Download economic insight MIDDLE EAST Quarterly briefing Q4 2012

economic Insight
Middle East
Quarterly briefing Q4 2012
Global economic outlook weakens but
the Middle East – led by GCC – bucks
the trend in 2012 although slower
growth expected next year
Welcome to the seventh issue of ICAEW’s Economic
Insight: Middle East, the quarterly economic forecast
prepared directly for the finance profession. Produced
by Cebr, ICAEW’s partner, and acknowledged experts
in global economic forecasting, it provides a unique
perspective on the prospects for the Middle East
region as a whole and for individual economies
against the international economic background.
We focus on the Middle East as being the Gulf
Cooperation Council (GCC) member countries
(United Arab Emirates (UAE), Bahrain, Saudi Arabia,
Oman, Qatar and Kuwait), plus Egypt, Iran, Iraq,
Jordan and Lebanon (abbreviated to GCC+5)1.
The global economic outlook has weakened further
but the Middle East, led by the GCC, is set to
record robust growth in 2012. The GCC countries
will expand by 5.6% in 2012, down from the rapid
7.4% expansion in 2011 but far stronger than world
economic growth. In contrast to the GCC countries,
sanctions and high inflation are squeezing the
Iranian economy and it is expected to contract by
0.8% in 2012; acting as a drag on growth across
the Middle East as a whole. The region’s resilient
growth is driven by continued high oil prices, surging
hydrocarbon production and huge fiscal stimulus
as the oil-rich governments of the region continue
their vast infrastructure investment programmes and
increase current expenditure on public services. This
fiscal loosening is not without risk. We consider at
what point Middle Eastern governments’ finances
become stretched and the need to achieve economic
diversification throughout the region.
BUSINESS WITH CONFIDENCE
icaew.com/economicinsight
Downward momentum in global
economy continues
expansion in the advanced economies has spread to
weaker growth in emerging markets.
The backdrop to the latest ICAEW Economic Insight:
Middle East is that global economic growth has slowed
to a crawl. Key emerging markets have joined the
advanced economies in posting significantly slower
economic expansion. In China, the annual rate of
growth dipped to its slowest level since the midst of
the global recession in Q2 2009; in India growth in
2012 is likely to only just reach 5% and in Brazil the
latest annual growth rate was just 0.5%. Although the
US has continued its modest post-crisis growth story,
the eurozone has shrunk over the last year and the UK
has only just emerged from recession. Hence, there has
been a widespread weakening in the global economic
outlook through 2012.
Figure 1 illustrates how, in 2012, growth is slowing
across the world’s largest economies – with Japan the
exception to the rule, driven by the boon from posttsunami construction. The weak growth story looks
set to continue in the eurozone, where the sovereign
debt and banking crisis remains unresolved as the
situation in Greece and Spain deteriorates, while larger
economies such as France, Italy – and even Germany
– are suffering economic contraction or at least slower
growth. In the US, newly re-elected President Obama
will have to take action on reducing the budget deficit,
which is acting as a headwind and impeding any
significant semblance of a return to sustained economic
recovery. The weaker growth story in the emerging
markets may be partially arrested by policy measures –
monetary and fiscal expansion in China and monetary
easing in India once inflation has eased. A more steady
global economic expansion seems the most likely
course at this point, although many downside risks do
still loom large.
Figure 1: How economic growth is weakening right
across the globe; annual change in real GDP
However, the Middle East – along with Africa – seems
to be bucking this trend. With oil production still
growing robustly and governments in the Middle
East – especially within the GCC – driving forward
their infrastructure investment programmes; trade
continues to expand rapidly in the wider Middle East
and emerging Africa region. Figure 2 illustrates how
the trend in trade volume growth is far stronger for
this part of the globe than western regions – and even
emerging Asia, the dynamo of the world economy in
recent years. Over the last 12 months, import volumes
to the Middle East and emerging Africa have grown by
11.4% compared with 3.7% in emerging Asia, 3.1%
in the US and a 2.5% contraction in the eurozone.
