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Sobering year ahead but Saudi and UAE can weather storm

Geopolitics will inevitably affect the big Gulf economies

International Monetary Fund chief Kristalina Georgieva with Saudi finance minister Mohammed al-Jadaan Reuters/Sonny Tumbelaka
IMF chief Kristalina Georgieva with Saudi finance minister Mohammed al-Jadaan

Saudi Arabia was a “bright spot” in the global economy in 2022, according to Kristalina Georgieva, managing director of the IMF. Meanwhile, the UAE had a “stellar” year, the economists agree. So, what could possibly go wrong in 2023?

It is a question of concern to the whole of the Mena region, as well as the world.

The two biggest Gulf economies drag the rest of the region along with them, to a great degree. If things are going well in the UAE and Saudi Arabia, their neighbours benefit from increased economic activity and capital flows, as well as providing work and remittances to large swathes of Africa and South Asia.

As the big global economic blocs struggle with the prospect of recession in 2023 (Europe and the USA) or the minefields of post-Covid recovery (China), so far the Gulf economies have provided a safe haven for growth, transactions and the all-round economic feel-good factor.

But there are signs the Middle East will find it harder to swim against the tide.

Georgieva’s comments at Davos last month notwithstanding, the IMF has downgraded economic prospects for Saudi Arabia to 2.6 percent this year, a big drop for a country that hit an incredible 8.7 percent in 2022.

For the UAE, the most recent survey of business expectations by S&P (the Purchase Managers Index poll) showed the weakest outlook since the dark days of February 2021 “amid concerns that economic problems abroad will seep through into the domestic economy”.

Global economic worries do have the potential to impact the UAE and Saudi Arabia, of course. As trading nations inextricably linked to the world economy, any downturn in trade, or inflationary pressures, or supply chain glitches, would inevitably affect the Gulf.

As two of the biggest exporters of crude oil, any global fall-off in demand would also impact the main revenue earner for both countries.

In fact, oil is the reason for some of the economists’ predictions that growth will slow this year. The controversial two million barrels per day cut orchestrated by Opec+ last October will impact overall levels of economic output in Saudi Arabia and the UAE in 2023, as well as reducing government revenue for future investment into the respective Vision plans.

This is not necessarily a bad thing if it encourages further growth in the non-oil economies of both countries, which is the long-term strategy. But at some stage oil policymakers will have to address the fact that crude export volumes are not as healthy as they might be, despite prices having held up well.

On the ground, for both Saudi and the UAE, it hardly feels as if there is any “slowdown” under way.

The kingdom shows no sign of decelerating the eye-popping levels of investment in Vision 2030 giga-projects.

While in the Emirates frenetic activity continues in financial markets, real estate and tourism. Wamda Capital, the Abu Dhabi-based investment firm, reckoned startup capital grew 24 percent in 2022, which will begin to show through in the UAE economy this year.

It is hard to imagine the “black swan” economic event that could pierce the UAE bubble. Dubai debt – which did that in 2009 – is still comparatively high, but manageable within the emirate and balanced ultimately by big UAE financial reserves, the economists agree.

This is not to downgrade the risks in other parts of the region. Egypt is stumbling from one rescue package to another and could call again on the Gulf countries if the recent IMF bail-out proves insufficient.

As ever in the “rough neighbourhood” of the Middle East, it is geopolitical factors that are likely to present the biggest threat to Gulf economic growth. Tensions in Israel and Iran continue to grow, while the unpredictability of global energy markets during the Ukraine war is apparent.

But, assuming a modicum of luck on the geopolitical front, the big Gulf economies look set fair in 2023 – even if not at the extraordinary pace of last year.

Frank Kane is a communications advisor and an award-winning business and finance journalist