Regional economic growth will accelerate, but rising global energy supplies mean there is change afoot
It has been a year of solid, if unspectacular, growth for the Middle East. High oil prices continued to boost the economies of the oil exporting states, delivering healthy trade and current account surpluses that have increased foreign currency reserves and reduced sovereign debt levels, while at the same time enabling government investment in security, infrastructure and job creation initiatives.
The Washington-based IMF is forecasting economic growth in the Middle East and North Africa (Mena) region of about 3.8 per cent in 2014, compared with 2.1 per cent in 2013, which has been dampened by lower global demand for energy, oil output disruptions in Iraq and Libya, and political instability in the region.
The bullish regional outlook is driven by improved global conditions, but it masks a growing schism between the regions rich and poor nations that is potentially destabilising.
|Breakeven oil prices ($ a barrel)|
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Growth among the regions oil exporters is expected to hit 3.6 per cent in 2014, up from 2.3 per cent in 2013. This will be driven by a recovery in oil output in Iraq and Libya, expected to deliver growth of more than 25 per cent for the North African state in 2014 due to a restoration of oil production and exports disrupted by blockades.
The GCC will be the primary engine of regional growth, projected at 4.1 per cent in 2014, compared with 3.7 per cent in 2013 and 5.2 per cent in 2012.
Challenges remain for the regions oil importers, which are hampered by high oil prices and political unrest. Growth among the oil-importing nations is forecast to be about 3.1 per cent in 2014, up from 2.8 per cent in 2013.
Governments in Egypt, Iraq, Tunisia, Libya, Syria and Yemen are still fundamentally weak and unable to deliver any form of meaningful economic progress, while security crackdowns have limited social and political reform anywhere in the Mena region.
Despite the IMFs bullish outlook, a GCC infrastructure spending boom and the prospect of a re-emerging Iran, the regional picture is more unclear than ever, with civil war in Syria, rising violence in Iraq and the growing Sunni-Shia sectarian tensions casting shadows across the region.
High rates of unemployment remain a chronic challenge, while low levels of bank lending continue to stifle non-oil sector activity, leaving the region more dependent on global energy markets for growth than ever before.
Key areas to watch that will shape the regions economy next year include (click on the title to go straight to the insight):
- Iran-US rapprochement
- Falling oil prices
- Sluggish global economy
- Dubai rebound
- Infrastructure boom
- Egypt referendum
- Iraq elections
- Qatar World Cup 2022
- Energy efficiency
Following his unexpected victory in Irans presidential elections in June, reformist-backed President-elect Hassan Rouhani promised a new approach and pledged to increase engagement with the West. This victory is a victory for wisdom, moderation and maturity over extremism, he said.
Hawks in Washington, Tel Aviv and some Arab capitals warned that nothing had changed. But three months later, on 24 November, Tehran announced it was to suspend its nuclear enrichment programme for six months in return for an easing of international economic sanctions.
In the immediate term, the deal will have little real impact, but the symbolism of Washington and Tehran talking directly to one another after decades of hostility has huge importance.
At a stroke, the re-engagement of the US with the Middle Easts second-biggest economy and the worlds third-biggest gas producer has the potential to substantially reduce concerns about global energy security, diffuse regional sectarian tensions and increase energy supplies.
Falling oil prices
Brent crude averaged about $105 a barrel in 2013, down about 3 per cent on the previous year. With global demand expected to remain sluggish and increased supply from emerging non-Opec and unconventional sources such as US shale oil, the outlook for 2014 is for prices to fall by a similar amount to just above $100 a barrel.
The new sources coming on stream mean there is growing downward pressure on oil prices. Based on supply and demand fundamentals alone, oil prices should be significantly lower than they are. There is currently spare global oil production capacity of about 2 million barrels a day, and some analysts say a realistic price for oil is about $70-80 a barrel.
One of the primary reasons for the continuing high energy prices is the threat of significant interruptions to supplies as a result of Irans nuclear dispute with the West. A possible consequence of a re-engagement with Iran is a long-term fall in oil prices.
Sluggish global economy
The outlook for global growth in 2014 remains uncertain. The IMF is projecting global output to grow by 3.6 per cent in 2014 on the back of a stronger US economy and a relaxation in governmental austerity programmes in Europe. But its forecast is heavily tempered by a long list of macro-economic risks.
In its latest Regional Economic Outlook Report for the Middle East & Central Asia, the IMF warns of its growing concern about a prolonged period of sluggish global growth.