Hence, there is robust evidence to demonstrate
that the Middle East is proving resilient despite the
downturn in the global economic growth in 2012.
Figure 2: Global trade growth running at a trickle –
but Middle East defying the trend; quarterly annual
percentage change in trade volumes
%
25
20
15
10
5
0
-5
-10
-15
-20
Middle East & emerging Africa export volume
Middle East & emerging Africa import volume
Global trade volume
%
10
Source: CPB, Cebr analysis
8
High oil prices help to drive Middle
Eastern resilience
6
4
2
0
-2
Eurozone
2011
Brazil
2012
Japan
United
States
India
China
2013
Source: Macrobond, Cebr Global Prospects forecasts
Middle East (and Africa) shows signs of
resilience amid global slowdown
The weaker global economic growth fundamentals
have been reflected in trends in global trade, with
the volume of global goods traded dropping by 0.1%
over the three months to August compared with the
previous three months. This brought the quarterly
annual growth rate down to just 2.2%; compared
with a long-run average expansion of around 6%. Not
since the global recession of 2008–9 has global trade
increased at such a slow pace, as the anaemic pace of
icaew.com/economicinsight
cebr.com
This resilience naturally leads to an array of questions.
What is driving the region’s robust growth in 2012
and can it go on? Which parts of the Middle East are
experiencing the strongest growth and why? How
sustainable is the current good economic performance
and can the Middle East continue to outpace
expansion in the global economy as a whole?
As ever in the Middle East, one cannot ignore the
impact of the hydrocarbon sector. Despite the
slowdown in global growth, oil prices have remained
relatively sturdy. Although there was a sharp drop in
prices between April and June, prices then rebounded
and have been generally trading in the $110–$115
a barrel range on the Brent Crude benchmark since
mid-August. With weaker economic data emerging,
prices have dipped below $110 a barrel in October
and November but are still close to the average $112
a barrel level seen over the latest 12-month period.
As oil prices remain high and Iranian production
declines – down by more than a tenth over the latest
12-month period – other gulf oil exporters have been
ramping up production. In Kuwait over the last
12 months output is up by more than a fifth compared
with the previous 12-month period. Figure 3 illustrates
how production is booming in the GCC states, with
a double-digit increase in the number of barrels
produced in Saudi Arabia and robust growth in the
UAE too. In addition, Iraqi oil production has picked
up again and is on course to achieve 20% growth in
output since 2010. Across the Middle East, the value
of oil exports is likely to rise by 1.4% in 2012, but
this comes after the 47% increase in oil exports the
previous year. However, the Middle East region figures
are distorted by Iran; across the GCC oil export values
will rise by 7.2% in 2012. Hence, the expansion of
hydrocarbon sector exports continues to play a strong
role in driving the Middle East economy, particularly in
the GCC countries.
Figure 3: Oil production has grown quickly –
particularly in the GCC – while Iranian production
has slumped; percentage change in oil production
volume over the 12 months to August compared
with same period a year earlier
Oil production growth
%
25
20
15
10
5
0
-5
-10
-15
Iran
Qatar
UAE
Iraq
Saudi
Arabia
Kuwait
Source: IEA, US EIA, Cebr analysis
Huge infrastructure spending helps to
drive growth, especially in the GCC
As well as robust export growth among the oil
exporting countries of the Middle East, huge
government spending and infrastructure investment
programmes continue apace as airports, railways,
roads, power plants and ports are built at a ferocious
rate. In Saudi Arabia, investment as a share of GDP is
expected to rise from 21% in 2012 and to peak at 26%
in 2016. Due to the large size of the economy, this is
the largest growth in the total value of investment in
the region. By 2017, the total value of investment in
Saudi Arabia in dollar terms will have doubled from its
2010 level.
