The struggle for MENA continues
The ICAEW has pointed out that although there is a hike in trade volumes, Middle East countries are still not expected to benefit from it as much as other parts of the world would, due to the slow recovery in oil-related activity and its spill over effects to the non‐oil sector and the overall economy.
The acceleration of global trade in the first half of 2017 has provided a boost to growth across many regions of the world economy. For several measures tracking physical trade volumes, world trade is growing at a faster rate than at any time since the rebound from the global financial crisis. However, according to ICAEW in a recent report, this gain is likely to be felt unevenly across the Middle East for three reasons: 1) reliance on commodity exports; 2) strengthening of the dollar; 3) the competition to become key trading hubs between east and west.
Too many economies in the region remain heavily reliant on commodity exports, rather than broader‐based manufacturing and services exports. Many of these economies have low non‐oil exports, so any improvement in non‐oil exports performance makes limited difference to GDP and jobs. Secondly, in spite of the softening of the US dollar through the second quarter of 2017, it remains very strong in a longer‐term context—undermining the export competitiveness of economies in the region whose currencies are pegged to the dollar, in addition to other barriers to competitiveness. Lastly, although several economies in the region aspire to become key trading hubs and service global trade both logistically and through services between the east and west, only UAE, and Dubai in particular, currently qualifies as such.
Thus the principle mechanism through which the region’s economies may expect to benefit from faster trade and overall growth would be through the more traditional channel of the impact on oil demand and prices. Yet the link between global trade and the oil price is likely to be less powerful than in the past—partly because cheaper oil is one of the key drivers of global growth (and therefore pricier oil would undermine consumer demand and trade), but also given the substantial new capacity in the global oil market.
ICAEW is of the opinion that OPEC’s decision to extend its current production cuts from July 2017 to March 2018 failed to have much impact on oil prices through May and June—partly because compliance outside the GCC is likely to be patchy, and because any rebound in oil prices will bring more output back on-stream in the US. The institute projects oil prices to remain close to $45bbl through most of 2017, creeping up through $55bbl by late 2019 as spare capacity in the world market is closed.
With oil output held lower for longer (but with little impact likely on prices), GCC economies are therefore under greater pressure to achieve progress in non‐oil sectors. Here, ICAEW sees brighter prospects. The bulk of public spending cuts needed to adjust to oil prices at current levels have now been implemented, enabling governments to better target their resources on areas that enhance growth prospects. Additionally, the squeeze on bank lending across the region has continued to ease, providing more funding for investment in new growth sectors. Less positively though, governments across the region need to increase non‐oil revenues—the introduction of VAT next year is a start in this respect, but other measures are likely to be needed, and these may impact on household spending power and business investment.
The institute estimates that the oil‐producing sectors of the GCC economies would contract by three per cent in 2017, with the non-oil sector is forecasted to grow by 2.6 per cent. Overall GDP growth is predicted to be just under one per cent. Looking towards 2018, ICAEW projects a one per cent pickup in oil output, complementing momentum in the non‐oil sector (which is expected to grow by four per cent) resulting in overall GDP growth of 2.7 per cent. However, further oil price weakness would clearly pose a downside risk to growth, as would an escalation of geopolitical tensions. The institute highlighted that these conditions do not bode well for cooperation on issues such as trade and tax policies, nor for the prospects of a more stable and transparent business environment across the region.
A recent report by S&P has highlighted that the average sovereign rating in the Middle East and North Africa (MENA) region is now closer to 'BBB-' than 'BBB' and trending downward. The sovereigns rated by S&P include: Abu Dhabi, Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Ras Al Khaimah, Saudi Arabia, and Sharjah.
Since January 2017, the rating agency has lowered the ratings on Oman, Qatar, and Sharjah, based mainly on increased external vulnerabilities and rising debt burdens. S&P also revised its outlook on Sharjah from negative to stable, on Bahrain from stable to negative, and placed Qatar on CreditWatch with negative implications.
Seven of the 13 MENA sovereigns S&P rates are investment grade. Bahrain, Egypt, Iraq, Jordan, Lebanon, and Oman are speculative grade. According to the ratings agency, GCC economies remain vulnerable to further sharp declines in oil prices, highlighting the potential benefits for these sovereigns of diversifying their economies and further developing their private sectors.