Middle East economies still dominated by oil sector development

Economic recovery in the Middle East is slowly gathering momentum after last year’s slump, when economic growth slowed to an eight-year low at only 0.9 per cent, according to ICAEW’s latest Economic Insight report.
Overall, the Middle East’s GDP is expected to grow to 2.3 per cent in 2018, though growth remains below the 2010-2016 average of 3.9 per cent. The accountancy and finance body says oil continues to dominate and shape the macroeconomic outlook for Middle Eastern economies, despite major economic diversification efforts.
Economic Insight: Middle East Q4 2018, produced by Oxford Economics, says the same factors that slowed down economic growth in 2017 are now contributing to the overall economic recovery. Oil prices have hit their highest levels since the end of November 2014 in recent weeks at more than $80 per barrel, oil production has been elevated in the GCC compared to last year and the fiscal stance has been expansionary in 2018 across the GCC in contrast to 2017.
As a result, the GCC governments are expected to benefit from a combination of higher oil prices and elevated oil production levels, contributing positively to oil sector growth, fiscal and external balances. The global crude oil price is forecast to average $80 per barrel in Q4 2018, retreating slightly to $76.5 per barrel in 2019.
On the other hand, indicators for the non-oil sector are also showing positive signs after a slow start in 2018. The PMI index, which measures the health of the non-oil private sector, slumped amid the introduction of the 5 per cent VAT in Saudi and UAE in January 2018, but recovered thereafter and remains in expansionary territory.
Similarly, credit to the private sector, which measures bank lending to the private sector and a proxy of domestic economic activity, has accelerated in the top three GCC economies (Saudi Arabia, UAE and Qatar) in Q2 2018. Credit to the private sector in Saudi Arabia was mostly in negative territory last year and in Q1 2018, but has steadily trended up this year, reaching 1 per cent year-on-year in August 2018, a 19-month high. While in the UAE and Qatar, the indicator has accelerated from 1.5 per cent and 7.4 per cent in Q1 2018 to 2.3 per cent and 10.4 per cent in Q2 2018, respectively, reflecting the gradual strengthening in private sector activity.
Mohamed Bardastani, ICAEW Economic Adviser and Senior Economist for Middle East at Oxford Economics, said: “Supported by higher oil prices, oil exporters in the Middle East region will experience visible improvements in external and fiscal balances in 2018–19. Non-oil activity is also expected to continue its recovery, supported by a slower pace of fiscal consolidation.
“But despite the positive outlook, consolidation efforts should continue over the medium term. This will enable countries to mitigate the potential impact of shocks and ensure a sustainable use of hydrocarbon revenue. At the same time, continued structural reforms will facilitate private sector development and strengthen long-term resilience. Any delays on the structural reform agenda could curtail economic diversification.”
For Oman, the outlook remains for an improvement in 2018, underpinned by an easing in oil output cuts and ramp-up in gas production, which both facilitate an increase in government spending. But weak domestic demand continues to weigh on non-oil activity and despite stronger hydrocarbon activity, poses a downside risk to the expected 3.6 per cent GDP growth for 2018, while the overall pace of expansion is expected to slow to 2.9 per cent in 2019, according to the report.
Oman’s economic fortunes remain largely tied to the oil sector and government spending. Recent official data releases show Oman’s real GDP shrank by 0.9 per cent in 2017, after downwardly revised growth of 5 per cent in 2016, amid a decline in oil production and fiscal retrenchment. Meanwhile nominal GDP growth was revised down to 7.3 per cent in 2017 (from 8.7 per cent), which followed a deeper than previously estimated contraction of almost 7 per cent in 2016.