Across the Middle East region, investment grew by
a fifth in 2011; in 2012, investment is rising solidly
from a far higher base. The overall Middle East figure
is distorted by Iran but gross investment across the
region is set to grow by 4% in 2012; among the GCC
countries alone a 12% expansion is expected, following
an 18% rise last year. This increase in investment drives
the region’s economy, and the increase in the capital
stock will help to provide future growth in productive
capacity. Figure 4 illustrates the huge increases in
investment expected between 2010 and 2015. Given
its scale, the increase in Saudi Arabia is especially
notable, but investment growth right across the GCC
continues to be huge.
Figure 4: Huge growth in Middle East infrastructure
investment – the GCC and especially Saudi Arabia
leading the charge; graph shows percentage
change in investment between 2010 and 2015 (not
adjusted for inflation; in current US dollars)
Oil production growth
Lebanon
Bahrain
Egypt
Iran
United Arab Emirates
Qatar
Middle East
GCC
Jordan
Oman
Saudi Arabia
Kuwait
0
10
20
30
40
50
60
70
80 %
Source: IMF, Cebr analysis
How will massive fiscal expansion across
the region affect public finances?
In addition to capital investment projects aimed at
driving growth, Middle Eastern governments have
been raising current spending. This includes major
rises in public services expenditure and in public
sector pay. For example, the Qatari government raised
public sector salary by up to 60% at a cost of $8.2bn
and there have been similar pay increases in Kuwait,
Saudi Arabia and the UAE. The increase in salaries is an
enormous boost to household spending power which
translates into rising consumer spending and thus
overall economic activity.
To a large extent, the economic resilience of the
Middle East in 2012 can be explained by a sustained
fiscal expansion that is driving higher household
consumption and investment expenditure. But, in the
light of the increasingly unsustainable fiscal situation
in industrialised nations and the Dubai debt crisis
of 2009, how sustainable is this expansion in public
expenditure? Figure 5 illustrates the expected change
in the balance between government spending and
revenue as a share of GDP from 2012 to 2017. It
illustrates that a heavy spending increase in excess of
revenues is predicted for several countries, especially
Saudi Arabia (16.1%), Kuwait (14.9%) and Oman
(14.8%). Such rises are only sustainable if resource
revenues continue to flow abundantly, a topic looked
at in the following section. It should also be noted that
Egypt and Iraq are expected to see the state of public
finances improve substantially. This development is in
line with the substantial growth opportunities offered
by the re-establishment of both countries as regional
economic heavyweights.
At what point do Middle Eastern public
finances look stretched?
Is there anything to worry about while oil prices remain
comfortably above $100 a barrel and production
continues to grow? The best way to answer this is
to consider what oil price is needed for respective
governments’ fiscal plans to work. Recent analysis of
break-even oil prices by the International Monetary
Figure 5: Middle Eastern infrastructure and
spending expansion will reduce government fiscal
surpluses significantly; graph shows the predicted
cumulative change in balance between government
spending and revenues as a percentage of GDP
from 2012–2017
%
15
10
5
0
-5
-10
-15
Iraq
Egypt
Jordan
Lebanon
Iran
United Arab
Emirates
Bahrain
Qatar
Oman
Kuwait
Saudi Arabia
-20
Source: IMF, Cebr analysis
Fund illustrates the degree to which different
economies across the Middle East are exposed to
shocks to the oil price and global demand for oil.
Figure 6 illustrates that the most fiscally exposed
economies are Bahrain and Iran, while on this evidence
Qatar and Kuwait are the least exposed. Notably, two
of the region’s largest economies, Saudi Arabia and
the UAE, face a relatively high fiscal break-even oil
price at 72% and 87% of the November OPEC basket
oil price respectively. One caveat on the data is that
they refer to 2011; since then government spending
commitments have risen, and Figures 4 and 5 show
that public spending will rise significantly in the
coming years. Indeed, another instructive trend is what
has been happening to the fiscal break-even oil price
over time. Data from the IMF show that, between 2008
and 2011, the fiscal break-even price rose by $39 a
barrel in Saudi Arabia and $69 in the UAE; the increases
in Kuwait and Qatar were more muted and their fiscal
break-even benchmark price remains lower.
