Economic snapshot

The Middle East and North Africa (Mena) region is projected to see a weaker real GDP growth rate of 1.3 per cent in 2019, compared with 1.4 per cent in 2018, according to the latest IMF estimates. Both figures represent a dramatic climbdown from the IMF’s November 2018 projections of 2 per cent and 2.5 per cent growth for 2018 and 2019, respectively.

This sharp downward shift in the region’s growth prospects reflects the considerable challenges that have emerged in the form of persistent weakness and instability in global oil prices and steadily escalating geopolitical tension and risk across multiple country markets.

Non-oil growth across the region is meanwhile broadly weaker than it should be due to ongoing fiscal consolidation efforts and austerity in the region, which have impacted consumption-linked market segments and construction activity.

Non-oil growth has improved in Saudi Arabia and the UAE in 2019, however, with purchases of goods and services rebounding from the lull that followed the introduction of value-added tax (VAT) in 2018.

Overall growth estimates for the GCC have also been reported, with the region now forecast to experience a slight rise in real GDP growth to 2.1 per cent in 2019, up from 2 per cent in 2018. This also represents a downgrade (if less extreme than for the region) from the IMF’s November 2018 projections of 2.4 per cent and 3 per cent growth in 2018 and 2019, respectively.

Real GDP growth projections for the Mena region
Country grouping 2016 2017 2018 2019 2020
MENA 5.3 1.8 1.4 1.3 3.2
MENA oil importers 3.3 3.5 3.8 4.1 4.6
GCC 2.3 -0.3 2 2.1 2.8
Non-GCC oil exporters 9.9 3.1 -1.1 -1.7 2.7
Arab World 3.6 1.4 2.6 2.8 3.8
Source: IMF regional economic outlook (April 2019)

Growth across the GCC has been supported by 18 months of oil prices consistently above the $60-a-barrel mark, but the risk remains that the oil price could once again be impacted by a slowdown in global growth. Recent trade figures notably show a large decline in Asian exports, indicating softening demand side fundamentals in China.

On the supply side, the Opec+ agreement has been extended to March 2020, but there are doubts about discipline over compliance by parties to the deal. At the same time, US shale oil production is rising. The outlook is for Brent crude oil to average about $60-$65 a barrel in 2019, down from $72 in 2018.

The political uncertainty created by the Iran/US standoff is not yet a major factor for business, but has the potential to undermine regional ambitions to attract institutional funds and corporate investments, and could destabilise energy markets.

Projects market

The projects market has had another tough year in 2019. Major project contract awards have fallen below the level forecast at the start of the year, and at the mid-point of 2019 were below 2018 levels, which themselves were at their lowest levels since 2014.

The recovery in oil prices in 2017/18 has eased the fiscal pressures on governments and the region has returned to stronger GDP growth. This has enabled an increase in specific public sector infrastructure projects, such as the Etihad Rail scheme in Abu Dhabi.

With oil prices set to remain at around current levels, there is no expectation of further increases in overall government spending however. This mean that there will be no return to 2011-14 levels of infrastructure spending.

Dubai’s Expo 2020 real estate boom is slowing as the property sector is oversupplied. Dubai has driven GCC construction activity since 2015, but now the amount of new projects being awarded is close to, or even below, the level of projects being completed. This is resulting in almost no growth in construction.

Saudi Arabia is moving into the spotlight with rapidly emerging construction and real estate opportunities. Egypt is the other attractive construction market of 2019.

Project Awards in the Middle East and North Africa, 2008-19

Growth sectors

The energy sector will see a huge investment drive over the coming years as governments seek to develop upstream oil and gas production capacity, and higher-value petrochemicals and refined oil products.

There is a particularly strong uptick in gas projects, as regional governments invest in both upstream and downstream projects to meet rising domestic energy, industry and petrochemical demand.

Demand for power will continue to grow as governments push ahead with industrial diversification programmes, with increasing levels of renewable energy capacity to be installed.

The region’s water sector has also seen a sharp rise in investment in 2019 so far, particularly in Saudi Arabia, as utilities press ahead with public-private partnership (PPP) desalination and wastewater projects.

Several rail clients have meanwhile begun the process of selecting transaction advisers under concerted efforts in the region to deliver transport projects on a PPP basis, despite concerns about the bankability of such projects.

In Mecca, land has been allocated for a new airport, which will bring the number of airports catering to hajj and umrah visitors to four, adding to the existing airports in Jeddah, Medina and Taif.

The technology sector has also received a boost with the UAE Economy Ministry’s approval of the $3.1bn acquisition of UAE-based Careem by US-based Uber Technologies. The deal has been touted as affirming the suitability of the UAE’s business environment for startups.

The region’s banks are well capitalised and able to lend, although the banking sector is going through a period of consolidation as government-owned entities are merged. Banks also face digital disruption in the retail banking space. Alternative sources of funding are emerging in the form of export credit finance, government-to-government deals and private equity.

