Download EconoMIc InsIGht MIDDLE EAST Quarterly briefing December 2011

economic Insight
Middle East
Quarterly briefing December 2011
Strong performance from Middle
East economy in 2011 but darkening
global economic backdrop means
growth will fall back in 2012
Welcome to the third issue of the ICAEW Economic
Insight: Middle East, the quarterly economic forecast
prepared directly for the finance profession. Produced
by Cebr, ICAEW’s partner, and acknowledged experts
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
The global economic backdrop has continued to
darken through the second half of 2011, with sharp
falls in equity prices and mounting concerns over
the prospects for the global economy. The ongoing
unresolved eurozone debt crisis rumbles on without
a clear resolution after several false dawns. With the
outlook increasingly uncertain in Europe, negative
growth may already be occurring in several European
countries. However, while emerging market growth
has cooled somewhat, the pace of expansion is
still robust. Given this, can the Middle East escape
unscathed by the eurozone crisis?
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Middle East on course to outperform
global economy in 2011 but we expect
a marked slowdown in 2012
Overall, as in our previous forecasts, we continue to
expect the Middle East economy to outperform the
global economy as a whole in 2011, but the story of
considerable divergence across the region still holds
and 2012 is likely to be more challenging. Oil exporting
countries – especially those in the GCC and Iraq – are
experiencing very strong growth in 2011. Higher oil
prices and production are boosting oil revenues, which
in turn is helping countries have enough fiscal room to
fund big expansions in public spending. However, it is
clear that the pace of global economic expansion has
slowed down and there are mounting downside risks
to growth in the final quarter of 2011 and moving into
2012. While we think the Middle East has become more
resilient, in part due to its fortunes being increasingly
tied to emerging markets rather than advanced
economies, we expect a significant slowdown in the
pace of growth in 2012. Looking further ahead, strong
emerging market demand should help to accelerate
growth in 2013.
Global economy slows but are emerging
markets more resilient?
The global economy has run into more turbulent
waters in the second half of 2011. Following robust
growth in 2010 and early 2011, concerns shifted to
widespread inflationary pressures – but these have
swiftly fallen into the back seat as the US economic
recovery continued to stumble and the eurozone debt
crisis rumbled on with ever greater risk of a major
dislocation of the global financial system and
disruption to real economic activity. Global growth
indicators such as the expansion in the volume of trade
have showed a marked slowdown. Figure 1 illustrates
how the quarterly pace of growth in the volume of
global trade has fallen into negative territory; over the
three months to August, global trade declined by
0.2% quarter on quarter. This compares to average
quarterly growth at 3.0% in 2010 and a long-run
average pace of growth at 1.5% showing the extent
of the weakening. But is there evidence of a slowdown
the world over, or are the predominant concerns in the
advanced economies of the West?
Figure 1: Global trade volumes, quarterly
percentage change – latest three months on
previous three months
%
10
5
0
5
-10
-15
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Three months on three months
Source: CPB Netherlands Bureau of Policy Analysis, Cebr analysis
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As confidence and market sentiment has worsened
across the globe – reflected by the sharp declines in
equity prices through Q3 2011 – the question remains:
has the strong emerging market growth story been
undermined in the last three months? Looking at
data on the growth in the volume of imports across
key country groups – a good indication of growth in
real domestic demand – the slowdown in growth has
occurred across the globe but it has been far more
pronounced in the advanced economies, most notably
the eurozone, and from a lower base. Figure 2 illustrates
the decline in import growth in the US from above 20%
year on year in August 2010, to just 1.0% by August
this year. The decline in growth in the eurozone is
less dramatic but arguably more serious, since import
volumes actually declined by 1.6% year on year over
the three months to August – and more recent shortterm indicators have pointed to contraction in several
eurozone economies. In contrast, while annual import
volume growth in Emerging Asia has fallen from its
remarkable pace in 2010, it is still running at 8.0% year
on year in August. In Emerging Africa and the Middle
East annual growth slowed earlier this year, linked to the
disruption to economic activity from political instability,
however, real annual growth continues and surpasses
the US for the first time since March 2010 at 2.0%.
