Download Economic Insight: Middle East

ICAEW Economic Insight: Middle East
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.
Global macroeconomic backdrop darkens
The outlook for the global economy at the start of
2014 was mixed, but broadly positive. Advanced
economies such as the US and UK were poised to
see their recoveries accelerate, supported by falling
unemployment and rising confidence. Even the stricken
eurozone, still weighed upon by a substantial debt
burden and economic imbalances, was expected to
turn the corner, driven by periphery nations exiting
recession. The weaker spots in the global economy
seemed to be emerging regions, where structural and
cyclical slowdowns were set to act as headwind to a
continuation of the robust expansion seen throughout
recent years.
This improving outlook for advanced economies was
set to help Middle Eastern output rise briskly from the
3.3% growth recorded during 2013. However, over the
course of the year, the economic climate has darkened
markedly. Geopolitical disruptions in the region itself
have combined with a more muted global backdrop,
helping constrain 2014 real GDP growth for the GCC+5
nations to an estimated 2.9%.
ICAEW Economic
Insight: Middle East
Quarterly briefing Q4 2014
BUSINESS WITH confidence
Poor weather dented activity in the US during Q1,
while in the UK confidence is falling back slightly after
rising strongly in 2013 and early 2014. The situation in
the eurozone is far worse and concerning. The currency
area has been affected by lacklustre performances from
its three largest economies, and now teeters on the
brink of a triple-dip recession. The continual fading of
price pressures in Europe is increasingly worrying, with
September data confirming that eight EU countries
are already in outright annual deflation. This raises the
prospect of businesses and consumers holding off from
making purchases as they expect prices to fall further –
causing economic conditions to worsen.
icaew.com/economicinsight
China’s economy has also experienced a bumpy year.
Economic activity has slowed and there are concerns over
diminishing returns from years of extensive credit-fuelled
investment. While stimulus measures taken throughout
the year are expected to help the economy meet the
official target for GDP expansion of 7.5%, slower output
growth in the future is almost certain. Meanwhile, Japan
has seen confidence ebb away over the course of the year.
Having slipped back into technical recession in Q3, it is
still far from clear whether recent reforms and stimulus
measures will help to shift the Japanese economy out of
years of stagnant growth.
The US has seen its share of GCC+5 fuel exports remain
broadly stable. This reflects a falling market share for
Saudi Arabia (the US accounted for 14% of external
demand for Saudi fuel commodities in 2013, down
from 24% a decade earlier), partially offset by greater
imports from Iraq and Kuwait. In dollar terms, its
purchases from the region amounted to $75bn in 2013,
representing a 12% annual decline. The outlook for
US demand for energy from the region is bleak – the
shale revolution in the States has supported increases
in oil production to the tune of 4.7 million barrels
per day (mb/d) over the last five years, reducing its
dependence on energy from the rest of the world.
Bleaker global outlook weighs upon the
Middle East
One export market which has seen an increase in its
share of GCC+5 fuel sales is India, having grown rapidly
from a very low base to account for 11% of total fuel
exports in 2013 (over a third of its purchases from the
region in that year was accounted for by supplies from
Iraq and Kuwait). This is a bright spot for the region’s
exporters: India’s economic potential represents a
substantial source of energy demand in future years, in
particular through its ambition to expand and extend
its manufacturing prowess. India is well-placed to claim
a larger share of global manufacturing chains over the
medium to long term, especially as labour costs in
Chinese and south-east Asian factories rapidly rise and
hold back their competitiveness.
The sum of these downward revisions is that we expect
global growth to reach only 2.7% during 2014, compared
to our expectation of 3.2% at the start of the year. This
slowdown, and the likelihood of sustained weaker growth
in coming years, has important implications on energy
demand – and the hydrocarbon-dependent economies
of the Middle East. Figure 1 below sets out the nations
and regions to which the GCC+5 export their energy
commodities.