Iran crisis

Confrontation in the Strait of Hormuz presents a real risk of significant disruption to Gulf oil supplies and of military action in the region. Yet no one wants war, and US President Donald Trump is committed to avoiding foreign entanglements with the US presidential elections looming in 2020.

Despite Iran’s seizure of two ships in the Strait of Hormuz and the US’ decision to send troops to Saudi Arabia, oil prices fell on the weekend of 19-20 July. This suggests that the markets are more troubled by the outlook for global growth and the impact on oil demand than they are about disruptions to Gulf oil supplies.

There is a lack of consensus about what is going to happen in the Gulf. Each incident has been quickly downplayed as an isolated one-off event, rather than an inexorable march to war.

At the same time, a couple of missteps could easily lead to a military confrontation, and there are influential voices on both sides that would like to make that happen.

Israel along with hawks in Washington, such as US national security adviser John Bolton, are on one side. Iran’s revolutionary hardliners are on the other. Within the region, Saudi Arabia and the UAE are seeking to contain Iran, but are averse to direct confrontation, preferring instead to resist Iran and cast it as a bad actor.

(Getty) US President Donald Trump (left) and UAE Crown Prince Sheikh Mohammed bin Zayed al-Nahyan

US President Donald Trump and UAE Crown Prince Sheikh Mohammed bin Zayed al-Nahyan. (Source: Getty)

US sanctions

Ongoing sanctions are hurting Iran’s economy and lending fuel to hardliners who are seeking to weaken the moderate arm of the government.

Yet Iran is unlikely to resort to direct confrontation, and will instead continue to pursue its own interests by other means in Iraq, Syria, Lebanon, Yemen, Hormuz and elsewhere.

The current US administration is aligned with the Arab Gulf states in its intent to curtail Tehran’s regional influence. Both sides want concessions, but neither wants to appear weak.

We can expect to see the hot words and actions continuing while some kind of dialogue takes place through back channels. But given Trump’s unpredictability and Tehran’s divisions, progress could prove elusive.

Short of serious talks, Iran has little reason to cease its proxy or asymmetrical warfare, and the military build up in the Gulf will likely continue – not least in the form of US and UK naval escorts for convoys through the Strait of Hormuz.

The Europeans meanwhile face a growing number of obstacles to their nuclear deal salvage efforts. As the threat of sterner US sanctions on Iranian oil exports looms, Tehran will seek new channels for oil exports through Russia, China and other Asian markets.

Ultimately, both sides are playing for time ahead of the US presidential elections in November 2020, which will clarify the future political direction of the US. In the meantime, the status quo is unlikely to shift dramatically, and proxy battlegrounds such as Iraq, Syria and Yemen will continue to suffer as a result.

Libya

Another ongoing source of regional instability is Libya, where the recent battle over Tripoli between the country’s two rival governments has left more than a thousand people dead.

The international community has failed to agree on a common strategy or policy to deal with the war, and efforts to end the conflict have been undermined by divisions within the EU and between the different factions of Arab states in the Middle East and North Africa (Mena) region.

Despite increased use of sophisticated weaponry, there is a relative balance of military forces on the ground and no one actor is likely to prevail in the short term.

While Libya continues to produce more than 1 million barrels a day of crude oil, there is the potential for production levels to drop rapidly if either side decides that it would benefit from shutting down oil infrastructure.

Libya

China

Despite question marks over its economic fundamentals, China is growing its role in the Middle East and North Africa by investing heavily in energy and infrastructure sectors.

In addition to significant investment in coal and renewable energy projects, Beijing is also seeking to harness its renewable energy expertise by assisting economic diversification programmes.

For example, three of China’s largest solar panel producers are reportedly in discussions to develop production facilities in Saudi Arabia to support the Public Investment Fund (PIF), which aims to raise local manufacturing capabilities for its ambitious 58.7GW renewable energy programme.

China is also in discussions to invest $10bn in Khalifa Industrial Zone Abu Dhabi (Kizad) over a period of 15 years as part of its Belt and Road Initiative (BRI).

While the Middle East will remain a key investment market for China, its level of foreign direct investment (FDI) in the short term may be impacted if there is not a swift resolution to the trade spat with the US.

Policy outlook

Moving forward, the policy focus will continue to be on opening up markets for private and international investment. This will be achieved through privatisations, stock market liberalisation, PPP programmes and changes to foreign ownership laws.

Developing startups and technology transfer in the manufacturing and hi-tech industries are vital to develop in-country value and create jobs.

Government-backed investment in downstream industrial clusters around steel, aluminium and petrochemicals is expected to continue. Tech sectors such as blockchain, 3D printing and artificial intelligence will also be promoted strongly, along with cybersecurity, which is probably the most significant area of technology-related business activity at present.

Geographically, Saudi Arabia, the UAE and Egypt offer markets with the most potential for growth. Iraq presents potential for growth, but also a significant degree of risk.

There is no immediate outlook for change in the ongoing GCC diplomatic crisis, which has seen few signs of progress in efforts to achieve a diplomatic resolution and restore normative ties.