Relative economic normalcy to return to Middle East in second half of 2021

Compiled by global forecasting firm Oxford Economics, Economic Update: Middle East Q1 2021 report indicated that most of the region’s economies will benefit from higher commodity prices and stronger external demand in the second half of 2021.

The Middle East’s GDP forecast for this year stands at 2.5 percent, in line with the average pace from 2010 to 2019 (2.6 percent). This follows the unprecedented decline seen in 2020 which was estimated at 5.2 percent.

The global economy started slow at the beginning of the year, the report observed, because of the restriction measures many countries, including those in the Middle East, enforced to curb the spread of coronavirus.

Despite it being uneven, the vaccine rollout has progressed particularly well in the UAE and Bahrain where a relatively large percentage of the population has been vaccinated compared to neighbouring countries and global peers.

More than 8 million UAE residents have been vaccinated against coronavirus so far, according to latest figures by the Ministry of Health.

“While Covid-19 vaccine rollouts are underway, Middle Eastern governments must continue to develop sectors and industries that generate net value for the economy. Increasing non-oil revenues is a challenging task in these times, so innovation will be vital to the region’s economic recovery,” said Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA). 

Michael Armstrong, FCA and ICAEW Regional Director for the Middle East, Africa and South Asia (MEASA)

Overall, GCC GDP will grow by 1.4 percent in 2021 following an estimated 5.4 percent contraction in 2020, according to Institute of Chartered Accountants in England and Wales (ICAEW) which commissioned the report.

Expectations of strengthening activity and rising demand increased sentiment and pushed oil prices up to $66 per barrel in late February, up from a low point of $9 per barrel in April 2020.

The oil price outlook has also been supported by ongoing supply restraint from OPEC+ producers. To sustain a reduction in inventory levels, the group plans to increase output only modestly in the months ahead with Saudi Arabia maintaining an additional voluntary production cut of 1 million barrels per day through April.

While the current oil price level is still much lower than the GCC has been accustomed to, it provides a reprieve to budgets and eases the pressure for further fiscal consolidation. However, some governments such as Oman and Saudi Arabia will cut expenditure against the backdrop of continued low oil revenue.

Although deficit financing needs will decline in 2021, most countries will continue to borrow in international debt markets to fund diversification programmes or refinance maturing debt at low rates.     

“In the first quarter of 2020, the Covid-19 pandemic brought Middle East economies to a temporary standstill. Today, we are encouraged by the steps regional governments are undergoing to bring back normalcy,” said Scott Livermore, ICAEW Economic Advisor and Chief Economist at Oxford Economics.

“However, the continued uncertainty in the global market puts more pressure on the oil-reliant economies to increase their non-oil revenues. Governments must remain proactive and continue to support their economies with pro-growth initiatives to bounce back quickly,” he continued.

Scott Livermore, ICAEW Economic Advisor and Chief Economist at Oxford Economics

The rest of the region faces many challenges, including oil production cuts, periodic virus-related lockdowns and, in Iran’s case, US sanctions. A potential return to the Joint Comprehensive Plan of Action under US president Biden and the lifting of sanctions could provide a meaningful boost to Iran’s oil economy and budget and help cool double-digit inflation, the report indicated.

In Lebanon, the continued stalled cabinet formation and concerning health situation continue to weigh heavily on the economy amid the ongoing financial crisis. With no reforms to spur a recovery and with demand persistently depressed, the report predicts that Lebanese GDP will fall by 5.3 percent in 2021, following an estimated 25 percent plunge last year.

Iraq, with the least diversified economy in the Middle East region, has again reached out to the IMF to help meet financing needs. A drop in foreign exchange reserves triggered a 16 percent devaluation of the Iraqi dinar in December, the first such move since 2003.