Figure 2: Import volumes by country groups,
quarterly annual percentage change – latest three
months on three months a year earlier
%
25
20
15
10
5
0
-5
Aug Sept Oct Nov Dec
Jan
Feb Mar Apr May Jun
2010
Jul
Aug
2011
US
Eurozone
Emerging Africa and Middle East
Emerging Asia
Source: CPB Netherlands Bureau of Policy Analysis, Cebr analysis
Emerging markets play increasingly
important role in driving global growth
Hence, there is a risk that market sentiment has
headed lower than the underlying economic reality,
at a global level at least. There is no doubt that the
problems in the euro area pose a major threat to the
global economy, but given its generally weak growth
performance, the eurozone comprises an ever smaller
share of the global economy – while the reverse is true
for fast-growing emerging markets. The euro area has
declined from making up 23.2% of the global economy
in 2004 to 19.3% in 2010 – and is projected to decline
to just 16.4% by 2016. At the same time as advanced
economies such as the UK, Italy, France and the US
decline in relative economic size, emerging economies
become ever more important. Indeed, emerging and
developing economies will rise from just over a fifth of
the global economy (21.6%) in 2004 to make up over
two fifths (41.4%) of global economic output by 2016,
reflecting their extraordinary pace of growth.
Middle East exports to China and India
now double exports to eurozone
Corroborating this from a Middle East perspective,
emerging markets are increasingly important in
terms of trade. Exports to advanced economies have
declined as a share of total exports from the region
over the last 20 years, as shown in figure 3. This has
been particularly pronounced in the GCC states, with
exports to the US and eurozone as a share of total
exports declining from above a quarter to around
an eighth. Concomitantly, demand from emerging
markets has surged. Across the Middle East as a whole
in 2011, exports to emerging markets made up 43.5%
of total exports – up from 26.7% 10 years ago – while
exports to advanced economies totalled 49.1% of all
exports, down from 65.8% in 2001. It is likely that
exports to emerging markets will surpass exports to
advanced economies in the next few years. Notably,
exports to India and China now total a fifth (20.4%)
of all exports, almost double exports to the eurozone
(10.6%), yet just five years ago exports to the euro
area easily surpassed exports to India and China.
Hence, there is a strong argument for supposing that,
if emerging markets can still grow at a solid pace, the
Middle East economy has some protection from the
storm created by the eurozone crisis.
Figure 3: Export destination as a share of total
exports in the Middle East
%
80
60
40
20
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012
Advanced economies
Eurozone
Emerging and developing countries
China and India
Source: IMF Direction of Trade Statistics, Cebr analysis
Oil prices remain high, giving Middle
East exporters a massive boost in 2011 –
but will 2012 be as strong?
In line with weaker expectations for global growth,
oil prices have moderated through 2011. The price of
Dubai Fateh oil stands around 5% lower than a quarter
ago and 9% down from the recent peak in April.
However, oil prices remain historically high and still
significantly up from last year; at the end of October
the price of Dubai Fateh was 34% higher than a year
earlier. It is clear that growth in global demand has
cooled in the second half of 2011, putting downward
pressure on prices. However, what growth there is
across the global economy is predominantly being
driven by oil-guzzling emerging markets, which is
propping up demand for oil.
