The ICAEW Economic Update: Middle East, is a quarterly economic forecast for the region prepared directly for the finance profession.
Economic Update: Economy heads into 2022 on a firmer footing
Positive: Economy has likely regained pre-pandemic level
Positive: Saudi Arabia: Economy growing at the fastest pace in almost a decade
Positive: UAE: Start of delayed Expo gives renewed impetus to recovery
Economy has likely regained pre-pandemic level
Economy has likely regained pre-pandemic level
- Higher oil output and relaxation of restrictions bolster growth prospects
- Domestic COVID-19 pressures have moderated, though virus remains a headwind
- Iran rejoins nuclear talks
The Middle East economy looks to have recovered pandemic-related losses earlier than we’d expected, thanks to higher oil output and almost complete lifting of health restrictions in some countries, and we believe progress will continue over the coming year. New COVID-19 outbreaks remain a risk to the outlook for the region and globally, as the emergence of the Omicron variant highlights. However, comparatively high vaccine coverage, especially across the Gulf, should limit the need for tight control measures. Provided the Omicron variant does not prove too disruptive, we expect Middle East GDP to accelerate to 4.4% in 2022, after an estimated expansion of 3% this year (up from 2.6% three months ago).
Activity appears to be rebounding strongly across the GCC, driven largely by higher oil output and spending on services as health restrictions ease. And with business optimism continuing to rise, our assessment heading into 2022 remains upbeat. We continue to expect GCC GDP to return to pre-crisis levels in Q1 2022, with GDP growth seen accelerating from 2.7% this year (0.5pp higher than we projected three months ago), to 5.0% in 2022.
The recovery will continue to follow a mixed pattern given divergent growth strategies and different policy space. The UAE’s proactive approach to attracting global investment and talent, along with greater budget headroom, means it will outperform regional peers. Meanwhile, Kuwait and Oman, where workforce nationalisation policies are driving away talent, face the prospect of a longer, more protracted recovery.
The oil sector is already benefitting from higher production quotas and will be critical to boosting regional GDP growth in 2022. It should also remain an important driver of growth beyond next year as producers expand capacity.
Meanwhile, regional PMIs show strengthening growth momentum in the non-oil sector, with output and employment on an upward trend. Although the pandemic is not over in the GCC, high vaccination uptake has helped regional countries avoid a Delta wave. The remaining domestic COVID-19 restrictions are mostly related to mask wearing, PCR testing and ongoing social distancing. Low infection rates and less disruptive COVID measures have allowed mobility levels and domestic activity to return close to normal, helping fuel the economic recovery, with equity prices rising strongly. And while virus headwinds remain, our forecasts for the GCC show non-oil growth of 3.3% in 2022, after estimated expansion of 3.8% this year.
Tourists are returning to the region after borders have re-opened, aiding the recovery of the hospitality sector, with Dubai in particular witnessing a significant bounce due to the start of the delayed Expo 2020. However, the rebound may suffer in the near-term as health situation fluctuates around the world.
The price of Brent oil has eased below US$80pb as high COVID-19 numbers in Europe and new restrictions raised concerns about demand, but it remains significantly higher than this time last year. The OPEC+ group has so far stuck to plans of steadily increasing oil output, but could adjust policy if the Omicron variant weighs on demand. We expect the oil market to swing into oversupply soon and prices should continue to trend lower as a result. We see Brent averaging US$72.5pb next year, slightly higher than this year, but reaching US$68pb by the end of 2022.
Higher energy prices have bolstered Gulf governments’ finances as oil revenues remain dominant in the region’s budget revenue structures. Recent data show Saudi Arabia’s budget swung back to surplus in Q3 after more than two years in the red. In Qatar and the UAE, data already showed surpluses in H1, while elsewhere in the region deficits are shrinking. But uncertainty over revenue remains and the budgetary plans for 2022 and beyond unveiled by some GCC governments point to continued fiscal restraint. Consequently, our forecasts show an overall GCC budget surplus next year for the first time since 2014.
