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Welcome to this 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.
Global economic growth continues to
strengthen in 2014
Annual GDP growth in the GCC+5 nations is expected
to accelerate to 3.6% this year, supported by
improvements in the external environment, particularly
among advanced economies. The latest data show that
US GDP bounced back in Q2, with the world’s largest
economy now set to expand by 1.9% over the course
of the year. Meanwhile the eurozone is on course to
register positive GDP growth over 2014 as a whole
– for the first time since 2011 – despite an ongoing
slowdown in France, the currency area’s second-largest
economy. Japan’s stimulus programme is expected to
see its growth continue apace in the short term. The
improved picture in these advanced regions is set to
underpin global growth of 3.0% during 2014, up from
2.4% in 2013.
Security concerns place upward pressure
on oil prices, despite a slowdown in
emerging market demand
ICAEW Economic
Insight: Middle East
Quarterly briefing Q3 2014
While accelerating growth in advanced nations will
support energy demand growth in the coming years,
a period of relatively softer oil prices had been widely
expected over the medium term. This is due in part
to the relatively weaker demand growth from many
emerging nations, as well as the effect of new supply
coming on-stream. However, recent security concerns
have introduced new upside pressure on oil prices.
Iraq had been expected to be a major source of new oil
supply and was forecasted by the International Energy
Agency (IEA) to contribute 60% of OPEC’s output
increase over 2013–19. The scale of this contribution
is now subject to doubt, given geopolitical
developments.
While current strife in the north of the country has
had a muted effect on prices so far – as Iraq’s oil
production and exports are sourced mainly from its
southern fields – the turbulence will fuel uncertainty
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around the longer-term path of Iraq’s oil production.
Security challenges will necessarily factor into decisions
about investment in future capacity, compounding the
difficulties in attracting capital and expertise to the
fractured nation. While we do not currently expect the
medium-term path of oil prices to change significantly
due to recent geopolitical developments in Iraq, the
situation certainly has the potential to generate significant
medium-term impacts.
The increasing requirement for freight capacity is
not the only driver of rail investment: population
growth and increasing congestion have also provided
impetus for renewing and expanding the region’s rail
infrastructure, particularly within cities. In addition,
the planned ambitious growth of tourism sectors
will also require the ability to move large volumes of
people across the region at low cost. Rail is one way of
achieving this.
Although higher crude prices may provide short-term
relief for governments in the region whose incomes
depend overwhelmingly on oil revenues, this is not
expected to stem the appetite for expanding or
supporting the non-oil sectors of their economies.
Indeed, any fiscal flexibility afforded by higher-thanexpected oil revenues would provide further opportunities
for investment in diversification, helping to shore up the
sustainability of the region’s long-term growth.
Ambitious national rail plans to culminate
in cross-region GCC railway
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45
40
35
30
25
20
15
10
5
Kuwait
Bahrain
0
Iraq
Addressing these constraints and investing in transport
capacity will provide a significant boost to the non-oil
sectors of these economies. The competitiveness of
downstream sectors depends to a large extent on their
ability to efficiently and safely move goods such as
machinery, chemicals, commodities, energy-intensive
manufactures and other containerised cargo over long
distances. Interconnected rail networks provide such
opportunities for the fast, safe and cheap transit of
these goods across the region as a whole, and as such
investment in rail will be a key part of the economic
diversification agenda of GCC countries.
50
Oman
In addition, this reliance on roads as the main conduit for
trade can cause road transport policies to be particularly
contentious. The UAE’s recent proposals to levy additional
tax upon road vehicles entering the Emirates has
frustrated both Saudi Arabia and Oman, who have urged
the UAE to reconsider. This tax would impose additional
costs upon their transport sectors, and stoke price
inflation for many basic items.
Figure 1: Current/proposed rail investment in the
Middle East, as of 2013, $bn
UAE
The region has long-relied upon roads as the main mode
of transport for the shipment of goods. This historical
reliance has been attributed to the comparatively smaller
size of GCC countries – meaning that internal trade
destinations are usually only a few hours’ drive away – as
well as the abundance of cheap road fuels. However, the
lack of alternative transport modes has made cross-border
trade almost entirely dependent upon road freight, a
method of transit which can be costly and slow over long
distances. This has acted as a brake on the growth in trade
volumes between GCC countries.
