ICAEW: 2020 Is A Turning Point For Middle East Economies

The Middle East economy is expected to recover at an estimated 2.1% in 2020. According to ICAEW’s latest Economic Update, overall improvement in the region will be primarily driven by an uptick in the region’s two largest economies, Iran and Saudi Arabia, following a dire 2019. However, the accountancy and finance body says that the Middle East GDP growth declined modestly in 2019 by 0.5%, down from an estimated growth of 0.7% in 2018. In the GCC, oil remains the dominant driver of growth. Consequently, low-trending prices and ongoing output caps pose a challenge for GCC countries that are heavily reliant on hydrocarbon receipts to balance their budgets.

Economic Update: Middle East Q4 2019, produced in partnership by ICAEW and Oxford Economics, says the downward revision to Middle East GDP growth is a result of the Iranian economy contracting by about 9.3% in 2019, due to tough US sanctions which weighed heavily on aggregate headline growth. In addition, Saudi Arabia’s economy is seeing minimal growth of around 0.1%, weighed down by the renewed oil production cuts by OPEC+.

According to the report, the ongoing weakness of the global economy will keep a lid on oil prices, maintaining a key headwind for GCC commodity-dependent economies. Following the attack in September 2019 on Saudi Arabia’s oil facilities, that halted almost 5% of global oil supply, oil prices jumped by 15% in one day – the biggest climb in 30 years. Once oil production was restored, oil prices swiftly fell back again, to around $60 per barrel (pb), underpinning the ICAEW and Oxford Economics 2019 and 2020 oil price forecasts of $63.8pb and $64.6pb respectively.

In 2020, non-oil growth is expected to recover to around 2.8% year on year, from an estimated 2.1% this year, supported by high government spending. In Saudi Arabia, 2019 is shaping up to be a year of underspending, according to the 2020 budget. However, an increased stimulus for households and industry is providing a boost to non-oil sectors as well as private sector consumption – which has already risen by 4.4% year on year in real terms in the first half of the year (H1).

However, with lower oil exports depressing revenues, there is less scope to maintain stimulus. Spending restraint would weigh on near- and medium-term non-oil output growth estimates. This is especially true given the generally weaker sovereign balance sheets compared with a few years ago. Oil prices stand significantly below most producers’ fiscal breakeven levels this year – prices required to meet expenditure targets – while running balanced accounts. In the region, only Kuwait and Qatar are able to cover spending needs. For Saudi Arabia, for instance, the Economic Update report forecasts that the fiscal deficit will widen to 6.8% of GDP this year from 5.9% in 2018.

Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA), said: “2019 has been a challenging year for Middle Eastern economies, due to geopolitical tensions, OPEC-led oil output cuts and ongoing weakness in the non-oil sector.   However, despite lower oil prices this year, we are pleased to see signs of pick-up in the non-oil economy, supported by government spending.

“We believe there is plenty of room for improvement. To achieve a more diverse and sustainable economy, regional governments must remain proactive in implementing the necessary fiscal reforms aimed at achieving economic diversification, and continue to support their economies with pro-growth initiatives.”

By contrast, monetary policy is becoming more supportive. GCC banks have followed moves by the US Federal Reserve, which should be supportive of private sector activity. Kuwait’s central bank joined in the easing in October, having skipped the previous two cuts as the basket of currencies that the Kuwaiti dinar is calculated against allows some flexibility to deviate from the path carved out by the Federal Reserve.

UAE ECONOMY TO EXPAND FURTHER IN 2020

The outlook for UAE remains promising, despite ongoing weakness in non-oil activity. In 2019, the ICAEW growth forecast has been revised slightly down, to 1.9%, from 2.2%. However, growth is expected to pick up in 2020, and the economy will expand by 2.2%.

Unlike other countries in the region, the UAE has produced more oil this year compared to last year – pumping at a steady pace of around 3.1m bpd, up from 3m bpd in 2018. Overall, this implies a positive contribution to growth from the oil sector, which has expanded by around 2.5% year on year in 2019, unlike a drag elsewhere in the region.

ICAEW maintains its estimation that UAE non-oil GDP growth will accelerate in 2020, to 2.8%.

With less than a year until the Middle East’s first World Expo event, Expo 2020, which is forecast to attract 25m visitors (14m from overseas), there is a high expectation that this will provide a boost to UAE’s economy – contributing up to 1.5% of the overall GDP in 2020.

The relevant authorities have stepped in to support non-oil activities in the UAE. Both Abu Dhabi and Dubai are implementing fiscal packages, while the recent interest rate cut by the US Federal Reserve, followed by the UAE central bank dollar peg, should support private sector credit growth. However, these measures are yet to have a significant impact on the UAE’s non-oil activity.

The expansion in non-oil activity is slowly beginning to translate into stronger job creation, although at a modest rate. Total employment in the private sector increased by 1% year on year in Q2 2019, up from just 0.1% y/y in Q1. However, while total employment increased in ‘other sectors’; which include tourism and real estate, it declined in the remaining sectors, including construction, services and manufacturing. Nonetheless, despite some pick-up in real estate transactions and employment, residential home sales prices continue to slide in both Abu Dhabi and Dubai. ICAEW says that market conditions are unlikely to see much of a rebound in the remainder of 2019 and the first half of 2020, reflecting expected strong supply growth and still subdued demand.

Although the legacy of Expo 2020 is hard to estimate, the investment climate remains positive with infrastructure upgrades. In 2019, the UAE has attracted $12.7bn in foreign direct investment in the first half of the year, an increase of 135% year on year – while tourist arrivals rose 3% in the same period to reach 8.4m.