ECONOMY

Middle East growth prospects lowered

The Washington-based IMF on 20 January downgraded its growth projections for the Middle East and North Africa (Mena) region.

In its latest World Economic Outlook report, the fund cut its Mena GDP growth forecast for 2016 and 2017 to 3.6 per cent for both years, a downgrade of 0.3 and 0.5 per cent respectively. Saudi Arabia’s GDP growth forecast was slashed 1 per cent for each year, to 1.2 per cent in 2016 and 1.9 per cent in 2017.

The downgrades were due to the slowdown in GDP growth in China, falls in oil and other commodity prices, and rising US interest rates. 

The IMF reduced its outlook for global growth to 3.4 per cent in 2016 and 3.6 per cent in 2017. On 6 January, the Washington-based World Bank downgraded its forecast for global growth in 2016 to 2.9 per cent, from its June 2015 projection of 3.3 per cent.

The lender said future growth depends on momentum in high-income countries, the stabilisation of commodity prices and China’s transition towards a consumption and services-based growth model.

 IMF projections for GDP growth in the region and Saudi Arabia

IMF WEO projections

OIL PRICES

Crude prices continue to fall

Brent crude hit a 13-year low of $27.67 a barrel on 18 January before recovering to just over $32 a barrel.

The slump is due to concerns about a glut in global oil supplies, which many analysts say will be worsened by the lifting of sanctions on Iran, and worries that the slowdown of economic growth in China, the world’s biggest commodity consumer, is reducing global demand.

Further volatility is expected throughout the first half of 2016, before prices start to recover. US financial services firm Morgan Stanley said crude could fall to about $20 a barrel before recovering, while Royal Bank of Scotland (RBS) said it could fall to $16 a barrel. UK lender Standard Chartered’s view was lowest, at $10 a barrel.

Many analysts anticipate prices to recover to about $50 a barrel by the end of the year, as non-Opec producers are forced to cut production due to the uneconomic prices. In its World Economic Outlook, the IMF forecasts oil prices will average about $42 a barrel in 2016 and $48 a barrel in 2017.        

SECURITY

Arab states cut ties with Iran

Saudi Arabia, Kuwait, Qatar and Bahrain cut diplomatic relations with Tehran in early January, in a growing regional dispute following Riyadh’s execution of an influential Shia Muslim cleric, Sheikh Nimr al-Nimr, on 1 January. The UAE downgraded its diplomatic representation in Iran.

The moves came after Iranian protesters stormed the Saudi embassy in Tehran on 3 January, in reaction to the execution of the cleric, who was executed along with 46 others accused of terrorism.

SAUDI ARABIA

Spending cut by 14 per cent in budget

In late December, Saudi Arabia announced a budget that outlines spending of about $224bn (SR840bn) in 2016, a reduction of about 14 per cent (about $36bn) on the actual spend in 2015. Riyadh expects a $87bn budget deficit this year. Revenues in 2016 are projected to be about $137bn, about 16 per cent down on 2015.

The budget marks a change in direction for the region’s biggest economy, with the key themes being reduced spending, economic reforms and finding alternative revenue streams to cut the kingdom’s dependence on oil. Riyadh’s oil price assumption for 2016 is estimated to be $45 a barrel

Riyadh mulls Aramco flotation

In an interview with UK publication The Economist on 8 January, Saudi Arabia’s Deputy Crown Prince Mohammed bin Salman al-Saud said Riyadh was considering selling shares in state oil company Saudi Aramco. The move reflects the kingdom’s view that the world is entering an era in which crude’s dominance of world energy markets will be challenged by unconventional hydrocarbons, including shale oil and gas, renewables, and nuclear power.

SUBSIDY REFORM

GCC states roll out economic reforms

The GCC is getting closer to finalising draft laws on the introduction of value-added tax (VAT). The rate is thought to be about 5 per cent and could be introduced from 2018.

The planned tax on consumer goods and services can be introduced as soon as any two of the six GCC member states are ready to implement it. It will be the first such tax in the Gulf states, as they seek to diversify revenues streams.

Other measures include reducing fuel and utility subsidies.On 23 January, UAE Energy Minister Suhail al-Mazroui said Abu Dhabi is considering ending subsidies on electricity and gas sold to power generation companies as part of a wider strategy to reduce pressure on the government budget amid shrinking oil revenues.

“Consumers need to pay the real price,” Al-Mazroui was reported as saying by Dubai-based newspaper Gulf News. ”They already do so for petrol and diesel, and electricity is still to come, and we will look at the subsidised sale of gas to power providers.”

On 14 January, Qatar introduced fuel subsidy cuts that increase the price of gasoline by 30 per cent, according to the state-owned Qatar News Agency. Days earlier, Bahrain also announced increased fuel prices as part of its ongoing reforms.

EGYPT

China to invest $15bn in Egypt

Beijing and Cairo signed agreements on 22 January to cooperate on 21 projects in the electricity, transport and infrastructure sectors, representing an investment of between $14bn and $17bn in Egypt by China. The agreements were announced during the official visit of China’s President Xi Jinping to the North African country. Work has already started on several of the schemes. Xi also said China wants to participate in the construction of Egypt’s new administrative capital.

