In 2018, international investors will continue their search for commercial opportunities in the Middle East and North Africa. Although beset by a number of headline grabbing crises, for the most part the region is firmly on the move.

In light of this, Shadow Governance Intel looks ahead to 2018 with a three-part series that looks at expected trends. Specifically, future developments in Egypt, Saudi Arabia, and the United Arab Emirates are likely to make these the most lucrative markets worthy of consideration.

As it stands, 2018 is set to be the year of privatisations and this first part of our MENA Outlook series will deal with this topic exclusively. Some of the region’s ‘national champion companies’ have teased foreign investors with the prospect of floating their stock of late, which will only garner more interest over the next 12 months. As this takes shape, country proclivities must be factored in as these processes will no doubt be vulnerable to political, and perhaps even illicit, forces.

Additionally, Saudi Arabia will grab headlines for the moves that its leadership continues to make this year. Politically speaking, the Kingdom sat still for many years, but changes – for good or for bad – are well and truly underway in Riyadh. Whether this increases transparency and accountability from a commercial perspective will be the key watch point for the Shadow Governance team, who are tasked with keeping up to date with emerging integrity concerns. Stay tuned for our assessment of this, scheduled for release on the 9th of January

Finally, with respects to political transitions, the only country whose political future is up for grabs is Egypt. A Presidential election is expected in March / April but the result is already a foregone conclusion for some, with the possibility of a power transfer being slim. Our third piece, also to be released on the 9th of January, will discuss Abdel Fattah El Sisi’s authority in Cairo and decipher how he will seek to entrench his wider network of influencers going forward.

Privatisation: A Holy Grail or Poisoned Chalice?
An issue high on foreign investors’ agenda is the prospective privatisation program being prepared across the Middle East and North Africa for 2018.

For so long, the protectionist economic model upheld by governments in the region has been a key barrier to penetrating countries’ domestic markets. From an outsider’s perspective, the Persian Gulf has espoused arguably the strongest policy of protectionism whereby foreign entities are almost completely subjugated to local actors.

Investment and commercial companies’ laws empower local partners, foreign participation in certain sectors is restricted, and arbitration disputes are placed in favour of the host entities. Essentially, it is a system that emphasises the need to source credible local partners and maintain strong ties with them at all costs.

This age old dynamic looks set to change, however, and a concerted push to entice foreign capital into the region is beginning to take shape. But, as is to be expected, years of empty rhetoric means that rumblings of ‘change’ and ‘reform’ must be followed by some concrete concessions in 2018.

Liberalising Egypt Once and For All
As such, Egypt is arguably first in line to begin its state-led privatisation project, which would mark the first time since 2005 that any government-owned companies list their shares on Cairo’s bourse. If reports are to be believed, entities from the energy and banking sectors will constitute the first phase of this strategy, which is touted to last for three to five years and eventually span a broader array of sectors.

Enppi is set to be the first entity heading to the stock market, but will be closely followed by the Alexandria Mineral Oils Co (“AMOC”) and Sidi Kerir Petrochemicals. As they do, their two primary shareholders – the Egyptian General Petroleum Company (“EGPC”) and the Egyptian Natural Gas Holding Company (“EGAS”) – will look to assert their dominance. In particular, the EGPC holds a lot of sway in the Ministry of Energy with both its current Minister, Tariq El Molla, as well as the Prime Minister, Sherif Ismail, being former Chairmen of the company.

Specifically, the central point of contention will be how government actors adjust to ‘sharing’ ownership of its key energy arteries. The appetite for foreign investment is always high during downturns; but, as Egypt’s fiscal position steadily improves, cordiality from state actors towards minority shareholders may dissipate. Takeovers, nationalisations, illegal raiding may not seem plausible scenarios at present, but their likelihood could increase given time.

The Zohr gas field finally began producing gas in December and has been watched with baited breath ever since its discovery in 2015. Local and international energy companies are vying for access to the field, and profitability appears set to cascade down through the maritime, construction, and banking sectors. The obvious point to consider now is the reliability of Egypt’s institutions and decision makers in upholding best practice in its energy sector as developments occur thick and fast.

In support of this, Parliament approved a law establishing a new ‘gas regulatory authority’ in July 2017, ostensibly in preparation for private sector buy-ins to the gas sector. Immunity from politicised forces will ultimately determine whether or not this authority retains any integrity and is able to uphold a transparent market. The recent appointment of Karem Mahmoud, formerly of GASCO, as the authority’s Head shifts the focus firmly towards his political allegiances in Cairo. Assessing Mahmoud’s relationship vis-à-vis the political elite will determine how compromised he may be in terms of decision making, and in who’s interests he is most likely to act.

