key performance indicators that translate the commitment into a tangible, measurable effort. Earn: From these actions; stakeholders earn their rewards. Community members gain a higher quality of life, and the public and private-sector sponsors ultimately benefit from their investments.
For governments across the region, urban regeneration is a social and economic imperative – their national security depends on the maintenance of cohesive societies and empowered individuals. Moreover, urban regeneration projects can only deliver these outcomes if they integrate ESG principles built around transparency, fairness, integrity and inclusion. L-I-F-E phases can provide policymakers and developers with a powerful roadmap to successful regeneration and towards building sustainable urban centers of the future.
Oil and gas commerce leaves an invisible footprint on Gulf’s non-oil economies in their attempt to move out of the ease and their related accommodating revenues.
The above image is for illustration and credit to Blue Bay Travel.
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Oil leaves invisible footprint on Gulf’s non-oil economies
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Touted progress in diversifying Gulf economies beyond the fossil fuel rent comes with a caveat. Oil and gas revenues indirectly propel large chunks of the non-oil economy through public expenditures such as wages, subsidies and infrastructure spending.
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This picture shows cranes on a construction site with a backdrop of the Dubai skyline, including Burj Khalifa, the world’s tallest building, on May 23, 2023. – GIUSEPPE CACACE/AFP via Getty Images
The International Monetary Fund (IMF) expects the non-oil segment of Gulf economies to grow 45% faster than the overall gross domestic product (GDP) this year, which includes the oil and gas sector. The figure is in line with the 2000-2019 average trend.
This follows a unique situation in 2022 when the Gulf’s overall gross domestic product expanded 57% faster than the non-oil segment after oil prices surged to their highest levels since 2008 as Western sanctions against Russia threatened to disrupt global oil supply. Even so, the World Bank noted in a May 2023 report that Gulf economies’ “stellar growth” last year “was not just a result of buoyant hydrocarbon prices but also continued growth of non-oil economies.”
“Hopefully by 2030, I wouldn’t care if the oil price is zero”, Saudi Arabia’s finance minister Mohammed Al Jadaan told CNN in 2017. But the prospect of decoupling the Gulf’s overall economy from its main export commodity in the near future has long been exaggerated.
“It is a mixed picture,” said Justin Alexander, director of Khalij Economics, a consulting firm. “Looking at just non-oil GDP figures is misleading.” Parts of the economy, he said, “are basically the result of the recycling of oil revenues through government spending rather than independent value creation.” Since oil revenues still account for about two-thirds of Saudi Arabia’s government revenue, the kingdom remains a petrostate.
Oil is sticky
Across Gulf economies, most economic developments are directly or indirectly driven by government spending, according to Jalal Qanas, an assistant professor in economics at Qatar University. The share of Gulf countries’ GDP from government expenditure has been trending up since the 2007-09 global financial crisis. In 2021, IMF data showed that it ranged from 29% in the UAE to 52% in Kuwait.
The fossil fuel rent’s invisible footprint runs deep into Gulf’s non-oil economy, from grocery shopping, entertainment activities, cab rides, and cars paid with public sector wages to flats bought with subsidized housing loans and wedding ceremonies funded by marriage grants. Alexander called it “complicated interlinkages” between Gulf’s economies and governments. Yet, non-oil economies are the cornerstone of everyday life in the Gulf region, a major source of employment and social interactions.
In Qatar, the government has wound down its public spending frenzy estimated at $300 billion ahead of the FIFA World Cup 2022. “Once you turn off the tap, will the private sector survive?” Qanas asked. “We need to wait at least one to two years to see how the country’s private sector will behave with less government spending”
Saudi Arabia launched the $1.3 trillion Shareek initiative in 2021 to push companies to invest domestically, particularly in the non-oil economy. But there is a catch: two of the initiative’s largest contributors are the kingdom’s top fossil fuel giants, national oil company Saudi Aramco and petrochemical firm SABIC.
Also, the private sector has done a poor job so far of converting the Gulf’s fossil fuel rent into economic sectors that can stand on their own. Corporate performance in Gulf economies, although it varies between countries and industries, is deteriorating. Profitability of the median firm in the region plummeted from 15.2% in 2007 to 4.1% in 2021, the IMF found.
Dubai has “set an example”
A notable exception is Dubai, where oil output peaked in 1991. The emirate’s oil sector slipped from about half of the local economy 50 years ago to only 1% of pre-pandemic GDP as the sheikhdom, one of the seven that form the UAE, built the Gulf’s first post-oil economy. In the third quarter of 2022, wholesale, retail trade, real estate, construction, manufacturing, and financial and insurance activities accounted for 60% of its GDP. The emirate’s push to become a global hub decouples its economy further from the region’s oil boom and bust cycles.
