Download economic insiGht MIDDLE EAST Quarterly briefing Q3 2012 Global economy stutters into the

economic Insight
Middle East
Quarterly briefing Q3 2012
Global economy stutters into the
second half of 2012 as euro crisis
drags on
Welcome to the sixth issue 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 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.
It has been another turbulent few months for the
global economy. The second quarter of 2012 saw
many key economic indicators deteriorate and a
plethora of growth forecasts downgraded. The
key result of this for the Middle East – which holds
48% of the world’s proved oil reserves2 – has been
the sharp decline in oil prices seen through May
and June. The biggest issue for the global economy
remains the seemingly never-ending eurozone crisis.
Despite more bail outs, summits and central bank
government bond buying, a clear way forward
remains elusive. This profound uncertainty continues
to plague the world economy. Meanwhile, recent
months have also seen the emerging market stars
of the global economy slow down notably, hitting
global growth. On top of these global developments,
political uncertainty and security concerns remain
prevalent in the Middle East to complicate the
economic outlook further still.
BUSINESS WITH CONFIDENCE
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Figure 1: How global growth has faltered – yearon-year percentage change in net tonnage and
number of vessels transported on the Suez Canal
Muscat Securities Market,
MSM 30 Index
Abu Dhabi Securities
Exchange, General Index
Tehran Stock Exchange,
All Share Index
Kuwait Stock Exchange
FTSE World Index
Doha Securities Market
Index
Egyptian Exchange,
EGX100 Index
Dubai Financial Market,
General Index
Through the second quarter of 2012 the broadbased slowdown in the global economy has become
increasingly clear. The amount of trade passing
through the Suez Canal is a rather useful economic
indicator, being closely linked to overall changes in
global economic activity; around 8% of the world’s
international trade passes through the Suez Canal.3
The data on the tonnage of goods passing through
offer timely indicators of real economic activity. The
June data illustrated in Figure 1 show that the number
of vessels passing through the Suez Canal stood 9.4%
lower than in June 2011, the steepest annual decline
in vessels travelling through since November 2009 –
when the effects of the 2008–9 global recession were
still impacting the figures. The figures on net tonnage
are also disquieting because they fell for the first time
year on year since the financial crisis – June 2012 net
tonnage was down 2.4% from 12 months earlier.
Figure 2: Middle Eastern equity markets hit by
weakening global economic outlook; percentage
change in key equity indices between 30 March
2012 and 30 June 2012
Saudi Stock Exchange,
Tadawul All Share Index
Suez Canal figures point to weakening
global economic activity
0
-5
-10
-15
-20
%
Source: Macrobond
%
35
30
Oil prices in sharpest drop since global
recession of 2008–9
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
Net tonnage
Number of vessels
Source: Suez Canal Authority
Middle Eastern equity markets sink as
economic outlook worsens
Markets were hit by the weaker economic picture
through the second quarter of 2012. Figure 2 illustrates
the decline in key equity indices across the Middle East
between the beginning of April and July. The Muscat
MSM 30 was the only one of the key benchmarks
to avoid a decline through the quarter with equity
markets generally weakening. The steepest decline over
the quarter was on the Saudi Tadawul index, dropping
in value by 15.4% while the Dubai Financial Market
index also experienced a double-digit decline of some
11.9% over the quarter. The declines in indices in
Saudi Arabia, Dubai, Egypt and Qatar all surpassed the
7.1% decline on the FTSE World index. The declines in
stock prices reflect falling profit expectations as well as
perceptions of higher risks for businesses in the region.
The weaker global economic picture has of course
resulted in a lower price of oil too – crucial as always for
the Middle East economy. The price of crude dropped
sharply from early April through to late June. The
average of the three main oil spot prices declined from
$117.79 in March to $90.73 in June. Figure 3 illustrates
that this was the steepest decline in oil prices over
three months since January 2009 – the lowest point of
the 2008–9 global recession. However, since late June
oil prices have rebounded; the price of a barrel of Brent
Crude reached a low at $90.34 dollars at close on 26
June but has risen through July to surpass $107 a barrel,
still some way short of the recent peak at $126 a barrel
in mid-March.
