Download Economic Insight

Economic Insight
Middle East
Quarterly briefing Q1 2014
Welcome to this 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 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+5.1
2014: a crossroads for the Middle East
Three years on from the onset of the ‘Arab Spring’
protests, the Middle East remains volatile. While the
conflict in Syria drags on, elsewhere in the region
countries are moving on from the problems of the
last six years. Most notably, continuing negotiations
between Iran and the P5+1 nations (the US, Russia,
China, UK, France and Germany) could finally reach
a lasting resolution in 2014. Iran has been under
international economic sanctions since 2006, as
a result of the country’s nuclear programme. An
interim resolution was reached in late 2013 – the
first formal agreement between Iran and the US in
34 years. Limited sanctions relief has been provided
for six months from 20 January 2014, in return for
a freeze in Iran’s nuclear programme and dilution
of existing stocks of enriched materials, as well as
access to enrichment facilities and power plants
for international inspectors. The question now is
whether a comprehensive follow-up agreement can
be developed. The results of further negotiations
will have wide-reaching implications across the
region: Iran’s return to international markets would
provide yet another supply boost to the global oil
market, potentially reducing oil prices and revealing
the fiscal vulnerability of other oil-producing states
across the region.
Elsewhere, Egypt will continue to attempt to rebuild
the state, following 2013’s political turmoil, while
Lebanon and Jordan will continue to suffer from the
influx of Syrian refugees. By contrast, the exportoriented economies of the GCC should perform well
as the global economy accelerates to expand at the
fastest pace since 2011.
BUSINESS WITH confidence
icaew.com/economicinsight
High oil prices have helped GCC growth
soar above most of the world since 2008
The Middle East has benefited from some of the
world’s strongest growth rates since the financial crisis
hit in 2008. High oil prices have allowed some of the
region’s states to post growth rates that advanced
economies, dragged down by debt and austerity, could
only dream of. A further boost has been provided by
significant investment in economic diversification.
Over the five years to 2013, the real GDP of GCC
countries grew by 24.0%, while that of the UK shrunk
by 0.5% and the eurozone by 1.9%. Even the US,
which returned to growth much more quickly after
the initial financial crisis, only grew by 6.2% over the
same period.2 Qatar’s economy performed particularly
strongly with double-digit growth in most years
adding up to a 66.7% expansion between 2008 and
2013. Saudi Arabia’s economy also grew by 29.6%.
Growth was slightly less strong outside the GCC, but
still remarkable given the global economic context.
Iraq’s economy expanded by 37.7% over the five
years, thanks to strong growth in 2011 and 2012 after
the destruction of years of conflict. Lebanon’s output
also rose by 21.0%, while Jordan and Egypt managed
growth of 17.2% and 16.7% respectively despite
regional instability. Even Iran managed growth of 9.8%
despite the crippling effects of international sanctions
and disastrous domestic mismanagement.
Rising populations mean wealth has to
go further
Countries across the Middle East have rapidly rising
populations, meaning the economy must grow just
to maintain living standards: although the volume
of economic resources available across the region is
growing, so is the number of people this wealth has to
support. Between 2008 and 2013, the population of
the GCC rose by 18.9% – more than six times quicker
than the rate of growth in the UK or US (2.9% and
2.7% respectively). The population of the ‘+5’ rose
9.4%.3 Population growth across the Middle East is
outpacing that across the rest of the globe, and most
other emerging markets. While population growth will
decelerate over the next decade as birth rates fall, the
population of the Middle East as a whole is expected to
rise by 17.3% between 2014 and 2024 – amounting to
an additional 45m people across the region.
