According to Scott Livermore, Institute of Chartered Accountants in England and Wales (ICAEW) economic advisor and chief economist at Oxford Economics, the Middle East is leading the way in the economic recovery from COVID-19.
Livermore said that second-quarter global growth was stronger than anything the Middle East has seen in the last 15 years, including the recovery from the global financial crisis. But there are signs that the growth may slow down again, he added.
A highly contagious delta and omicron variants of COVID-19 had caused disruption to supply chains and to the overall economic recovery. Individuals were forced to quarantine and halt work including daily consumer activities. During the omicron wave, some economies have reintroduced restrictions that further suffocate economic activity.
Livermore said that the Middle East is doing better than the rest of the world. He also said that the chances of further lockdown is low for highly vaccinated nations, which means the threat of major economic disruption remains low if new variants that impact vaccine efficacy do not arise.
Globally, industrial production has been stagnant for the year 2022, despite rising demand and new orders. Firms are delving into current inventories rather than producing.
Livermore said reserve stocks are significantly below what they would expect given the number of orders. This is causing bottlenecks across some sectors. Livermore also said that these supply limits are putting a lot of pressure on the economy’s recovery.
Middle East economy to grow by 4%
According to forecasts from the International Monetary Fund (IMF), the world economy would rise by 6% in 2022. Last month, emerging markets were downgraded, particularly in Asia. Livermore explained that this was due to the omicron variant, the downward revision is much more about delayed recovery rather than foregone recovery.
Meanwhile, experts anticipate that economic development in the Middle East will be faster in 2023 than predicted by the IMF.
The IMF predicted that the Middle East and North Africa (MENA) region will grow at a rate of 4% in both 2022 and 2023. Whereas, analysts at ICAEW and PricewaterhouseCoopers (PwC) believe it will develop at a quicker rate. The IFM also predicted that economic growth would shrink by roughly 6% in 2022.
The analysts expect a 3% expansion in 2022, and they said that the region’s economic growth will accelerate to 4.4% in 2023, only if any other COVID variant does not prove too disruptive.
As business optimism rises, the Gulf Cooperation Council (GCC) GDP is expected to rebound to pre-pandemic levels in Q1 2023, with GDP growth rising from 2.7% in 2022 to 5% in 2023.
The appearance of the Omicron variant posed a threat to the world economy. However, the Middle East has had a very high vaccination coverage, particularly in the Gulf, which limited the control measures.
Michael Armstrong, ICAEW regional director for the Middle East, Africa, and South Asia said that even though high vaccination rates have helped regional countries avoid an Omicron wave, the emergence of a new COVID variant poses an economic danger.
While Middle Eastern economies have made significant investments in healthcare infrastructure, data must be collected quickly to understand the scope of any new COVID threat – and governments must implement a dynamic response as early as possible, he said.
Experts on GCC
According to PwC economists, economic diversification has been a top priority for GCC governments in recent years.
Richard Boxshall, Middle East chief economist at PwC Middle said, with evidence of recovery in both the non-oil and oil sectors, the region appears to be on the mend.
However, travel and tourism, a vital industry, is still struggling to recover. The reopening of travel appears set to boost this, and all eyes are on Dubai Expo2022, which will be a key milestone in the travel sector’s recovery.
Livermore said given the region’s disparate growth goals and policies, the Middle East’s economic recovery will continue to follow a mixed pattern.
The UAE, on the other hand, will outperform regional neighbours due to its proactive strategy of recruiting global investment and talent, as well as larger budget headroom. Countries like Kuwait and Oman, which have tight worker nationalisation laws, are in for a longer, more protracted recovery, he added.
As producers boost capacity, the oil sector, which is already benefiting from greater production permits, will remain an important economic development driver through 2023.
Brent oil prices have fallen below $80 per barrel as high COVID-19 numbers in Europe and new limits have sparked concerns about demand levels. Brent will average $72.5 per barrel in 2023, according to the research.
The IMF predicts that the GCC will return to fiscal balance in 2023, for the first time since 2014. The rise in oil prices to their highest sustained level since 2014, as well as the tapering of the Organization of the Petroleum Exporting Countries (OPEC+) production cuts, is also helping to fuel a solid improvement in public finances.
Even Oman, which had a substantial structural deficit prior to COVID-19, is forecast to return to surplus in 2023 as a result of major reforms and a higher oil price.
