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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 the region’s 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.
In this issue of Economic Insight: Middle East, we discuss
the game-changing global economic events of 2015 and
how they impact the regional outlook for the coming
years. In summary we find that:
• lower oil prices are drastically changing public
spending patterns across the region and households
and businesses should brace themselves for fewer
giveaways;
• with the US Federal Reserve preparing to raise
interest rates in the coming months, it will become
more difficult for countries such as Saudi Arabia and
the UAE to maintain their currency pegs;
• the Chinese economy is slowing at a faster-thananticipated rate, posing challenges for the commodity
exporting nations of the Middle East;
• as international sanctions on Iran are gradually
lifted, the country’s oil will begin competing more
intensely with other exporters, but the opening up of
the market will also create numerous opportunities for
businesses across the GCC+5; and
• despite a number of uncertainties in the global
economic landscape, the GCC+5 countries are
better placed than many other parts of the world
to face these changes and should continue on a
strong, if slightly altered, growth path.
Faced with lower prices, oil exporting
countries reassess their spending priorities
ICAEW Economic
Insight: Middle East
Quarterly briefing Q4 2015
BUSINESS WITH CONFIDENCE
One of the most drastic and talked about macroeconomic
events of 2015, and one with arguably the most
direct repercussions for the Middle East, has been the
persistence of low oil prices. In September, Brent traded
at $47 per barrel – roughly the same price as in January
and less than half the $95 per barrel average price in
September 2014.
The cause of the severe drop in oil prices remains
twofold. Firstly, American shale extractions alongside
record production in areas such as Iraq have contributed
to strong growth in oil supply. From a demand point
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In 2016, Bahrain will probably see further efforts to cut
government spending. This is evidenced by the recent
announcement that the country is forming a small
cabinet to specifically deal with financial issues arising
from the slump in oil prices. Across the rest of the region,
government responses to shrinking revenues have
been mixed. Some nations, such as the UAE, have been
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Figure 2: Central bank key policy rate, by country
8
7
6
5
4
3
2
US
Bahrain
Saudi Arabia
Qatar
2015
0
2013
1
2014
As we noted in the Q3 edition of this report, an important
category of public spending that could be curbed is
government subsidies. Numerous governments have
already started the process of pulling back on subsidies.
For example, as of 1 October the Bahraini Government
no longer subsidises meat prices and similar measures
are being implemented for fuel, electricity and water. In
order to minimise the negative impact of the price rises
that the population will face, Bahraini nationals will be
eligible for state issued cash payments. Unlike subsidised
prices, which benefit all consumers (especially those that
consume more of the subsidised product), cash payments
partially eliminate handouts to households deemed to
be less in need of assistance. However, basing these
payments on nationality rather than need will, among
other things, leave some households in a difficult financial
position.
2011
Source: US Energy Information Administration, Cebr analysis
2012
The Organization of the Petroleum Exporting Countries (OPEC)
2010
Ecuador
Oman
Kuwait
Venezuela
Angola
Algeria
Other oil exporting countries
But a lot of these factors do not apply to all countries in
the Middle East. The GCC countries, for example, benefit
from large sovereign wealth funds and trade surpluses,
both of which minimise their dependence on external
financing and are therefore, better able to withstand
monetary policy tightening in the US.
2009
GCC+5 countries
Iraq
Qatar
Nigeria
Saudi Arabia
-60
UAE
-50
2008
-40
2007
-30
Since the US lowered its interest rates to almost zero
seven years ago, emerging markets have relied on cheap
financing options to fuel economic growth. An increase
in US interest rates would make it more desirable for
investors to hold US dollars. This could render emerging
economies vulnerable to capital flight as investors rush to
acquire US dollars, leading to depreciation in emerging
economy currencies and unfavourable shifts in the
terms of trade (ratio of export prices to import prices).
Furthermore, companies in these emerging economies
that have taken on dollar-denominated debt could
face difficulties servicing the debt after local currency
depreciation.