Figure 3: Weaker global economy hits oil prices –
although downward trend reversed in July, change
in average of three spot prices4 from three months
prior, $ per barrel
$
30
20
10
0
-10
-20
-30
-40
-50
-60
-70
Source: IMF, Cebr analysis
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cebr.com
Whatever the precise up or down movements,
an increase in the volatility of commodity prices
has become evident since the mid-2000s. Rising
speculative activity in this formerly sleepy corner of
the financial markets may have a role to play; large
shifts in demand to emerging markets are another. The
injection of large amounts of cheap money through
central bank quantitative easing into global markets
may have exacerbated this trend as money moves out
of the economies it is intended to support to chase
returns in the globalised financial marketplace. While
the fluctuations around the average have become
increasingly unpredictable, the next section looks at
expected future prices.
But oil prices rebound in July as political
uncertainty escalates
This most recent market trend could partly be a
function of central banks responding to the weaker
growth environment with a range of monetary policy
measures; we have seen rates cut from China to the
eurozone to South Korea, Brazil and India. Meanwhile
in the UK the Bank of England has once again increased
its quantitative easing programme by £50bn5 and
there are growing calls for further quantitative easing
from the Federal Reserve in the US.
However, given the sharp, abrupt nature of the recent
price rises and no particular sign of a significant change
from the weakening trajectory of the global economy
in recent weeks, it seems likely that a large part of
these price movements can be explained by increased
political uncertainty.
This ongoing political uncertainty means that, despite
weaker economic fundamentals, the oil price remains
high. Figure 4 shows an analysis of futures market
contracts for delivery of oil over the next four years.
This suggests that the price of Brent Crude will remain
above $100 a barrel in 2013, although increased supply
will put slight downward pressure on prices for the
following three years. Not surprisingly, given prices
far above the cost of production in the Middle East,
moves to boost production are already evident as the
following sections illustrate.
Figure 4: Oil prices to remain above $100 a
barrel in 2013? Brent crude futures $ per barrel
$
120
100
80
60
40
20
0
Brent crude
Source: IMF, Macrobond, Cebr analysis
Brent futures
Iranian oil production slumps while
Kuwaiti, Saudi and Iraqi output booms
Hand in hand with the higher oil prices, oil production
in the Middle East has grown strongly over the last
couple of years – especially after the Libyan crisis
knocked around 3% out of global oil supplies. With
Libyan oil production back up to around 84% of its
pre-crisis level and global economic growth slowing,
the robust growth in the oil economy seems almost
certain to slow in the second half of 2012 and into
2013. Figure 5 shows that oil output growth has been
especially robust in Iraq, Kuwait and Saudi Arabia
through 2012, while the trade sanctions imposed on
Iran are causing steep cutbacks in production. Despite
the falls in Iranian production, the strong growth in
oil production across the region has seen the Middle
East’s share of global oil output reach almost 31%
over the latest 12-month period. Within that, the
Gulf Cooperation Countries’ share of output reached
22.7%. Both these figures are near record highs.
Figure 5: Percentage change in oil production
volume over three months to May compared
with same period a year earlier
%
25
20
15
10
5
0
-5
-10
-15
Kuwait
Saudi Arabia
Iraq
UAE
Qatar
Iran
May 2012
Source: IEA, US EIA, Cebr analysis
But Middle East oil surge will slow as
2012 goes on
Emphasising the strong growth and record production
figures leaves a clear danger of looking too much in
the ‘rear view mirror’. There are obvious signs that the
oil economy – and the wider regional Middle Eastern
economy – will slow as 2012 goes on. Figure 6 shows
that while the last two years have seen a prolonged
period of robust growth in Middle East oil production,
the last few months have seen a trend decline in the
annual pace of output growth starting to emerge.
While clearly the declines in Iranian production play
a significant role in this, given the weakening global
economic backdrop captured in the Suez Canal
data in Figure 1, this weaker pace of growth is likely
to continue into the second half of 2012. Supply is
only one part of the market equation determining
prices and volumes traded. Demand, of course, is the
other. We now turn to look at events in major world
regions to gauge the drivers of oil markets from that
perspective.
