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ICAEW Economic
Insight: Middle East
Quarterly briefing Q1 2015
Welcome to the latest edition 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 expert
in global economic forecasting, it provides a unique
perspective on the prospects for the Middle East
as a whole and for individual countries 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.
Low oil prices to persist in 2015
The first weeks of 2015 have seen a continuation of
the trends which drove oil prices sharply downwards
during the latter half of 2014. Brent crude has traded
around and below $50 per barrel ($/bl) since the turn
of the year – down by more than half from the $111/bl
average seen in June 2014.
As explored in the Q4 2014 edition of this report, these
remarkable price movements are due to a combination
of demand and supply factors, as well as developments
in currency markets. Low inflation readings across
many major economies have provided mounting
evidence of weakening demand for goods and services,
leading market participants to downwardly revise their
expectations for medium-term growth across many key
economies.
Concerns over weakening demand have come at the
same time as strong oil supply growth, with Iraqi
output having reached a 35-year high in December.
Supply has also been supported by OPEC’s decision
to maintain its production quota at 30m barrels per
day (mb/d) at its November meeting. Rather than
seeking to achieve higher market prices by cutting
back on production volumes, the association elected to
hold steady, in an effort to protect their market share.
This has also been interpreted as an effort by Saudi
Arabia – OPEC’s dominant member – to heap financial
pressure on the shale extractors of the US. At current
price levels, many such unconventional fields are
unprofitable, and will face eventual shutdown.
Developments in currency markets are also affecting oil
prices, with the relative strength of the US economic
recovery leading to a strengthening of the US dollar.
This has placed downward pressure on the price of
dollar-denominated goods such as oil. The plunging
oil price is having varied impacts across the global
economy. While a boon to the disposable incomes of
consumers in countries which are net fuel importers,
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those nations which have traditionally been net fuel
exporters have come under increased financial pressure.
This, of course, includes many of the GCC+5 nations
examined in this report.
Fiscal pressures are mounting
Although oil prices have more than halved in six months,
their current levels do not threaten the financial viability
(in terms of profitability) of oil production in the Middle
East. This is because much of the world’s easily-accessible
hydrocarbon reserves are in the region – hence, onshore
extraction in the Middle East is still, on average, the
cheapest method of obtaining oil anywhere around
the globe. Indeed, the ‘lifting costs’ for Saudi Arabia
– encompassing the capital and operational costs of
removing oil from its fields – are believed to average just
$5/bl.
The more pressing concern for regional governments
is their fiscal break-even prices – prices at which their
budgets will be in balance. Over recent years, these
have crept up for most countries in the region, reflecting
the proliferation of ambitious government spending
plans, including diversification efforts and infrastructure
investment.
The new state of the world is a marked departure from
the high and relatively stable oil price of 2011-13. While
many of the GCC nations are fiscally strong enough to
withstand several years of sustained lower revenues, the
drop brings into sharp focus the challenge for the longer
term. To ensure fiscal sustainability in the Middle East,
the base of non-oil revenues must be broadened and
strengthened. Difficult spending decisions are looming,
and productivity-boosting reforms must be given a higher
priority.
Large public sector workforces distort labour
markets
Since a large share of employment within many Middle
Eastern countries is accounted for by public sector
workers, the health of the region’s labour markets
depends directly upon government revenues; and
therefore oil prices.
Public sector roles tend to provide ample job security
and income, with the necessity for efficient working
alleviated by an abundance of public funding,
backstopped by oil revenues. Figure 1 above shows
that public sector wage bills in many Middle Eastern
nations are high by international standards, accounting
for at least 10% of GDP in Bahrain, Saudi Arabia, Oman,
Kuwait and Iraq. While Qatar expends proportionally
less on public sector wages, the distorting effect of
state-funded employment remains: 70% of unemployed
Qataris reported an unwillingness to work in the private
sector, according to its Q3 2014 Labour Force Survey.
In addition, these bills are rising over time – among the
GCC nations, these proportions have increased each year
since 2011, when widespread wage rises were granted
partially as a response to challenging social unrest.
The fiscal pressures mounting on governments in the
region show that using this model is not sustainable.
