While humans squabble and debate their commitment to combat climate change, nature has been relentless and unforgiving. Extreme weather events are growing in intensity and frequency. June 2019 was the hottest June in 140 years, setting a global record, and maximum temperatures last seen a century ago were felt in Bagdad, Bahrain and Kuwait. The ongoing drought in India and related acute water shortage continues, threatening rural communities and leading to greater poverty.
Sea levels are expected to rise between 10 and 32 inches or higher by the end of the century. Arctic ice loss has tripled since the 1980s and Antarctica lost as much sea ice in four years – four times the size of France – as the Arctic lost in 34 years. The Global Climate Risk Index reports that “altogether, more than 526,000 people died as a direct result of more than 11,500 extreme weather events; and losses between 1998 and 2017 amounted to around $3.47 trillion (at purchasing power parity rates).
The clear and present danger warning of the 2018 report by the Intergovernmental Panel on Climate Change (IPCC) is going unheeded.
While climate change will be global, its regional impact will be varied and unequal, the Middle East and North Africa (MENA) along with Sub-Saharan countries are among the most vulnerable. Growing desertification, widespread drought, high population growth rates (leading to a doubling of population by 2050), rapid urbanization and extreme heat compound the effects of water scarcity to magnify the impact of climate change. The near absence of climate change combating and risk mitigation policies are aggravating the impact.
The World Bank conservatively estimates that climate-related water scarcity will cost Mena 6 to 14 per cent of its GDP by 2050, if not earlier, while some 17 countries are already below the ‘water poverty line’ set by the UN. The lack of efficient water management infrastructure and policies exacerbate natural water scarcity. Home to 6 per cent of the global population but just 1 per cent of freshwater resources, MENA will very likely be fighting “water wars” by mid-century. The Tigris and Euphrates rivers are drying up, building up tensions between Turkey, Iraq and Syria over water resources. Ethiopia is building its Grand Renaissance Dam and Egypt claims that it will cut downstream flows and water supply to Egypt by some 25 per cent. The potential for conflict is growing, with Egyptian President el-Sisi openly declaring that the dam is “a matter of life and death”.
Climate change poses an existential challenge, threatening the economic viability of oil-producing countries. The energy transition to comply with COP21 is leading to a global shift away from fossil fuels to greater energy efficiency and renewable energy, implying a secular downward trend in demand for fossil fuels and prices.
The implication is that the main source of wealth and income of the GCC and oil producers could rapidly depreciate in value because of the fall in demand and prices. Fossil fuel asset prices could rapidly deflate leading to “stranded assets” – that is, assets that are not able to meet a viable economic return as a result of unanticipated or premature write-downs. It is estimated that about a third of oil reserves, half of gas reserves and more than 80 per cent of known coal reserves would remain unused in order to meet global temperature targets under the COP21 Agreement.
The “stranded assets effect” would directly impact all economic activities and businesses that extract, distribute and those that use fossil fuels intensively as inputs for production, such as transportation. In turn, the prices of fossil fuel exposed assets (stocks, bonds and financial securities), would rapidly deflate to reflect the growing risks, and loans would become impaired, resulting in a loss to investors, including banks, pension funds, insurance companies and SWFs.
Central banks are raising the alarm that climate risk is a direct financial risk for the banking and financial sector. Mark Carney, Governor of the Bank of England, has highlighted three broad channels through which climate change can affect financial stability. He names physical risks affecting the insurance industry; climate change liability risks due to claims arising from climate change; and transition risks. Transition risks will crop up as changes in policy and technology result in a reassessment of the value of a large range of assets that emerge once they have been stranded. Citigroup forecast that the total value of stranded assets could be over $100 trillion in a 2015 report (based on $70 per barrel of oil, $6.50/MMBTU of gas and $70 per tonne of coal).
The bottom line is that the GCC faces three direct risks from climate change: physical, as heat, rising sea levels and water scarcity become reality; economic, as wealth destruction ensues vast oil reserves becoming stranded assets; and financial, with a banking and financial sector highly dependent and exposed to the oil and gas sector.
What should the GCC countries do? To counter these existential threats, they need to accelerate their economic diversification plans, develop and implement decarbonisation strategies and develop neighbourhood climate risk mitigation policies. The nations have tentatively embarked on this path.
How should Mena address the existential threat of climate change?
– Article by Nasser Saidi in The National, 28 Aug 2019 –
The starting point for MENA to address the existential threat of climate change is to reduce excessive fossil fuel use by removing subsidies and investing to increase energy efficiency.
The GCC nations – starting with the UAE – have initiated a phased removal of fuel, electricity and water subsidies that have distorted consumption and production choices and encouraged energy waste. The removal of subsidies will discourage energy-intensive activities, provide cost incentives to improve energy efficiency and shift the energy mix away from fossil fuels towards renewables. Eliminating subsidies also provides greater financial resources to fund renewable energy investments and climate-resilient infrastructure.
Given heat levels in the GCC, modernising air conditioning systems and retrofitting existing buildings can radically improve energy efficiency and reduce carbon emissions. Green buildings standards are a policy initiative gaining traction: Dubai Municipality has issued the Green Building Regulations and Specifications for all new buildings in the Emirate since March 2014.