2006
-20
2005
-10
2003
0
2004
%
Out of 11 GCC+5 countries 7 maintain a currency peg to
the US dollar. These countries are: Bahrain, Qatar, Oman,
Saudi Arabia, the UAE, Jordan2 and Lebanon. Additionally,
Kuwait’s currency is pegged to a basket that includes the
US dollar. As such, when the US Federal Reserve raises
interest rates, most likely by early 2016, an impact on
countries across the Middle East can be expected. Due to
the unique nature of the region, the GCC+5 will not be
impacted by a US rate rise in the same way as is expected
in many of the world’s emerging markets such as Brazil
and Indonesia.
2002
Figure 1: Net oil export revenues, annual decline
Jan-Feb 2015 1
GCC+5 countries with pegged currencies
will face added challenges as the US Federal
Reserve prepares to raise interest rates
2001
Across the Middle East, governments have publicly
stated that their economic growth plans will not be
compromised by lower oil prices because a combination
of diversification and fiscal reserve utilisation will allow
them to cover existing spending obligations. However,
while the region’s oil exporting countries may be able
to continue unaffected in the short term, a strong
economic performance further down the line will require
a reconsideration of both public spending priorities and
sources of government revenue.
eliminating consumer fuel subsidies, while others, Qatar
for instance, announced that they have no immediate
plans to reduce subsidies or cancel funding of any statebacked projects. Given the unforeseen extent of the fall in
government revenue, it will be difficult for oil exporting
countries to stick to their current obligations. Further
public spending reforms are likely to be necessary but, if
this transition is handled in a timely and gradual manner,
strong economic growth across the Middle East should
continue.
2000
of view, key markets such as China have witnessed more
subdued levels of economic activity, meaning that they
are importing less oil. Secondly, countries around the
world are becoming more energy efficient and many are
relying more heavily on alternative energy sources. Due
to this combination of factors, the remainder of 2015 will
probably continue to see low oil prices, with Brent trading
around and below $55 per barrel.
UAE
Source: Countries’ central banks, Macrobond
Nonetheless, the region will be impacted by US rate
rises in a different way. Due to the currency pegs, large
interest rate gaps with the US leave the GCC countries
vulnerable to destabilising capital flows. This is why, as
shown in Figure 2, countries with pegged currencies
ECONOMIC INSIGHT – MIDDLE E A ST Q 4 2 015
have moved their interest rates closely in line with the
US Federal Reserve. As the US begins the process of
gradually increasing interest rates, the GCC countries
may have to follow its path. Unfortunately, raising interest
rates at a time when economic growth is already being
dragged down by lower oil prices is not ideal. A potential
decoupling of the monetary policy cycles in the US
and the GCC would make it more difficult to maintain
currency pegs in the future.
Figure 3: Share of total exports sold to China
Several impacted countries, such as Saudi Arabia and the
UAE, have stated as recently as September that they are
committed to keeping their currencies pegged to the US
dollar. In the short term, this will be feasible if the rate
rises in the US are gradual, as expected. However, in the
medium and long term it is more likely that the GCC
countries will want to take advantage of greater exchange
rate flexibility. To do so, three primary options exist:
10
1. Follow the Kuwait route and establish a peg to a basket
of currencies, thereby reducing fluctuations.
2. Establish a common regional currency that oil prices
and revenues could be denominated in – this is already
being considered. This would involve a lot of crossnational cooperation and synchronisation – something
that has proven difficult to achieve.
3. Let currencies float. This would allow the greatest degree
of monetary policy flexibility but could also deter some
investors looking for exchange rate certainty. Floating
currencies would also add complications to oil pricing
which is conducted in US dollars. As such, this remains an
unlikely scenario for the moment.
The Chinese economy slows, dragging down
demand for commodities
It has become clear over 2015 that the cracks showing in
the Chinese economy are not just minor flaws that can
be smoothed over with a quick batch of government
interventions. The extent of the slowdown is evident in
a number of economic indicators. September’s factory
activity, as measured by the Caixin/Markit manufacturing
purchasing managers’ index, contracted at the fastest
rate in over six years. In August, fixed asset investment
(most of which is property investment) grew by 10.9%
year-on-year – the slowest annual rate of expansion in
15 years. The official figure for GDP growth over 2014
has been revised down to a 25-year low of 7.3%. Based
on anecdotal evidence and a series of leading indicators,
many suspect that the actual rate of expansion is even
lower than what the government-released figures show.