Tourism and real estate insulate Dubai’s economy from the wider Gulf. Seven out of ten tourists who visited Dubai in the first quarter of 2023 did not come from the Middle East, while top non-resident buyers of real estate in Dubai in 2022 were Russian, British, Indian, German, and French citizens.
Dubai may be the first, but it will not be the last Gulf post-oil economy. Omani luxury fragrance brand Amouage sells its perfume in more than 80 countries, Bahrain is a fintech hub for the Middle East, Qatar makes its mark in global sporting events, and Muslim pilgrims from all over the world flock to Saudi Arabia’s Mecca.
“Dubai has set an example for the region, and now Gulf countries are all trying, I would not say to copy, but to learn from what Dubai did,” Qanas said.
NEW HAVEN — Few institutions have shown as much versatility and adaptability as the World Bank. Initially founded to address global capital-market imperfections after World War II, the institution’s primary mission evolved over time to focus on fighting extreme poverty. But now that the World Bank is welcoming a new president this July, it should adapt again, this time to address climate change.
Poverty reduction, of course, should remain a high priority, considering that the COVID-19 pandemic has left many low-income countries in dire straits. But climate change has emerged as an equally important threat to these countries’ futures, as well as to the entire planet. Poverty reduction therefore must go hand in hand with the goal of addressing climate change.
But grounding these efforts in evidence-based research is easier said than done. One often hears that low-income countries should focus on climate change because they have the most to lose from its consequences (natural disasters, soil degradation, water shortages, and so forth). That conclusion may be right; but the argument is flawed, because it is based on a spurious comparison.
Policymakers in poor countries do not care whether they have more to lose compared to richer countries. Rather, their focus is on weighing policies that promote growth but harm the environment against green policies that may imply slower or even no growth. To paraphrase what one such official once told me when I questioned the wisdom of his government’s strategy to encourage oil and natural-gas extraction: “Who cares what the long-term trend is? We can do this for ten years, grow rich and then move on to other activities while using the proceeds to clean up.”
The wastefulness of this approach is self-evident, as are the large negative externalities it entails for the rest of the world. But the tradeoff for many low- and lower-middle income countries is real, especially when, like India and Indonesia, they are rich in coal deposits or, as in Nigeria, oil reserves. Giving up on growth in return for a cleaner, greener future is not something that many policymakers in such countries find acceptable.
Still, there is scope for considerable improvement, and the World Bank has the financial resources, credibility and convening power to make a substantial contribution. To do so, it must ensure that decisions are based on the best available evidence, rather than on untested claims or first principles. Policymakers and advisers should study the experiences of countries that have successfully reduced greenhouse-gas emissions, as well as absorbing the emerging body of academic research focused on developing countries.
For example, the US experience shows that emissions reductions were the result of stricter environmental regulation, not the outsourcing of “dirty” production activities to developing countries (the so-called pollution-haven hypothesis). This implies that carbon border adjustment taxes, often justified on a notional “leakage” hypothesis, will do little to improve emissions in advanced economies. Worse, they may deal a severe blow to some low-income countries’ exports. The lesson from the United States, then, is that a path to a greener planet should start with stricter environmental regulation.
Recent research by the Nobel laureate Economist Esther Duflo and co-authors offers a second, related lesson, based on data from one of the biggest polluters in the world: India. Contrary to what many may think, India has some of the strictest environmental regulations in the world. What it lacks is the ability to enforce them. Weak state capacity, reflecting inadequate institutions, unreliable contract enforcement, or outright corruption, can nullify the effectiveness of environmental regulations.
Duflo’s team shows how devising proper mechanisms to address these constraints can significantly improve emission outcomes. It is precisely here, in the design and implementation of policies to address institutional shortcomings, that the World Bank could add enormous value.
Another recent paper reports on a bold, decade-long effort by a team of researchers, in cooperation with the Indian state of Gujarat, to introduce India’s first cap-and-trade programme (it also happens to be the world’s first market-based programme to regulate particulate emissions). Remarkably, they find that the programme functioned smoothly and produced significant emissions reductions as well as cost savings (relative to an alternative, command-and-control-based regulation).
Such results are extremely promising. Interventions to create “markets” for emissions have proven successful in the US and Europe. If such programmes can take root in developing countries, a truly global solution to climate change will be within reach. Moreover, if just a couple of research teams can make so much progress, imagine what the World Bank could achieve with all its resources, expertise, and access to top policymakers.
