Macroeconomic conditions seem more promising for Middle East economies after a relatively slow start to 2018, according to ICAEW’s latest Economic Insight report.
Overall, the Middle East’s GDP is expected to grow from 0.9 per cent in 2017 to 2.4 per cent in 2018. Despite the positive outlook, the accountancy and finance body said downside risks remain.
Economic Insight: Middle East Q3 2018, produced by Oxford Economics, says higher crude production and recovering oil prices will aid growth in an otherwise sluggish oil sector and strengthen fiscal and external balances for the GCC economies. The global crude oil price is forecast to average at $78 per barrel in H2 2018, and at $74.5 per barrel for the year.
Bahrain and Saudi Arabia are under the greatest pressure with highest fiscal break-even oil prices this year at $113 and $87.9 per barrel, respectively. Followed by Oman and UAE at $77.1 and $71.5 per barrel, respectively. Kuwait and Qatar enjoy the lowest fiscal break-even oil prices at $48.1 and $47.1 per barrel, respectively.
The non-oil private sector is also starting to show some signs of recovery. The Purchasing Managers’ Index (PMI) for Saudi Arabia and UAE, the region’s biggest economies, reached their highest levels this year in June, reflecting growing momentum in the non-oil private sector.
The outlook for the Saudi economy remains strongly tied to the developments in international oil markets. Rising oil prices this year and potential supply disruptions from Libya, Venezuela and Iran, have improved the economic prospects for the Saudi economy, given the Kingdom’s role as a major oil producer with substantial spare production capacity.
Oil production in Saudi Arabia is expected to average around 10.10 million barrel per day this year, representing a 1.4 per cent year-on-year increase on the 9.96 million barrel per day registered last year.
The non-oil sector will also support growth, buoyed by pro-growth government initiatives and higher public spending. The $19.2 billion private sector is expected to play a key role in driving growth in the non-oil sector and cushioning businesses from the changing macroeconomic landscape.
Preliminary figures by the Saudi authorities show that real GDP grew by 1.2 per cent year-on-year in Q1 2018, which compares favourably to Q1 2017, when the economy contracted by 0.8 per cent. The oil sector grew by 0.6 per cent year-on-year in Q1 2018, while the non-oil sector grew by 1.6 per cent over the same period. Overall, real GDP is expected to accelerate by 2.1 per cent in 2018.
On the social front, for the first time in the Kingdom’s history, women were granted the right to drive and cinemas opened their doors for the first time in over three decades in April. These events signal the steady progress of social and economic reforms in the Kingdom.
But in spite of the more promising economic prospects, the report says certain challenges to the Saudi economy remain, notably the high local unemployment rate and the need to attract increased levels of Foreign Direct Investment (FDI) to support Vision 2030 and expand the role of the private sector.
“Saudi Arabia is on the right track to economic diversification and is implementing the necessary fiscal and social reforms to support these efforts. We’re also encouraged by the recent inclusion of Saudi Arabia in the MSCI Emerging Market Index. This will definitely help in attracting foreign investment, which in turn will support the expansion of the private sector’s role in generating output and creating jobs,” said Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA).
The outlook for Bahrain’s economy remains stunted by the ongoing contraction in the oil sector and lack of policy space due to persistently wide budget deficits and high levels of public debt. The fiscal risks arise largely from reliance on debt-fuelled spending and a bloated public sector while reform implementation has generally lagged behind peers, eroding the competitive edge gained from early diversification of the economy.
Unlike its neighbours, activity in Bahrain is driven primarily by the non-oil sector, which has averaged over 4.3 per cent annually in 2014-2017, cushioning the economy from the oil shock. Against this backdrop, overall growth expanded by 3.8 per cent in 2017, supported by a buoyant projects market. While this trend is seen continuing in 2018, the pace of investment is moderating, which will result in a slowdown in headline growth to 2.6 per cent, rising to 2.8 per cent in both 2019 and 2020.
Meanwhile, the contribution from the oil sector has continued to decline and will remain a drag on growth this year notwithstanding the turnaround in the oil price. Oil output fell by almost one per cent in 2017 and a further contraction of 4.5 per cent is expected this year.
However, oil output should rise by one per cent annually in 2019-20, and medium- and long-term prospects for the oil sector have improved given Bahrain’s recent discovery of its largest oil field since 1932. The new field is expected to be operational within five years and is estimated to have a capacity of 200k barrel per day, essentially doubling current capacity.
Bahrain’s economy may have become less dependent on the oil sector, but oil proceeds remain a key driver of government spending trajectory. While the current global crude oil price is still significantly below Bahrain’s estimated fiscal break-even of $113, the report expects it to support an acceleration in expenditure this year to 3.1 per cent, from an estimated 1.4 per cent in 2017. Higher revenues should also allow for a narrowing in the budget deficit to 7.5 per cent of GDP, from almost 10 per cent in 2017.
The implementation of VAT, still planned for the end of the year, should help diversify revenue streams, alongside the excise taxes announced at the end of 2017, but containing public expenditure is the biggest challenge for Bahrain’s government. The revenue enhancing measures are also expected to contribute to higher living costs. Inflation is expected to accelerate to 2.7 per cent this year, from 1.4 per cent in 2017, weighing on household spending.
In addition to economic vulnerabilities, lingering political issues could re-surface, weighing on business and consumer confidence and further weakening Bahrain’s position as an important finance, business, logistics and tourism centre, hurting the non-oil economy.