A plausible downside scenario for the medium term would be characterised by a continuation of only modest growth in the euro area because of persistent financial fragmentation and unexpectedly high legacy effect from private indebtedness, a hobbling of emerging market economies by imbalances and supply-side bottlenecks, and prolonged deflation in Japan, it says.
It also warns of the impact of the end of US economic stimulus spending. The end of US quantitative easing could come with greater and longer-lasting tightening of global financial conditions than is presently expected. As a result, the global economy could grow by only slightly more than 3 per cent a year over the medium term, instead of reaccelerating to over 4 per cent, it says.
The Middle Easts most dynamic city has rediscovered its swagger following its successful bid to host the World Expo 2020.
According to the Dubai government, Expo 2020 will drive about $6.9bn of direct capital investment in infrastructure and a further $1.6bn of investment in the emirates tourism and leisure industry.
The immediate consequence will be a strong recovery in Dubais property sector in 2014. Even before the Expo announcement, property prices had risen by as much as 20 per cent in 2013, while rents in some areas have increased by as much as 30 per cent. Not matched by salary increases, these price hikes have raised concerns that Dubai is facing a new property speculation bubble.
The cloud on the horizon for Dubai is its high debt levels. While the emirates credit risk has fallen in the past year amid a series of successful debt restructurings, analysts have warned that the Expo spending will increase the emirates debt costs. Dubai has some $85bn of debt to be refinanced or rolled over in the coming four years, including $30bn of government debt and corporate debt in 2014.
Nonetheless, Expo 2020 is forecast to drive growth of about 6.5 per cent in the next three years, rising to 10 per cent a year from 2017 to 2020.
Project spending in the GCC region is projected to ramp up significantly in 2014, with construction contracts forecast to be worth close to $140bn in 2014, compared with $130bn this year and $108bn in 2012. About $100bn is expected to be awarded on infrastructure projects and about $40bn on energy projects.
Saudi Arabia will be the biggest market, with about $55bn of contract awards projected for 2014. The UAE and Kuwait are forecast to award about $33bn-worth of major project contracts each.
Rail projects accounted for about 30 per cent of all awards in 2013, despite representing only 8 per cent of all planned projects. This trend will continue in 2014, with the award of metro schemes in Jeddah, Mecca and Abu Dhabi joining this years awards in Riyadh and Doha. But other sectors will also boom, particularly power and water, and wastewater schemes.
The regions most populous country enters 2014 still facing political and economic uncertainty following the removal of the democratically elected president Mohammad Mursi. The subsequent military crackdown and introduction of emergency laws restored the political structures that were in place before the uprising of 2011 that overthrew President Hosni Mubarak. And despite widespread domestic and international anger against the military takeover, the army, supported by funding from Saudi Arabia, UAE and Kuwait, is firmly back in control.
A referendum will be held in January on a new constitution prepared by an army-appointed constitutional committee. This will be followed by parliamentary and presidential elections in the first half of the year, which, once complete, will unlock international development funding.
Parliamentary elections set for April raise the prospect of repeating the paralysis of 2010, when the lack of a clear winner created a power vacuum that not only stalled legislative reform and infrastructure investments, but also led to an increase in sectarian violence from the countrys Sunni Muslim minority. With violence increasing as a spill over from the civil war in Syria, the prospects for progress in Iraq in 2014 look slim.
Qatar World Cup 2022
Following the launch of a committee to look into the consequences of moving the dates of the Qatar 2022 World Cup from summer to winter, footballs governing body Fifa will make a decision in December 2014 about whether or not to switch the tournament to the cooler months.
In a report published on 17 December, Riyadh-based investment bank Jadwa Investment warned that rising Saudi energy demand is a bigger threat to the worlds largest oil exporter than surging US shale output.
The key long-term challenge facing Saudi Arabias oil and gas industry remains the high and growing domestic demand for hydrocarbons, said Fahad al-Turki, the banks head of research. This is exacerbated by low prices locally, which will distort internal economic decisions and reduce the available income from the kingdoms oil exports.
The report reflects the growing awareness in the region that global demand for crude oil produced by Opec members like Saudi Arabia is expected to fall, along with oil prices, over the next few years due partly to an abundance of cheap natural gas liquids, produced by the US shale gas boom. And that the greatest opportunity for economic growth no longer comes from increased production, but from more efficient use of energy resources.
It is a realisation that will shape policy and spending across the region for the next decade.
Growth among the regions oil exporters is expected to hit 3.6 per cent in 2014, up on 2.3 per cent in 2013