Abu Dhabi fiscal policy fuelled by increased investment and public consolidation

One of the core aspects of Abu Dhabi’s drive to boost the efficiency of public spending is a reorganisation of the emirate’s investment vehicles and stateowned commercial arms. These include sovereign wealth funds, domestically oriented conglomerates, banks and other institutions commonly referred to as government-related entities (GREs). The past several years have seen a number of announcements of major mergers, such as the union of sovereign wealth funds Mubadala Investment Company and the Abu Dhabi Investment Council (ADIC) in the spring of 2018, a partial privatisation of the retail and distribution arm of Abu Dhabi National Oil Company (ADNOC) via the emirate’s stock market in November 2017, and a banking sector merger which created the largest lender in the UAE. The emirate’s leadership has made it clear that more such moves are in the pipeline for the near and long term.

Many of these organisations have spent less on their activities in recent years, due to lower disbursements from the government of Abu Dhabi, and this has deprived the economy of some of its principle catalysts for growth. However, efforts have been made to eliminate overlaps in government functions and highlight efficiency in public expenditure as a new driver of growth. According to the IMF the deployment of labour has historically driven growth in the emirate and the wider region, rather than productivity gains. However, this looks set to change as Abu Dhabi prepares for a number of initial public offerings (IPOs) of state-owned entities, which are expected to increase the attractiveness of the Abu Dhabi Securities Exchange and raise trading volumes.

Stock Enterprises

Capital markets in Abu Dhabi and the wider region are typically smaller and less active in volume and value than in countries with similar economic profiles, in part because the region’s oil reserves provide sufficient capital, and there has been little need to turn to public markets. However, the authorities recognise the benefits of having larger and deeper capital markets with a greater volume of tradeable securities and derivatives.

The decision in November 2017 to partially privatise a portion of ADNOC through a stock sale helped accomplish that goal, providing additional capital at a time when its government was seeking to eliminate budget shortfalls in the wake of the new low oil price environment. The move was achieved through the sale of a 10% stake in ADNOC’s downstream sales unit, ADNOC Distribution, in an IPO on the Abu Dhabi Securities Exchange which generated $851m in capital. It marked the first IPO on the exchange in six years and the largest in the emirate in 10 years.

IPO Pipeline

Next up to list may be Emirates Global Aluminium, the Middle East’s largest aluminium producer, which is jointly owned by Abu Dhabi’s Mubadala Investment Company and the Investment Corporation of Dubai. The two emirates’ investment vehicles both signalled a desire to list the company in 2018, with Reuters reporting in April that between 10% and 15% of the firm’s value would be sold in an IPO. However, Emirates Global Aluminium told international press in September 2018 that the planned IPO will be launched in 2019, citing “unfavourable market conditions” as a reason for the delay.

In February 2018 Mubadala Investment Company told Reuters that it had begun the IPO process for two firms in its portfolio, but did not provide further details. In September 2018 the company announced plans to float 25% of its shares in integrated energy company Cepsa on Spanish exchanges in the fourth quarter of 2018. However, the following month, Mubadala Investment Company disclosed that these plans would be delayed until conditions improved.

Other names outside the Mubadala umbrella reportedly considering launching IPOs are Abu Dhabi Ports and the emirate’s industrial holding firm Senaat. Abu Dhabi Ports operates 11 ports and other facilities, including Khalifa Industrial Zone Abu Dhabi, a free zone for trade and logistics. The group’s facilities contributed Dh19.6bn ($5.3bn) to the emirate’s economy, or 3.6% of its non-oil GDP, in 2017. According to coverage from Bloomberg report in mid-2017, it had reportedly met with transaction advisors that year for a potential sale; however, Mohamed Juma Al Shamisi, CEO of Abu Dhabi Ports, responded by saying the company had no short-term plans to list. Senaat oversees a portfolio worth more than Dh27.4bn ($7.5bn) across four areas – metals, oil and gas services, construction and building materials, and food and beverage production – and works with firms such as Emirates Steel, National Petroleum Construction Company and Dubai Cable Company. The expected IPOs of either Abu Dhabi Ports or Senaat had yet to materialise as of late 2018.

Any IPO in the UAE or the region may require the right timing to avoid conflicting with that of Saudi Arabia’s national oil company, Saudi Aramco. The firm is considering what could be the largest IPO in history, potentially raising $100bn – four times larger than the current global record of $25bn set by China’s Alibaba Group in 2014. Should others seek to list in the GCC at the same time as Saudi Aramco, they may find less demand as investors turn their attention to Saudi’s record offering. For companies in Abu Dhabi, that could mean moving fast, before Aramco’s arrangements are set: despite plans to shelve the planned 5% sale of the oil company, Saudi Arabia’s crown prince, Mohammed bin Salman bin Abdulaziz Al Saud, told Bloomberg in October 2018 that the IPO will occur by early 2021.

Consolidation

Along with generating capital through IPOs, the emirate is looking to merge key entities in an attempt to utilise improved public spending as a driver of economic growth. Market observers have for years suggested benefits to be realised from merging GREs and other state vehicles, and these moves have come at a faster pace in recent years. In 2017 the International Petroleum Investment Company was merged with Mubadala Development Company to become Mubadala Investment Company, and National Bank of Abu Dhabi, the emirate’s largest lender, was combined with First Gulf Bank to create First Abu Dhabi Bank. The savings created by the bank merger lowered operating costs by between $100m and $150m annually, while also boosting revenue by 3% to 4%. In addition, the merger created economies of scale: First Abu Dhabi Bank had assets of Dh699bn ($190.3bn) at the end of 2017, making it the second-largest lender in the GCC region and one of the largest in MENA.

Lenders in Abu Dhabi are licensed at the federal level, and attention has now turned to Abu Dhabi Commercial Bank, which is the last conventional bank among the three major commercial lenders in the UAE to be considered for a merger that would have a significant impact on the banking sector. In 2017 the bank had Dh265bn ($72.1bn) worth of assets and, according to a Bloomberg report from November 2018, will be involved in a three-way merger that would create two banks. Abu Dhabi Commercial Bank will acquire Union National Bank to create a conventional lender, while the Islamic divisions of both banks consolidate to take over local Al Hilal Bank.

Other Alliances

The consolidations announced in 2018 again featured Mubadala Investment Company, which merged with ADIC. The company reportedly oversaw Dh832bn ($226.4bn) in assets as of September 2018. According to the Sovereign Wealth Fund Institute, in November 2018 Mubadala Investment Company was the 14th-largest sovereign wealth fund in the world by assets. The Abu Dhabi Investment Authority, with around $683bn worth of assets, placing it third on the list.

Another cross-emirate relationship was announced in March 2018, when Abu Dhabi’s largest property developer, Aldar Properties, announced a joint venture with Dubai’s largest developer, Emaar Properties. The $8.1bn alliance was not a consolidation, however, as the two firms will remain distinct.