Figure 6: Percentage change in total Middle East oil
production over time, three month annual change
Figure 7: Middle East exports to eurozone, share
of total goods exports
%
%
30
14
12
10
8
6
4
2
0
-2
-4
-6
-8
-10
-12
25
20
15
10
5
2001
Source: US EIA, Cebr analysis
Egypt
Iraq
Iran
Lebanon
Saudi Arabia
Qatar
Total
Kuwait
Jordan
World
United Arab
Emirates
Middle East
Bahrain
Oman
0
2011
Source: Macrobond; IMF Direction of Trade Statistics & Cebr analysis
The ongoing eurozone crisis and its
impact on the Middle East and world
economy
It is clear that global economic growth is straining as
the eurozone current and future performance remains in
question, but how bad are things likely to get and what
impact will it have in the region? A contraction in the
eurozone economy through 2012 seems all but certain.
Economic output in the single currency area is expected
to decline by 0.8% in 2012 and struggle to achieve
growth in 2013, but this is highly uncertain. Steep
drops in economic activity are occurring in Italy and
Spain – with GDP likely to decline by at least 2% in both
cases – while Greece and Portugal are mired in recession
and even Europe’s economic powerhouse Germany is
suffering from weaker growth as business sentiment
indicators have been declining. But what bearing will
this have on the world economy and the Middle East
region?
The eurozone accounted for around 19% of the global
economy at the end of 2011, measured at market
exchange rates, so the ongoing crisis acts as a major
drag on global economic growth. Indeed, in current
dollar terms, the forecast decline in eurozone economic
GDP will knock around $50bn off global GDP in 2012.
So there is a serious impact on the global economy,
oil prices and hence the Middle East. However, on the
upside for the region trade with the eurozone is, in
relative terms, quite small. Figure 7 shows that across the
regions goods exports to the eurozone total around 9%
of total Middle East exports – and this export share has
been declining; back in 2001 eurozone exports totaled
11% and going back further it was larger still. For some
Middle Eastern economies the proportion of exports
to the eurozone has declined notably, including the
region’s two biggest economies: Saudi Arabia and Iran.
With the large economies of the West subdued, the
onus is increasingly on emerging economies to drive
global growth. Indeed, previous editions of Economic
Insight: Middle East have highlighted the importance
of emerging economies to the region’s economy
as a major trade partner and driver of Middle East
export growth. Moreover, growth in the Middle
East is strongly correlated with emerging market
growth. While emerging market expansion is still
going to significantly outstrip growth in the advanced
economies of the West, the outlook has become more
challenging.
In China there have been clear signs of a slowing
economy as investment expansion eases after years
of booming growth. The rate of growth is expected
to ease back towards 7% over the next few years,
having averaged 10.3% from 2000-2010. In India,
growth is also weakening considerably in 2012, forcing
the Reserve Bank of India to loosen monetary policy
by cutting benchmark interest rates. Overall, Indian
economic growth is expected to fall below 6% and is
not expected to surpass this level in 2013 either. What
this all means for global economic growth is illustrated
in Figure 8: in 2012 the world economy will slow to its
lowest rate of growth since 2009 and remain below
3% in 2013.
Figure 8: Economic growth outlook for key
economies, annual percentage change in real GDP
%
12
10
8
6
Global economic growth to fall again in
2012 and remain muted in 2013
Across the AtIantic the US has been far stronger than
the eurozone but there have been clear signs of weaker
performance in the US too, with employment growth
disappointingly weak through the second quarter of
2012. Hence, economic growth below 2% is expected in
the US in 2012 and, with fiscal tightening likely to set in
through 2013, growth is likely to remain impaired.
4
2
0
-2
-4
China
Eurozone
India
US
Global
Source: IMF, Cebr analysis
economic insight – middle e a st
Q3 2 012
Emerging markets slowing too, posing
downside risks for the Middle East in
2013
As the global economy slows, growth across the
Middle East is expected to fall back. Growth is slowing
from nearly 6% in 2011 down to 4.4% in 2012. This
is still some 1.8 percentage points higher than across
the global economy as a whole as the strong growth
in oil production boosts the overall level of economic
activity. However, with key export markets slowing
down and weaker oil demand growth resulting in a
lower rate of expansion in oil production, the pace of
growth is set to fall further in 2013, with expansion the
smallest since 2009. Beyond that, policy intervention
and the turning of the global economic cycle will see
Middle East growth rise again towards 4% in 2014. In
all years of the forecast period growth in the Middle
East outpaces the world as a whole, but in 2013 the
gap will close as the effect of lower oil production
growth hits the Middle East harder then.