The summer was also marked by stock market turmoil
that added to growing concerns over the state of China’s
economy. Stock market losses in themselves are not as
damning as the large-scale figures make them out to
be. Only a small percentage (around 10%) of Chinese
households own stocks and shares, so events in the stock
market do not have as much bearing on the broader
economy as in other large markets, such as the US. The
government has also implemented numerous measures
to prevent further market losses. This includes cutting
interest rates to record lows and allowing its main state
pension fund to invest up to 30% of its net assets in
Chinese held shares. But while the stock market woes
alone do not mean much for the Chinese economy, taken
in the context of a broader slowdown, they are one of
many reasons for concern.
As China is the world’s second largest economy, domestic
developments have a great bearing on the rest of
the world. This is especially true for regions that are
comparatively more dependent on trade with China.
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%
20
15
5
0
Africa
Asia-Pacific
2007
Middle East
North America
Europe
2013
World average (2007)
World average (2013)
Source: Peterson Institute for International Economics
In 2013, the latest year for which data are available, nearly
12% of Middle Eastern exports were sold to China. A large
portion of this is accounted for by oil. Asia has become
an increasingly important destination for the region’s
commodity exports, especially as import demand in the
US has slowed down due to better domestic production.
China and the rest of Asia are also important markets for
the GCC+5’s non-oil exports. China is the second largest
market for Saudi Arabia’s non-oil exports such as plastics.
However in January, these exports were 23% lower than
in the same month a year earlier.3
Several GCC countries and numerous businesses have
been in the process of diversifying their investments
by shifting their focus eastward. In April, Qatar opened
the region’s first centre for clearing yuan-denominated
transactions with the aim of boosting economic links
between China and the Middle East. But, in light of the
Chinese slowdown, there may be less appetite among
local governments and businesses to establish or deepen
links with the country. However, we only expect the
Chinese economy to slow down, not to come to a
screeching halt. Establishing closer ties with the Far East
remains a viable economic growth strategy for the Middle
East, so long as appropriate levels of caution are exercised.
Sanctions on Iran to be gradually lifted,
creating both challenges and opportunities
for the rest of the region
In July, Iran and the P5+1 (the five permanent UN
Security Council members, plus Germany) reached a deal
which sets out how Iran will limit its nuclear capacity
in exchange for a relaxation and eventual lifting of
international economic sanctions.
The re-introduction of Iran to world trade will create
numerous opportunities for the rest of the GCC+5 region,
but also several challenges. Due to the region’s diversity
and at times, complex intraregional relations, not all
countries have greeted the nuclear deal with the same
dose of enthusiasm. Saudi Arabia has been especially
vociferous in expressing its reservations about the deal,
highlighting concerns that the agreement leaves Iran with
the capacity to construct a nuclear weapon undetected.
Other countries, such as Qatar, have expressed a hope
that Iranian sanctions relief will contribute to both
stability and economic growth in the region. Considering
ECONOMIC INSIGHT – MIDDLE E A ST Q 4 2 015
Figure 4: Ease of Doing Business Index
140
120
100
80
60
40
Easier
2014
Iran
Jordan
Egypt
Lebanon
Kuwait
Oman
Bahrain
Qatar
Saudi Arabia
UAE
UK
0
US
20
Harder
Arab world
World
Source: The World Bank
Note: 1 = most business friendly regulation
Outside of the GCC, US Secretary of State John Kerry
visited Cairo in August to discuss the nuclear deal and
its significance for Egypt. Trade between Iran and Egypt
is estimated at $331m annually – a modest amount
given the size of the two economies. This suggests
that businesses on both sides could benefit from an
intensification of commercial ties.