Perhaps the most encouraging message from recent research is that interventions that meaningfully improve environmental outcomes in developing countries need not be excessively expensive. Another recent paper examines why India, with its generally warm climate and plentiful sunshine, has been slow to deploy solar panels. It turns out that local governments’ inability credibly to commit to the contracts they sign with producers impedes investment. Once investments in a solar plant are made, state governments have a strong incentive to renegotiate. Because solar suppliers anticipate this, investment in green energy ultimately falls short of where it could be. Intermediation by the federal government could help, resulting in much higher solar adoption.
Such examples show that substantive progress toward de-carbonisation in low- and middle-income economies is feasible without bankrupting the country or halting growth. But success requires knowledge, perhaps even more so than money. Hitting poorer countries with punitive carbon taxes, which even advanced economies like the US have been reluctant to adopt, should be a non-starter. Encouraging the green-energy transition with policies tailored to the institutional constraints prevalent in low-income settings is much more promising.
The World Bank has always prided itself on being not just another “bank”, but rather a “knowledge bank”. As it develops its climate agenda, it must remain true to that credo by adhering to the lessons of rigorous research and evidence.
Pinelopi Koujianou Goldberg, a former World Bank Group chief economist and editor-in-chief of the American Economic Review, is professor of Economics at Yale University. Copyright: Project Syndicate, 2023.
Global economic uncertainty means oil prices – and your fuel bill – will continue to surprise us all this year. Let us hear what Carole Nakhle says about it.
Oil prices have confounded expectations in the first quarter of 2023. Brent – a major global benchmark – hit a low of US$72 (£58) a barrel on March 17, while the world’s other main benchmark, WTI, dropped to less than US$66 a barrel. This is a far cry from the nearly US$114 and US$103 a barrel, respectively, reached on the same day a year before following the invasion of Ukraine by Russia, a major oil producer.
These unexpectedly low prices remain even as the war in Ukraine continues with no clear end in sight. Other developments have also failed to boost prices as expected. China, the world’s largest importer of crude oil, abandoned its zero-COVID policy in December 2022, creating expectations that Chinese oil demand would quickly return with a vengeance, propelling prices higher. A couple of months before this, OPEC+ (the cartel of certain oil-producing nations) had announced a production cut of 2 million barrels a day (mb/d) – roughly 2% of world supply and the largest cut since 2020.
But oil has now started to retreat again, an unexpected development during a war involving a major oil exporter, and at a time when a giant consumer like China is reopening after three years of economic isolation.
This shows that oil price forecasts continue to be unreliable. The economic outlook and Chinese consumption growth are key to demand expectations, while Russia is the wild card in terms of supply. Until uncertainty around these three factors dissipates, global oil markets will not have a clear direction.
Oil price movements:
US Energy Information Administration, Bloomberg, Author provided
Economic outlook
Oil demand is closely linked to economic growth because a slowing economy shrinks income, leading people to curtail expenditure and travel less, and slowing down manufacturing that uses oil. Various economic forecasts have recently highlighted the major challenges facing the global economy, but widely prevailing uncertainty seems to top the list.
In its April 2023 World Economic Outlook, the International Monetary Fund (IMF) emphasised a high level of uncertainty “amid financial sector turmoil, high inflation, ongoing effects of Russia’s invasion of Ukraine, and three years of COVID”.
The World Bank has also warned that “a lost decade could be in the making for the global economy” as “nearly all the economic forces that powered progress and prosperity over the last three decades are fading”.
April’s OPEC+ Monthly Oil Market Report kept its forecast for economic growth and oil demand largely unchanged from previous reports, but said: “The global economy will continue to navigate through challenges including high inflation, higher interest rates particularly in the Eurozone and the US, and high debt levels in many regions.” It stated that “these uncertainties surrounding current oil market dynamics” were behind its decision to cut production.
Prince Abdulaziz bin Salman Al Saud (centre), minister of energy, industry and mineral resources of the Kingdom of Saudi Arabia, speaks at an OPEC press conference in Vienna, Austria, October 5 2022. Christian Bruna/EPA-EFE
The China factor
China is the world’s second-largest oil consumer and the second-largest economy after the US. So all eyes have been on its oil demand since the country ended the nearly three-year zero-COVID policy that severely restricted its peoples’ mobility and economic activity.
Today, it is the main bullish factor in many global economic forecasts. The IMF’s managing director recently said:
China this year is going to contribute about one-third of global [economic] growth. We calculated that 1% more growth in China translates into 0.3% more growth for the economies that are connected to China.
The IEA believes China will account for half of the global increase in oil demand this year. Goldman Sachs expects China’s oil demand growth to boost Brent by roughly US$15 per barrel.
However, such enthusiasm is not universally shared. A Citibank report says China’s post-COVID recovery seems slower than expected. Being an export-driven economy, the Asian powerhouse is exposed to the health of the rest of the world. A weakening global economy will reduce demand for Chinese exports, with negative repercussions on its economy and therefore oil demand.
