Regional economies can look forward to 2019 as a year of progress, with governments generally charting more expansive budgeting courses and private sector sentiment moving in the right direction. Yet there were also signs of softness in oil prices in November 2018 that took the edge off some of the more robust sentiment evident earlier in the year. Oil prices were down to $60 a barrel by 25 November, compared to the heady levels of $85 seen in early October.
Looking into 2019, much will hinge on the outcome of the Opec ministerial meeting in Vienna on 6 December, and the prospects of a new round of production cuts to shore up prices to the plus-$70 level that were seen in 2018.
The good news for some of the bigger Middle East and North Africa (Mena) oil producers is that their balance sheets are in much stronger positions thanks to a firming of prices over 2017-18. Consultancy Capital Economics says the latest slump in oil prices is unlikely to lead to major strains in the largest Gulf economies and, even if prices fall further to $40-50 a barrel, dollar pegs should not come under threat.
However, there will be a general wariness among Gulf economic strategists that the recovery of oil prices in 2017-18 could be temporary. In that context, the reforms that many had undertaken in recent years to increase non-oil revenues and boost diversification, such as introducing VAT in the UAE and Saudi Arabia, could prove increasingly important.
Mena oil exporters will have to deal again with the possibility of lower oil prices for a prolonged period. According to the Washington-based Institute of International Finance (IIF), Brent crude will likely average $67 a barrel for 2019 and $60 in 2020, compared with $72.5 in 2018. However, lower oil revenues in 2019 may not translate into dramatic budget cuts as was the case in 2015 and 2016. GCC governments are keenly aware of how austerity economics has dampened economic activity in the post-2015 period, and will not be willing to repeat that experience.
“In Saudi Arabia, fiscal consolidation, mostly in the form of cuts in capital expenditure, hurt the economy,” says Garbis Iradian, chief economist for Mena at the IIF. “Non-oil real GDP growth was less than 1 per cent in 2016 and 2017, and is likely to pick up only marginally to 1.4 per cent in 2018. As a result, national unemployment has increased to about 13 per cent in 2018. I expect government spending to increase by about 6 per cent in 2019, compared with more than 20 per cent in 2018 to stimulate the economy. At the same time, I would not expect a significant recovery in private sector activity for 2018 due to the continued weak private investment,” he says.
The shift in gear to a more expansive fiscal approach was announced in October 2018, when Saudi Arabia’s government signed agreements with contractors for two large railway projects totalling more than $14bn. Coming shortly after Abu Dhabi’s government announced a $13.6bn economic stimulus programme, this seemed to indicate that the two biggest economies in the region were ready to distance themselves from their former fiscal conservatism. The effects of this change should be felt more strongly in 2019 as more and larger projects get the green light. This should provide a direct boost for the construction sector in 2019 as a new era of government-led investment gains serious traction.
While purse strings will be looser, this should not imply a carefree approach to public expenditure. In Saudi Arabia, the spending increases of 20-25 per cent recorded in 2018 are unlikely to be repeated in 2019. The IIF’s Iradian foresees budgetary spending increases of 6 per cent as likely. “There won’t be a drag effect on the fiscal side, but at the same time I would not expect to see the private sector picking up significantly,” he says.
Even though some of the spending taps are back in ‘on’ mode, business conditions will still be challenging for many. Some of the trickle-down effect of spending boosts will inevitably take more time to register fully, with the expectation that much of the impact will be felt in the second half of the year. One factor that might limit a more aggressive growth outlook is the challenging global backdrop, with trade wars and more expensive credit conditions – as US Federal Reserve pushes interest rates higher – triggering weaker demand.
The IMF in its Regional Economic Outlook published in October 2018 said growth in the GCC countries would recover to 3 per cent in 2019, mainly due to the implementation of public investment projects, including those consistent with the five-year development plan in Kuwait and ongoing preparations for Expo 2020 in the UAE. In Bahrain, the expected fiscal consolidation is projected to dampen non-oil activity, despite rising aluminium production capacity.
If the Vienna Opec summit succeeds in putting a floor under oil prices, Saudi Arabia should have the legroom for more growth-oriented spending in 2019. But expectations are being lowered about how much dynamism will be left in the economy. Riyadh-based Jadwa Investment forecasts overall GDP growth of 2 per cent, a small decline on the previous year, because of a slower annual rise in the oil sector. On the non-oil side, it expects economic growth to continue improving on the back of another record level in budgeted government expenditure of SR1.1tn ($293bn), as detailed in the 2019 Preliminary Budget Report.
Saudi Arabia is at least beginning to disburse funds on construction projects. Building work on the King Abdullah Financial District in Riyadh began in 2018 as the Public Investment Fund moves to complete the project ahead of the G20 summit scheduled for October 2020. Another major PIF scheme gaining traction is a $4bn entertainment city in the Qiddiya area on the outskirts of Riyadh, which includes a Six Flags theme park.
The UAE is in a stronger position relative to the kingdom, thanks to its firmer financial footing. Economic activity picked up in 2018, although Dubai saw fewer new projects greenlit amid concerns over oversupply in the real estate market. The next year is unlikely to bring immediate relief as more supply comes onto the market. Nonetheless, there is some good news for UAE policymakers. The IMF’s annual Article IV report, published in September, forecasts that the value of total oil and gas exports in 2019 will reach $85bn, more than 80 per cent higher than the equivalent figure in 2016.