Figure 1: Composition of external demand for fuel
commodities from GCC+5 nations, measured in current
dollars, 1995-2013
13%
2013
10%
2010
8%
11%
10%
9%
18%
19%
10%
33%
9%
34%
1%
6%
2005
15%
25%
12%
28%
1%
4%
2000
15%
1%
26%
0
10
US
30%
4%
18%
1995
11%
20
China
32%
30
EU
40
50
India
11%
60
Japan
70
23%
80
ASEAN
90
100 %
Other
Source: UNCTAD, Cebr analysis1
The single largest consumer of the region’s hydrocarbons
output remains Japan, which purchased $168bn of fuel
commodities from the GCC+5 nations during 2013. It
has traditionally been the dominant customer for several
nations in the region, and as recently as 2002 accounted
for over half of the energy exports from UAE and Qatar
(by 2013, the equivalent proportion was 27%). This
reduction in market share reflects not only diversification
in the export partners of the two GCC nations, but also
prolonged stagnation in Japan.
A similar picture is evident when considering the EU,
whose share of GCC+5 fuel exports fell by 10 percentage
points between 1995 and 2013. In dollar terms, its
purchases from the region have fallen by a quarter since
2011, from $96bn to $72bn. This reflects the economic
malaise gripping Europe as well as structurally lower
energy demand due to increasing efficiency, and the rapid
proliferation of alternative energy sources. Looking further
ahead, Europe’s stagnation could persist for years to come
if deflationary expectations become entrenched, leading
to delays in consumption and investment decisions.
Industrial production, accounting for some of the most
energy-intensive economic activities, remains languid,
with monthly output at levels first seen nearly 15 years
ago; 13% below its pre-financial crisis peak.
icaew.com/economicinsight
cebr.com
The energy inputs required to deliver China’s economic
growth will continue to fall, both through more
efficient production, and its long-term rebalancing
away from dependence upon commodity-intensive
capital investments. China is a key customer for both
Oman and Iran in particular, and accounted for 40% of
fuel exports from those nations in 2013.
The proliferation of alternative energy sources will
continue to erode hydrocarbon demand growth.
According to BP’s Statistical Review of World Energy,
the total global stock of installed wind and solar
capacity increased more than tenfold in the decade
to 2013. Over 85% of this capacity growth has taken
place in the US, China, Japan and Europe – even
amid slowing growth and falling market shares, these
economies comprise nearly half of energy demand for
the GCC+5.
Oil price fall driven by demand, supply,
and dollars
The sharpness with which oil benchmarks have
tumbled represents a surprise adjustment to short-term
demand and supply expectations. Nonetheless, the
likelihood of sustained lower growth in coming years
raises the prospect of the global economy entering
a longer period of structurally weaker hydrocarbon
demand. Due in part to the more sluggish path of
global economic growth, the International Energy
Agency (IEA) has sharply revised down its forecast for
global oil demand for both 2014 and 2015. In its latest
Oil Market Report, it forecast that 2014 would see
annual demand growth of just 0.7 mb/d.
In addition to this demand weakness, abundance of
supply is also weighing on prices. September saw total
global oil supply grow by an estimated 2.8 mb/d on
an annual basis. This was supported by continued
increases in output from Libya, despite the crises
afflicting the country.
economic insight – middle e a st Q 4 2 014
Currency movements are also having an effect. The
US Fed’s tapering of quantitative easing (QE), and the
expectation of interest rate rises during 2015, are leading
to the US dollar strengthening against other currencies.
This trend is being amplified as the weakness in other key
regions of the global economy becomes more apparent.
The greater purchasing power of the dollar therefore
drives down the prices of other dollar-denominated assets
– such as oil – and has contributed to the slide seen in
recent weeks.
This is in sharp contrast to the trend for much of the
2000s, when a weaker dollar coincided with rising
commodity prices, to the benefit of exporting nations in
the Middle East. Nations in the region, and commodityrich emerging markets more generally, were able to
rapidly accumulate export earnings and foreign exchange
reserves, funding ambitious investment programmes
and bolstering growth. It also allowed them to weather
the global financial crisis from a position of comparative
strength.
GCC+5 nations have varying levels of
readiness for lower prices
The impacts of the economic and technological trends
discussed above will be felt over the medium term,
meaning that the likelihood of prolonged softer demand
and lower prices will present significant challenges for
GCC+5 nations. Figure 2 below sets out the evolution of
Brent crude’s spot price over recent months, compared
with the IMF’s estimates for the 2015 fiscal break-even
prices for selected GCC+5 nations. Fiscal break-even prices
denote the level at which these countries’ government
budgets would be balanced. They are a function of
assumed production and export levels, government
spending plans, as well as expected tax revenues from
both the oil and non-oil sectors.