But Dubai is the only city in Mena to join the Building Efficiency Accelerator programme, aiming to double the rate of energy efficiency by 2030. Overall, effective implementation of energy use targets and standards could lower energy use by some 30 per cent. Increasing energy efficiency is low hanging fruit and should be accelerated given the high returns on investment.
The Middle East and GCC are part of the Global Sun Belt: more energy falls on the world’s deserts in six hours than the whole world consumes in a year. Harnessing solar power is an efficient policy choice. The GCC nations, especially the UAE, are taking a lead in investing in renewable energy in Mena. There is now a GCC renewable energy project pipeline comprising over 7 GW of new power generation capacity to be realised within the next few years. To put it in perspective, one gigawatt is roughly equal to 3.125 million photovoltaic solar panels, 412 utility-scale wind turbines or 110 million LED bulbs. The surge in projects has been supported by the rising cost competitiveness of renewables: it is now cheaper to build new wind and solar PV plants than it is to run existing fossil-fuel ones. The falling costs of energy storage is addressing the intermittency problem of renewables; by 2021, the capital costs of lithium ion battery-based storage are expected to fall by 36 per cent compared to the end of 2017. While the wind power market is slowly catching up in Jordan and Morocco, the GCC has under-invested: more than 56 per cent of the GCC’s surface area has significant potential for wind deployment.
The International Renewable Energy Agency’s (IRENA) 2019 report estimates that by 2030 the GCC is on track to leverage renewables to save some 354 million barrels of oil equivalent (a 23 per cent reduction). Its efforts will also create some 220,500 new jobs, reduce the power sector’s carbon dioxide emissions by 22 per cent and cut water withdrawal in the power sector by 17 per cent.
Renewable energy related targets range from the UAE’s ambitious goal of 44 per cent of capacity by 2050 (from 27 per cent clean energy in 2021) to Bahrain’s target of 10 per cent of electricity generation in 2035, and Saudi Arabia’s 30 per cent of generation from renewables and others (mainly nuclear) by 2030.
While these targets sound ambitious, they do not meet the threat of climate change. The acceleration and intensity of climate change requires deeper and holistic strategic planning and action. Climate change poses some daunting challenges and existential risks.
To address the stranded assets risk, the GCC needs to share risk on a global basis by privatising or selling participation in their vast energy reserves and related assets (upstream and downstream). Saudi Arabia’s announced plan to privatise Aramco is a structural reform that could be a model for other oil producers to emulate. In the same vein, the GCC sovereign wealth funds should divest from fossil fuel assets (as Norway’s Government Pension Fund Global is doing) and the banking and financial sector should gradually divest and reduce its exposure to fossil fuel assets.
The GCC have developed energy sustainability policies. But these are modest given their natural comparative advantage in harnessing solar & wind power and their substantial financial resources allowing accelerated investment in renewable energy assets. This is the time for the GCC to commit to and implement comprehensive, Net Zero Emissions (NZE) goal climate strategies in or before 2050, along with some 15 other nations.
Decarbonisation and economic diversification are complementary strategies and a win-win opportunity. By diversifying and investing in renewable, sustainable energy and climate risk mitigating industries and activities –through Green Economy strategies – the GCC can create jobs, innovate and develop a new alternative export base.
The existential threat of climate change is real and becoming a clear and present danger requiring national and regional concerted policies and action, with the promise of new technologies, decarbonised growth and new economic development models. The alternative of inaction is decades of decline, dismal growth prospects, growing impoverishment, instability and conflicts. The choice is clear.
GLOBAL Developments Bottomline: Trump’s trade/ China tweets took centerstage last week vis-à-vis the more anticipated comments from Powell (the central bank “will act as appropriate”) at the Jackson Hole annual meeting. The G7 summit is underway in Biarritz, France: trade will dominate policy discussions (especially given the most recent tweets) but globally there remain other matters of urgency where nations haven’t seen eye-to-eye: climate change and fires in the Amazon and Central Africa, fiscal stimulus, Brexit, Iran and so on. In parallel, the CBOE volatility index (the “fear gauge”) has topped 20 frequently this month while global debt yields have tumbled to new record lows as investors seek safety.
- Employment of Bahraini citizens is reported to be picking up pace: under the National Employment Programme, nearly 50-60 nationals were being recruited daily.
- Egypt’s central bank cut its overnight deposit and lending rates by 150bps to 14.25% and 15.25% respectively. This is the central bank’s 1st rate cut since Feb.
- Foreign holdings of Egypt’s debt instruments rose to USD 20.1bn at end-Jul, increasing by USD 7bn this year, according to a board member of the central bank.
- Egypt banks’ reserves and assets abroad grew by 18.75% mom to USD 19bn in Jul, and includes USD 17.7bn in deposits and USD 1.3bn in current accounts.
- Egypt’s holdings of US Treasuries increased for the 6th consecutive month, rising by 0.6% mom and 2.1% yoy to USD 2.151bn in Jun.