Iran
The GCC nations lead the region’s current
rail investment boom
The most ambitious aspect of the region’s railway
infrastructure plans is the planned GCC Railway,
a 2,177km project which will link the networks of the
six GCC countries. This cross-regional network would
be delivered by a new GCC Railway Authority, with a
view to becoming operational by 2018–19. However,
officials from Oman and Bahrain have already
cautioned that delays and planning hurdles may
complicate the timely completion of the network.
With most Gulf States investing heavily in all manner
of infrastructure developments over the period,
competition for materials and expertise are likely to
weigh upon delivery of the project.
Qatar
Years of sustained high oil prices have provided many
governments in the region with the dry powder
needed for ambitious and far-reaching investment
programmes. The GCC nations in particular have
seized on the opportunity to stimulate their non-oil
sectors, devoting significant sums to investments in
infrastructure. Improvements to the region’s built
environment and transport networks are central to the
diversification aim. Increasing the ease of transport
within and across the region’s economies will support
commerce and investment, providing the networks with
which to transmit goods internally and externally, while
proliferating services trade through simplifying and
boosting business and commuter travel.
Saudi
Arabia
Diversification can assuage the disruption
caused by political turbulence
To this end, countries across the region are undertaking
massive and transformative rail investments.
Construction of the 1,200km Etihad Railway began in
2012, seeking to further integrate the UAE’s regions,
with the ultimate goal of linking the national network
to the Saudi and Omani borders. Saudi Arabia’s North
South Railway, currently partially-operational, links the
capital with mining centres near the Jordanian border
and ports on the Gulf, and will eventually open to
passenger services. The ‘Landbridge’ freight link is also
set to go ahead, connecting its east and west coasts
and enabling fast cargo shipments between the Gulf
and the Red Sea. Qatar’s Doha Metro and Lusail light
rail projects are set to be followed by long-distance
passenger and freight links, integrating Qatar’s
network with those of Saudi Arabia and Bahrain.
Source: Middle East Rail
The Gulf nations continue to build aviation
connectivity
While the expansion of railway infrastructure will be of
vital importance to the growth of cities and industries,
the rapidly-developing tourism market is also crucial
to diversification objectives. As such, aviation projects
also account for a substantial part of the region’s
infrastructure pipeline.
economic insight – middle eas t Q3 2 014
Aviation’s importance to the region can be seen in the
growth of Dubai International Airport, which recently
displaced London Heathrow as the world’s busiest airport
for international passengers. The UAE is also building
Dubai World Central – a five-runway, three-terminal
airport and logistics complex – which aims to become
the world’s biggest cargo and passenger hub. Moreover,
expansion is planned at Abu Dhabi International, which
would increase its passenger capacity to 20m per year.
Meanwhile in Qatar, plans are already being prepared
to construct a second terminal at the recently-opened
Hamad International Airport, if passenger growth exceeds
current projections. Oman is investing $6.1bn to expand
Muscat and Salalah International airports, as well as to
develop four new regional airports across the Sultanate.
The Middle East as a whole is set to become one of the
world’s most important aviation centres over the long
term. As well as providing attractive destinations within
the region for leisure and business tourists, the Middle
East’s location – in the middle of Africa, Asia and Europe
– makes it very well suited for hub airports, providing
connectivity for long-haul travellers across the world. The
region’s hubs are therefore well placed to share in the
projected future growth in global air travel.
This huge infrastructure pipeline is expected to see
transport and logistics sectors play an increasingly large
role in the region’s economies. It will be the transport
sectors in the region which will have the task of
generating value from these fixed assets: establishing and
maintaining efficient supply chains, delivering goods and
personnel swiftly and reliably within and across borders,
and supporting the activities of the travel and tourism
industries. Figure 2 below sets out Cebr’s forecasts for
the relative importance of logistics sectors to Middle East
economies.
Figure 2: Transport, storage and communications
sectors as a % of real GDP
%
16
across many governments in the region include large
expenditures on household subsidies for everyday items
such as food, fuel or electricity. These are considerable
in macroeconomic terms: the IMF estimates that, in
the Middle East and North Africa, 22% of government
revenues are expended on pre-tax energy price subsidies,
accounting for nearly half of all subsidies in the world.