Figure 9: Comparison of regional annual GDP
growth forecasts
8
7
6
5
4
3
2
1
0
-1
-2
-3
Global
Source: IMF, Cebr analysis
What policy tools are available for the
Middle East?
As the global economy slows and the Middle East
feels a cooler breeze from the rest of the world
economy, policy-makers across the region may need
to assess what options they have to mitigate weaker
external conditions. A weakness for the region has
traditionally been its dependence on the hydrocarbon
economy. Measures to diversify economic structures
have long been a policy objective in the region, but
the overwhelming importance of the petrochemical
industry makes progress in this direction a challenge
– why change a winning formula? In addition, the
financial crisis exposed a construction boom in some
countries as unsustainable, teaching the Middle East
a lesson that many other regions of the world have
also had to learn the hard way: buildings in and of
themselves don’t make things. Once the boom fizzles
out, a large part of the economy slumps in the ensuing
downturn.
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Those long-term policies which require an extended
period both to be implemented and to bear full fruit
are crucial for living standards in the coming decades,
but the shaky state of the global economy also
points to the need for more immediate measures to
safeguard livelihoods. A possible fall in oil prices amid
a global recession that might be caused by a eurozone
implosion or a China slump could depress oil prices
substantially. That suggests the need to be prepared
for a more immediate policy response if the economy
sours.
With a dollar peg common in the Middle East,
exchange rate volatility is eliminated. But on the other
hand it also cuts states’ capacity to set interest rates
and effectively outsources monetary policy to the
US Federal Reserve. In other words, the Middle East
has less policy flexibility than countries with floating
exchange rates and has to look to fiscal policy for
management of the business cycle. However, large
spending increases implemented during the Arab
Spring have already boosted the role of the state in
the economy in many countries. Further stimulus from
the public purse runs the risk of creating imbalances,
resulting in wasteful spending with a low multiplier
impact on the rest of the economy and also increasing
the reliance on oil and gas revenues at a time when the
underlying resource is losing value.
%
Middle East
Therefore, investment in skills and technology appear
to be the way forward. The opening of campuses
by foreign universities as well as the construction of
innovative projects such as the zero emissions city in
Abu Dhabi, and the growing international profile of
regional businesses are steps in the right direction.
To build a diverse industrial base will require deeper
changes, however, with more inclusive education
policies and greater opportunities for minority
groups such as recent migrants another part of the
policy mix. Only a universally high level of skills and
economic opportunities can provide the level of labour
productivity growth required for lasting success in the
21st century.
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In this context, a potential crisis in the Straits of
Hormuz may benefit the oil-dependent countries
more than it may hurt them by driving up prices. The
other risks to the global economy, which appear to
be firmly weighted on the downside, suggest that the
Middle East would feel the effects of a downturn as
strongly as other parts of the world. However, if the
above-mentioned economic diversification is made a
priority and oil and gas revenues are invested to boost
the long-term growth potential, the outlook for the
region is bright. Growing populations that are raising
their skill level, a strategic location between rising stars
Africa and Asia as well as an insatiable need for energy
all promise a bright future even if the path to lasting
prosperity may be a bumpy one in the aftermath of the
global financial crisis.
economic insight – middle e a st
Q3 2 012
FOOTNOTES
1The 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 According to the latest BP Statistical Review of World Energy, June 2012
3 The Economist; ‘Running Aground’ http://www.economist.com/blogs/dailychart/2011/09/world-economy
4 Brent crude, West Texas Intermediate and Dubai Fateh
5 When the central bank buys up government bonds through the creation of new central bank reserves.
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For enquiries or additional information, please contact:
Sarah Jane Carter
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Currency House, Unit 4, Level 4
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PO Box 506836
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© ICAEW 2012 MKTPLN11514 08/12