Download economic insight mIDDlE EaST Quarterly briefing august 2011 mixed picture across the middle

economic Insight
middle east
Quarterly briefing August 2011
Mixed picture across the Middle
East as oil exporters boom in 2011
– but growth to slow in 2012
Welcome to the second 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 remains
uncertain as concerns over the health of
eurozone and US economies linger and the
European sovereign debt crisis threatens to
seriously impact real economic activity. Does
this mean the outlook for the Middle East is
materially worse? What kind of risk does the
ongoing sovereign debt crisis pose to the
region? Given concerns over a slowing global
economy are oil prices heading lower now
and what does this mean for the Middle East?
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Middle East to outperform global
economy but growth to slow in 2012
Overall our latest assessment is that growth in the
Middle East looks set to be stronger than in the
global economy as a whole in 2011. However, there
are interesting divergences in performance, with
particularly strong growth expected in Qatar, Iraq
and Saudi Arabia as export growth drives increased
economic activity and government investment surges.
The ongoing ramifications of political unrest in Egypt,
Lebanon and Bahrain lead us to expect far weaker
performance in these economies. Looking ahead, it
is abundantly clear that there are major risks to the
global economic outlook and we expect oil prices and
production to ease even without a hard landing for the
global economy which is becoming a clear risk. Hence,
we project an appreciable slowdown in Middle East
growth in 2012.
Mixed picture for global oil demand
Oil prices fell sharply from a peak in May, with a 12%
peak to trough decline in the price of Dubai Fateh,
but have since partially recovered and the surge since
mid-2010 means prices stand some 52% higher than
a year earlier in July. But can prices be sustained over
$100 per barrel against a turbulent global economic
background?
While emerging market growth has been strong, the
economic recovery in Europe and the US has generally
struggled to gain traction. With sluggish job creation,
unemployment above 9% and major public spending
cuts ahead, the US looks set for 2011 growth far weaker
than trend. Meanwhile, in the eurozone, concerns over
the sustainability of large public sector debt continue
and the growth performance in large economies like
Italy and Spain disappoints.
However, this weakness in demand from advanced
economies is offset by strong growth among emerging
economies. China and India are expected to grow in
real terms by 9.4% and 7.9% respectively this year.
Indeed, China’s oil demand will grow by 6.6% in 2011
and a further 5.2% in 2012 in contrast to declines
across OECD economies in both years.2 Overall, the
emerging market thirst for oil will result in global oil
demand expanding by 1.4% in 2011, down from
3.3% growth in 2010.
Figure 1: Oil price, simple average of three spot
prices 3 , $ per barrel
Source: IMF, Cebr prospects service forecasts
Middle East oil production surging to
fill in gap created by Libya conflict
Looking at the generally weakening picture in the
global economy, one could have reasonably expected
to have seen a sharper and more sustained decline
in oil prices. While we expect slow growth in the
advanced economies and deceleration in emerging
markets due to monetary policy tightening to lead to
a fall in the average price in oil in 2012 (as shown in
Figure 1 above), prices are likely to remain relatively
high relative to long-run levels.
One of the major factors contributing to the
precipitous rise in oil prices earlier in the year was
political uncertainty among oil exporting countries
of the Middle East. The ongoing conflict in Libya
has seen close to 2% of global oil supplies dry up.
Interestingly, the decline in capacity seems to have
been compensated by growth in production from
key Middle East economies. Oil supplies from Libya
are down by around 1.6m barrels per day, while
production in the GCC countries plus Iran and Iraq
is up by around 1.4m barrels. 4 Indeed, over the three
months to March, annual growth in oil production
across the GCC was the highest since August 2008 and
production in Iraq and Iran as a share of global supply
reached its joint highest level since 2003. 5
Hence, Middle East oil production is surging in 2011
and this will contribute to boosting overall economic
growth in the region this year. However, we think
that weaker global growth fundamentals – and the
assumption that Libyan production comes back
online at some point in 2012 – imply that growth in
production will ease appreciably in 2012.
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 International Energy Agency Oil Market Report, 13 July 2011.