Figure 6: Fiscal balance break-even oil price in 2011
across Middle East economies
Oil prices expected to fall slightly on
weaker global growth – not enough
to seriously threaten fiscal positions
for now
So how does the outlook for oil prices stack up against
the fiscal break-even oil price benchmarks? Our best
guess is that oil prices will dip slightly in 2013 on the
weak pace of global growth and the return of Libyan
production to full capacity, but move upwards in
2014 and 2015 as global demand hardens. Figure
7 illustrates the central forecast for oil prices; this
scenario would be unlikely to pose a massive threat to
government finances in the Middle East, other than
Bahrain as Figure 6 shows. However, as government
spending commitments rise further – particularly on
current spending such as salaries, pensions and public
services – the benchmark break-even oil price will rise.
The greater spending commitments become and the
greater the reliance that Middle Eastern economies
have on oil for their levels of economic activity and
tax revenues, then the greater the risk that an oil price
shock would impose. Clearly it is almost impossible
to predict how technology will evolve, but the US in
recent years serves as an interesting example. Shale gas
technology has evolved and gas extraction through
this means has ratcheted up, to the extent that energy
from gas is available at an equivalent of around $25
a barrel. Hence, it is not impossible to suppose that
a structural change could occur that would affect oil
prices significantly. However, the best evidence at
present suggests that oil prices are supported by the
fundamentals of growing emerging market demand
and burgeoning affluent middle classes in China, India,
across the Middle East and throughout the emerging
economies will continue to drive demand for energy
and oil.
Figure 7: Latest oil price forecast – as production
rises and global demand growth steadies, oil prices
likely to fall slightly; average of three spot prices2
$ per barrel
$
120
100
80
60
$
120
40
100
20
80
0
60
Source: IMF, Cebr analysis
40
Bahrain
Iran
OPEC
November
basket price
Iraq
Saudi Arabia
Oman
United Arab
Emirates
Kuwait
0
Qatar
20
Source: IMF October 2012 World Economic Outlook report
economic insight – middle e a st
Q 4 2 012
The need to diversify – Qatar follows
Dubai’s lead but is the region doing
enough?
The discussion in the previous section highlights the
need for economies in the Middle East to achieve
diversification that will mitigate the risks of a shock to
the oil price. In the majority of economies in the Middle
East, the non-oil export sector is relatively weak and
the hydrocarbon sector drives a significant proportion
of economic activity and tax revenues. Although the
real estate sector suffered a major crash in 2009 and
the consequences of this are still being felt, Dubai led
the way in attempting to diversify the economy and
establish itself as a major financial and business hub.
More recently, Qatar has been making a major push
into diversifying its economy – indeed the latest GDP
data showed that the non-oil part of its economy had
grown faster than the hydrocarbon sector. Indeed, in
Q2 2012 non-mining and quarrying (ie, excluding oil
and gas) real economic output grew by 8.5% compared
with a year earlier while the mining and quarrying
sector grew by 0.8% year on year. However, it is a long,
challenging road to create the right conditions for the
non-hydrocarbon private sector to flourish.
Figure 8 illustrates that, despite the diversification
agenda in the UAE, the oil and gas sector still rose
significantly as a share of the economy. This rise is partly
due to the strong performance of the oil and gas sector,
but notably both the manufacturing and wholesale
and retail sectors shrank by more than four percentage
points between 2001 and 2010. Diversifying the
economy by creating conditions for private sector
businesses to flourish, invest and create jobs remains
one of the major challenges for the region.
Figure 8: How successful has diversification in the
UAE been? Change in share of economic output by
sector in UAE between 2001 and 2010; change in
share of total value added in percentage points
Wholesale & retail
We think 2013 could be a year of two
halves but the Middle East – led by the
GCC – will continue to outpace the
global economy.