Additional spending momentum will be underpinned by the Abu Dhabi stimulus package, which will be spread out over three years.
The UAE government has also sanctioned more spending at the federal level, with the approval of an expansionary federal budget for the 2019-21 period. In 2019, government spending is budgeted at AED60.3bn ($16.4bn), 17 per cent more than the planned spending for 2018. Further boosts will come through state energy company Abu National Oil Company (Adnoc), which is planning its largest investment programme for a decade.
“All this should have a positive impact on economic performance in 2019,” says Iradian. “For the UAE, the IIF forecasts GDP growth of just above 3 per cent in 2019 – a pick-up on the year-earlier forecast of 2.9 per cent – driven by the gradual recovery in the private sector and a modest fiscal stimulus. Several leading indicators, including credit to private sector, point to a significant pick-up in economic activity, unlike in Saudi Arabia where it has been subdued.”
One potential headwind confronting the UAE economy is the contraction of the Iranian economy, to which it has extensive trade relations through Dubai. The increased sanctions regime on Iran, in place since November 2018, will further hamper the ability of Iranian investors to buy real estate or bring money in through the UAE banking system.
Kuwait, meanwhile, faces different issues: It has experienced weaker credit growth and some delays in project activity, although the National Bank of Kuwait anticipates a strengthening of non-oil GDP growth to 3 per cent in 2019.
Wider regional trends
One of the Mena region’s brightest spots will be Egypt, which the IMF forecasts as likely to report real GDP growth of 5.5 per cent in 2019. Recent indicators paint a story of economic recovery. For example, Egypt’s foreign trade grew 16 per cent in year-on-year terms to $78.4bn in the first 10 months of 2018. Egypt’s external position has also strengthened, with the current account deficit narrowing more than 6 per cent of GDP in 2016 to about 3 per cent of GDP in late 2018, according to Capital Economics.
Construction activity is being driven by Cairo’s urban development programme, which could involve building 23 new cities. By the end of 2019, Egypt should also have succeeded in transforming itself into an exporter of natural gas, as the full capacity of the Zohr development from Italy’s Eni comes onstream. “Egypt was the best performer among Mena countries in 2018, with a GDP growth rate of 5.3 per cent, and this strong growth could continue for the next few years, driven by the rebound in tourism and natural gas production,” says Iradian.
A less positive reality faces Iran, which finds itself the target of an amplified sanctions regime. As a result, Tehran is headed into recessionary territory, with its oil sector likely to bear the brunt of the pressure in 2019. US ratings agency Fitch estimates that Iran’s GDP will contract by 4.3 per cent in 2019, as exports and investment inflows decline, and rising inflation and high unemployment weigh on consumption.
Iraq, on the other hand, looks to be in stronger fettle, with the formation of a government under prime minister Adil Abdel-Mahdi after months of haggling restoring some confidence among investors. The World Bank foresees overall Iraqi GDP growth accelerating to 6.2 per cent in 2019, sustained by higher oil production. Non-oil growth is expected to remain positive on the back of higher investment into the much-needed reconstruction of the country’s damaged infrastructure network.
One other theme likely to manifest itself in 2019 is for Mena sovereigns to tap increased volumes of external debt.
As of June 2018, Saudi Arabia had issued sovereign debt worth $11bn. More is likely to come from Gulf states as they seek to tap debt capital markets in 2019, particularly with state budgets locked into an expansionary pattern and oil revenues that may not be sufficient to fund the spending programmes. The IIF has forecast that Saudi Arabia could face a need to borrow about SR50bn in 2019 to finance its deficit. While about one-third of this requirement could be met by domestic bond or sukuk, the rest is expected to come via the international debt capital market. But Saudi Arabia at least remains in the fortunate position of having a low debt-to-GDP level of below 20 per cent, leaving plenty of room to increase such borrowing – as it has repeatedly been advised to do by the likes of the IMF.
Elsewhere, Bahrain and Oman may face a more difficult 2019. The two states’ current account and budget positions are the worst among the Gulf economies and both countries will post large deficits if the late 2018 oil price slump continues. In fact, oil prices would need to rise to $80-90 a barrel and stay there to return these two Gulf states to a position of current account surplus, reckons Capital Economics. Foreign exchange reserves would also be drawn down at a rapid pace, the consultancy says, and both countries have much lower foreign currency savings than their neighbours. That leaves devaluation as a larger risk, although Bahrain’s securing of a $10bn financial backstop will calm nerves in Manama.
Overall, the Mena economies face a mixed picture. If asked in early October, most governments would have expected a more positive outlook for the year ahead than has transpired at year-end. As it is, growth may not prove as vibrant as predicted, though many citizens will doubtless relish the prospect of moving away from the prevailing austerity economics of previous years.
MEED’s 2019 Yearbook will be published in print on Tuesday 18 December
- Provides an outlook for the region in 2019
- Examines opportunities and investments
- Explores the project market landscape
- Assesses the risks and challenges ahead
- Delivers unrivalled expert analysis and insight
- Provides comprehensive sector-by-sector analysis