Oil and Gas - - FEATURE -

Ac­cord­ing to ICAEW’s lat­est re­port (Eco­nomic In­sight: Mid­dle East Q4 2017), sev­eral economies in the Mid­dle East, par­tic­u­larly those in the GCC, are tran­si­tion­ing to­wards a “new nor­mal” in 2018, al­low­ing spend­ing to start grad­u­ally re­cov­er­ing. Over­all, GCC GDP is ex­pected to grow from just 0.3% in 2017 to 2.8% next year, and an ac­cel­er­a­tion from 1.4% in 2017 to 3.2% next year in the wider Mid­dle East. How­ever, the ac­coun­tancy and fi­nance body says sev­eral risks re­main to growth in the re­gion, in­clud­ing those from pol­i­tics and se­cu­rity.

Eco­nomic In­sight: Mid­dle East Q4 2017, pro­duced by Ox­ford Eco­nom­ics, ICAEW’s part­ner and eco­nomic fore­caster, says pub­lic fi­nances now look to be on a more sus­tain­able path in most economies in the GCC thanks to three main fac­tors: the up­com­ing Value-Added Tax; the im­por­tant so­cial change in Saudi Ara­bia with the lift­ing of the ban on women driv­ing; and as a re­sult of a pe­riod of emer­gency aus­ter­ity which saw pub­lic spend­ing cut by al­most 20% from 2015-2017 at the GCC level.

With OPEC-plus oil pro­duc­tion cuts likely to be main­tained through 2018, and re­versed in 2019, GDP growth is ex­pected to pick up to around 4% in both the GCC and wider Mid­dle East in 2019. Within this, GCC oil GDP is fore­cast to re­bound from a 2.3% con­trac­tion in 2017 to growth of 1.7% in 2018 and around 1 per­cent­age point stronger in 2019. Growth in the GCC non-oil sec­tor is fore­cast to pick up from 2.4% in 2017 to 3.7% in 2018 and 4.7% the year af­ter. Tom Rogers, ICAEW Eco­nomic Ad­vi­sor and As­so­ciate Di­rec­tor of Ox­ford Eco­nom­ics, said: “Eco­nomic growth prospects of the Mid­dle East coun­tries, par­tic­u­larly the GCC, are pro­jected to im­prove in 2018 and the years af­ter. But the po­lit­i­cal and se­cu­rity risks re­main high and could limit or de­lay the re­cov­ery in the re­gion.”


2018 will be a key year of tran­si­tion for Saudi Ara­bia in sev­eral con­texts. For the first time, Saudi ci­ti­zens will pay VAT on the goods and ser­vices they buy, Saudi women will be per­mit­ted to drive, and pri­vate (and for­eign) in­vestors may be able to take a stake in Saudi Aramco. The King­dom is at the start of a po­ten­tially decades-long process of eco­nomic di­ver­si­fi­ca­tion and so­cial change.

Ad­di­tion­ally, the ex­pected in­crease of Brent crude to an av­er­age of $55 in 2018

and a dol­lar or two higher the fol­low­ing year, will of­fer some sup­port to pub­lic spend­ing and growth. In this con­text, Saudi Ara­bia is ex­pected to play a key role in se­cur­ing an ex­ten­sion of the OPEC-plus deal at the Novem­ber 30th meet­ing.

Away from the oil sec­tor un­der­ly­ing busi­ness con­di­tions re­main rel­a­tively pos­i­tive. Pri­vate bank de­posits have also started to re­cover through the sum­mer months, pro­vid­ing some sup­port for spend­ing power into 2018. More pos­i­tively, plans to per­mit women to drive could save some house­holds as much as $1,000 per month – par­tic­u­larly where women use a driver or taxis to get to their work­places.

How­ever, the re­lax­ation on women driv­ing seems un­likely to have an im­me­di­ate im­pact on fe­male em­ploy­ment. At 20%, fe­male labour force par­tic­i­pa­tion is low even by re­gional stan­dards (UAE leads the way at 42%, com­pared to 50-60% in western economies), and the gov­ern­ment aims to raise this to 30% by 2030. To do so, Saudi Ara­bia will need to nar­row the gap in wage ex­pec­ta­tions be­tween Saudi work­ers and ex­pa­tri­ates.

The Crown Prince’s de­ci­sion to re­turn the coun­try to “a mod­er­ate Is­lam open to the world” and to tackle cor­rup­tion are pos­i­tive moves. As are the two re­cent flag­ship pol­icy ini­tia­tives - a ma­jor tourism zone in the Red Sea re­gion, and an in­dus­trial mega city span­ning three coun­tries (Saudi Ara­bia, Jor­dan and Egypt). Both will draw heav­ily upon in­ward in­vest­ment and ex­per­tise, but care needs to be taken to en­sure the en­force­ment of anti-cor­rup­tion mea­sures sup­ports, rather than in­hibits, the con­fi­dence of over­seas in­vestors and trade part­ners in do­ing busi­ness in the King­dom.

Michael Arm­strong, FCA and ICAEW Re­gional Di­rec­tor for the Mid­dle East, Africa and South Asia (MEASA), said: “Saudi Ara­bia is mov­ing in the right di­rec­tion with re­gards to eco­nomic re­forms. There is clearly in­creas­ing mo­men­tum be­hind the shift to­wards a more mar­ket-driven econ­omy in Saudi Ara­bia. But this shift will take some time and for the com­ing years the econ­omy will re­main heav­ily in­flu­enced by tra­di­tional growth driv­ers – the oil sec­tor and the im­por­tance of gov­ern­ment spend­ing.”

The Saudi Ara­bia econ­omy is ex­pected to pick up from a 0.3% con­trac­tion in 2017 (largely a re­sult of lower oil out­put) to record growth of 2.3% in 2018. As oil out­put is re­stored to pre-cut lev­els in 2019, GDP is ex­pected to grow 3.8%. But in the ab­sence of more am­bi­tious re­form ef­forts in the com­ing cou­ple of years, this is likely to be the speed limit for growth.

The re­port also ex­pects the fol­low­ing GDP growth in Mid­dle Eastern economies:

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