Eroding the ‘employer of first and last resort’ status
of the public sector, and reducing its prominence as a
desired source of employment both of nationals and
non-nationals, must be a priority for the coming years.
Youth unemployment is a pressing concern
Against this backdrop, private sector job creation is an
important policy objective. While hiring in the private
sector can be stimulated through government spending
(for example, as with the flurry of public investment
across the region), this does not act to reduce the labour
market’s dependence upon state spending to support
jobs. In addition, evidence suggests that outsized public
sectors tend to have a ‘crowding out’ effect: this means
that, rather than reducing unemployment effectively,
they diminish the stock of private sector jobs. Pursuing
diversified and inclusive economic growth, creating
a supportive and stable business environment, and
encouraging entrepreneurship as well as investment are
some of the key steps needed to achieve sustainable
private sector job creation.
Figure 2: Youth unemployment rate (% of labour
force aged 15-24), 2013
%
The provision of public sector jobs is one of the avenues
through which oil wealth has historically been dispersed,
especially among national populations. This can be seen
through the relative concentrations of nationals and nonnationals within public sector roles: in the UAE, 61% of
employed nationals work in public administration and
defence; compared with just 6.7% of non-nationals. The
equivalent proportions in Saudi Arabia are 37% and 0.6%
respectively.
45
Figure 1: Public sector wage bills, % of GDP, 2014
10
GCC
Other oil exporters
Non-GCC
Rest of world
35
30
25
20
15
5
Qatar
UAE
Kuwait
Oman
Lebanon
Bahrain
Saudi Arabia
Iran
Jordan
15
Iraq
0
Egypt
%
40
Source: ILO
10
5
UAE
Iran
Qatar
Yemen
Bahrain
Algeria
Saudi Arabia
Oman
Kuwait
Iraq
Libya
0
The scale of the challenge, in terms of creating and
maintaining an inclusive labour market, is considerable
in all countries across the region. However, important
differences can be observed, as illustrated in Figure
2 above, which sets out the International Labor
Organisation’s (ILO) estimates of youth unemployment
rates in the GCC+5.
It can be seen that the GCC nations generally have
a lower prevalence of youth unemployment than
Source: IMF
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economic insight – middle e a st Q1 2 015
the ‘+5’ countries do. This partially reflects the better
fiscal situations among GCC nations, allowing greater
freedom to finance government spending-led growth,
and maintain public sector workforces. However, evermounting pressures from lower oil receipts will erode this
ability over time. Moreover, many of the nations with
massive oil wealth still see youth unemployment rates of
20% or higher, indicating that large reserves of financial
‘dry powder’ are not enough to fight elevated youth
unemployment.
Research into the detrimental effects of youth
unemployment shows that it reduces the attachment
of young generations to the workforce, impairs their
lifetime career prospects, erodes their skills, and constrains
the future productive potential of a nation’s economy.
Moreover, it exacerbates inequality and can corrode social
cohesion, which remains a concern for nations in the
region.
Failure to implement policies and construct labour
market institutions which can generate enough jobs for
young people will be even more damaging in future. The
Middle East is one of the world’s youngest regions, with a
population which is set to mushroom over the medium to
long term. Figure 3 below sets out the projected growth
in the Middle East’s working-age (15–69) population for
the next 15 years.
Figure 3: Growth in working-age (15–69) population,
2015–30, medium-fertility variant
%
20
Despite lagging behind other regional economies in terms
of female labour market participation (at 20% of the
female population aged 15+), Saudi Arabia is proactively
encouraging Saudi women to join the workforce. While
there is a focus on sectors such as retail, initiatives also aim
to develop female representation in senior roles, fostering
leadership and managerial skills among the domestic
population.
These initiatives are, in part, indicative of efforts across
the region to ease over-reliance on foreign labour. Various
nationalisation policies have long been in place in the
GCC nations, ranging from quotas to wage subsidies. But
such hiring incentives are unlikely to be more than shortterm solutions for encouraging labour force participation
among nationals.