Figure 1: Growth of real GDP per capita across the
Middle East
Living standards set to rise rapidly over
next decade
Economic prospects for the next decade on a per
capita basis are more favourable. As the pace of
population increase begins to slow, growth of GDP per
capita should accelerate across the region, as illustrated
in Figure 1. For the region’s oil-importing economies,
including Egypt, Lebanon and Jordan, GDP per capita
is expected to rise by more than 10% over the next five
years. Iraq is expected to see even more spectacular
growth, despite ongoing political instability, as the
country begins to make greater use of its natural
resources. Here GDP per capita is expected to rise by
more than a third between 2014 and 2019, and to
continue growing at this pace until 2025.
A boost to living standards is also expected in GCC
economies, as investment in downstream industries
and diversification begins to bear fruit. The most
dramatic improvements will be seen in Qatar, where
GDP per capita should double between 2014 and
2025, thanks to the low costs of producing natural gas
and the country’s hosting of the 2022 football World
Cup. Other countries will see slightly slower growth,
held back by a fall in global oil prices. This will mean
GDP per capita growth in Saudi Arabia will be slightly
slower in the coming years than over the last five, but
the UAE, Kuwait, Qatar and Bahrain are all expected to
see further acceleration.
High savings to fuel investment in
diversification
GDP per capita is just one measurement, however, of
the prospects for an economy. While this is the average
resources available for each person in the population,
the measure tells us little about how these are
distributed among the population. Across the GCC, less
than half of all GDP is consumed, either by government
or households. In Saudi Arabia, for example, just 38.6%
of GDP was used to finance domestic consumption in
2012, while the UAE consumed only slightly more of its
GDP – 46.2%. Qatar consumed just 19.9% of its GDP,
allowing 23.0% of what it earned to be invested.4
2008–2013
2014–2019
forecast
Iraq
Saudi Arabia
Egypt
Qatar
Lebanon
US
Iran
Bahrain
UK
Jordan
Oman
Kuwait
Instead, much of the earnings of oil exporters
are saved, providing finance for investments in
other industries to guard against dependence on
hydrocarbons.
UAE
%
40
35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
This population growth means that despite robust
economic expansion, living standards (measured by
GDP per capita) have not increased across the board
in the Middle East. Indeed, despite the rapid growth
of their economies over the last five years, the UAE,
Kuwait, Oman and Jordan have all seen real GDP
per capita fall. Although output is rising quickly, a
combination of high birth rates and immigrants hoping
to take advantage of the opportunities created by
economic expansion mean that living standards have
struggled to keep pace with GDP growth.
2020–2025
forecast
The International Monetary Fund (IMF) estimates that
Qatar’s gross national savings accounted for 59% of
GDP in 2013 – more than even the 51.4% famouslythrifty China put aside. Kuwait also saved 55.2% of its
earnings, and other GCC nations were not far behind
– Saudi Arabia’s national savings account for 47.6% of
GDP, while the UAE’s are worth 40.1%. GCC countries
have among the world’s highest gross national savings
per capita on a US dollar basis, as illustrated in Figure 2.
Source: United Nations World Population Prospects: The 2012 Revision, International
Monetary Fund World Economic Outlook, Cebr analysis
icaew.com/economicinsight
cebr.com
economic insight – middle e a st Q1 2 014
Figure 2: National savings per capita, US$ current
prices
Figure 3: Consumer Price Index (CPI) inflation,
annual percentage change 2013 and 2018
US$
%
60,000
14
50,000
12
10
40,000
8
30,000
6
20,000
2020 forecast
Source: United Nationals World Population Prospects: The 2012 Revision, International
Monetary Fund World Economic Outlook, Cebr analysis
In Qatar, gross national savings per person were
equivalent to nearly US$55,000 in 2013, while the
equivalent figure in Kuwait was over US$30,000. Saudi
Arabia and the UAE also have relatively high levels of
savings per capita – both above the US’s level of just
under US$9,000. These high savings rates, a result
of strong exports and a persistent current account
surplus, can be used to finance investment, providing
these economies with a boost in their efforts to
diversify.