Similarly, the banking sector will draw interest from prospective investment partners, as changes are touted for some of its bigger players. Banque du Caire and Arab African International Bank are both reported to be in the IPO queue, and United Bank may yet end up in the hands of a ‘strategic investor’. As this sector liberalises, investors will become increasingly reliant upon the Ministry of Finance as well as the role of the Central Bank.

Although not embroiled in the same controversy that Egypt’s Agriculture or Supply Ministries have faced, the Finance ministry is arguably culpable in system-wide failings. The current Minister of Finance, Amr Al Garhy, had ties to EFG Hermes whilst Gamal Mubarak pushed through sham transactions and he has been a lifelong force in Egypt’s public banking sector. As such, the issue on investors’ minds is whose interests does he hold at heart, and can he still be manipulated by corrupted political officials.

Overall, persistent underperformance is likely to keep driving Egypt towards a policy of economic liberalisation, making privatisation an increasingly certain strategy. In this sense, it is very much a case of ‘when’ and not ‘if’ these take place. The political elite are agreed on the need for this move but differ on the methods by which to safeguard government access or, in other words, ‘protect their own’. It is this divergence which may lead to some of the more hidden power plays unfolding between Cairo’s top decision makers ahead.

A Red Sea Rival
Saudi Arabia is making even louder noises vis-à-vis the international investment community with regards to privatisation. Aramco is undoubtedly the crown jewel of regional energy companies and Crown Prince Mohammed bin Salman appears intent on floating its stock.

Traditionally, the energy sector has been dominated by the state and is intrinsically bound to the ruling family. Al Saud princes have been the beneficiary of oil proceeds dating back to the mid 20th century, and sharing the spoils of Saudi’s natural resources is not part of their modus operandi. Petroleum proceeds have at times accounted for over 90% of Saudi’s budget and so this sector is as much about maintaining political stability as it is about developing the economy.

That said, only a series of ‘permitted’ actors will have any real chance of a buy into Aramco. Allies of the current ruling clique of Al Saud princes will perhaps take stakes in the company based on trust and expectations from the government in return. In this sense, a cadre of local commercial elites could yet become proxy holders of Aramco stock. International investors who find themselves touted as prospective buyers will no doubt be in esteemed company, but potentially may fall into the minority camp in terms of being commercially – instead of politically – driven.

Families such as the Al Olayan, Al Zamil, Al Rashed, and Sharbatly are among the most prominent of Saudi’s private investors and have not been implicated in any of the Crown Prince’s ‘anti-corruption’ drives. Could they be invited to hold stock in strategic sectors? They may not grab the mainstream headlines, but they should be points of interest on investors’ research agendas.

Shadow Governance Intel drew attention to the Aramco IPO in May 2017, making it clear that the destination of the listing was up for grabs, and this still remains some way off being confirmed at the turn of the year. Officials from the Saudi side have revealed very little about the Kingdom’s intentions but it is believed that legalities are still being sorted ahead of the listing. In any case, this is expected to remain a key watch point in the year ahead.

Investors moved into the stock market in 2015 and they now look likely to gain access to the parallel stock market (Neom). Saudi’s overall macroeconomic goals will need foreign cash and foreign expertise, meaning that the country simply cannot afford to fail at this critical juncture. Which direction the country’s political elite take at this crossroads will reveal all about its modus operandi.

In simple terms, the central question remains how long the impetus for reform will carry on. With oil prices on the rise, the region’s primary commodity and main source of income may begin to put power players at ease financially – at which point, economic concerns will be placed on the backburner, ultimately testing the elites’ commitment to reform.

Emirates Stakes Its Claim
Finally, the United Arab Emirates has hinted that it will hold a high profile public offering of its own. Namely, an IPO for one of ADNOC’s subsidiary companies is on the horizon. Irrespective of how small and limited this move may appear to be in comparison with its regional counterparts, it would have been impossible to put ADNOC and IPO into the same sentence ten, or even five, years ago.

As was the case with Saudi, energy investments are the most politically exposed of all the UAE’s economic portfolios, with the Al Nahyan family dominating the Emirates’ petroleum sector. Mohammed bin Zayed (“MbZ”) can effectively been seen as CEO, Chairman or Minister of Energy in this regard and so final decisions in this sector are taken by him. Sheikh Khalifa’s role is largely ceremonial now despite the fact that he Chairs the Supreme Petroleum Council but either way, international investors would be playing with the elite.

More specifically, ADNOC CEO Sultan Al Jaber is firmly a part of Abu Dhabi’s elite circle of influencers and looks set to remain so going forward. He will be instrumental in the IPO of any subsidiary company but will invariably take orders from MbZ. Who Al Jaber meets with and which cities he visits will provide insight into ADNOC’s thinking, and may even reveal where plans are being laid out with the public eye.

With this array of IPOs on the horizon, a strong understanding of the pre-listing dynamics at play will be a huge asset for interested onlookers. Networks will be key to picking apart the privatisation strategy as it begins in earnest.