2020 is a turning point for Mideast economies
Following the attack in September 2019 on Saudi Arabia’s oil facilities, that halted almost 5 per cent of global oil supply, oil prices jumped by 15 per cent in one day – the biggest climb in 30 years. Once oil production was restored, oil prices swiftly fell back again, to around $60 per barrel (pb), underpinning the ICAEW and Oxford Economics 2019 and 2020 oil price forecasts of $63.8pb and $64.6pb respectively.
In 2020, non-oil growth is expected to recover to around 2.8 per cent year on year, from an estimated 2.1 per cent this year, supported by high government spending. In Saudi Arabia, 2019 is shaping up to be a year of underspending, according to the 2020 budget. However, an increased stimulus for households and industry is providing a boost to non-oil sectors as well as private sector consumption – which has already risen by 4.4 per cent year on year in real terms in the first half of the year (H1).
However, with lower oil exports depressing revenues, there is less scope to maintain stimulus. Spending restraint would weigh on near- and medium-term nonoil output growth estimates. This is especially true given the generally weaker sovereign balance sheets compared with a few years ago. Oil prices stand significantly below most producers’ fiscal breakeven levels this year – prices required to meet expenditure targets – while running balanced accounts. In the region, only Kuwait and Qatar are able to cover spending needs. For Saudi Arabia, for instance, the Economic Update report forecasts that the fiscal deficit will widen to 6.8 per cent of GDP this year from 5.9 per cent in 2018.
Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA), said: “2019 has been a challenging year for Middle Eastern economies, due to geopolitical tensions, OPEC-LED oil output cuts and ongoing weakness in the non-oil sector. However, despite lower oil prices this year, we are pleased to see signs of pick-up in the non-oil economy, supported by government spending.
“We believe there is plenty of room for improvement. To achieve a more diverse and sustainable economy, regional governments must remain proactive in implementing the necessary fiscal reforms aimed at achieving economic diversification, and continue to support their economies with pro-growth initiatives.”
By contrast, monetary policy is becoming more supportive. GCC banks have followed moves by the US Federal Reserve, which should be supportive of private sector activity. Kuwait’s central bank joined in the easing in October, having skipped the previous two cuts as the basket of currencies that the Kuwaiti dinar is calculated against allows some flexibility to deviate from the path carved out by the Federal Reserve.