By 2020, as populations begin to age and middle
classes continue to grow, savings per capita will fall
across many of these countries – most notably in
Qatar, but also in Kuwait, the UAE and Saudi Arabia.
Middle Eastern economies will become less reliant on
hydrocarbons in future as prices fall and diversification
efforts bear fruit. Once this is achieved, the pattern
of economic growth across the region is likely to shift
away from the current emphasis on investment towards
consumption – a natural sign of a maturing economy.
Determination to reform subsidies places
pressure on inflation rates
Rising GDP per capita should bring benefits to people
across the Middle East in coming years. Although
they may not feel the benefits directly in pay packets,
quality of life should also be improved by access to
better public services and improved transport networks
as the benefits of strong economic growth trickle
down.
At the same time, however, households across the
region will be feeling the pinch of rising inflation. After
many years in which daily essentials such as food and
power have been heavily subsidised by governments,
fiscal pressures mean that many are now seeking to
cut the amount they spend on supporting household
consumption. The immediate impact of this will be to
increase the prices of these goods, raising inflation, as
illustrated in Figure 3.
icaew.com/economicinsight
cebr.com
2013
Egypt
Lebanon
Jordan
Saudi Arabia
Qatar
Kuwait
Oman
Bahrain
Iraq
Qatar
UAE
Kuwait
US
Saudi Arabia
Oman
UK
2013
Bahrain
Iran
China
Iraq
Jordan
0
Egypt
0
Lebanon
2
UAE
4
10,000
2018 forecast
Source: International Monetary Fund. Iran data excluded from figure due to distortionary
effect on scale – Iranian CPI inflation was 42.3% in 2013, and is expected to fall back to
20.0% by 2018.
Most hard hit by attempts to reduce subsidies will be
households in Egypt, where a third of all government
spending (13% of GDP) is on reducing costs of
consumption. In the initial aftermath of political
upheaval in 2013, relief was increased to reduce the
prices of subsidised goods by 10-15%, but in the long
run policies such as these are simply not sustainable.
Reducing the subsidy bill here is a condition of further
IMF relief. The withdrawal of state support, however,
will hit household budgets hard, pushing consumer
price index (CPI) inflation up from 6.9% in 2013 to
12.3% by 2018. The proportional rise in inflation will
be even higher in Iraq, as the removal of subsidies
combines with the accelerating economy and greater
demand for resources to leave inflation at more than
double its 2013 level by 2018. Price rises in the UAE,
Kuwait and Qatar will be more limited, but inflation
is still expected to rise. By contrast, households in
Jordan and Lebanon are expected to see some relief
from inflationary pressures by 2018, as a reduction
in the violence overspilling from Syria (if not an end
to the civil war) reduces demand for essential items
and lowers the pressure placed on resources by large
populations of refugees.
What if sanctions on Iran are lifted?
Iranian oil production has dropped dramatically since
2012, when sanctions imposed as a result of the
country’s nuclear programme were tightened. Over the
12 months to September 2013, production was nearly
1m barrels a day lower than over the same period two
years earlier,5 representing the loss of almost a fifth of
Iranian oil output. As negotiations continue between
Iran and the P5+1, what would the consequences of a
deal be for other countries around the Middle East?
Increased oil supply pushes prices down
To date, sanctions have provided yet another supply
restriction which has kept global oil prices elevated.
Combined with the US ban on exports of crude oil,
disturbances in other major oil producing states, and
security concerns across the Middle East, sanctions
against Iran have kept average oil prices6 persistently
above $100 a barrel since early 2011. This is despite
an increase in global oil production of 2.5% over the
same period.7
economic insight – middle e a st Q1 2 014
30
20
2002
2004
2006
2008
2010
2012
2014
2016
2018
Baseline forecast
Forecast if an agreement is reached by 20 July 2014
Source: International Monetary Fund and Cebr analysis
We expect that the immediate impact of a full-scale
international agreement between Iran and the P5+1
would be minimal, as it would take some time for
production to restart. Countries such as India and
China, who are already purchasing oil from Iran under
waivers from the US, may immediately increase their
purchases from this source, reducing prices slightly
across the rest of the market. If a deal is reached within
six months of the implementation of the interim deal
on 20 January 2014, Iran could increase production by
1m barrels a day within months. Under this scenario,
international average oil prices could fall to $100 a
barrel this year – slightly lower than the $101 otherwise
anticipated.