Figure 2: Brent oil spot price, and projected 2015 fiscal
break-even prices for selected GCC+5 nations, $/bl
140
Iran
130
120
Bahrain
110
Oman
100
Iraq
The downward price pressures are an immense challenge
for Iran, which has the highest breakeven price among
the countries in the region. Its response was to sell at a
discount to Asian markets, pricing its production $0.82/
bl below the regional benchmark, its largest cut since
late 2008. In addition to price competition, producers
more broadly are maximising output from producing
fields, running at capacity and postponing maintenance
outages. Such efforts among exporters to retain market
share and earnings are weighing on prices further.
Some GCC+5 nations are much better placed to withstand
a prolonged revenue squeeze than others. The UAE, Saudi
Arabia and Qatar have large and mature domestic banking
systems and access to international markets. These
nations and Kuwait also have large sovereign wealth funds
generating ample investment income. Iran’s economic
and financial isolation, by contrast, has led to suppressed
export earnings, curtailed access to financial markets and
international asset freezes.
Fiscal pressures will mount with oil earnings
suppressed
While a reduction in oil export earnings will impact
revenues in many of the GCC+5 nations, fiscal pressures
continue to mount on the spending side. Some insight
into the drivers of the break-even price levels in Figure
2 can be gained through the current and projected
future fiscal balances of the region’s governments (ie, the
balance between annual tax receipts and government
spending at both central and local levels). Figure 3 below
sets out the IMF’s latest projections for net government
lending/borrowing in the Middle East region.
Figure 3: General government net lending (+) or
borrowing (-), % of GDP, 2013-16
Kuwait
Qatar
80
UAE
70
Qatar
UAE
60
Mar
2014
Saudi Arabia’s apparent willingness to tolerate prices
at these levels has been interpreted as an attempt to
heap financial pressure on shale producers in the US and
elsewhere. Extracting a barrel from these wells is much
more costly than in the readily-accessible oil fields of Saudi
Arabia. Rather than endeavouring to prop up prices in
response to the drop-off in demand, the Kingdom actually
cut prices for its November output of all grades and in all
markets.
Saudi Arabia
90
50
However, a shift in policy response may follow the next
OPEC meeting, scheduled for 27 November.
Kuwait
Apr
2014
May
2014
June
2014
July
2014
Aug
2014
Sep
2014
Oct
2014
Nov
2014
Saudi Arabia
Oman
Iran
Source: US Energy Information Administration, IMF
Iraq
The oil prices at which the 2015 fiscal budgets of these
nations will be balanced varies hugely – from $131 in Iran,
to just $53 in Kuwait. Saudi Arabia, which has in the past
organised with its OPEC partners to jointly cut production
levels in response to falling prices, is perceived as unlikely
to scale back production at present. Indeed, the spending
plans inherent in these break-even prices imply that
most exporters in the region do not have the flexibility
to endure sustained reductions in output or revenues.
icaew.com/economicinsight
cebr.com
Bahrain
Jordan
Lebanon
Egypt
-20
-10
2013
0
10
2014
20
2015
30
40 %
2016
Source: IMF
economic insight – middle e a st Q 4 2 014
Substantial government spending plans are common –
each of the countries with a projected surplus for 2014 is
expected to see it narrow in the coming years. However,
government spending is not in principle unsustainable.
The ambitious plans for investment and infrastructure
building across the region are substantial drivers of the
fiscal expansion represented in Figure 3. They involve
activities which stimulate growth in the short term, and
can also improve productive capacity and raise long-term
productivity.
However, a large share of government budgets in the
region are swallowed up by current spending, such as
generous public sector wages and salaries, widespread
subsidies for food and fuel, or direct cash transfers to
households. Current spending to curb discontent amid
elevated unemployment and inflation can be financed
during periods of high oil prices and abundant revenues.
Nonetheless their sustainability will be brought into
sharp focus by the likelihood of lower oil receipts for a
protracted period.
For example, Saudi Arabia is among the Middle
Eastern nations with the most ambitious medium-term
infrastructure plans. However, public sector wages are
considerable budget items, presently accounting for 35%
of total government spending. Iran, having partiallyreformed its indirect subsidy regime in recent years,
replaced it with a programme of direct cash transfers to
Iranian households, which will continue to place strains on
public finances.