Given that the expected downward path of oil prices in
the medium term will erode the budgetary flexibility
of governments in the region (whose incomes depend
greatly upon hydrocarbon revenues), reforms of price
subsidies are increasingly on the agenda. While such
measures are fiscally prudent, they will place huge
burdens upon households in the short term: for example,
Egypt’s recent subsidy reforms saw gasoline prices rise
by up to 78% overnight, with electricity prices set to
double over the next five years. In addition, its bread
subsidy scheme is currently being overhauled, along
with improvements to grain storage and distribution, with
the aim of curbing the nation’s dependence on wheat
imports.
Unless forced into action through fiscal pressures,
governments in the region have shown reluctance to
withdraw or reform such subsidies, as the price increases
they impose upon consumers can be socially destabilising.
However, though such reforms are painful for households,
their replacement by more equitable social safety nets will
be a necessary step to tackle inefficient spending, and
ensure fiscal sustainability in the region.
Hydrocarbon dependency has constrained
the development of intra-regional trade links
While the aforementioned infrastructure projects will
enable more extensive trade activity within the Middle
East (and in particular within the GCC, given these nations
are undertaking the bulk of investment), the region’s
economies have historically had much greater reliance on
trade with countries outside their region.
Since fuels represent the overwhelming export
commodity of the GCC+5 nations, their main export
partners are likely to be nations without fuel reserves of
their own, rather than fellow economies in the region,
which also have extensive economic specialisation in the
extractive sectors. This has limited intra-regional trade in
the Middle East. Figure 3 below illustrates this, by setting
out the proportion of the region’s goods exports shipped
to other GCC+5 nations.
14
12
10
8
6
Figure 3: Percentage of total goods exports to
GCC+5 partners
4
2
%
0
This is a pertinent issue in light of ongoing moves
towards subsidy reform in the Middle East. Fiscal policies
20
15
10
5
2003
2008
GCC+5
Iraq
Qatar
Iran
Kuwait
Saudi
Arabia
Egypt
0
Oman
Another benefit of this transport growth, and the
establishment of more efficient regional supply chains,
will be the alleviation of infrastructure bottlenecks which
create inflationary pressures throughout the region’s
economies.
25
UAE
More efficient supply chains will ease
inflationary pressures at a time of subsidy
reform
30
Bahrain
Source: National statistical offices, Cebr analysis
35
Lebanon
2018
40
Jordan
Jordan
Kuwait
Oman
Saudi
Arabia
UAE
Egypt
2013
% of total goods exports to GCC+5 nations
2008
Qatar
Bahrain
45
2013
Source: UNCTAD, Cebr analysis
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economic insight – middle eas t Q3 2 014
Jordan, Lebanon and Bahrain see the highest shares of
their goods exports delivered to other nations within
the GCC+5, with the relevant proportions amounting to
40.0%, 37.3% and 33.4%, respectively, in 2013. Indeed,
the relatively deeper links these nations have established
with other GCC+5 economies have been a substantial
contributor to their trade growth over the past decade.
In each of these three countries, over a third of their total
exports over the period were accounted for by growth in
exports to other members of the GCC+5.
suitable comparisons to the Gulf States in terms of the
stages of their economic development. Yet each of these
regions has more extensive intra-regional trade than
is observed among the GCC+5 nations: in 2013, intraregional goods exports in ASEAN, UNASUR and CIS
accounted for 26.0%, 19.7% and 18.7% of total goods
exports, respectively.
However, these three economies are small in comparison
to some of the others in the region, amounting to just
2.4% of total goods exports of the GCC+5 countries.
Saudi Arabia is the largest goods exporter, accounting for
over 30% of the region’s exports, equivalent to $376bn in
2013. However just 5.3% of these exports, by value, were
destined for other nations within the region. Unlike Saudi
Arabia, the UAE, which is the region’s second-biggest
goods exporter, has become more dependent on GCC+5
trade in recent years: total goods exports to GCC+5
nations grew by 575%, amounting to $65bn in 2013 and
representing 17.7% of its total goods exports, up from
14.3% in 2003.
The scale and scope of the transport and logistics projects
touched upon earlier in this report will contribute to
fostering deeper intra-regional trade links between Middle
Eastern nations. Fast, reliable and cost-effective rail links,
reduced road congestion and increased airport capacity
will all reduce the technical barriers to the efficient
movement of cargo and passengers across the region.
