Download EcOnOMIc InSIGht MIDDLE EAST Quarterly briefing February 2012

economic Insight
Middle East
Quarterly briefing February 2012
Uncertainty pervades the Middle
East; region set for weakest growth
in 2012 since global recession but
ties to emerging markets give hope
for resilience
Welcome to the fourth issue of ICAEW’s Economic
Insight: Middle East, the quarterly economic forecast
prepared directly for the finance profession. Produced
by Cebr, our partner and acknowledged expert in
global economic forecasting, it provides a unique
perspective on the prospects for the Middle East
region as a whole and for individual economies against
the international economic background. We focus on
the Middle East as being the Gulf Cooperation Council
(GCC) member countries (United Arab Emirates,
Bahrain, Saudi Arabia, Oman, Qatar and Kuwait), plus
Egypt, Iran, Iraq, Jordan and Lebanon (abbreviated
to GCC+5) 1.
It remains a highly uncertain outlook as the eurozone
debt crisis hangs over the global economy like a dark
cloud that could conceivably turn into a thunderstorm
with severe consequences in the coming months. In
this edition, we evaluate what another recession in the
eurozone could mean for the global economy and,
more importantly, the Middle East. There are several
questions to consider: how exactly will the Middle East
be affected by the changing global macroeconomic
environment? Is weaker growth in 2012 inevitable or
will the region’s ties to emerging markets give it some
insulation? Political uncertainties in the region seem to
be bubbling away once more – what does this mean
for oil prices and will the oil economy grow at the
robust pace it did in 2011?
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Figure 1: Economic growth across countries,
percentage change in country/region annual GDP
7
%
100
6
5
4
3
2
90
80
70
60
50
40
30
20
Egypt
Eurozone downside
Lebanon
Global
Global downside
0
World
Eurozone
Iran
Middle East
10
Non GCC
Middle East
2014
Jordan
2013
Qatar
2012
Oman
2011
Kuwait
2010
Saudi Arabia
2009
GCC average
2008
Bahrain
2007
United Arab
Emirates
1
0
-1
-2
-3
-4
-5
Figure 2: Exports as a share of country GDP across
the Middle East – 2010 or latest year for which data
are available
Source: IMF, Cebr analysis
Source: World Bank Development Indicators, Cebr analysis
Global economy to experience slowest
growth since recession as eurozone poses
downside risk
The region is closely tied to global trends
The Middle East economy, like the rest of the world,
will grow more slowly in 2012, the key question is: how
much slower? The answer depends substantially on the
extent of the weakness in global economic performance.
The world economy is expected to grow by just 2.5% in
2012; the weakest expansion since the global recession
of 2009, and there are significant downside risks to
this from the ongoing eurozone crisis 2. Indeed, many
eurozone countries are likely to be in recession as of the
first quarter of 2012 and, as a whole, the euro area is
expected to shrink by around 1% in 2012.
However, there is a real risk that the euro debt crisis leads
to an even sharper drop in real economic activity, having
a ripple effect on the global economy and sending
global growth down towards the 1% mark in 2012. In its
January update to the World Economic Outlook, the
International Monetary Fund (IMF) sketched out a
downside scenario for the eurozone in which the euro
area economy would be around 4% smaller than in their
central forecast by the end of 2013. In such a scenario,
global output would be around 2% lower than in their
already relatively modest projections for growth. The
Middle East’s fortunes will ultimately be tied to the
outcome for the world economy, but its own growth
potential and strong interdependence with fast-growing
emerging markets means it is expected to outperform
the global economy, as shown in figure 1.
What would an escalation of the
eurozone crisis mean for the Middle East?
While figure 1 illustrates that the Middle East is expected
to grow faster than the global economy as a whole,
how seriously could the region be affected were the
downside scenario to materialise with a deep recession in
the eurozone? How globalised is the Middle East and to
what extent is it going to be insulated by slower growth
or contraction in the advanced economies of the West?
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Most countries in the Middle East are major exporters
and this is a key driver of the overall level of economic
activity; this is especially the case in the GCC countries.
Figure 2 illustrates country exports as a share of total
economic output (as measured by Gross Domestic
Product (GDP)). In general exports are more important
for the region than is typically the case across the global
economy; on average exports make up 52% of GDP in
the Middle East compared with 25% across the whole
global economy. Across the GCC, exports account for
between 47% (Qatar) and 97% (Bahrain) of GDP; so on
the face of it the GCC countries in particular are heavily
reliant on export markets. So does this mean the Middle
East – and especially the GCC countries – are heavily
exposed to the downturn in global growth in 2012?
The region is increasingly geared towards
fast-growing emerging markets
The answer to this question is: yes, but it is complicated
by where the demand for Middle East exports comes
from. Exports to resource-thirsty emerging markets
have grown enormously over the last decade or so.
Over the last year, goods exports from the Middle East
to emerging and developing economies totalled some
$455bn compared with $521bn to advanced economies.
Over the last 10 years, exports to India in dollar cash
terms from the region have grown by over 32 times
while exports to China have increased by 15 times.