Relative to GDP terms, Egypt has the largest government
borrowing needs of any country in the region. Despite
taking the courageous step of enacting subsidy reforms
which immediately increased petrol prices by up to 78%
in July, energy subsidies still account for about half of
the budget deficit. Egypt will be supported in meeting
its borrowing needs through aid payments from Saudi
Arabia, the UAE and Kuwait.
Figure 4 sets out the industrial components of GDP
among the GCC+5 nations (excluding Iran) in 2011.
These are the latest available data on a comparable basis
and give insight into the structural features of these
economies. Such structural compositions are the result of
long-term trends, with the relative proportions illustrated
below unlikely to have changed substantially since 2011.
The most noticeable trend is, of course, the predominance
of mining and fuel extraction in overall economic activity.
However, even these shares do not fully capture the
importance of, or dependence upon, hydrocarbons
across these nations. For example, some proportion of
manufacturing comprises downstream activities such as
refining and petrochemicals. In addition, some of the
commerce (wholesale trade) and transport-storage sectors
are also oil and gas-related activities.
More crucially, government revenues in these nations are
even more dependent on oil and gas than is suggested by
their shares of economic output. The sustainability of both
economic growth and fiscal stability across the region will
only be assured in the long term through more diversified
growth and a broader tax base.
Middle Eastern growth revised down for 2014
Figure 5: Real GDP growth forecasts, Q4 2014
%
8
6
4
2
0
Stability through broader growth
90
2014
2015
Iran
Kuwait
Lebanon
Oman
Bahrain
Egypt
Saudi Arabia
Jordan
-4
UAE
%
100
Iraq
Figure 4: Industrial composition of total GDP, 2011
Qatar
-2
2016
80
70
Source: IMF, national statistics offices, Cebr analysis
60
Saudi Arabia’s output contracted by 3.1% during Q2,
with activity weighed upon by falling exports and
a tightening of government spending. The stronger
headwinds from weakened export earnings will drag on
GDP over the coming years, leading annual growth to
slow from 4.2% this year to 3.9% in 2016. However, a
more dramatic deceleration is not anticipated, given the
Kingdom’s commitment to stable growth, its plans for
medium-term fiscal expansion and its ample flexibility to
deliver this.
50
40
30
20
Agriculture
Transport & storage
Mining & fuel
Finance & insurance
Manufacturing
Property
Utilities
Government services
Construction
Other services
Commerce, restaurants & hotels
Lebanon
Jordan
Egypt
Bahrain
UAE
Oman
Saudi
Arabia
Iraq
Qatar
0
Kuwait
10
Despite the pace of job creation in the UAE’s non-oil
sector slowing down in recent quarters, it has seen robust
output expansion across the year, supported by export
orders and domestic demand. Annual growth in real GDP
should amount to 4.6% in 2014, slowing only marginally
to 4.4% in 2015. The UAE’s progress in diversifying its
economy (and revenue base) away from oil means it will
be relatively well-sheltered from the hardest impacts of
Source: Arab Monetary Fund, Cebr analysis
icaew.com/economicinsight
cebr.com
economic insight – middle e a st Q 4 2 014
falling oil prices. However, recent sharp downturns in
equity markets – with Dubai’s property index down over
15% since September – underline risks to this outlook.
While the fall coincides with a broader slide in global
equities, a puncturing of confidence in the prospects for
the UAE’s property market could slow investment growth
in the coming years.
Qatari GDP contracted on a quarterly basis during Q2,
with strong growth in non-hydrocarbon activities only
partly offsetting a slowdown in the oil and gas sector.
Annual growth is expected to amount to 6.3% this year,
rising to 7.2% in 2015. This forecast, which assumes that
announced infrastructure projects proceed as planned, is
set to be supported by a continuation of brisk and broadbased growth across construction, financial and business
services, and tourism. Intensive capital investment will
buttress GDP expansion across the medium term, even at
lower oil prices.
Oman’s hydrocarbons production has grown sluggishly
this year, leading to annual growth slowing to an
estimated 3.3% during 2014. Due in part to the lower
expected oil price constraining fiscal expansion, GDP
growth is not likely to accelerate markedly in the short
term. The outlook further out is brighter, with new gas
fields expected to begin production, and developments
in downstream and non-oil activities boosting output.
