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ANALYSIS

Michael Armstrong

2019 a challenging year for ME economies: ICAEW

DUBAI, July 21, 2019

The Middle Eastern economy is expected to slow down from an estimated 1.5 per cent last year to about 0.6 per cent in 2019, the slowest in almost a decade, according to ICAEW’s latest Economic Insight report.

The Middle East GDP growth forecast slowdown is primarily driven by a deeper-than-expected recession in Iran, one of the region’s largest economies, said the Economic Insight: Middle East Q2 2019.

In the GCC, the burden of generating economic growth and employment is expected to fall more on the non-oil sector in 2019. Lower oil prices pose a challenge for a number of GCC countries that rely heavily on hydrocarbon receipts to balance their budgets, notably Bahrain and Oman.

The report, produced in partnership by ICAEW and Oxford Economics, says the downward revision to Middle East GDP growth is because the Iranian economy is expected to contract by 7 per cent in 2019. Weighed down by tougher American sanctions and the US administration’s recent decision to stop granting waivers to Iran’s oil import partners, which took effect earlier in May this year, Iran’s economic outlook is now particularly dire.

According to the report, oil producers in the Middle East will also see limited growth in the oil sector, the traditional engine of economic growth and a primary source of government revenues, given the anticipated extension of the output cuts by Opec+ to balance the international oil markets. Oil prices are forecast to average around $67 per barrel (pb) in 2019, down by some 5.6 per cent from the average of $71 pb last year.

In 2019, the non-oil sector will continue to be supported by various pro-growth government initiatives, expansionary budgets and fiscal stimulus plans, especially in Saudi Arabia and the UAE, the two largest GCC economies. The non-oil sector in the GCC is expected to accelerate from an estimated 2.3 per cent last year to 2.6 per cent in 2019.

Indeed, several proxy indicators of economic activity paint a positive picture, with the credit to the private sector trending up in most GCC countries, while the quarterly average of the Purchasing Managers’ Index (PMI), a gauge of the health of the private sector, continued to show some improvements in Q1 2019 in both Saudi Arabia and the UAE compared to Q4 2018.

Michael Armstrong, FCA and ICAEW regional director for the Middle East, Africa and South Asia (MEASA), said: “The outlook for Middle Eastern economies remains challenging for the rest of 2019 as global developments continue to be of crucial importance to the region. Growth prospects for the Middle Eastern economy have deteriorated as geopolitical risks, involving Iran especially, have risen in the last year. Continued uncertainty in the global oil market means increasing non-oil revenues is vital for regional economies – governments in the region have been proactive, but they must continue to support their economies with pro-growth initiatives.”

Oman’s economy remains largely driven by the oil sector and government spending

The economic outlook for Oman looks challenging in 2019, with oil production curbs and oil price volatility weighing on incomes and sentiment. Oman’s economy is still in the early stages of recovery and is expected to experience modestly weaker growth of 2.8 per cent this year, down from an estimated 3.3 per cent in 2018 but up from the 0.9 per cent drop in 2017.

Both domestic demand and the external sector face persistent headwinds, the latter reinforced by the fractious US-China trade relations. Renewed pressure on oil prices complicates fiscal adjustment, as the overall thrust of policy remains expansionary. Additionally, the ramp-up in gas output over the past 18 months has partly compensated for lower oil production, cushioning oil sector performance.

Mohamed Bardastani, ICAEW economic advisor and senior economist for Middle East at Oxford Economics, said: “The slump in oil prices has put significant pressure on Oman in the last year – oil revenue still amounts to60 per cent of the nation’s total budget revenue. There is a dire need for an improvement in the non-oil sector and delaying the introduction of VAT has had a significant effect on the fiscal deficit. Oman must continue with its economic diversification efforts to drive growth in its economy.”

According to ICAEW, non-oil activity in Oman remains tepid, though it should improve, anchored by economic diversification efforts and infrastructure spending under the country’s Vision 2020 plan.

However, the public sector budget’s heavy reliance on energy receipts will continue to limit the authorities’ room to support spending and activity. The report forecasts slower GDP growth but wider fiscal shortfall this year, entrenching accumulation of external debt further above 50 per cent of GDP. Despite increased state spending, domestic demand remains under pressure, reflected in slowing private sector credit uptake.

Running large deficits has done little to strengthen employment prospects for the local population. Notwithstanding the expat hiring freeze, now extended to a larger number of professions, the private sector created just 13,444 jobs for Omanis in 2018, short of the 25,000 target, and a further 5,780 in January-April. Coupled with slow progress on addressing the underlying skill mismatch, labour market dynamics will continue to constrain consumption and the overall outlook in the coming months. – TradeArabia News Service




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