- Modest ambitions: the Egyptian stock exchange is likely to witness the IPO of a private company this year, disclosed the bourse chairman – without divulging any further details.
- Egypt will invest EGP 5.23bn (USD 315mn) in the Sinai Peninsula in the fiscal year 2019-2020; this is up 75% yoy, with hopes of restoring stability in the region.
- Natural gas production at Egypt’s Zohr field increased to 2.7bn cubic feet per day (bcfd), according to the petroleum minister; production was just 2.1 bcfd in Feb.
- The Egyptian General Petroleum Corporation is planning to launch an oil and gas exploration tender by the end of this year.
- Jordan reported an 8.6% increase in tourism revenue to USD 3.2bn in Jan-Jul this year, supported by a 6.3% rise in number of tourists.
- Total debt issuance in the GCC hit a record high USD 40bn in Apr-Jun 2019, surpassing Q1’s record of USD 32bn, according to a report by the National Bank of Kuwait. The report highlighted that about 2/3rds of the issuances in Q2 came from Saudi Arabia (USD 26.8bn) and that 82% issuances were from government entities.
- Inflation in Kuwait picked up by 1.15% yoy and 0.26% mom in Jul, with all sub-categories showing an annual increase except for housing sub-group (-0.78% yoy).
- Remittances from Kuwait surged by 23% yoy to USD 8.6bn in H1 this year; remittances in Q2 grew by 15% qoq to USD 4.6bn.
- Total money in circulation in Kuwait increased by 15.36% yoy to KWD 1.885bn (USD 6.215bn) in Jul.
- About 2.333 million expatriates were employed in the private sector in Kuwait while the public sector absorbed an additional 459,218 expatriates as of end-Dec 2018.
- Fitch downgraded Lebanon by two notches to CCC deeper into junk territory, noting that the downgrade reflects “intensifying pressure” on Lebanon’s financing model, increasing risks to the government’s debt servicing capacity, and that “a credible medium-term plan to stabilise government debt/GDP is lacking”. S&P meanwhile maintained its ratings but stating that the outlook remains negative.
- Oman’s Ministry of Commerce and Industry will implement the new Foreign Capital Investment Law (issued under Royal Decree No. 50/2019) from Jan 2, 2020.
- Qatar plans to build a new seaport at Somalia’s Hobyo – known for its proximity to the Bab-el-Mandeb Strait. The value of the deal remains undisclosed.
- Saudi Aramco has picked Lazard and Moelis & Co for advising on its IPO. “The IPO will happen in the 2020-2021 timeframe”, according to the energy minister.
- Deposits of banks operating in Saudi Arabia grew by 8.1% yoy to SAR 1.718trn (USD 458.07bn) in Q2 2019. Total assets of these banks increased by 8.65% yoy to SAR 2.33trn (USD 622.14bn) in Q2 2019.
- Saudi Arabia’s crude oil exports fell to 6.721mn barrels per day in Jun, down from May’s 6.942mn bpd, according to Joint Organizations Data Initiative data.
- Saudi Arabia sold SAR 2.3bn (USD 613mn) in Jul, as part of its monthly Sukuk issuance.
- Saudi Tadawul approved a listing request of debt instruments; the total value of listed debt instruments is SAR 2.26bn.
- Saudi Arabia started to implement its latest reform allowing adult women to receive passports and travel without permission from a male guardian. Local media reported that over 1,000 Saudi women over the age of 21 went through passport control in the Eastern province without consent of their male guardians.
- Crude oil from OPEC comprised only 30% of world oil supply in Jul 2019, down from more than 34% a decade ago and a peak of 35% in 2012, according to OPEC data.
- Foreign assets at the UAE central bank increased by 11% yoy to AED 369.3bn (USD 100.5bn) at end-Jul. In mom terms, the value fell by 2.1%.
- UAE banking sector’s loan exposure to the real estate sector nearly halved to 8.5% last year, according to the central bank Financial Stability Report 2018.
- The UAE will impose a 100% “selective” tax on electronic smoking products and a 50% tax on sweetened drinks starting from Jan 1, 2020.
- UAE trade surplus with Japan widened by 14.4% yoy to AED 32.96bn (USD 8.98bn) in H1 this year. Exports to Japan increased by 2.3% to AED 44.92bn while imports were down 21% yoy to AED 15.12bn.
- Increased integration: Saudi Arabia topped the list of Abu Dhabi’s trade partners for the first time during Jan-May 2019: non-oil trade between the two touched AED 23.5bn, accounting for 26.5% of the emirates total global trade.
- Dubai’s Department of Economic Development reported the issuance of 14,737 new licenses during H1 2019, up 33.25%.
- The number of tourists into Dubai increased by 3% yoy to 8.36mn in H1 this year; visitors from India topped the list (at 997k, but down 8%), followed by Saudi (+2% to 755k) and UK (-2% to 586k). Countering the declines from top markets were Chinese and Omani visitors who reported 11% and 28% increases to 501k and 499k respectively in H1.
- Fitch affirmed Ras Al Khaimah at A, with a stable outlook, its ratings supported by the declining government debt burden, high GDP per capita as well as its UAE membership.