GCC+5’s goods trade integration lags behind
that of other regions
While there are variations over time and between
countries, the overall trade picture in the Middle East has
changed little in the last 10 years: from 2003 to 2013,
the proportion of GCC+5 nations’ goods exports which
were shipped to other countries in the region grew only
marginally, from 8.9% to 9.4%. Figure 4 below compares
this share to the equivalent figures among selected
regions and country groups.
Figure 4: Intra-regional goods exports, as a share of
total goods exports
In addition, trade within Middle Eastern countries is also
supported by free trade agreements, and the continued
minimisation of tariff and non-tariff barriers to trade. The
elimination of such barriers has long been a policy goal
of governments in the region, and all GCC+5 countries
except Iran and Lebanon have been members of the
Greater Arab Free Trade Area (GAFTA) since 1997. This
agreement was intended to gradually reduce customs
duties and other trade barriers, and most tariffs between
member states have now been eliminated. The GCC
has also succeeded in encouraging and fostering free
movement of capital and labour within its member states,
as an ongoing process of further integration in the region.
In addition, the GCC has also sought to promote
trade with external partners through a series of bilateral
agreements: an agreement with the European Free Trade
Association (comprising Iceland, Liechtenstein, Norway
and Switzerland) was signed in 2009, and discussions and
negotiations to establish similar arrangements with China,
Australia and Turkey are ongoing.
This widespread commitment to trade openness
is shown in Figure 5 below, which sets out the Middle
Eastern nations’ Trade Freedom Index scores. This index
takes into account the weighted average tariff rate for
each country, as well as the extent of non-tariff barriers
to trade (such as quantity or price quotas, customs
and investment restrictions, and direct government
intervention in trade matters). It shows how many
economies in the Middle East currently exhibit more trade
openness than many other emerging market nations.
60
50
40
30
20
Figure 5: Trade Freedom Index of GGC+5 and selected
emerging economies, 2014
cebr.com
65
55
45
India
Brazil
China
Russia
Iran
Turkey
Egypt
Lebanon
Kuwait
Oman
Bahrain
Jordan
35
Saudi Arabia
Also included in Figure 4 are the ASEAN nations, UNASUR
and CIS.1 These country groupings, comprising mainly
less-developed and emerging economies, are more
75
UAE
The regions with the highest penetration of intra-regional
goods trade are NAFTA (North American Free Trade
Agreement, consisting of the US, Canada and Mexico)
and the eurozone. Goods trade between NAFTA and
eurozone members comprised 49.2% and 45.1% of their
memberships’ total goods exports respectively in 2013.
However, since these groups are comprised mainly of
advanced economies, with extensive cross-border supply
chains and economic interdependencies, they may not be
the most apt comparison for the GCC+5 region.
85
Trade freedom index score
Source: UNCTAD, Cebr analysis
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95
GCC+5
2013
CIS
2008
UNASUR
ASEAN
2003
Euro
area
0
Qatar
10
NAFTA
Intra-regional goods exports, as a % of total goods exports
%
Free trade and infrastructure alone will not
deliver deeper integration
Source: The Heritage Foundation. A higher score indicates more trade openness
economic insight – middle eas t Q3 2 014
We can conclude that, while this openness and intraregional infrastructure provide the means for better
integration, they will not on their own result in
significantly higher shares of intra-regional goods trade
for the GCC+5 nations. Most fundamentally, progress
in diversifying the region’s economies away from
commodities extraction will be the most effective driver
of integration. The continued development of upstream
(such as exploration and extraction) and downstream
(such as refinery activities and petrochemicals
manufacturing) industries in GCC+5 countries, which
draw inputs from and sell services to one another,
represent the most immediate integration opportunities.
In the longer term, the growth across the region of nonoil related sectors such as manufacturing, tourism, and
financial & business services will establish and entrench
cross-border supply chains, unlocking efficiency gains and
helping underpin the sustainability of the region’s growth.
Middle Eastern growth to accelerate in 2014,
driven by Saudi Arabia and UAE
Figure 6: Real GDP growth forecasts, Q3 2014
Weakening business confidence in Bahrain, related
to political unrest, is set to be a persistent hindrance
to GDP growth in the coming years. Government
consumption and infrastructure developments should
support growth of around 3.8% in 2014, with similar
levels expected for 2015–16.