On the supply side, after the Libya conflict wiped out
close to 1.8m barrels per day of oil production, crude
output across the Middle East oil producers has risen
strongly. Oil production across the region has grown
by 5.2% over the three months to July compared with
the same period a year earlier.2 According to the US
Energy Information Administration, this has taken
the Middle East region’s share of global oil output
to 31.5%; the highest since a comparable dataset is
available in 1994.3
Figure 4: Oil production, annual percentage change
%
14
12
10
8
6
4
2
0
Kuwait
UAE
2000–2010
Iraq
Saudi Arabia
2011 YTD growth
Source: IMF International Financial Statistics
Middle East oil production growth to
slow in 2012 as global demand weakens
As shown in figure 4, oil production has been growing
particularly strongly in Kuwait, the UAE, Iraq and Saudi
Arabia – all recording double-digit annual growth
according to the latest IMF data. Indeed, oil production
in Saudi Arabia has reached its highest level since 1981.
This is driving ballooning current account surpluses
for oil exporters across the Middle East. For example,
in Saudi Arabia the current account balance is set to
reach $115bn in 2011. This is short of the record high
of $132bn in 2008, but equivalent to an astonishing
20.6% of GDP and is the fourth largest trade surplus
in the globe (behind only China, Germany and Japan).
Hence, the Middle East economy has been strongly
boosted by the effects of oil prices this year. Can the
same be true next year?
Looking ahead, with Colonel Gaddafi now removed
and Libya aiming to re-establish its economy, it is likely
that Libyan oil production will continue to increase
further towards full capacity in 2012. As the global
economy slows through the first half of 2012 and
the Middle Eastern producers adjust to the expected
increases in supply from Libya, we expect to see the
rate of increase in oil production slow significantly in
2012. This will help to provide a floor to oil prices,
which we expect to fall back in 2012. As the global
economy slows, we expect emerging markets to use
monetary and fiscal policy firepower at their disposal
to drive growth in the second half of 2012 and into
2013. Therefore, with robust emerging market growth
returning in 2013 we expect oil prices to edge up once
more, as shown in figure 5. At these projected prices,
the majority of Middle Eastern oil production is hugely
profitable and while trade surpluses will decline, they
will remain comfortably high.
Figure 5: Oil price, simple average of three spot
prices,4 $ per barrel
$
120
Figure 6: Contribution to real economic growth
from Middle East country groups, percentage point
contribution to annual percentage change 6
7
6
100
5
80
4
3
60
2
40
1
0
20
-1
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
2005
2006
GCC
2007
2008
Iran and Iraq
2009
2010
2011
2012
2013
Egypt, Jordan and Lebanon
Source: IMF, Cebr prospects service forecasts
Source: Cebr analysis and IMF World Economic Outlook Database September 2011
Middle East growth to fall by almost a
third in 2012 but still stronger than US
and eurozone
to increase by some 30% in 2011 compared with a
year earlier. As the oil price falls back amid the global
slowdown, the environment will be tougher. Hence,
we expect the economy to expand by 4.0% in 2012,
down from 6.9% growth in 2011. We remain confident
that, even if the global economic environment worsens
more than expected, Saudi Arabia will have policy
tools to drive the economy forward. With the massive
surpluses that come with its position as the world’s
largest oil producer, the government has the capacity
to drive growth through public spending – especially
as unemployment is expected to remain relatively high,
close to 11% throughout the forecast period.
Growth across the Middle East is expected to fall back
in 2012, after an exceptionally strong performance
in 2011. With high oil prices and a large expansion in
production across the GCC, the increase in economic
activity in 2007 in these six states has been the
strongest since 2005, at 7.2%. This compares with
5.4% growth across the Middle East as whole in 2011,
as shown in figure 6. Outside the GCC, the booming
oil economy and huge reconstruction activity is
contributing to a rapid expansion of the Iraq economy,
joining Qatar as the only other country of the 11 in
the Middle East region to experience double-digit real
GDP growth in 2011 and expected to continue on this
trajectory in 2012.
Looking ahead, as the world economy cools we expect
oil prices to fall in 2012 and the rate of expansion in oil
production to fall back. In this environment, we don’t
expect the GCC to be able to match its performance
in 2011 but we still expect a 4.0% expansion, which
would be over double expected growth across the
advanced economies.5 Looking outside the GCC,
political instability contributes to Egypt and Lebanon
generally lagging behind and only expected to record
growth of 1.1% in 2011. Growth is expected to be
almost double this in 2012 and rise again in 2013 as the
impact of massive political instability gradually passes
and these economies try to catch up.