3 Brent crude, West Texas Intermediate and Dubai Fateh.
4 Cebr analysis of US Energy Information Administration (EIA) data.
5 Cebr analysis of US EIA data.
Figure 2: Oil production, annual percentage change
Figure 4: Export value index; three month moving
average; May 2009 = 100
20%
170
15%
160
10%
150
5%
140
130
0%
120
-5%
110
World
GCC
Iran and Iraq
Asia
Advanced
MEA
May 11
Mar 11
Jan 11
Nov 10
Sep 10
Jul 10
May 10
Mar 10
Jan 10
Nov 09
Jul 09
100
90
Sep 09
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
-15%
May 09
-10%
World
Source: EIA
Source: CPB Netherlands Bureau of Policy Analysis, Cebr analysis
Political turmoil sees real economic
activity hit in the wider MEA region
But Middle East – especially GCC
more insulated from drop off in trade
Despite the surge in oil prices and production levels
in the Middle East, the ongoing conflict in Libya and
political disruption has had a palpable effect on real
economic activity in the wider region. As shown in
Figure 3, traffic through the Suez canal over the three
months to June was 2.2% lower compared to the same
period a year earlier and the month of May saw the
largest year-on-year decline since November 2009.
The volume of traffic on the canal still stands some
25% below the peak level before the recession.
At first inspection, the trade volume data suggest
that real economic performance in the Middle East
has weakened appreciably in 2011. However, this
interpretation needs to be treated with caution
for two reasons. First, the disruptions to economic
activity caused by political unrest and conflict affected
different parts of the wider region quite differently;
for example events in Egypt and Libya are likely to
have distorted the overall MEA trade volume figures
downwards. Second, when we analyse the figures in
terms of values, i.e. in dollar cash terms, and consider
the importance of oil trade to the region, a different
story emerges.
While the Suez canal figures are likely to have been
particularly influenced by the political disruption
in Egypt, the latest trade volumes for the wider
Middle East and Africa (MEA) region bear witness to
evidence of a weakening in real economic activity in
2011. Annual growth in the volume of exports from
MEA over the quarter to May 2011 has fallen to 1%,
compared with rampant 12.6% annual growth as
recently as December 2010. The 1% growth compares
with 7.2% growth in trade volumes across the world
and 13.5% growth in Asia over the same period,
suggesting weaker performance in MEA.
Figure 3: Suez canal traffic, quarterly annual
percentage change in total number of vessels
30%
20%
Figure 4 illustrates that MEA trade, in dollar terms,
has boomed since Q3 2010. Over the three months
to May, the value of exports stood 28% higher than
the same period a year earlier, compared with 15%
annual growth in the value of total world exports. The
value of MEA imports grew by 18% in the same period
– suggesting a substantial boost to trade surpluses
among those economies benefitting from the export
boom. The obvious explanation for this is that the
surge in oil prices has driven robust growth in the
value of MEA exports. With the GCC plus Iran and Iraq
making up around 73% 6 of total MEA oil production,
this suggests that large parts of the Middle East will
experience a stronger 2011 than trade volume data
suggest in isolation.
10%
0%
-10%
-20%
Jun 11
Jun 10
Jun 09
Jun 08
Jun 07
Jun 06
Jun 05
Jun 04
Jun 03
Jun 02
Jun 01
-30%
Source: Suez Canal Authority, Cebr analysis
6 Cebr calculation based on latest EIA oil supply data.
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August 2 011
Figure 5 illustrates that combined exports from across
the Middle East to the eurozone and US as a share of
total exports declined from near 30% in 1990 to 15%
in 2010. Notably, the countries in the GCC have the
lowest export reliance on the US and eurozone at just
12% in 2010. Hence, while Middle East exports to the
eurozone and US are still huge in value terms at $66bn
and $52bn respectively in 2010, the data show that
fast-growing emerging markets are an increasingly
important source of demand for exports from
the region.
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
2011
Qatar
The US and eurozone account for more than two fifths
(43%) of global economic activity, but how reliant are
Middle East export markets on them? 7 The answer to
this, interestingly, is less than they used to be.