Middle East cash exports (of course, partly reflecting
increases in the price of goods) to emerging markets
have grown by 723% over the last 10 years, compared
with 305% growth in exports to advanced economies.
Emerging market exports to overtake
exports to West by 2014
Hence, the Middle East’s links to emerging markets
have been expanding enormously in recent years.
Exports to China and India now add up to three times
the value of exports to the world’s largest economy,
the US, and are double those to the eurozone. This
is despite the total size of the Chinese and Indian
economies being equivalent to only around two thirds
the size of the eurozone economy in dollar terms.
Figure 3 illustrates this disparity between exports to
various regions and the relative size of their economies
– pointing to the region’s growing interdependence
with emerging markets. The share of Middle East
exports to emerging markets is expected to surpass
those to the advanced economies within the next two
years, as shown in figure 4.
Figure 3: Export destination as a share of total
exports in the Middle East over the 12 months to
Q3 2011 and share of global economy in 20113
%
70
60
50
As emerging markets have become increasingly
important trade partners for the Middle East, growth
in the Middle East is becoming less linked to growth
in the West. Figure 5 below shows the correlation
between growth in the Middle East and other parts of
the global economy over the period 1993–2011. Quite
simply, a higher number implies that the Middle East
moves more closely with the economy in question. As
the graph shows, the strongest correlation with Middle
Eastern growth is with the emerging and developing
economies. Importantly, this analysis illustrates that the
region is less tied to macroeconomic outcomes in the
euro area and the advanced economies more generally.
However, there is a significant correlation with the
performance of the global economy. So, while growth
in the emerging markets can provide insulation in the
case of a severe contraction in the eurozone and the
region is less directly dependent on the euro area, the
drag on the global economy from a severe recession in
Europe – as shown in figure 1 – would still have serious
implications for growth across the Middle East.
Figure 5: The correlation of Middle East regional
40
GDP growth with the global economy (1993–2011)
30
0.9
20
0.8
10
0
Reasons to hope for resilience: growth
in the Middle East is more closely linked
to emerging economies than the West
0.81
0.7
0.6
United
States
India
China
Euro
Area
Share of Middle East exports
Emerging & Advanced
Developing Economies
Economies
Share of global economy
0.53
0.5
0.4
0.31
0.3
0.3
0.2
0.1
Source: IMF Direction of Trade Statistics, Cebr analysis
0.0
Figure 4: Middle East exports to emerging markets
as a proportion of exports to advanced economies
World
Correlation coefficients
%
120
Source: IMF, Cebr analysis
100
80
60
40
Middle East exports to emerging markets as a share
of exports to advanced economies
Cebr estimates
Source: IMF Direction of Trade Statistics, Cebr analysis
2015
2014
2013
2011
2012
2010
2009
2008
2007
2006
2005
2004
2003
2001
2002
20
0
Emerging &
Developing
Economies
Euro Area
Advanced
Economies
But downside scenario sees Middle East
growth slowing to nearly 3%
Looking at a scenario in which sovereign and bank
funding pressures in the euro escalate, leading to a
major credit squeeze and a decline in real economic
activity in both the eurozone and global economies,
modelling can assess the impact on growth in the
Middle East. Figure 6 shows that recession in the
eurozone and a weaker global growth outturn – with
the pace of expansion across the world dropping
to 1% in 2012 – would likely lead to growth in the
Middle East falling back to 3.3%, compared with 4.4%
on the central forecast. Other than when recession
swept across the globe in 2009, this would result in
the weakest performance of the Middle East economy
since 2001–2.
Political uncertainties complicate
the outlook
Economic forecasts are of course often shrouded
in uncertainty, but at present this is especially
pronounced due to political developments in the
region. With the continuing concern over Iran’s nuclear
programme, tensions between the West and Iran have
escalated in early 2012. In January, the EU imposed
economic sanctions on Iran that will come into full
force in July, while Iran has mooted the possibility of
blocking the key trade route of the Strait of Hormuz.
It is likely that the economic sanctions will knock back
growth in the Iranian economy through the second
half of 2012 but the blockade of this key trade route
could have a profound impact on regional trade and
economic activity. In such a scenario, one would
expect economic activity in the region to be hit.
However, while all of this uncertainty continues, one
thing seems certain: the ongoing uncertainty is helping
to prop up oil prices.
Oil prices defy logic of economic gravity
– as political uncertainty works in the
opposite direction
Indeed, the price of oil has so far defied the global
economic slowdown. While the outlook for growth
in 2012 is rife with uncertainty – and there are major
downside risks – the forces of economic gravity
have been offset by the question marks over Iran’s
apparent collision course with the West. In addition,
there has been speculation that more members
of the Organization of the Petroleum Exporting
Countries (OPEC) are shifting towards a target price
for oil of closer to $100 a barrel. This could mean that
production levels are eased if the slowdown starts to
have more effect (as one could reasonably expect) on
prices in the coming months, following massive increases
in production across the Middle East through 2010–11.