After posting strong growth during the first half of the
year, we estimate that Bahrain’s output will expand by
4.0% over 2014 as a whole. However, growth is expected
to slow in coming years, to an average of 3.5% over
2015-16, due to flat oil production, and weaker growth in
non-oil activities. Bahrain’s economic potential remains
constrained, with confidence in the business environment
shaken by enduring social tensions.
IS militants will continue for some time, activity will
continue being disrupted in coming years, substantially
squeezing Iraq’s future economic potential.
Lebanon’s economy will remain severely tested by
the spill-over impacts of Syria’s civil war, and inertia
within the domestic political environment. Exports
fell on an annual basis in 14 out of the last 15 months,
underlining the disruptive effect of regional instability
to its trade and investment prospects. Jordan also
remains challenged by the turmoil in Syria, with the
additional strain of Iraq’s continued chaos impacting on
its economic climate. It stands to benefit from cheaper
oil, as fuels comprise a substantial share of its imports.
However, availability remains a concern, with Iraqi
supplies having been halted for much of 2014.
Egypt has seen private sector activity pick up in recent
months, with September’s Purchasing Managers’ Index
(PMI) indicating the first expansion in hiring for over
two years. We expect annual GDP growth of 2.1% over
the year as a whole, rising to 3.3% in 2015, supported
by a recovering private sector. Recent oil price
movements will help moderate inflationary pressures,
which have been elevated as subsidy reforms sharply
increased the fuel prices faced by households. However,
despite the ceasefire agreement in Gaza, economic
confidence will continue to be negatively impacted
by the situation in Sinai, as well as ongoing turmoil in
neighbouring Libya and Sudan.
Kuwait’s oil production has fallen short of projections
for this year, leading GDP to grow by less than previously
expected. Strong increases in private sector credit over
the year indicate the non-oil sector has helped to offset
some of this weakness, however, the outlook remains
subdued. We estimate GDP to have grown by 1.7% this
year, accelerating to 2.5% next year.
Iran is among the nations in the region most challenged
by the recent oil price correction, with increased fiscal
pressures dragging on growth in the coming years. GDP
expansion should amount to 1.2% this year, supported
by inflation falling back amid limited sanctions relief.
We expect subsequent years to see slower growth than
previously forecast, amounting to 1.6% in 2015 and
1.9% in 2016. This forecast assumes incremental progress
continues during nuclear negotiations with the P5+1 (the
five permanent members of the UN Security Council,
plus Germany), enabling an extension of talks beyond
the 24 November deadline, and further gradual steps
towards greater economic integration. Hence, there are
substantial risks to this forecast in both directions – a more
comprehensive deal being reached would boost growth,
while a breakdown leading to tightening of sanctions
would choke Iran’s already fragile recovery.
The persistent violent conflict across Iraq has shattered
its short-term growth outlook. While the threat posed by
IS to the Kurdish and Baghdad regions appears less dire
after military intervention by the US and fellow Gulf states,
the extensive disruption has taken a severe toll. GDP is
expected to contract by at least 2.7% this year, alongside
oil production interruptions and export pipelines being
sabotaged. On the assumption that the fight against
icaew.com/economicinsight
cebr.com
economic insight – middle e a st Q 4 2 014
ENDNOTES
1 Fuel commodities are defined as those recorded under Section 3 of the Standard Industrial Trade Classification (SITC) framework. These include crude
oil, petroleum products, natural gas, and coal. Note that these figures refer to external fuel demand, meaning that the values of commodity shipments
between GCC+5 nations has been excluded from the total.
Cebr
The Centre for Economics and Business Research is an independent consultancy with
a reputation for sound business advice based on thorough and insightful analysis.
Since 1993 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 and trade bodies.
ICAEW is a world leading professional membership organisation that promotes,
develops and supports over 142,000 chartered accountants worldwide. We provide
qualifications and professional development, share our knowledge, insight and
technical expertise, and protect the quality and integrity of the accountancy and
finance profession.
As leaders in accountancy, finance and business our members have the knowledge,
skills and commitment to maintain the highest professional standards and integrity.
Together we contribute to the success of individuals, organisations, communities
and economies around the world.
Because of us, people can do business with confidence.
ICAEW is a founder member of Chartered Accountants Worldwide and
the Global Accounting Alliance.
www.charteredaccountantsworldwide.com
www.globalaccountingalliance.com
For enquiries or additional information, please contact:
Lara Khouri, Marketing 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 2014 MKTPLN13602 11/14