Figure 7: Real GDP growth across Middle East
economies, annual percentage change
Iraq
A key theme of 2011 has been the eurozone sovereign
debt saga as member countries with large public sector
deficits and liabilities struggle to convince markets that
they will be able to service their debt. Meanwhile, the
US recovery has disappointed, with quarter-on-quarter
growth at just 0.1% and 0.3% in Q1 and Q2 2011
respectively. This is far below the long run trend at
0.8% quarterly growth.
Saudi Arabia
How big a risk does weak growth
in Europe and the US pose to the
Middle East?
Kuwait
Source: IMF Direction of Trade Statistics, Cebr analysis
Oman
2010
UAE
Total
(GCC+5)
Jordan
2000
GCC
Iran
1990
Iraq
and Iran
Bahrain
Egypt, Jordan
and Lebanon
Growth across the Middle East as a whole looks set to
outpace global growth in 2011, but there are major
divergences in performance across the region. Growth
across the GCC could reach its highest level since
2004 and to be far stronger than in Egypt, Iran, Jordan
and Lebanon, while growth in Iraq is likely to be its
strongest since the US-led invasion in 2003. Growth
across the GCC is being bolstered by some exceptional
factors. First, oil production is surging, partly to
making up for reduced capacity elsewhere. In addition,
government spending and infrastructure investment is
growing strongly. However, growth rates are expected
to normalise in 2012 as the global economy slows. In
contrast to the GCC, the group of Egypt, Jordan and
Lebanon are experiencing weaker growth conditions,
partly due to the consequences of turbulent political
circumstances – we expect growth across these three
countries to come in at its weakest level since 1992, but
expect some improvement in 2012 as political turmoil
subsides; but clearly this remains relatively uncertain.
Lebanon
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Mixed picture across the Middle East
as the GCC powers ahead in 2011
Egypt
Figure 5: Exports to the eurozone and US as a share
of total exports by country group in the Middle East
2012
Source: Cebr analysis
Qatar’s incredible growth continues;
growth across GCC to fall in 2012
WC: 1090 (2790)
Figure 6: Real economic growth in the groups,
annual percentage change 8
8%
6%
4%
2%
0%
-2%
2005
2006
GCC
2007
2008
Iran and Iraq
2009
2010
2011
2012
Egypt, Jordan and Lebanon
Source: Cebr analysis and IMF World Economic Outlook Database April 2011
In 2011, for the sixth successive year, the strongest
growing economy in the region will be Qatar. We
expect the economy to grow by 19% as booming
liquefied natural gas (LNG) production drives growth.
In current dollar terms, the size of the economy has
more than tripled since 2006 – a performance rivaling
any economy across the globe. Despite the exceptional
growth rate, inflation remains well contained,
standing at 1.8% in June but likely to accelerate and
come in around 3% for the year as a whole. Growth
is expected to ease in 2012 to around 7%, but with
13.5% of proved natural gas reserves, investment will
continue to pour in, with the government expected
to spend $125bn over the next five years on major
developments.
8 Weights derived from current dollar GDP share.
7 Calculation based on 2010 current dollar GDP estimates from IMF World Economic Outlook April 2011.
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For Saudi Arabia, the Middle East’s largest economy,
we expect a rate of expansion that ranks alongside
fast-growing emerging markets in 2011. Oil production
is growing robustly this year; over the quarter to
June, Saudi oil output stands some 13.7% higher than
during the same period a year earlier, which is the
strongest annual pace of growth since the quarter to
January 2005. At the same time, government current
expenditure and investment is booming; government
expenditure is likely to fall in the 40–45% of GDP
range in 2011 and is likely to be structurally higher
than the 34.9% average over the 10 years to 2008.
As the global economy cools, we expect growth to fall
to a more normal 4% in 2012.
In the United Arab Emirates, the GCC+5’s third
largest economy, we have upwardly revised growth
– expected to come in at 3.8% in 2011. The buoyant
economic performance is partly being driven by the
flow of labour and capital from countries experiencing
political unrest and, in particular, robust performance
in Abu Dhabi where oil production also booms.