While buoyant oil and non-oil sectors are critical for economic growth across the GCC, analysts point out that while there has been much speculation on a global scale that the easing of stimulus measures enacted to mitigate the impact of the pandemic, combined with increased oil prices, will lead to an increase in inflation, indicators suggest that this is less of a concern in the GCC than in other territories.
Meanwhile, according to a statement from the General Authority for Statistics, Omar Hariri, the UAE’s private sector recovery trailed in the second quarter of 2021, accounting for 48% of economic output, compared to roughly 52% in the previous three-month period.
The UAE’s air travel has also been impacted due to COVID. For the full year of 2021, the crisis is forecast to have removed 5.4 billion passengers, representing a loss of 55% of global passenger traffic.
The longer the crisis lasts, the more economic damage it causes and the more difficult it will be for firms to recover. With rising climate change issues, the global economy, particularly those in the Middle East that are particularly vulnerable to climate change will see a change. The Middle East must be prepared to deal with potential new variations and rising temperatures, said Hariri.
Rising temperatures are predicted to have the greatest impact on GDP growth in Latin America, Africa, Southeast Asia, and the Middle East, while the cost of dealing with climate change is highest in the Middle East and Asia.
However, there are some bright spots. While some of these countries have been slower to adopt renewable energy, they are now actively seeking ways to include more green energy into their energy mix. The UAE has said that by 2050, it will have doubled the share of renewable energy (from 25% to 50%) in the total energy mix.
In the GCC, countries like Saudi Arabia and the UAE have made significant investments in green technology, and sustainable energy projects are on the rise.
According to the International Renewable Energy Agency (IRENA), the GCC region can cut its annual water use by 16%, save 400 million barrels of oil, create close to 2,10,000 jobs, and reduce its per capita carbon footprint by 8% in 2030 if renewable energy targets set by national and sub-national governments are met.
Livermore said the Middle East has historically performed poorly, but the UAE, Saudi Arabia, and Qatar are all working hard to improve their institutions and R&D bases. He said there should be a strong pipeline in this area moving forward.
Middle East oilfield services market to grow by 6%
The Middle East oilfield services market is expected to grow with a Compound annual growth rate (CAGR) by 6% during 2022-2027 period.
The COVID-19 pandemic had a highly adverse impact on the oilfield services market. The unprecedented collapse in oil demand caused by the pandemic resulted in a halt in greenfield investments by the upstream companies and delays in the ongoing projects. Thus, the demand for oilfield services reduced during the pandemic, which got reflected in low revenues for the industry players.
As an example, Halliburton, one of the leading players, recorded the revenue for 2020 as USD 14.44 billion, a 35% reduction as compared to 2019, which was around USD 22.4 billion. The Middle-East oilfield services market is likely to grow in the future due to the steadily increasing natural gas demand from the developing economies in the region as well as outside the region, which may result in new production projects in the coming years, and the growth in private participation in the oil and gas industry.
However, the rise in momentum towards cleaner energy sources in almost every country is expected to beat the oil and gas demand at the regional as well as global level.
Saudi Arabia to witness growth
Saudi Arabia holds around 15% of the global proved oil reserves and is one of the major crude oil-producing countries in the world. It is the largest crude oil exporter among all the OPEC countries and the second-largest oil producer in the world after the United States.
The country’s crude oil production was recorded as 11 million barrels per day in 2020, which was the highest among all the GCC countries. Saudi Arabia has recently witnessed an upsurge in the upstream projects planned for the next five years, which largely includes field development projects, resulting in high demand for oilfield services in the country.
To strengthen the local value chain of the services in the country, the Saudi government gave approval for the construction of the “Oilfield Services (OFS) Regional Hub”, which broke the ground in October 2021, at King Salman Energy Park, Saudi Arabia. The oilfield services industry player Baker Hughes took charge to complete the project. The 300,000 sq meter regional hub is meant to support Baker Hughes’ OFS operations and customers across the Middle East. The project is expected to be commissioned in the second half of 2022.
Furthermore, in November 2021, the NOC of Saudi Arabia, Saudi Aramco, has awarded the Jafurah gas field development contracts to some domestic and international oil field services companies. It includes 16 subsurface and EPC contracts valued at USD10 billion for the unconventional gas field. Opening the output opportunity for an estimated 200 million standard cubic feet per day, the field is expected to start production in 2025. Owing to such developments, Saudi Arabia is expected to have the largest chunk in the oilfield services market in the near future.