Improving business environment spurs job
creation
In addition to encouraging broader workforce
participation to ensure that the region’s human resources
are used as fully as possible, other complementary actions
may be undertaken to deliver a healthy and inclusive
labour market. Specifically, the most effective way to
provide jobs for rapidly-expanding populations is to
encourage and incentivise private sector investment and
entrepreneurship. While achieving this goal is complex,
important steps include simplifying and rationalising
regulations, ensuring the provision and reliability of vital
infrastructure, supporting the flow of credit to SMEs, and
establishing stable legal and tax frameworks.
Many nations in the region have made significant progress
in these areas, as shown in Figure 4 below, which sets out
the World Bank’s Ease of Doing Business scores for the
GCC+5 countries. These scores summarise how conducive
a country’s conditions are to the starting and operation of
a local firm.1
15
10
Figure 4: Doing Business indices, 2011–15
5
80
0
75
Lebanon
Iran
Qatar
Oman
Bahrain
Egypt
65
60
55
Source: United Nations, Cebr analysis
50
In aggregate, these countries will see their working-age
populations swell by 27% – amounting to nearly 49m
people – over the next 15 years. In absolute terms, the
main drivers of this trend are the ‘+5’ nations, with about
three-quarters of this increase (74%, or 37m people) to
be contributed by Iran, Iraq and Egypt. This population
boom illustrates the scale of the job creation challenge
faced by the GCC+5 nations, while underlining the
need to address structural barriers to labour market
participation.
45
In particular, the Middle East sees the biggest gap
between male and female labour force participation of
any region in the world. Barriers which discourage female
workforce participation can include substantial gender
wage gaps, the unavailability or unaffordability of child
care, and various other restrictions. Tackling these barriers
could greatly expand the human capital available to
economies in the region, contributing not only to growth,
but also to economic diversification (as women tend to be
more likely to work in service sectors).
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2011
2013
Iraq (156)
Iran (130)
Jordan (117)
Egypt (112)
Lebanon (104)
Kuwait (86)
Oman (66)
UAE (22)
40
Bahrain (53)
2025–30
Qatar (50)
2020–25
Saudi Arabia (49)
2015–20
Jordan
Saudi Arabia
UAE
Kuwait
70
Iraq
-5
2015
Source: World Bank. Numbers in brackets refer to that nation’s place in the overall global ranking
for 2015. Index values are expressed relative to the highest-scoring nation, which is ascribed a
score of 100.
In nine of the 11 countries shown in Figure 4, the ease
of doing business (relative to the highest-scoring nation
in each year) has improved over the period 2011-15,
reflecting ongoing efforts to encourage entrepreneurship
and support the development of private sector activity.
However, substantial differences remain between nations
in the region. Notably, each of the six GCC nations has
more supportive business environments than the ‘+5’
group of nations. The ease of trading internationally has
also been further-improved in recent weeks for these
economic insight – middle e a st Q1 2 015
countries, following the full implementation of the GCC
customs union on 1 January.
That being said, while the tax regimes in the GCC are
some of the most supportive in the world (only Kuwait
falls outside the top 10 in the World Bank’s tax subindex for 2015), the GCC nations score comparatively
poorly on factors such as starting a business, accessing
finance and enforcing contracts. This suggests that there
is considerable room for further business environment
improvements.
While regulatory refinements alleviate hindrances to job
creation, they cannot address another key factor weighing
upon private sector growth in the Middle East: the
political instability afflicting the region. This is especially
true in the ‘+5’ nations, where conflicts and social
volatility over recent years have restrained private sector
investment from both domestic and international sources.
Even with the most supportive business environments,
future growth will only be assured if confidence in
domestic stability and security can be maintained, both
within these nations and internationally.
Appropriately-skilled workforces are key
Establishing stable and secure business environments,
which are conducive to private sector entrepreneurship, is
the best way to foster durable labour demand. However,
ensuring robust and inclusive employment growth also
depends on labour supply. As was illustrated in Figure 3,
the age and fertility of Middle Eastern populations will
deliver substantial volumes of prospective workers over
the longer term. On the other hand, this considerable
quantity of labour must also be of sufficient quality, in
order to ensure sustainable demand for it from private
businesses.