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%
8
7
6
5
4
3
2
2015
2016
Iran
Kuwait
Saudi Arabia
Lebanon
Bahrain
Oman
Egypt
0
UAE
1
Iraq
While various nations can benefit from a trade boost as
a major market opens up on their doorstep, oil exporters
may feel the added pressure of another supplier entering
the market. This boost in supply will further intensify the
need for the public spending reviews described in detail
at the start of this report. Those firms that do consider
entering the Iranian market should keep in mind that,
even with sanctions relief, it will probably take time
for the country to adjust to an increase in international
business activity. As shown in Figure 4, in 2014 Iran
earned the worst score in the region in the World Bank’s
Ease of Doing Business Index. Additionally, not all levels
of sanctions against Iran will be lifted. For example,
the US will maintain sanctions relating to Iran’s alleged
involvement with terrorism and human rights violations.
This means that many firms will still have only a limited
capacity to work with the country.
Figure 5: Real GDP growth forecasts, Q4 2015
Jordan
Bahrain has historically held strong cultural ties with Iran,
providing opportunities for local companies to expand.
Iran could also prove to be a useful supplier of liquefied
natural gas, the demand for which is on the rise as the
Kingdom works on a receiving terminal for the fuel.
However, despite an abundance of lucrative business
opportunities, it is too early to tell what stance the
government will take on strengthening commercial ties.
As the country’s ally, Bahrain may take cues from Saudi
Arabia when establishing its official stance on cooperation
with Iran.
Economic outlook
Qatar
that, over the past few years, Oman has often acted as
a facilitator in the American-Iranian dialogue, it would
not come as a surprise to find the country deepening its
commercial ties with Iran in the coming period.
2017
Source: IMF, national statistics offices, Cebr analysis
As we have noted in earlier editions of this report, Saudi
Arabia is taking numerous steps to adjust its economy
in preparation for a prolonged period of lower oil prices.
On a recent trip to Washington, Deputy Crown Prince
Mohammed bin Salman Al Saud presented investors
with a broad range of investment opportunities across
a number of sectors including infrastructure, retail and
entertainment. June’s opening of the Saudi stock market
to non-nationals should draw more international investors
as qualified foreign investor status (a pre-requisite for
investing) is granted to an increasing number of firms. We
expect diversification efforts to contribute to GDP growth
of 2.3% in 2016.
On 18 October, Iran began implementing the Joint
Comprehensive Plan of Action (JCPOA), the completion
of which will be followed by gradual relief from Westernimposed sanctions. Implementation of the JCPOA will
see the country dismantle thousands of centrifuges and
re-purpose numerous nuclear facilities. Although a few
bumps on the road are to be expected, it is very likely that
Iran will fulfil its part of the deal in the first half of 2016,
meaning that Iranian oil could be boosting global oil
supplies as soon as next year. As the world’s fourth largest
holder of known oil reserves (after Venezuela, Saudi
Arabia and Canada) the country’s reintroduction to oil
trade flows may further supress prices. Assuming there are
no major issues with the implementation of the JCPOA,
we anticipate 1.5% growth over 2016.
Despite diminishing government revenues, the UAE has
continued to invest heavily in big infrastructure projects
that its government hopes will support growth in the face
of sustained lower oil prices. This is one of the reasons that
the Q2 edition of this report assessed that the UAE has
gone further than many of its neighbours in diversifying
its economy. One of the most ambitious infrastructure
projects currently underway in the entire region is the
newly-renamed city, Dubai South, previously Dubai World
Central. Further investment in non-oil sectors can also
be expected given that Sheikh Mohammed bin Rashid Al
Maktoum recently announced a national target for non-oil
sectors to account for 80% of GDP by 2021. This would
be an 11 percentage point increase from 68.6% in 2014.
ECONOMIC INSIGHT – MIDDLE E A ST Q 4 2 015
The heavy focus on diversification will contribute to strong
3.9% GDP growth in 2016.