Annual growth in production across the UAE reached
its highest rate since 2005 in 2011. In Dubai, the
hospitality and retail sectors have shown promise and
while the real estate sector is still relatively weak, there
are signs of stabilisation. Overall, growth in Abu Dhabi
is likely to be stronger than Dubai, while growth across
the emirates will ease to 3.4% in 2012, less than half
the 7.9% average growth for the five years through
to 2008.
Similarly, Kuwait is expected to record solid 5%
growth in 2011 as oil production grows strongly and
the government approved the largest budget since
2003 at $71bn. Inflation remains a concern at 5.4%
year-on-year in June. We expect growth to moderate
slightly in 2012 but fiscal policy will continue to
contribute strongly to growth in economic activity
in the near term. Growth in Oman is expected to
be a touch weaker than Kuwait, at 4.2% in 2011. Oil
production growth has been generally weaker while
government spending growth is less ambitious than
in some of the other GCC states. Growth is expected
to moderate to 4% in 2012.
The weakest performing economy within the GCC
is Bahrain, with ongoing concerns due to political
instability. The uncertainty over political developments
has impacted investor sentiment and is affecting
real economic activity. Real GDP growth is expected
to come in at 1% in 2011; the weakest since 1994.
Stronger growth, although still weaker than the GCC
as a whole, is expected in 2012 but it is a particularly
uncertain outlook.
Iraq economy to record post-war
growth high while Iran navigates
economic reforms
since March 2008. While inflation remains high
– surpassing 6% earlier this year – investment has
poured into the economy and growth is expected to
be as high as 10% in 2011; second only across the
Middle East to Qatar. Growth is expected to moderate
slightly in 2012, but increased trade links with China
and infrastructure investment is expected to result
in Iraq recording the highest growth rate across the
Middle East in 2012.
In Iran, the picture is less clear. Evidence on recent
real growth performance is ambiguous, with estimates
ranging between 1–3%. The removal of some $60bn
of government subsidies is thought to have been
relatively successful as inflation has remained lower
than recent years, although at 19.7% in April, is still the
highest rate of price growth across the Middle East.
There is a large degree of uncertainty around growth
estimates but we expect growth to rise from 1.5% in
2011 to 2.5% in 2012.
Sluggish growth in Egypt and
Lebanon due to political instability
In Egypt, the political turbulence through 2011 is
having a discernible negative impact on real economic
performance. Industrial production fell as much as 25%
year-on-year in February and May saw a 6% annual
decline. Overall, the economy declined by nearly 4%
compared with a year earlier in Q1 2011. Against this
background – and with the annual rate of inflation
running at 11.8% in June, squeezing real disposable
incomes – growth across the year is likely to be its
weakest since 1992. Growth is estimated to come in at
1% as the Central Bank of Egypt keeps interest rates on
hold at 8.25%, where they have been since September
2009, but growth could be even lower than this. The
pace of expansion is expected to increase in 2012 as
the relatively low interest rates and weak exchange rate
help to boost external and internal demand.
In Lebanon, political uncertainty remains and
economic performance continues to underwhelm.
We expect GDP growth at just 1% in 2011, the weakest
since 2006. Inflation remains above 5%, squeezing
consumer purchasing power while the government is
running a large budget deficit, so fiscal consolidation
is likely to be around the corner.
In Jordan, the economy is expected to post reasonable
growth at 3.4% in 2011. Although unemployment
stands high above 13% of the labour force, annual
growth in industrial production returned to positive
territory in Q2. The real estate sector shows signs
of promise while the country’s information and
communications technology sector can capitalise on
the government’s aim to increase internet penetration
from just 11% in 2007 to 50%. Overall, growth is
somewhat less stellar than the GCC, but is stronger
than economies adversely affected by political unrest.
Similarly to the GCC, Iraq is benefitting from high oil
prices and corollary double digit annual growth in oil
production volumes. Over the three months to June,
oil production rose by 18.3% compared with the same
period a year earlier, the strongest rate of expansion
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