This means that investment in education systems,
which will develop the future skills and capabilities of a
nation’s population, is no less important than the eyecatching infrastructure projects currently underway
across the region. Figure 5 below sets out the educational
expenditures of countries in the Middle East, comparing
these with selected other economies.
leading educational outcomes. With a shorter-term focus,
Saudi Arabia has pledged that spending on schools will
remain high in the 2015 budget and beyond, despite the
collapsed price of oil.
Education spending is undoubtedly vital, and schools and
universities feature highly within the fixed investment
plans across many Middle Eastern nations. However, this
alone is not sufficient to ensure future workers will arrive
in the labour market with the skills needed to undertake
productive work. A frustration across the region has
been the widespread mismatch between skills imparted
by schools and universities, and those demanded by
workplaces. This is one of the key drivers of the large
prevalence of non-national employment, particularly
within GCC nations as businesses continue to find it
necessary to import the skills they require at various levels
within their organisations.
The situation has also contributed to the regional
unemployment challenge, as illustrated in Figure 2, with
many of the young unemployed being educated and well
qualified. Some of this can be related to the distorting
effect of public sector hiring practices, which have
often led to a focus on diplomas over applicable skills.
Private sector involvement in the shaping of curricula
and education agendas – especially relevant for tertiary
and technical education – could help to remedy this.
With such a rapid increase in workers on the horizon, it
is important that Middle East nations invest in the types
of skills and abilities which will be of use to businesses.
Moreover, with governments in the region seeking to
diversify their economies, the nature of work which will
be available to these future generations is broadening
quickly. As their economies continue to move up value
chains, creating a larger role for complex and knowledgeintensive work, soft skills such as creativity, flexibility and
leadership will be more of a priority.
7
Certainly the challenge faced by governments of
the Middle East is substantial. Delivering economic
diversification and growth, and sustainable job creation,
for a young and rapidly-growing population will be
an immense test. While these are by no means new
problems, developments over recent months have
highlighted the importance of implementing longterm solutions: lower revenues are highlighting the
unsustainability of public sector hiring as a mitigation
mechanism.
6
Economic outlook 2015
5
Figure 6: Real GDP growth forecasts, Q1 2015
Figure 5: Public expenditure on education, % of GDP,
2012 or most recent year
%
4
%
4
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2015
2016
Iran
Kuwait
Lebanon
Iraq
Bahrain
Saudi Arabia
0
Oman
1
Jordan
The graph illustrates how several Middle Eastern nations
expend similar proportions of their annual output on
education as other comparable economies. While lower oil
prices enforcing budgetary discipline could lead to these
proportions declining over the coming years, education
will remain a priority. For example, the UAE has made
education one of the central themes of its Vision 2021
agenda, with the explicit aim of transforming its current
system and teaching methods, in order to achieve world-
Egypt
2
UAE
3
Source: UNESCO, Cebr analysis
Qatar
Lebanon
Qatar
Bahrain
Iran
5
Egypt
0
Oman
6
Saudi Arabia
1
India
7
Russia
2
Mexico
8
Brazil
3
2017
Source: IMF, national statistics offices, Cebr analysis
economic insight – middle e a st Q1 2 015
Squeezed export earnings and government revenues
will challenge Saudi Arabia, although the Kingdom
has confirmed that spending on infrastructure, health,
education and social services will remain elevated
during 2015. The death of King Abdullah in January is
not expected to substantially alter this outlook, with
his successor King Salman indicating that he intends to
prioritise continuity in governance, despite his reshuffling
of cabinet personnel. Given the commitment to current
policy and the fiscal flexibility to follow through, we
see the Kingdom’s growth slowing only steadily: after
real GDP expanded by an estimated 4.1% during 2014,
growth of 3.4% is expected this year.
Iran’s progress in nuclear talks with the P5+1 (the five
permanent UN Security Council members, plus Germany)
has seen the deadline for a deal extended until June,
although a framework agreement is required by 1 March.
We anticipate that steady progress will be made towards
these milestones, with the collapsed oil price renewing
the impetus for Tehran to achieve continuing sanctions
relief. Emerging from a very challenging economic
period, the economy should expand by around 1.2% this
year, with growth accelerating thereafter. However, this
forecast depends on incremental progress leading to a
comprehensive nuclear deal at some point during 2015 –
hence, adverse developments during negotiations could
lead to a renewed slowdown or contraction.