For Egypt, the second half of 2015 has been marked by
a heavy political shake up. In September, following a
corruption-related investigation into the Cabinet, President
Abdel-Fattah el-Sisi appointed a new government. Arguably
one of the most important items on the new government’s
agenda is the implementation of various economic reforms
including a revision of the subsidy system. Despite various
challenges, including security concerns in the region
deterring many prospective tourists, the start of several
mega-projects will contribute to 3.9% GDP growth in
2016.
In 2016 and beyond, Qatar’s economy will be fuelled by
substantial infrastructure investment including rail network
improvements and reservoir construction. In September,
the country’s finance minister repeated that, despite
spending cuts in neighbouring countries, Qatar has no
plans to scale back on any of its major programmes. Many
of the planned construction projects are related to the
2022 FIFA world cup, which has so far been marked by
several scandals, as our Q3 report noted, but is nonetheless
expected to progress as planned. We expect growth of
6.8% in 2016.
The continuing fighting with Islamic State and a drop in
global oil prices are a double negative for Iraq’s economic
prospects. While low oil prices have created the need for
spending cuts, military intervention has required increased
spending – leaving the country with a substantial budget
deficit. The hole in the budget will be partially filled by
the International Monetary Fund’s (IMF) Rapid Financing
Instrument and the potential sale of dollar-denominated
debt, the country’s first in nearly a decade. Assuming a
de-escalation in the country’s security concerns, we expect
growth of 4.2% in 2016.
Although a notable sovereign wealth fund and investment
in social areas such as youth development will support
1.9% growth in Kuwait in 2016, in the medium and long
term the country will need to find ways of addressing
the projected fiscal deficits. Earlier editions of this report
have questioned how declining government revenues
and a need for continued spending on numerous sectors
like security will be handled. In September, the National
Assembly’s financial and economic affairs committee
rejected an IMF call to lift subsidies and impose various
taxes, stating that such measures would come at the
expense of Kuwaiti citizens. However, given that low oil
prices are here to stay, measures such as a value added tax
(VAT) may become necessary.
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We expect the economy of Oman to expand by 3.2% in
2016. Due to strong historic ties with Iran, the Sultanate
is expected to see a boost in the form of foreign direct
investment and domestic businesses gaining access to
a new market. Infrastructure projects, seen as crucial
for diversification, such as the Liwa Plastics plant and
national railway expansion, will also provide a source of
growth.
Despite cuts in subsidy spending, continued
infrastructure investment and assistance from the
GCC development fund, we have lowered our
expectations for 2016 GDP growth in Bahrain to 2.8%.
The change in expectations is partially a result of a
worsening outlook for the country’s non-oil sectors,
such as banking. Rating agency, Moody’s has said that
macroeconomic headwinds will impact the profitability
of banks operating in the country and has changed its
outlook for the sector from stable to negative.
All of the 2015 Economic Insight: Middle East reports
have noted the added economic challenges Lebanon
is facing as a result of the influx of more than one
million Syrian refugees. The country’s foreign minister
Gebran Bassil warned in September that the capacity
of the health, education and sanitation infrastructures
is nearing its limit. Conflicts in neighbouring states, the
fact that the country has been without a president for
a year and a half and occasional peaceful protests have
also damaged Lebanon’s touristic appeal. We anticipate
GDP growth of 2.8% in 2016.
Another country whose economic growth continues to
be stalled seriously by its proximity to conflict-stricken
Syria and Iraq is Jordan. Nevertheless, we expect the
Kingdom’s GDP to expand by 4.2% in 2016. As the
country is a net importer, growth will be supported by
lower oil prices as well as a push to draw in more foreign
direct investment. As part of this effort, King Abdullah
has been making trips (especially to the US) promoting
opportunities in the country’s IT, telecommunications
and pharmaceutical sectors.
ECONOMIC INSIGHT – MIDDLE E A ST Q 4 2 015
ENDNOTES
1 Data for Oman refer to the Jan-May 2015 period rather than Jan-Feb 2015.
2 Jordan’s currency is officially linked to the IMF’s special drawing rights, but the rate is heavily influenced by
movements in the value of the US dollar.
3 Based on analysis published by The Middle East Eye.
Cebr
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