Despite the weakening global economic environment,
growth in the United Arab Emirates, the GCC+5’s
third largest economy, is expected to hit 3.8% in 2011.
Generally, growth is now weaker than the boom in the
years leading up to the global financial crisis but the UAE
is a solid performer. Abu Dhabi has benefitted principally
from the oil economy in 2011 and as such, will probably
experience a slower pace of expansion in 2012. The nonoil private sector has shown some resilience according
to recent short-term indicators but is likely to suffer
from the effects of a weakening global economy in the
coming months, so we think UAE’s growth rate will slow
to 3.1% in 2012, lower than across the Middle East as a
whole but still higher than advanced economies.
The region’s fastest growing economy in recent years
has been Qatar and in 2011 it will record the largest
rate of expansion at 19.0%. The Qatar economy is
something of a safe bet within the Middle East, but
even it will see growth fall back to 6.5% in 2012; still
a pace of expansion over three times higher than a
typical Western-world economy.
Like other GCC oil exporters, Kuwait is seeing oil
production boom in 2011. At the same time as oil
revenues surge, the government is spending heavily,
with a 16% increase in nominal terms expected in
2011 and further successive 7% per annum increases
in 2012 and 2013. However, inflation continues to
run relatively high, with the annual rate at 4.6% in
August, including particularly high food price inflation.
This is placing downward pressure on real household
incomes, although these are to some extent offset by
the government’s spending measures. Hence, overall, we
expect the economy to expand by 5.3% in 2011, broadly
in line with growth across the Middle East as a whole.
However, growth will be hit by the softer oil market,
slowing to 3.9% in 2012 before picking up again in 2013.
The region’s largest economy, Saudi Arabia, has
experienced a robust performance in 2011 as oil
production surged and the government began a
massive increase in public spending. The trade balance
and government revenues are surging as oil production
booms and government revenues are expected
In contrast to other GCC states, growth in oil production
in Oman has been far weaker and the general economic
performance is less robust. Despite this, the higher oil
price through 2011 still means the value of oil exports
will gain some 25% through the year as a whole and the
current account balance as a share of GDP will reach its
Growth to slow across the GCC in 2012
after robust performance in 2011
economic insight – middle e a st
December 2 011
highest level since 2006. This is helping to drive a 17%
cash-terms increase in government spending this year
with further strong growth expected in 2012 and 2013.
Despite the government spending increases, we expect
the economy to weaken in 2012, with growth falling to
3.2% – below par in the region.
The slowest growing economy within the GCC is
Bahrain, with real GDP growth expected to come
in at 1.2% in 2011; the lowest rate of growth since
1994. This is despite large increases in public spending
by the government as the private sector investment
environment remains uncertain amid political
instability. Growth is expected to pick up in 2012 and
2013, closer into line but still some way behind the
strongest GCC states.
Iraq’s boom will see the size of its
economy double in nine years
The Iraq economy is benefitting from surging oil
production, inward investment and reconstruction
activity. The total level of oil output in 2011 is likely
to be the highest since 1989. This is helping to fund
a huge increase in public spending, with government
spending up around 9% in real terms and further
strong growth in government spending expected.
With rebuilding and investment continuing to move
swiftly forward, the economy is expected to grow by
10% in 2011 and we expect the double-digit growth to
be maintained in the following two years, making Iraq
the fastest growing Middle Eastern state in 2012 and
2013. On its expected growth trajectory, the size of the
Iraq economy is expected to double in real terms in the
period from 2007 to 2016 – even despite the effects of
the global recession in 2008-09.
