Economic Outlook Middle East: Oil central
By Scott Hazelton17 July 2012
As ever in the Middle East, the oil price is the dominant factor for GDP growth and construction spending. The turmoil associated with the 'Arab Spring' is still causing some concern, notably in Syria and Egypt, but the worry now is more about soft demand for oil, rather than threatened supply.
Brent crude has fallen from an average of $125 per barrel in March to $99 in early June on concern that debt problems in the Euro-zone will undermine global economic growth and therefore demand for oil. The near term outlook has Brent averaging $95 per barrel in the second half of 2012 and in 2013, recovering to $103 in 2014 as demand strengthens.
The weaker global economy and lower oil prices will lead to slower construction growth in 2012 than 2011. Flat oil prices in 2013 will hold growth across the region to about the same as 2012, with some markets, such as Oman and Qatar a little ahead of the average. However, the industry will slow in Kuwait and Saudi Arabia as the stimulus spending launched in 2011 cools off.
High oil prices have not helped Iran, however. It has been penalised with four sets of UN sanctions over its nuclear program since 2006 and the current round poses the greatest problem. The country has become financially and technologically isolated, which is constraining its ability to extract oil from maturing fields.
Bilateral sanctions from the EU and US targeting trade and financial investment will continue to hurt Iran's growth, particularly as it tries to build its gas export capacity.
In stark contrast to Iran, the construction growth leaders in the region are Kuwait and Saudi Arabia.
In Kuwait, the high oil prices and the quieting of social unrest are providing the basis for growth, although it is the non-hydrocarbon sector that is most dynamic. Infrastructure projects headed by the government's four-year development plan are helping the construction industry even as oil production slows.
The picture in Kuwait next year is expected to remain much the same as in 2012, as Organization of Petroleum Exporting Countries (OPEC) quotas will hit oil production. The government's four-year, US$ 104 billion capital spending plan will not only be the engine behind Kuwait's economic momentum, but it is also the first serious initiative to diversify the economy away from its dependence on oil and expand private-sector involvement. In addition, by offering attractive investment opportunities, the fiscal package will allow banks to divest risky asset classes and slacken their lending policies.
Saudi Arabia is one of the few economies that has surprised on the upside in 2012. It boosted crude output through the first quarter of the year as prices remained high and it has shown continued strength in non-oil activity, with strong public spending helping to firm-up domestic demand. Spending on development and infrastructure projects will continue to provide a boost.
In light of the weakening global economic environment, Saudi Arabia's 2012 state budget sets not only another record but underpins the economy's growth momentum while addressing its development and social needs. The continuation of social support measures unveiled in the spring of 2011 will keep expenditure growth strong this year, with much of the planned spending in 2012 will be funnelled into education and training as well as housing and infrastructure projects.
Oman's economy also continues to grow apace in 2012. Despite social unrest in 2011, the economy grew thanks to the hydrocarbon sector. In 2012, GDP growth is expected to accelerate thanks to firm oil prices, waning political turbulence, loosening credit conditions, and a number of government-led capital projects.
Investor confidence is rising - catalysed by public-sector spending.
Policies to promote economic diversification will boost activity, with windfall revenues from hydrocarbons financing key development projects, while schemes that were shelved by tighter credit conditions in recent years will restart as credit conditions ease and private-sector involvement increases.
Investment will continue to focus on the expansion of Liquefied Natural Gas (LNG) production and export as an alternative to oil. Oman has also focused on growing its petrochemical, manufacturing, and tourism industries as further means to diversify the economy.
The UAE will continue to improve, but it could well see a bumpy road ahead. Growth is still healthy thanks to the oil price, but the over-built real estate market is coming under price pressure that will see the recovery drag this year.
Heightened financial-market volatility also threatens to dampen business and economic conditions, and could have repercussions for the UAE's still-tight credit conditions and troubled state-owned companies seeking to refinance or roll over debt. UAE banks will remain cautious but should continue to loosen credit. With the support of Abu Dhabi, the federal government revived public spending and investment in 2011, including a US$ 1.6 billion development plan for the four smaller northern emirates-Ajman, Fujairah, Ras al-Khaimah, and Umm al-Quwain-with a focus on infrastructure, water, and electricity.
Middle Eastern construction markets weathered 2011's unrest with widespread investment of oil wealth. The long term nature of these investments will keep construction activity humming for the next couple of years. In the longer term, fiscally induced spending will subside and oil prices will strengthen only moderately. While this region will be hydrocarbon-based for the foreseeable future, economies that best diversify away from hydrocarbons will have the strongest potential for long term growth.