By the end of the forecast period, the combination
of increased Iranian production and spare capacity
in other OPEC states, particularly Saudi Arabia, could
drive prices down to $88 a barrel – where they would
otherwise be expected to remain around $96 a barrel.
The pace of price decreases would likely be moderated
by a fall in production from ‘tight oil’ sources. Our
baseline forecast – assuming that a deal is not reached
by 20 July 2014 and sanctions on Iran are tightened
once again in late July – also shows prices falling, albeit
less quickly, mostly as a result of increased oil supply
from shale sources. However, as the cost of recovering
this oil is much higher than that of drilling conventional
icaew.com/economicinsight
cebr.com
Figure 5: Annual real percentage change in GDP,
assuming Iran and the P5+1 fail to reach an
agreement
%
9
8
7
6
5
4
3
2
1
0
2014
2015
Iraq
40
Qatar
50
Saudi Arabia
60
UAE
70
Bahrain
80
Oman
90
Even without a full international agreement, we believe
that the economic prospects for Iran are looking better
than they have over the last few years. Poor domestic
policies have deepened Iran’s economic troubles
in recent years; the combination of expansionary
policies and falling revenues thanks to international
sanctions have left the country battling high inflation8
and unemployment as well as contracting output.
President Rouhani made clear when presenting his first
budget in December that he intends to move away
from the populist policies of his predecessor and focus
on turning Iran’s economy around. Additionally, the
limited relief provided under the interim agreement
will give the Iranian economy some positive
momentum. Given this, Iran’s GDP is expected to rise
by 1.3% over the course of 2014 – a stark contrast to
the 1.3% reduction in output experienced last year.
Nevertheless, without an international agreement
which will allow Iraq to export its hydrocarbons, it will
remain the region’s weakest performer, as illustrated in
Figure 5.
Jordan
100
Scenario 1: Iran and the P5+1 fail to reach
agreement on a full-scale deal
Kuwait
110
This price fall would obviously have consequences for
oil exporters across the Middle East. Many states have
implemented dramatic programmes of government
spending in the aftermath of 2011’s protests, raising
the ‘break-even’ oil price needed to pay for these
outgoings and balance the budget. The reduction in
oil prices will have an impact on the fiscal decisions
of these states, and also their decisions to invest in
additional oil production capacity – with Iran back in
the game, the incentive to invest in new wells and take
advantage of historically high prices would be reduced.
Charts 5 and 6 below compare the growth forecast for
these two scenarios.
Egypt
US$
How would falling oil prices affect
economies across the Middle East?
Lebanon
Figure 4: Oil price forecasts: the effect of an Iranian
return to market. US$ per barrel, simple average of
prices of Brent crude, West Texas Intermediate and
Dubai Fateh
wells, the steeper price decrease expected if Iranian oil
returned to markets would have the potential to reduce
supply growth from these sources. By reducing the
scale of the increase in the global oil supply, this would
counteract some of the negative price pressure of Iran’s
return to global markets.
Iran
If a deal is reached and sanctions on Iran are lifted
fully in the next 12 months, this would certainly
have an impact on global oil prices – assuming that
other factors do not change significantly. President
Rouhani’s decision to re-appoint former oil minister,
Bijian Zanganeh who brought in billions of dollars of
international investment between 1997 and 2005,
suggests that Iran is serious about re-entering the
international oil market. Furthermore, although Iranian
production has been curtailed by sanctions, wells are
likely to have been closed in an orderly fashion, making
the prospect of re-starting production much simpler
than the task faced in neighbouring Iraq, where
infrastructure has been damaged by years of conflict.
