The breakneck pace of economic growth in the Middle East came to a sudden halt in 2009. Many of the region’s economies slipped into recession for the first time in many years, as the global economy faltered and oil prices tumbled.
But the downturn did not hit every economy equally. While some slumped, others such as Qatar’s have thrived, due to high demand for its gas. The question the region now faces is how quickly the countries that have been worst affected will recover in 2010, and how sustainable that recovery will be.
For many countries, the prime cause of the sharp downturn in their gross domestic product (GDP) growth over the past year is the production cuts made by Opec and the fall in the oil price. Eight countries in the region are Opec members, including key economies such as Saudi Arabia and the UAE.
|GDP (% change on previous year)|
|GDP = Gross Domestic Product; f = forecast|
|Source: International Monetary Fund|
|f = forecast|
|Source: International Monetary Fund|
“Opec had to cut production quotas to support oil prices, and that has translated into a sharp downturn in GDP for the region’s Opec members,” says Giyas Gokkent, chief economist at National Bank of Abu Dhabi (NBAD).
Non-Opec members that produce oil, such as Oman and Yemen, were not as badly hit, as they did not have to cut their production levels, although they have been affected by the lower oil prices.
Gokkent predicts that as the global economy recovers and oil prices rise, Opec will begin to increase production, helping to drive the economic recovery of its members. Most analysts forecast an average oil price of about $75 a barrel in 2010, compared with about $62 a barrel in 2009. This means the region’s Opec members should do better next year than non-Opec countries, which will not be able to increase their production.
Assuming oil prices do remain at this higher level, the International Monetary Fund (IMF) predicts that all of the region’s economies will return to growth in 2010.
Qatar and Saudi Arabia will be the fastest-growing GCC economies, with Qatar continuing to benefit from increases in natural gas prod-uction. Saudi Arabia should also benefit from a combination of higher oil prices and increasing production.
The UAE is likely to experience a slower recovery, however. The IMF predicts the emirate’s economy will grow by just 2.4 per cent in the coming year, partly because of the continuing difficulties facing Dubai.
“The economy of Abu Dhabi continues to look very strong in 2010, but what is uncertain is how much of a drag Dubai will be on the overall growth of the country,” says Gene Leon, Washington-based adviser in the Middle East and Central Asia department of the IMF.
Gokkent says the UAE economy, and that of Dubai in particular, will nevertheless look better next year than it did in 2009. “What we will see in 2010 is the benefits coming through of a very low baseline compared with 2009, which was the bottom of the economic cycle,” he says.
Credit availability is a particular concern for the UAE and Saudi Arabia, and could dampen their growth. In the UAE, banks are struggling with overstretched loan-to-deposit ratios after the withdrawal of large volumes of foreign capital over the past year. In Saudi Arabia, by contrast, banks have plenty of funds to lend, but have become so risk-averse that they are placing most of their excess liquidity with the Saudi Arabian Monetary Agency (Sama), the country’s central bank. Persuading banks to lend again will be vital to economic recovery.
To counteract the economic downturn, most GCC countries expanded their budgets to prop up their economies in 2009. Saudi Arabia and the UAE, in particular, provided large stimulus packages, and this trend is expected to continue throughout 2010.
One side effect of this boom in government spending has been a depletion of reserves. The IMF estimates that the combined fiscal balance of the six GCC states fell from 27.4 per cent of GDP in 2008 to 5.3 per cent of GDP in 2009. A recovery in oil prices should help bring this back up to 10.4 per cent by the end of the year.
But this points to a larger weakness that still afflicts most countries in the region: a continued reliance on oil revenues, despite several years of investing heavily to diversify their economies. The IMF estimates that, for the GCC region as a whole, the oil sector’s contribution to GDP shrank by 5.2 per cent in 2009, and will grow by 5.5 per cent in 2010. The non-oil sector will continue to expand, but more slowly, with growth rising from 3.2 per cent in 2009 to 4.4 per cent in 2010 . Without faster rate growth, the non-oil sector will continue to account for only a small proportion of overall economic activity.
If the fall in oil prices has dented growth rates in the GCC this year, it has had the opposite effect in North Africa, particularly for those countries without significant oil exports.
“What we will see in 2010 is the benefits coming through of a very low baseline compared with 2009”
Giyas Gokkent, chief economist, NBAD
“Many of the North African countries have saved money over the past year, because the cost of subsidising oil and food imports has fallen as commodity prices go down,” says Simon Kitchen, an economist at Egyptian investment bank EFG-Hermes.
There have been only slight slowdowns in several North African countries. The largest and most open economies, such as Morocco and Egypt, were hit hardest, but still experienced growth and should enjoy slightly higher growth levels in 2010.
But if oil prices begin to rise again, this will eat into these countries’ budgets. In addition, the slow recovery in Europe will continue to have an impact on their economies as they are more reliant on trade and a flow of tourists from Europe. “Egypt had found a sweet spot between strong European trade and tourism, and investment from the Gulf region,” says Kitchen. “That co-ordination of growth factors will not return in 2010.”
The banking system in North Africa is more willing to continue lending than that in some Gulf countries. The financial system is generally less well integrated with the West so has not suffered such serious losses, and the banks still have the capacity to make loans.
Growth in Jordan and Syria will also pick up from 2009 levels as they open their economies to private investors.
One positive side-effect of the slowdown is that it has taken some of the heat out of inflation in the region. Over the past few years, inflation has been driven by rising prices for commodities, food and housing. In 2008, inflation in the GCC was 10.8 per cent, according to the IMF, but in 2009 and 2010, it is expected to be less than 4 per cent.
Large-scale layoffs of expatriate workers and the difficulty of accessing bank finance have helped ease the housing pressures in countries such as the UAE and Qatar. In addition, the global economic slowdown has reduced commodity and food prices.
As the global economy recovers, there could be a return to higher inflation, something that is already being seen in some areas.
“In Egypt, the price of some food has already started to rise again as a result of global inflationary trends,” says Kitchen.
During this recovery period, governments will also have to be careful how they withdraw their help. “The stimulus packages have been helpful to the economies of the region, but they need to be sure they don’t withdraw the stimulus too soon,” says Masood Ahmed, director of the Middle East and Central Asia department at the IMF.
Most governments seem aware of this risk and have maintained expansionary budgets into 2010, which should help reduce volatility.
The coming year will remain very different from the boom period for many countries. A shortage of bank credit, continued weakness in the real estate market and a lag in job creation will mean that, for most people, it will feel like the recovery has yet to begin. There is also the painful and ongoing work of corporate restructuring.
Confidence is returning and for most countries, there are more reasons to be hopeful than pessimistic. “The GCC is going to be one of the fastest-growing regions in the world,” predicts one Dubai-based banker.
John Sfakianakis, chief economist at Banque Saudi Fransi, agrees that recovery will come slowly. He predicts GDP growth across the region will average 3.5 per cent in the year ahead.
“The outlook for 2010 is definitely better than it was in 2009,” he says.