Analysis Middle East growth forecast brightens despite global gloom By Andy Sambidge June 20, 2022 Unsplash An oil refinery. Rising oil prices are protecting MENA economies from the surge in inflation Region’s GDP growth for 2022 now projected at 5.2%, up 1 pointRise in oil prices offsetting inflation surge and supply-chain disruptionsGCC nations set to post budget surpluses, with most used to repay debt Growth forecasts for the Middle East have been revised upwards despite the darkening global landscape. Middle East GDP growth for 2022 is now projected at 5.2 percent, an increase of 1 percentage point on the forecast three months ago, according to the Economic Insight report for the Middle East, commissioned by the Institute of Chartered Accountants in England and Wales (ICAEW) and compiled by Oxford Economics. The Q2 report, published on Monday, said Middle Eastern countries were having to adjust to pressures stemming from the Russia-Ukraine conflict, China’s economic slowdown and the tightening of global market conditions. However, the rise in oil prices has provided strong support to the macroeconomic environment across the Gulf, which is being used to offset the impact of rising inflation and supply-chain disruptions to commodity-importing countries in the region. However, if several large economies slide into recession, the impact on oil demand would test the GCC’s resilience, the report warned. The Middle East faces a dilemma. Geopolitical turmoil has brought GCC nations to the international negotiating table. But hiking up oil production counteracts the diversification strategyVanessa Heywood, head of Middle East, ICAEW Scott Livermore, ICAEW economic adviser and chief economist and managing director of Oxford Economics Middle East, said: “The GCC economy has seen an impressive bounce back from the disruption caused by the Covid-19 pandemic and has appeared steady despite global headwinds from prolonged market instability. “Growth in the oil sector has largely been the driver of the region’s success, although Saudi Arabia recently gestured its willingness to help control rising oil prices – an indication that the region is concerned about the impact of a recession in key economies.” Inflated oil prices have led to improved GDP growth prospects in Saudi Arabia, where output is forecast to expand by 7.1 percent, up from the previous forecast of 4 percent. There is also optimism in the UAE, where government reform agendas and a rise in oil output are expected to underpin growth of 6.7 percent this year. The higher income from hydrocarbons means that all six GCC nations are likely to post budget surpluses, despite rising expenditures, the report said. However, it added that this is unlikely to impact on spending plans, with most of the windfalls earmarked for debt repayments. This should lead to a decline in debt-to-GDP ratios across the region. Saudi GDP grows 9.9% in Q1, beating flash estimate UAE economy’s growth for 2022 upgraded to 5.4% World Bank slashes global growth forecast Non-oil growth also continues to show strong signs across the GCC. The ICAEW’s 2022 forecast for non-oil activity stands at 4 percent, up from 3.4 percent three months ago. Recent S&P Global Purchasing Managers’ Index surveys in the UAE and Saudi Arabia indicated that business activity is softening, as global headwinds take a toll on confidence, but they still remain firmly in expansion territory. Vanessa Heywood, ICAEW head of Middle East, said: “The Middle East is faced with an interesting dilemma. “Geopolitical turmoil has brought the GCC nations to the international negotiating table to aid global oil supply challenges. But hiking up oil production counteracts the region’s long-term strategy of diversification. “It is also important to note that the Middle East sits in an ecologically sensitive part of the world and is therefore more susceptible to climate change. “While inflated energy prices will support its renewable energy transition, the region’s leadership has demonstrated resistance to delaying the progress being made in its energy transition, even as global pressures mount.” Rising commodity prices, caused by the Russia-Ukraine conflict, have buoyed the GCC’s fiscal and external balances, but have subsequently caused inflation rates to increase, according to the report. The ICAEW predicts that GCC inflation to average 3.1 percent this year – up from its 2.7 percent forecast three months ago and up from 2.3 percent in 2021 – before falling back to 2.5 percent in 2023. The GCC’s dollar currency pegs have forced the region’s monetary authorities to follow the US Federal Reserve rate hikes in March and May. The Federal Reserve’s determination to tame high US inflation with rate increases – and the resulting rise in financing costs – may dampen the non-oil recovery in 2023, but it should not pose an immediate risk to the region’s growth or continued expansion. Dr Bhaskar Dasgupta, head of strategic development MENA at global financial services provider Apex Group, told AGBI: “The MENA region continues to be a complex market. “The Ukrainian crisis has driven a massive inflow of funds into UAE and that has caused certain sectors, such as real estate and services to boom. “GCC oil-producer nations have benefited from oil price increases in the first six months of the year, while non-oil-producing markets are feeling the effect on their economies, which in conjunction with inflationary pressures, has started to dampen investments.” He added: “We expect a continuation of H1 trends in the next six months, with inflows into the region accelerating as the OECD economies move into slowdown. “The number of funds setting up in MENA should increase as the relative attractiveness of UAE as a destination improves vis-à-vis other countries, which is attracting many families and ultra-high net worth individuals to move and expand to UAE. “Family offices are expected to become more risk adverse, directing their capital towards real assets. “However, there are some existing trends which will move in a different direction: startups and VCs are going to struggle to raise capital and we expect that [environmental, social, and corporate governance] will lose some momentum as oil prices rise further and inflation bites harder.” Last week, AGBI spoke to experts who said the UAE and wider Gulf markets were likely to avoid a recession although fears of a global slump have increased in the wake of the Federal Reserve’s decision. “In the GCC in general, and UAE in particular, I do not see a recession looming on the horizon,” said UAE-based economist Kassim M Dakhlallah. Emirati investor Sabah Al-Binali, executive chairman of OurCrowd Arabia, a subsidiary of the world’s largest global venture investing platform, said the region would be cushioned by the rising oil price. Gulf economies are projected to receive up to $1.4 trillion in additional revenue in the next four to five years as oil prices remain high and headline inflation stays low, the International Monetary Fund said in its regional outlook in May.