Looking at all the issues in the round, we expect
growth across the Middle East to have slowed from
the particularly strong pace of expansion in 2011. Our
forecast is for Middle East GDP to expand by 3.9% in
2012, outpacing global growth (weighted at market
exchange rates) at 2.4%. However, the regional
headline growth figure hides the strength of the GCC
countries. At 5.6% in 2012, they are expected to
expand more than two times faster than the global
economy.
Given the downward momentum in the global
economy and the fact that the big boost to growth
from government spending in the Middle East came
in 2011 and 2012, the pace of growth is expected to
ease going into 2013. The overall Middle East region
will see growth fall to 3.5% in 2013, the slowest pace
of expansion since 2009, while growth among the GCC
countries will fall back to 4.2%. Oil production growth
is expected to fall back and government spending will
not increase with the same voracity as in recent years.
However, the growth fundamentals are still relatively
strong and the Middle East is expected to continue
outperforming the global economy throughout the
forecast period to 2015 – as shown in Figure 9. The
global and Middle Eastern economies are expected to
quicken in 2014 as the global mini-cycle comes to an
end; the impact of policy stimulus among currently
slowing emerging markets will have taken effect and
the advanced economies will gradually emerge from
exceptionally weak growth in 2014–15. Trend growth
across the region at around 4% in real terms is likely;
breaking into a higher growth trajectory would need
reforms that unleash the dynamism of the private
sector.
Figure 9: Cebr forecasts for global, Middle East and
GCC GDP growth; annual percentage change in real
economic activity3
pp change
Manufacturing
%
8
Restaurants & Hotels
Quarrying
7
Real Estate &
Business Services
Social & Personal Services
6
5
Electricity, Gas & water
4
Transport, Storage
& Communication
Construction
2
3
1
Financial services
0
Crude oil & Natural Gas
-1
-5 -4 -3 -2 -1 0
1
2
3
4
5
6 %
-2
-3
Source: United Arab Emirates National Bureau of Statistics, Cebr analysis
Global
GCC
Middle East
Source: IMF, Macrobond, Cebr analysis
icaew.com/economicinsight
cebr.com
economic insight – middle e a st
Q 4 2 012
ENDNOTES
1 The phrase Middle East is often used to cover different parts of the region. Much of the internationally-available economic data relates to the Middle East
and North Africa region which we call MENA (this covers the seaboard countries in North Africa from Somalia to Mauretania and all the states in the Arabian
Peninsula including Israel, plus Iran and Turkey in the north). Political discussions often treat the Middle East as synonymous with the Arab world. But if we
refer to wider definitions of the region, we will try to point this out explicitly.
2 Brent crude, West Texas Intermediate and Dubai Fateh
3 We weight economies at market exchange rates rather than the Purchasing Power Parity valuations used in the International Monetary Fund’s headline world
GDP estimates; hence our numeric estimates are lower. However, this doesn’t affect the trajectory and overall profile in comparing the respective forecasts.
ICAEW
ICAEW is a professional membership organisation, supporting over 138,000 chartered
accountants around the world. Through our technical knowledge, skills and expertise,
we provide insight and leadership to the global accountancy and finance profession.
Our members provide financial knowledge and guidance based on the highest professional,
technical and ethical standards. We develop and support individuals, organisations and
communities to help them achieve long-term, sustainable economic value.
Because of us, people can do business with confidence.
Cebr
Centre for Economics and Business Research ltd is an independent consultancy with a
reputation for sound business advice based on thorough and insightful research. Since 1992,
Cebr has been at the forefront of business and public interest research. They provide analysis,
forecasts and strategic advice to major multinational companies, financial institutions,
government departments, agencies and trade bodies.
For enquiries or additional information, please contact:
Sarah Jane Carter
Regional Marketing and Business Development Manager, Middle East
T +971 (0)4 408 0000
E [email protected]
ICAEW
Currency House Unit 4 Level 4
Dubai International Financial Centre
PO Box 506836
United Arab Emirates
icaew.ae
ICAEW
Chartered Accountants’ Hall
Moorgate Place
London
EC2R 6EA UK
icaew.com
© ICAEW MKTPLN11796 11/12