QATAR

Doha predicts first budget deficit in 15 years

Qatar expects to post a deficit of $12.8bn in its 2016 budget, its first budget deficit in 15 years. The government plans to plug the deficit by issuing debt to local and international financial institutions.

The oil price assumption is $48 a barrel. Doha has allocated QR91bn ($25bn) for major projects in the 2016 budget, a QR3.3bn increase on the previous fiscal year, which will ensure schemes are implemented to the planned schedule.

The total cost of government projects already under way is QR261bn. This includes QR87bn for transport, QR54bn in other infrastructure, QR24bn for sports developments, QR30bn in water and electricity, QR17bn in education and QR7bn in the health sector.

OMAN

Sultanate decreases overall spending

Muscat cut overall spending by 11 per cent to RO11.9bn ($30.9bn) in its 2016 budget. Measures include a 14 per cent cut in oil and gas expenditure, and a 18 per cent cut in development project spending. Non-essential schemes will be postponed.

Total revenue in 2016 is projected to be RO8.6bn, 4 per cent lower than actual revenues in 2015, and down 39 per cent from 2014 revenues. To compensate, Muscat will raise corporate taxes, enhance tax collection measures and review fees for government services. It plans to continue the privatisation of state-owned companies.

UAE

Dubai increases infrastructure spend in budget

Dubai will increase its spending on infrastructure by 20 per cent, according to its budget for 2016. The government said it plans to spend $1.74bn on infrastructure in 2016, and is planning to maintain the size of its investments in infrastructure over the next five years. 

GCC PROJECTS OUTLOOK

 Gcc contract awards forecast 2016

GCC contract awards forecast 2016

Regional projects tracker MEED Projects estimates GCC contract awards will be down about 16 per cent in 2016 to just over $140bn. Worst affected will be Saudi Arabia, while the UAE, Kuwait, Qatar and Oman will be marginally down on last year, and in the case of Oman and Kuwait, up on the five-year average. Outside the GCC, Iran and Egypt both offer strong growth potential, but progress will depend on the political situation.

IRAN

Sanctions lifted

Six months since the signing of the Joint Comprehensive Plan of Action (JCPOA) nuclear deal by Iran and six world powers – the US, France, Germany, the UK, China and Russia – international sanctions against the Islamic Republic were lifted on 16 January, after UN nuclear watchdog the International Atomic Energy Agency (IAEA) confirmed that Tehran had complied to limit its nuclear development programme.

The deal calls for Iran to cut back its nuclear programme in exchange for relief from US, EU and UN-enforced sanctions against its economy, including the banking and energy sectors.

On 11 January, the Iranian government completed the removal of its plutonium reactor at Arak and filled it with concrete.The immediate impact of sanctions relief is likely to be an increase in Iranian crude exports, while Tehran will receive billions of dollars of oil revenues frozen in overseas bank accounts. 

Over the longer term, the country is likely to attract increased investment from overseas, with companies already signing preliminary agreements on projects in sectors such as oil, gas and metals. The local Mehr News Agency (MNA) reported on 16 January that France’s Total and UK/Dutch Shell had sent executives to Tehran ahead of the meeting in Vienna. The executives were reportedly meeting officials from National Iranian Oil Company (NIOC) and affiliated firms to discuss deals on Iranian oil assets.

Before the sanctions suspension was announced in Vienna on 16 January, it emerged that Iran had released four Iranian-American prisoners, including Washington Post journalist Jason Rezaian, who was jailed on charges of espionage in November 2015. 

US declares new sanctions

One day after the lifting of nuclear sanctions, the US Treasury Department imposed sanctions on 11 individuals and companies suspected of aiding Iran’s ballistic missile programme. These entities will be restricted from using or accessing the US banking system.

The sanctioned entities include UAE-based Mabrooka Trading, along with its founder, Hossein Pournaghshband, who told MEED in December 2015 that he is not aware of his or the firm’s potential inclusion in the list.

Iran sells first oil to Europe

On 24 January, MEED reported that Iran had sold its first shipments of oil into Europe following the removal of sanctions. Greece’s largest refiner, Hellenic Petroleum, said it agreed to buy crude from National Iranian oil Company, adding that the two sides have signed a long-term deal. The agreement covers cooperation on the supply of crude and the settlement of financial liabilities from the sanctions imposed on Iran in 2011.

According to reports, Hellenic Petroleum is estimated to owe Iran €500m-€600m ($541m-$650m), but was unable to pay when sanctions were introduced on Iranian banks.

Iranian banks to return to Swift

The Brussels-based Society for Worldwide Interbank Financial Telecommunication (Swift) has announced that some previously sanctioned Iranian banks will be reconnected to its services.

Swift provides financial messaging services used for international money transfers.

The head of Iran’s Chamber of Commerce, Mohsen Jalalpour, told Iranian press that banks would be reconnected by the end of January. EU sanctions required Swift to disconnect all Iranian lenders in 2012, effectively isolating them from global finance.

Reconnection is the first step in reintegrating Iran into the global economy. However, foreign banks will be very cautious on doing business with the Islamic Republic due to remaining sanctions. Certain Iranian banks allegedly connected to other sanctioned activities, such as the ballistic missile programme, remain listed and will not be reconnected. These include Ansar Bank, Bank Saderat, and Mehr Bank, according to US Treasury guidance.