The UAE’s non-oil sector added jobs and expanded
output throughout 2014, helping to deliver an estimated
4.3% growth in GDP during that year, and entering
2015 with considerable momentum. While Dubai has
announced strong spending growth for 2015, the lower
oil price risks dampening confidence and demand in the
wider economy, especially alongside a cooling property
market. Nevertheless, the UAE’s diversified economy and
strong fiscal position should help deliver real GDP growth
of 3.7% during 2015.
As a net oil importer, Egypt’s economy is receiving
a boost from the recent steep price falls, which are
serving to support households’ spending power and
consumption. Its private sector saw activity accelerate
during the second half of the year, helped by both
domestic and export orders picking up and a return
to positive job growth. After output expanded by an
estimated 2.2% during 2014, an acceleration to around
3.8% is expected for 2015, amounting to the fastest
annual growth in five years. This will be supported by a
gradual recovery in confidence and tourism. However,
security concerns in Sinai, as well as in neighbouring
Libya, Sudan and Gaza, remain a challenge.
have led to an estimated GDP contraction of 3% during
2014. From this low base, expansion of around 2% is
expected for 2015, with Baghdad targeting further
increases in oil production and exports.
Hindered by stagnant oil production, Kuwait’s GDP
grew by an estimated 1.4% during 2014. Non-oil GDP
is set to accelerate during 2015, which should help to
deliver growth of around 1.8% this year. While the
government’s fiscal surplus will narrow significantly
due to lower oil prices, the Kuwaiti Finance Ministry
has indicated that this will not put the brakes on their
considerable fixed investment plans for the coming
years.
Oman has also indicated that lower prices will not
hinder infrastructure delivery during 2015, with the
Sultanate continuing to develop ports, roads and
railways; as well as planning a slight increase in oil
production over 2014. After estimated annual growth
of 4.4% last year, moderating inflation and low interest
rates will support activity, helping the economy expand
by around 3.5% over 2015 as a whole.
After annual expansion of 5.1% in Q3 2014, Bahrain’s
growth for 2014 as a whole is set to amount to 4.0%,
driven by construction and infrastructure spending.
While the momentum from this development activity
will continue stimulating the non-oil sector in 2015,
sluggish growth in oil production and lower prices
moderate the pace of fiscal expansion. The Kingdom’s
economy is projected to expand by 2.7% over 2015 as
a whole.
The economic headwinds facing Lebanon remain
substantial, as security challenges disrupt activity and
political impasses hinder policymaking. The difficulties
of moving goods through crisis-engulfed Syria have led
to prolonged import and export weakness, which will
persist during 2015. The Lebanese economy is likely to
expand by only 2.0% this year. Jordan’s economy is
also particularly affected by the crises in Syria and Iraq.
While growth is set to pick up this year, helped by lower
oil prices, the consumption boost from reduced inflation
will be partially offset by continuing regional instability.
As is the case in Lebanon, public services and housing
remain strained by the volume of refugees fleeing
conflicts in neighbouring nations.
Real GDP expanded by 6% in Q3 2014, leaving Qatar on
course for annual growth of 6.3% for 2014 as a whole. As
one of the oil exporting nations best-placed to withstand
a prolonged period of low prices, fiscal policy will remain
expansionary in the coming years as Qatar seeks to
deliver an ambitious programme of development projects
– partly in preparation for the 2022 World Cup. With a
$30bn pipeline of infrastructure delivery on the cards for
2015, non-oil sectors will continue driving growth, leading
to expected GDP growth of 7.1% in 2015.
The ongoing struggle against IS continues to weigh
upon Iraq’s economy. Despite this instability – which is
likely to last throughout 2015 at least – oil production
reached a 35-year high in December 2014. Yet even with
oil production continuing to defy insurgent violence,
disruptions to trade and a dismal investment environment
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economic insight – middle e a st Q1 2 015
ENDNOTES
1 Overall ‘Doing Business’ scores are constructed from several indices encompassing a wide range of factors. Examples include the costs and procedures
involved in registering businesses and properties; barriers to trading internationally, enforcing contracts, or accessing credit; and the financial and
procedural burden of paying taxes.
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