It has been a year of significant reform for the Iranian
economy, as large government subsidies were
removed, sending inflation far higher (consumer price
inflation is expected to average over 22% across 2011
as a whole) and squeezing real household incomes and
hence their spending power. However, as a producer
of over 5% of the world’s oil, Iran has benefitted from
the strong oil market and will see growth come in at
2.0% in 2011. As the economy recovers from the shock
of the removal of subsidies, we think growth will pick
up in 2012 as inflation falls back, reaching 3.0% before
rising further to 3.5% in 2013. As such, Iran’s growth
performance remains weaker than the Middle East as a
whole for the entire forecast period.
Figure 7: Real GDP growth across Middle East
economies, annual percentage change
%
20
15
10
5
2013
Qatar
Iraq
Kuwait
Oman
UAE
Jordan
Iran
2012
Saudi Arabia
2011
Bahrain
Lebanon
Egypt
0
Egyptian growth to improve in 2012 but
still lagging behind regional growth
Egypt is the slowest growing economy across the
Middle East, even if there has been some improvement
in economic performance since the massive disruption
to economic activity caused by political instability at
the start of the year. After contracting 3.8% year on
year in the first quarter, the economy declined by 0.1%
compared with a year earlier in Q2, suggesting some
improvement. Overall, we expect the economy to
record very weak growth in 2011 at 1.0% – less than a
fifth of growth across the Middle East. Looking ahead,
the exceptional factors driving growth downwards in
2011 should abate in 2012, for example, declines in
tourism saw output in the hotels and restaurants sector
decline by 19% year on year in Q2 2011 (see figure 8
below); this trend should reverse in 2012. However,
the economy still faces major challenges and is still
likely to lag behind; we expect the economy to expand
by 2.0% in 2012, but this is still only around half the
expected pace of growth across the Middle East. We
see further scope for acceleration in 2013 with growth
expected to move into line with Middle East as a whole
at 4.5%.
Figure 8: Gross value added of the Egypt
restaurants and hotels sector, quarterly annual
percentage change
%
30
20
10
0
-10
-20
-30
-40
Q3
Q4
2008
Q1
Q2
Q3
Q4
Q1
2009
Q2
Q3
2010
Q4
Q1
Q2
2011
Source: Egypt Ministry of Economic Development, Cebr analysis
In Jordan, growth is expected to be less than half
the regional average at 2.5% in 2011. Government
spending is being pushed on in 2011, expected to
surpass 34% of GDP, up from 30% in 2010. But with
the economy growing weaker than expected the
budget deficit could be as large as 7% of GDP, so it is
unclear whether public spending can drive growth.
In summary, considerable challenges remain for the
Jordan economy in order to achieve strong private
sector-led growth. We expect growth to remain
relatively subdued at 3.0% in 2012, picking up to
3.8% in 2013.
In Lebanon, political uncertainty lingers and economic
performance is expected to underwhelm. We expect
GDP growth at just 1.0% in 2011, the weakest since
2006 and the joint-slowest growing country in the
Middle East. Export volume growth is likely to be just
1.8% in 2011, down from 10.9% in 2010 – and this
is a contributing factor to the current account deficit
reaching 14.7% of GDP in 2011, reflecting major
imbalances within the Lebanese economy. We expect
growth to pick up in 2012 but the country will still lag
behind the Middle East trend.
Source: Cebr analysis
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economic insight – middle e a st
December 2 011
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 Cebr analysis of US Energy Information Administration (EIA) data
3 Cebr analysis of US Energy Information Administration (EIA) data.
4 Brent crude, West Texas Intermediate and Dubai Fateh.
5 Important constituents of this group include: the US, eurozone, UK, Canada etc.
6 Weights derived from current dollar GDP share.
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For enquiries or additional information, please contact:
Deborah Amara
Regional Marketing and Business Development Manager, Middle East
Currency House, Level 4, International Financial Centre, Dubai
United Arab Emirates
T (+97)15 0550 0256
E [email protected]
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