Indeed, production across the Middle East rose to a
recent peak of 27.4m barrels per day – up some 16%
from a trough in the 2009 recession; across the GCC
production is up by a fifth. This robust growth in
production contributed to the strength of economic
growth in the last two years and there are some signs
of the pace of growth easing. This trend could become
more pronounced moving through 2012, so the oil
economy contributes less to growth across the region
– and in particular in the GCC countries – this year than
the previous two. Summing up, as shown in figure 7,
the projections for oil prices in 2012 and 2013 have been
upwardly revised; while prices are still expected to fall
in 2012, political factors will prop prices up more than
previously anticipated.
Figure 7: Oil price average across calendar year,
average of three spot prices 5, $ per barrel
$
120
100
Figure 6: Modelling what the eurozone crisis
could mean for the Middle East economy, annual
percentage change in Middle East real GDP4
80
60
%
9
40
8
20
7
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2002
5
2003
0
6
4
3
Source: IMF, Cebr prospects service forecasts
2
1
2014
2013
2012
2011
2010
2009
2007
2008
2006
2005
2004
2003
2002
2001
2000
0
Central scenario
Downside scenario
Source: Cebr analysis
economic insight – middle e a st
february 2 012
Iraqi oil economy to continue boom
despite weaker production growth
across the region
Scope for Middle Eastern economies
to stimulate economic growth in coming
years
While global oil production could slow this year as
exporters react to weaker growth in global demand,
in Iraq it is a different story. Oil production is expected
to continue its expansion as investment pours into
the resurgent Iraqi oil economy. There are ongoing
ambiguities surrounding production in the Kurdistan
Regional Government-controlled areas, but on the
whole production across the country continues to
expand. In 2011, output was around 10% up on the
average level in 2010 and the highest level since 1989.
Although the rate of expansion in production may
not match this level in 2012, we still expect further
growth in the coming years (as shown in figure 8)
which will take the overall level of output to almost
90% of the peak level of production achieved in 1979.
As output expands, this will help to fuel strong growth
in the Iraqi economy and maintain its status as the
fastest growing country in the Middle East. However,
there are ongoing concerns about the weak non-oil
economy and the lack of investment in the non-oil
manufacturing and service sectors.
With oil prices set to remain high despite a weaker
global outlook and even with softer growth in oil
production, the public finances of many of the Middle
East’s key economies remain very healthy, especially
when compared with the heavily indebted advanced
economies. As discussed above, slower growth in the
global economy will necessarily affect the region and
retard growth, which is of course necessary to create
jobs and keep unemployment low. With most Middle
Eastern countries effectively having monetary policy
determined out of their control due to their dollar
pegs, the other key policy option available is using
fiscal policy to keep overall demand growing robustly.
Figure 8: Oil production in Iraq, calendar years
index where total production in 1970 = 100
250
200
150
100
50
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
0
Oil production in Iraq
Forecast
Source: IMF International Financial Statistics, Cebr analysis
Figure 9 illustrates how low the public sector debt
burden is in the region’s largest economies relative to
the advanced economies of the West. Furthermore,
Saudi Arabian public debt is expected to drop to just
3% of national income by 2016. This compares with
109% in the advanced economies – suggesting there
is plenty of scope for governments in the region to use
expansionary fiscal policy; that is, lower taxes or public
spending programmes on, for example, infrastructure,
education and other key public services. From an
economic viewpoint, policies that help to stimulate
productivity growth would be most beneficial –
investment in high quality education and skills.
However, figure 9 also illustrates that it is not one story
for all in the region. While Saudi Arabia and the United
Arab Emirates have very low public debt burdens and
Iraq’s is expected to continue falling as oil production
increases, in Egypt total public debt and the current
level of government borrowing is far higher.
Weakness in economic growth and bond market
nervousness provide major constraints to Egypt’s
ability to rapidly expand public spending despite high
unemployment, particularly for the youth population,
and much needed improvement in public services.
Notwithstanding the Egyptian situation, on the whole
there is plenty of fiscal room for manoeuvre across the
Middle East – which is another reason to believe in the
region’s resilience against slower growth across the
globe in 2012.
Figure 9: General Government Gross Debt in 2012
(% of GDP)
120
100
80
60
40
20
0
Saudi
Arabia
United Arab Emerging
Emirates
Economies
Iraq
Egypt
Advanced
Economies
Source: IMF
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cebr.com
economic insight – middle e a st
february 2 012
FOOTNOTES
1 The phrase ‘Middle East’ is often used to cover different parts of the region. Much of the internationally-available economic data relates to
the Middle East and North Africa region which we call MENA (this covers the seaboard countries in North Africa from Somalia to Mauretania
and all the states in the Arabian peninsula including Israel plus Iran and Turkey in the north). Political discussions often treat the Middle East
as synonymous with the Arab world. But where we refer to wider definitions of the region we will try to point this out explicitly.
2 Global GDP weighted at market exchange rates.
3 Share of global economy calculated using nominal GDP at current exchange rates from IMF October World Economic Outlook dataset.
4 Middle East GDP weighted at market exchange rates.
5 Brent crude, West Texas Intermediate and Dubai Fateh.
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