Sunday 01, October 2017 by Jessica Combes

Middle East GDP to grow 2.4 per cent in 2018 but economic outlook still tough

The outlook in the Middle East region is expected to remain tough, with several further squeezes on household income in 2018.

However, overall GDP is expected to grow by 2.4 per cent next year and rising to four per cent in 2019, according to o ICAEW’s latest report, Economic Insight: Middle East Q3 2017.The accountancy and finance body says any extension of OPEC’s production cut deal, which ends on 31 March 2018, would delay the recovery.

“GCC countries need to shift focus towards deeper, multi-dimensional fiscal policy and institutional reforms. These will help to secure long term fiscal sustainability, and also support the development of vibrant private sectors. Furthermore, by boosting investor and market confidence, they can also start a virtuous cycle of stronger investments, including FDI, and output growth in the near term,” said Tom Rogers, ICAEW Economic Advisor and Associate Director of Oxford Economics. 

span lang="EN-GB">The report, produced by Oxford Economics, ICAEW’s partner and economic forecaster, says governments across the region are unlikely to find any solace in the oil market, which looks likely to require an extension of OPEC’s production cut deal merely to stabilise prices around $45-50. In this case governments would come under further pressure to prioritise public spending in growth-enhancing areas and find new revenue sources in order to stop public debt from accelerating. 

One of the key challenges for the Middle East economies as we move into the final months of 2017 and into 2018 is the ongoing squeeze on household incomes. The upcoming GCC Value-Added Tax is expected to increase the cost of living in impacted economies by around 2.5 per cent in 2018, and 0.5 per cent in each year from 2019-2022.  

Households in many countries are also feeling the pinch from higher energy costs – fuel prices were raised by 6 per cent in the UAE earlier this year and are expected to rise in Saudi Arabia in early 2018. Together with the impact of a weaker dollar on import costs, these pressures are expected to drive consumer price inflation at the GCC level from just 1.2 per cent in 2017 to 4.7 per cent in 2018, and 3.5 per cent in 2019. Consumer spending is also expected to grow 2.5 per cent in 2018 and 2019–compared to an average of 4.2 per cent per annum from 2010-2016.

More positively, evidence is emerging that the acceleration in world trade has been felt in the Middle East region. Those economies which are the most diversified appear to be seeing the greatest benefits. Growth in the non-oil sector in the UAE accelerated to a two-and-a-half year high in August, according to the survey-based Emirates Bank Purchasing Managers Index. Growth remains well above the long-run average. Meanwhile in less-diversified Saudi Arabia, the same metric has picked up through the year, but remains well below the historical norm. 

Oman must tackle its economic challenges

According to the report, Oman’s economy is benefitting from trade diversion, as exporters use Omani ports for transit to and from Qatar. Figures released by Sohar Port and Freezone show the number of vessels docking rose by 16 per cent in 2017 Q2 versus Q1, and by 18 per cent versus 2016 Q2. However, this will be a modest and temporary boost, and does little to address the more fundamental challenges the economy faces.

“Getting the deficit under control soon in Oman is critical, and if the OPEC deal needs to be extended beyond 2018 Q1 this will require yet more difficult policy choices to be made by the Omani government in order to achieve financial stability,” said Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA).

Oman’s government has not been as aggressive in cutting expenditure recently as other GCC economies, and as a result the squeeze on spending is having to last longer–while government spending is up around three per cent in cash terms in the GCC as a whole in 2017, it is expected to contract a further 12 per cent in Oman. In conjunction with the implementation of VAT, the impact of austerity on public sector wages and welfare will maintain pressure on household budgets. Household spending is expected to rise by just 3.4 per cent in 2017, and 2.9 per cent in 2018 and 2019–substantially slower than the 5.6 per cent average rate from 2011-2016.

The squeeze on public spending will need to be stuck to rigorously, given Oman’s reliance on debt issuance to finance a fiscal deficit expected to top 12 per cent of GDP in 2017, and narrow only modestly to 9.4 per cent in 2018. The consequence of these deficits is that government debt will have risen from just five per cent of GDP in 2014 to 57 per cent of GDP in 2018.

span lang="EN-GB">More positively, the economy is expected to get a boost from the gas sector in 2018, when the Khazzan gas field comes fully on-stream (boosting gas output by an estimated 25 per cent). Also, Oman is one of non-OPEC countries that agreed to OPEC deal so if oil output reverts to pre-OPEC deal levels in Q1-2018, GDP growth could rebound to five per cent in 2018. But if OPEC’s production cut deal is to be extended, GDP growth is expected to be substantially slower.

 

 

  

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