While Iranian oil would not return to market as soon
as a deal is reached, the prospect of additional supply
within a few years could be significant enough to bring
oil prices down in the short term as much oil is traded
through futures markets.
2016
Source: Cebr analysis
economic insight – middle e a st Q1 2 014
Elsewhere, Lebanon and Egypt will both continue
to be held back by political instability. Lebanon is
not expected to find a permanent government until
late 2014, and with no end to the Syrian civil war in
sight, the country will continue to pay the price in lost
tourism and the overspill of violence. Prospects for
2015 onwards are a little bit brighter in Egypt, where
growth is expected to rise to 4.0% by 2016 as the
political situation settles down.
The Middle East’s brightest growth prospect is Iraq,
where growth is expected to accelerate in 2014 to
6.7%, up from 4.4% in 2013. Although the region
continues to be dogged by outbreaks of violence, there
is nonetheless evidence that companies are increasingly
keen to operate there. International banks are moving
in – Standard Chartered opened a Baghdad branch in
2013, and Citibank is expected to follow suit shortly –
as are business services firms including Deloitte. Strong
growth will become self-reinforcing, as international
firms seek a piece of the action and invest. With other
emerging markets, including China, Russia and India,
looking less attractive than they have in recent years,
Iraq will be tempting to investors despite instability.
With a third of the population on the public payroll,
increases in government spending will also have a
significant effect. Growth is expected to rise to 8.6%
by 2016.
Across the GCC, a slight acceleration in output
growth is anticipated in 2014, from 4.0% in 2013 to
4.4%. High levels of fiscal spending will continue to
provide an impetus for growth in the UAE, Qatar and
Saudi Arabia, although this will fall slightly later in
the forecast period as governments grapple with the
difficult problem of reducing spending on subsidies.
Scenario 2: Iran and the P5+1 reach a deal, and
Iranian oil returns to markets
Figure 6: Annual real percentage change in GDP,
assuming a deal between Iran and the P5+1
%
9
8
A fall in oil prices would push many GCC countries
perilously close to their break-even oil prices. As
countries including Bahrain, Kuwait and Saudi Arabia
have boosted social spending in the wake of the Arab
Spring, they have raised the amount they need to
earn from oil revenues to fund this spending. The Arab
Petroleum Investments Corporation (APIC) estimated
in August 2013 that Saudi Arabia’s break-even price had
risen to $98 a barrel from $94 in 2012, while the UAE’s
break-even price is also edging closer to $100 a barrel.9
While most GCC countries are already expected to
reduce fiscal spending within the forecast period, the
fall in oil prices anticipated if Iranian oil was to return
to international markets would bring forward the date
at which these countries would enter fiscal deficits and
make efforts to trim subsidy spending and public wage
bills more pressing. Lower prices would also reduce the
incentives to invest in new oilfields elsewhere in the
Middle East, knocking a few percentage points off the
growth forecasts for the UAE, Oman, Kuwait and Saudi
Arabia. Production limits in OPEC states, in an attempt
to support international prices, could have the effect of
capping growth in these countries.
The main loser from a deal between Iran and
international powers would be Iraq. Iran, with the
second-largest proved oil reserves in the Middle
East, would be a very attractive destination for many
international firms. Several international carmakers
have already spoken of their willingness to produce in
Iran if a deal is reached. Given this, we expect that free
access to Iranian markets may significantly reduce the
attractiveness of investment in Iraq, where violence is
expected to continue throughout the forecast period.
An international agreement with Iran would thus
cut forecasted growth in Iraq in 2016 from the 7.3%
envisaged in our baseline scenario to 6.9%.
It is possible that the reintegration of Iran into the
international community could also speed along
the resolution of the conflict in Syria. Given that
this slightly improves the prospects for surrounding
countries, we expect that growth in Lebanon and
Jordan would be slightly stronger in the event that
an agreement was reached between Iran and the
international community.