Similarly, China’s National Bureau of Statistics said “the external environment is even more complex, inadequate demand remains prominent and the foundation for economic recovery is not solid yet”. Or, as the Saudi energy minister reportedly said when asked about an oil demand rebound recently: “I’ll believe it when I see it.”
Russia: not done yet
As a major oil producer and exporter, Russia also has a massive influence on global oil markets. Despite sanctions since the beginning of the war in Ukraine (and following the annexation of Crimea in 2014), Russia continues to be the world’s third-largest oil producer after the US and Saudi Arabia.
When Russia invaded Ukraine, oil prices spiked due to fears of a loss of Russian supply. The IEA warned the resulting 3 mb/d loss (around one-third of Russia’s total and almost 3% of world production) could produce “the biggest supply crisis in decades”. Analysts from investment bank JP Morgan said Russia could cut up to 5 mb/d of production driving global oil prices to a “stratospheric” US$380 per barrel.
Such gloomy scenarios did not materialise. Russian oil continued to flow but changed direction from Europe to Asia, helping to ease price pressure for consumers everywhere. And Russia’s cuts in retaliation for sanctions have so far been smaller than expected. Of course, it could cut more, especially if this would put more economic pressure on the west and affect support for Ukraine.
This cocktail of uncertainties should encourage a more cautious stance when it comes to predicting oil prices, this year at least. Some analysts have already reduced their 2023 price forecasts, with estimates varying between US$81 and US$100 a barrel.
Expect more revisions. As one study that tracked the evolution of oil prices over four decades said: “all price expectations are subject to error”.
ETF Stream‘s question: Are UN Sustainable Development Goal ETFs fit for purpose? It seems incongruous, but only the reply can justify such interrogation.
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Are UN Sustainable Development Goal ETFs fit for purpose?
The goals look ready-made for thematic funds, but can they be properly aligned to an investment framework?
The Sustainable Development Goals (SDG) continue to capture the imagination of ETF issuers but questions have been raised about the ability to properly align them to an investment framework.
Used by both active and passive funds, they were thrust into the spotlight again in January after DWS launched a seven-strong range of thematic ETFs targeting the SDGs it believes “present a growth story”.
The goals comprise 17 interlinked objectives, including no poverty, zero hunger and clean water and sanitation, which aim to serve as a blueprint to advance global progress for “peace and prosperity” for the planet.
However, while offering a strong narrative to pitch to investors, many have questioned the validity of using the SDGs as an investment framework.
Kenneth Lamont, senior fund analyst at Morningstar, said he understood some of the concerns around using SDGs as an investment framework but added it was part of a broader problem around impact investing with ETFs.
“The question mark hanging over SDGs is part of the broader question of whether you can use ETFs to invest impactfully. Investors need to be able to measure that impact, that is the goal of the investment,” he said.
“Generally, it is questionable whether investors can ever have a real impact by investing in listed stocks.”
Stuart Forbes, co-founder at Rize ETF, agreed, adding the SDGs were not designed for public or private market investment.
“The way the goals are measured is through a series of indicators such as decreasing deforestation and habitat loss. It would be almost impossible to assess a company’s contribution to forestation in Brazil or Indonesia,” he said.
“The further you go with SDGs from an investment and thematic perspective, it is just not possible to align.”
Forbes said Rize ETF explored the idea of launching products linked to the goals, looking at SDG alignment tools, but that they “just do not make any sense”.
“Looking at what the funds are holding, they are almost all developed market economies, they are not servicing an underserved region of the world or having a significant social impact,” he added.
For example, DWS uses MSCI’s SDG alignment tools designed to provide a “holistic view” of companies’ net contribution towards addressing each of the SDGs.
However, Lamont added the thematic element of the SDGs is what makes them attractive. For example, he noted GLUG’s thematic approach, investing in companies’ infrastructure and technology.
“I find GLUG interesting because it does focus a lot on water technology. It is a completely different set of stocks that are actually trying to solve the problem. It is much more of a thematic approach than the traditional water sector fund.”
DWS also includes a thematic element to its SDG range, with sustainable revenue accounting for 75% of the MSCI indices it tracks, while the remaining 25% will be calculated using forward-looking thematic metrics.
Speaking to ETF Stream ahead of the launch in January, Olivier Souliac, senior Xtrackers product specialist at DWS, said it chose not to do all 17 SDGs due to the inability to align them all within an investment framework.
“The reason we have a revenue-based approach is that some of the SDGs such as zero hunger and education can only really be filled by society and governments and are not themes in the sense of being growth stories,” he said.
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