Inflation has been much less of a problem across the GCC than in many Emerging Markets. Moreover, the energy and food prices (which have the highest share in regional CPI baskets) have likely peaked, which implies regional inflation will gradually subside in the coming months, even as disinflationary forces from housing and weak demand wane. We see GCC inflation averaging 2.5% next year, just above the estimated average of 2.4% this year, before falling back below 2% in 2023. As a result, regional central banks can afford to remain patient, keeping interest at current levels until the US Fed begins to hike in Q3 2022, with low financing costs supporting recovery momentum.
Elsewhere in the Middle East, we maintain expectations of modest growth of 2.5% for Iran next year, slightly slower than this year’s forecast of 2.9%, but see some upside risks as Iran rejoins talks over the lifting of US sanctions. Lebanon remains stuck in a deep economic crisis and, while the government has been in place since early-September, it is plagued by internal discord. Pending an updated recovery plan for the economy, vital to set in motion essential reforms and secure any external financial assistance, we maintain our GDP forecast of a fall of 5.8% for this year and then growth of just 1.4% in 2022. Finally, higher oil prices and output are supporting recovery in Iraq, after the economy shrank by 10% in 2020.
Saudi Arabia: Economy growing at the fastest pace in almost a decade
- Latest data show stronger-than-expected economic rebound
- Energy transition firmly on government agenda
- Higher oil prices set to tip budget back into surplus
Latest GDP data show the Saudi economy growing at the fastest pace since 2012 as the Kingdom pumps more oil to meet higher global energy demand. The non-oil sector is also getting a boost from an increase in domestic spending in relation to a loosening of travel and other restrictions. Following the release of Q3 GDP data, we have lifted our estimate for Saudi GDP growth this year to 3.3% (previously 2.3%), after the 4.1% contraction last year. We expect GDP growth of 5% in 2022.
The outlook for the non-oil sector has improved as the COVID-19 outbreak receded, allowing the government to re-open the economy. The manufacturing PMI, which is the mostly timely indicator of business conditions, is showing strengthening momentum, with recent readings highest since the start of the pandemic. We estimate non-oil growth of 4.4% this year and 2% next year. Saudi Arabia has also bid to host the World Expo 2030 which, if successful, would provide a significant tourism and infrastructure boost. The estimates for the current Expo being held in the UAE put the boost to its economy at around 1.5% of GDP with 25m visitors.
The oil sector is now again an important driver of growth. Production has gradually risen from a low of 8.1m b/d earlier this year as cuts to OPEC quotas are phased out. We expect further increases in production through 2022 and beyond as Saudi Aramco is pushing ahead with plans to expand production capacity further. Our forecast sees 9.5% expansion in the oil sector in 2022, alongside higher output, following growth of 1.7% this year.
Notwithstanding ongoing investments into oil and gas, energy transition is also firmly on the Saudi agenda. The Kingdom has pledged to achieve net zero carbon emissions by 2060, with more than 60 initiatives targeting investment of nearly $190bn. The Kingdom hopes to reduce CO2 emissions by more than 4% of its global contribution by 2030 and raise protected areas to 30% of the total land area (from 5% currently). The goal refers only to emissions produced domestically, so assumes no change in Saudi’s hydrocarbon exports.
The GCC has been a slower adopter of renewable energy than many other regions and, like all governments in the GCC, Saudi Arabia faces significant hurdles in achieving ‘Green Growth’, given its dependence on hydrocarbon extraction, which contributes 40% of GDP, and which has led to an economic structure that is fossil fuel and emissions intensive. However, the authorities remain firmly focused on the diversification drive and have launched a National Investment Strategy to deliver the transformation. The plan includes establishing special economic zones which would offer competitive regulations and incentives aimed at attracting investment in a number of priority sectors, consistent with the ‘Invest Saudi’
national platform. Foreign direct investment (FDI) is seen as an important driver of the diversification strategy against the backdrop of a large domestic market, with authorities setting an ambitious annual target of US$100bn (up from an average US$5.2bn in the period 2015-19).