7
6
A deal would hasten diversification across
the GCC
5
4
3
2
2014
2015
Iraq
Qatar
Saudi Arabia
UAE
Bahrain
Oman
Jordan
Kuwait
Egypt
Iran
0
Lebanon
1
2016
Source: Cebr analysis
The impact of a deal between Iran and the P5+1 which
resulted in a loosening or retraction of international
sanctions would not have an immediate impact on oil
prices. The impact on expectations of future prices
would be felt much more quickly, however, and would
influence decisions on government spending and
investment in new oil production capacity. Figure 6
presents forecasts which take these changes, and their
consequences for economic growth, into account.
icaew.com/economicinsight
cebr.com
The impact of a deal on GCC economies would be
mitigated in the medium term by existing efforts
to diversify economies away from reliance on
hydrocarbon production. As long as investment in
transportation networks, improving education and
building downstream industries continues, these
countries will escape the worst consequences of a
sharper fall in the international oil price than if no deal
is reached.
The negotiations to reach a deal will doubtless be long
and arduous, with the US particularly struggling to
balance domestic calls to treat Iran harshly with the
desire to improve the stability of the region. However
the cards fall in 2014, oil prices will fall as supply grows
in coming years. Countries within the GCC must
continue to confront their fiscal situations and the need
to diversify if the economic success of the last five years
is to be sustained in a world of lower oil prices.
economic insight – middle e a st Q1 2 014
ENDNOTES
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 if we
refer to wider definitions of the region, we will try to point this out explicitly.
2 Estimates of GDP growth rates 2008-2013 are based on IMF historical data for 2008-2012 and Cebr forecasts for 2013.
3 United Nations, Department of Economic and Social Affairs, Population Division (2013), World Population Prospects: The 2012 Revision.
4 Cebr analysis of data from the UN National Accounts Main Aggregates Database
5 Cebr analysis of Energy Information Administration data.
6 IMF, simple average of market prices of Brent crude, West Texas Intermediate and Dubai Fateh.
7 Cebr analysis of Energy Information Administration data.
8 See comment below Figure 3.
9 APICORP (2013), Modeling OPEC Fiscal Break-even Oil Prices: New Findings and Policy Insights, Economic Commentary 8(9-10). Available online at http://
www.apic.com/Research/Commentaries/2013/Commentary_V08_N09-10_2013.pdf
Cebr
The Centre for Economics and Business Research is an independent consultancy with
a reputation for sound business advice based on thorough and insightful analysis.
Since 1993 Cebr has been at the forefront of business and public interest research.
They provide analysis, forecasts and strategic advice to major multinational companies,
financial institutions, government departments and trade bodies.
ICAEW is a world leading professional membership organisation that promotes,
develops and supports over 142,000 chartered accountants worldwide. We provide
qualifications and professional development, share our knowledge, insight and
technical expertise, and protect the quality and integrity of the accountancy and
finance profession.
As leaders in accountancy, finance and business our members have the knowledge,
skills and commitment to maintain the highest professional standards and integrity.
Together we contribute to the success of individuals, organisations, communities
and economies around the world.
Because of us, people can do business with confidence.
ICAEW is a founder member of Chartered Accountants Worldwide and
the Global Accounting Alliance.
www.charteredaccountantsworldwide.com
www.globalaccountingalliance.com
For enquiries or additional information, please contact:
Lara Khouri, Marketing Manager, Middle East
T +971 (0)4 408 0000
E [email protected]
ICAEW
Currency House Unit 4 Level 4
Dubai International Financial Centre
PO Box 506836
United Arab Emirates
icaew.ae
ICAEW
Chartered Accountants’ Hall
Moorgate Place
London
EC2R 6EA UK
icaew.com
© ICAEW 2014 MKTPLN12929 02/14