Kuwait’s oil output and export performance are
set to be muted in 2014, while a strengthening in
the domestic non-oil sector will offset some of this
weakness, leading to annual GDP growth of around
2.7%. Consumption growth and a robust pipeline of
infrastructure developments will help the economy
accelerate in the coming years, reaching 4.0% annual
growth by 2016.
Economic growth is set to return to Iran in 2014 after
two years of contraction, as the incremental lifting
of sanctions enable relatively weak growth, of 1.4%.
Emerging from this low base, growth is expected to
reach 2.1% in 2016 – but currency turbulence and
disruptions to imports will keep inflation very high,
eroding consumption and confidence.
%
10
9
8
Annual GDP growth forecast
Hindered by labour market issues, Oman’s GDP growth
is expected to reach 3.4% this year, and remain broadly
flat in 2015. Its maturing oil fields mean that increases in
oil production will slow in coming years, placing a cap
on the extractive sector’s growth, until new gas capacity
starts becoming operational after 2016.
7
Ongoing upheaval in Iraq has led us to revise down its
growth forecast to 4.0% for this year, due to security
concerns hindering expansion in the oil sector. While
we expect some of this growth to be made up in
subsequent years – with GDP forecast to expand by
8.7% in 2016 – persistent turmoil may discourage
investment and cap its longer-term growth.
6
5
4
3
2
1
2014
2015
Iran
Lebanon
Bahrain
Egypt
Oman
Kuwait
Jordan
UAE
Saudi
Arabia
Qatar
Iraq
0
2016
Source: IMF, national statistics offices, Cebr analysis
While the expected moderation in oil prices will put the
brakes on the rate of Saudi Arabia’s GDP expansion over
the coming years, extensive infrastructure investment
and fiscal expansion will continue, supporting growth of
around 4.3% in 2014, rising to 4.4% next year. Should
Iraq’s oil exports become further-disrupted amid security
concerns, this would prompt Saudi Arabia to increase
its own production, providing a boost to growth in the
short term.
Despite a moderation in the oil sector, the UAE’s
economy has continued accelerating throughout 2014,
with non-oil activities driving job creation and growth.
Rising confidence has been accompanied by an upturn
in the construction and property industries, while fixed
investment is expected to offset the medium-term
slowdown in oil sector expansion. Real GDP is expected to
increase by 4.7% this year, with the pace of growth set to
decelerate marginally in 2015–16.
The conflicts within Iraq and Syria will continue
challenging Lebanon and Jordan. Along with
domestic instability, these external conflicts have
further dampened business and consumer confidence,
delaying investment plans and disrupting trade, while
refugees from neighbouring regions place strains upon
resources and public services. Interventions from other
countries in the region, and institutions such as the
World Bank, are providing financial support to stretched
governments, but the economies of these nations will
continue to be challenged by the millions of displaced
people within their borders.
The outbreak of fighting between Israel and Palestine
is also impacting Egypt, where output is expected to
rise by 1.9% this year. The conflict in Gaza presents
additional security concerns, while persistent internal
political tensions are also hampering confidence.
Government stimulus will be supported by donations
from other Gulf states, but growth will be weighed
upon by widespread uncertainty, while consumption
remains weak amid high inflation and subsidy reforms.
Against this background, the possibility of further
social unrest remains a significant downside risk to
Egypt’s growth.
Qatar’s flurry of fixed asset expenditure will keep
investment levels elevated over the coming years, driving
growth over the medium term. Real GDP is expected to
be 6.3% higher in 2014 than in the previous year, with
annual growth rising above 7.0% during the years 2015–
16. A downside risk for Qatar’s growth projection is the
possibility of FIFA reconsidering the country’s award of the
2022 World Cup: much of its current infrastructure plans
have been drawn up in preparation for the tournament.
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economic insight – middle eas t Q3 2 014
ENDNOTES
1 ASEAN is the Association of South East Asian Nations (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and
Vietnam). UNASUR refers to the Union of South American Nations (Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, Peru, Suriname,
Uruguay and Venezuela). CIS is the Commonwealth of Independent States (Armenia, Azerbaijan, Belarus, Kazakhstan, Kyrgyzstan, Moldova, Russia,
Tajikistan and Uzbekistan).
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.
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