The easing of pressure on public finances, coupled with savings accumulated in the past, should help finance clean energy investments. The surge in oil revenue due to higher oil prices and slightly higher oil output pushed the Saudi budget balance into quarterly surplus in Q3, for the first time since Q1 2019, and we expect this to continue in the medium term as output recovers. Non-oil revenue has also risen rapidly, and the fiscal revenue base is seen expanding in the coming years. Coupled with spending restraint highlighted in a recent budget update, our forecasts show a small budget surplus next year, for the first time since 2014. The Public Investment Fund (PIF) will continue to lead the efforts aimed at advancing Vision 2030 goals.
As in much of the world, Saudi Arabia is witnessing a rise in inflation driven by costlier food and transportation. In its latest inflation report, the Saudi central bank predicts that inflation will rise slightly in the coming months, as the rebound in domestic demand pushes up consumer prices.
But annual rates will come down thereafter; we expect full-year inflation at 3.6% this year and 2.9% in 2022.
UAE: Start of delayed Expo gives renewed impetus to recovery
- The economy is on track to regain its pre-pandemic level in Q1 2022
- Oil output will surge next year, supporting GDP
- The tourism sector is rebounding strongly from the repercussions of the pandemic
The UAE economy is close to fully recovering losses induced by the pandemic and last year’s energy price slump, supported by higher oil output, loosening of health restrictions and the recent start of the delayed Expo 2020. Continued government support also bodes well for the outlook, and after expansion of 1.7% this year, we forecast GDP growth of 6.5% for 2022. We expect output to return to its pre-pandemic level in Q1 2022.
The rise in oil output will be critical to boosting UAE GDP growth in 2022. The oil sector has started to recover as OPEC+ eased production limits, but we expect a more significant increase next year, driving GDP growth. The UAE’s production baseline will benefit from its reference production baseline being lifted to over 3.5m b/d from May 2022, from just under 3.2m b/d currently. The oil sector should remain an important driver of growth over the next decade as ADNOC aims to raise output to 5m b/d by 2030.
The non-oil sector is expanding at its fastest pace since the crisis, and we continue to forecast non-oil GDP growth of about 4% this year and next. Recent manufacturing PMI readings showed a strong boost to output and new orders, in part on the back of rising demand from the World Expo 2020, which started in October and lasts until March 2022. The travel and tourism sector, which accounts for about 16% of GDP in the UAE, is a clear beneficiary – hotel occupancy rates in Dubai have risen above 80%, marking a three-year high. Although international visitors may be lower than the 25m initially hoped for, particularly given rising virus prevalence in Europe and headwinds from the Omicron variant, we see numbers rising over the duration of the event leading to a further pick-up in activity in the coming months. Tourism is a key pillar of Dubai’s longer term growth ambitions and we believe benefits from the Expo will accrue over a number of years as the success of the event helps promote Dubai as a place to live, work and invest.
UAE considers foreign capital and talent as critical to the country’s long-term development. With that in mind, it has announced a series of private labour law reforms, giving additional protection to workers and allowing flexible working in a bid to attract talent and develop a high-skilled and stable workforce. This will encourage greater investment and involvement by expats in the local economy. Dubai has also announced plans to introduce a five-year multiple entry visa to international companies residing in the emirate, with the aim of increasing its competitiveness. Like elsewhere in the region, FDI is an important pillar of the UAE’s medium-term growth and diversification strategy and the country aims to become one of the 10 largest FDI destinations by 2030 (it was the 15th largest recipient of FDI in 2020 as it bucked the global trend of FDI flows declining).
The recovery in both oil and non-oil revenue have bolstered government finances and despite many growth-fueling spending initiatives, we expect fiscal surpluses over the forecast period. Given its strong finances, the UAE is well placed to support the clean energy transition. It has set up plans to increase renewable power generation including a net-zero target for 2050 that includes AED600bn (US$163bn) in green investment. Although the sovereign wealth fund will likely shoulder some of this investment, the authorities will also continue to tap foreign funds to take advantage of favourable market conditions to fund ambitious development and investment plans.
Inflation turned positive in Q3 for the first time since 2018, due to rises in the price of transport, recreation and culture and the cost of education, but it remains at very low levels. We see inflation averaging -0.3% this year, before rising to 1.5% in 2022, the lowest in the GCC region.