0
Middle East
The IMF has increased its growth forecast for the Middle East in 2008 by 0.2 basis points to 6.1 per cent, despite predicting that world growth would slow due to the financial crisis. In its latest World Economic Outlook report the IMF said that global financial turmoil was having little direct effect on the Middle East, although the weakness of the dollar was making life harder for policymakers in the region. In contrast to the IMF’s report,
Standard Chartered has lowered its growth forecast for Middle East countries in the wake of the turmoil in credit markets. According to the Fund, the short-term outlook for the region is positive.
Growth is projected to be more than six per cent in 2008 and 2009 and the current account surplus is expected to remain large. However, inflation is likely to remain uncomfortably high in the short-term. Region-wide inflation rose from 3.4 per cent in 2006 to 10.1 per cent in 2007. It is running at close to 20 per cent in Iran, 14 per cent in Qatar, and above nine per cent in the UAE. Inflation is unlikely to decrease soon while money supply is high and the dollar pegs continue. The IMF report warns that any large cut in US interest rates could stimulate domestic demand further in the region, leading to higher inflation.
Another independent economists report reveals that a wider global slowdown leading to a drop in oil prices as well as regional geopolitical uncertainties are the main short-term risks for the region. In order to boost their longer-term economic health, regional governments should reduce barriers to trade, simplify tax systems, and enhance the transparency of legal and administrative systems. The sensitive nature of the current global crisis initiated by the US subprime mortgage disaster, the depreciation of the dollar against other currencies, the more recent collapse of several major American banks, and the anticipation that the worse is yet to come.
Considering the recent and current regional developments, risks to the Arab region seem to be relatively lower than those in other world regions. The region’s economy, which has benefited from sustained high oil prices, has continued to perform remarkably well.
However, with the weakening of the US economy and the slowing of global growth, the balance of risks to the Arab energy investment outlook has tilted further to the downside. The Arab region has posted a growth rate of 6.4% over the past five years. This rate will decline to 5.9 per cent in 2008. Oil-exporting countries are likely to record higher growth rates than the rest of the region, primarily as a result of high oil prices.
Inflation in the Arab region has risen to 8.5 per cent in 2007, although it remained lower in oil-exporting nations. The report also mentioned that the impact of the depreciating dollar and inflation on consumers varied from one country to another, ultimately depending on each country’s economy and the resilience of its economic sectors. It also focused on a serious and chronic phenomenon in the Arab world, namely the rising unemployment rate.. Unemployment rate in the Arab world ranges between 12 and 15 per cent, with variations noted across countries. The report further warned that “average unemployment, points to a major structural problem, which is the degree of economic diversification.”
Investments dedicated to the energy sector between 2008 and 2012 have reached almost $420 billion for the entire Arab world, representing an increase of 22 per cent for the period from 2007 and 2011 in which allocated energy sector investments had reached $345 billion. It is noticeable that 44 per cent of these investments are allocated for the oil sector, including oil extraction and marketing in addition to constructing petrochemical plants. The figures also indicate that over half the Arab energy investments are concentrated in three countries, namely Saudi Arabia ($105 billion), Qatar ($65 billion) and the UAE.
Saudi Arabia
Saudi Arabia’s economic expansion and diversification will continue for the next two years at least with real economic growth of six per cent or more annually according to Samba report. Samba expects real GDP growth to reach 6.7 per cent in 2008, up from an estimated 3.7 per cent in 2007. Real non-hydrocarbon growth is also set to show strong growth of around 6.5 per cent. Global oil prices are expected to remain high, investment in domestic oil and gas production capacity is increasing, and the potential of the private sector is being encouraged by fundamental improvements to the business environment. The hydrocarbons sector will remain the cornerstone of the economy and is projected to grow by one third in nominal terms in 2008.
Oil production is expected to average around 9.25 million b/d in 2008, some 6.3 per cent up on 2007. The surge in Saudi oil revenue will support increased government spending (around 15 per cent both in 2008 and 2009), mainly directed towards basic infrastructure but also towards salaries and other benefits in order to offset the social costs of rising inflation. Since oil prices will remain high, the budget will remain in surplus by around 20 per cent for both years. Samba expects a record fiscal surplus of 23 per cent of GDP in 2008, and a current account surplus of around $128 billion, or 28 per cent of GDP.
Despite the economic stimulus coming from rising government spending, the expanding private non-oil sector is increasingly becoming the driver of growth. With economic reform momentum likely to be maintained, the prospects for sustained private investment growth are excellent. Economic policy challenges have been heightened by the pickup in inflation, which reached 8.7 per cent (year on year) in February. With the authorities firmly committed to maintaining the fixed peg to the dollar, and in a context of free capital flows, monetary policy options to stem robust liquidity growth are limited.
The adherence to the fixed dollar peg has been a complicating factor in at least two ways: the weakness of the dollar has contributed directly to imported inflation; and the peg has precluded the use of monetary policy as a counter-inflationary tool. The picture is further complicated by the continuing pickup in government spending which is projected at 16 per cent in 2008. While Saudi Arabia’s economic prospects for the medium term are excellent, inflationary pressures remain a concern, and are likely to continue increasing in 1H 08, before easing somewhat in 2H08 and into 2009. Consumer price growth is likely to average eight per cent in 2008.
Barring any change of policy, the outlook for prices depends largely on the pace of housing delivery, the course of global commodity prices (especially food), and the value of the dollar.
These conditions may gradually improve in 2H08 and into 2009, helping to dampen some import prices and subdue wage pressures, Samba adds. However, keeping in lockstep with the dollar could lead to a situation where higher rates of inflation are inevitable and inflationary expectations become entrenched. On the positive side, the government has been measured in its spending, and has thus created room to pay down domestic debt and build up foreign assets. This has given the government greater fiscal flexibility and a substantial resource base to maintain spending in the face of potential future shocks, including a decline in oil prices
The Kingdom is gradually opening up sectors for investors including telecommunications, airlines and insurance and is continuing to support the main engines of economic growth by encouraging local and foreign private sectors to contribute to development of Saudi Arabia’s new economic cities.
Last year, the World Bank in its annual global Doing Business report recognised the Kingdom as one of the world’s top reformers, with Saudi Arabia being advanced fifteen places to rank 23rd out of 178 countries as one of the easiest countries to conduct business.
According to the World Bank, the Kingdom rates the best of any Middle East state even ahead of mature economies such as France and Austria. The Kingdom is now aiming to be among the top ten most competitive countries globally by 2010 increasingly focusing on building a knowledge-based economy.
However, reform also means difficult decisions to ensure that in the long term Saudi Arabia sheds uneconomic activities and develops in areas where it has global comparative advantage. The foreign direct investment flow is expected to increase yet further as the Kingdom’s new economic cities and special industrial zones are completed. However, there are many challenges ahead.
