Middle East faces sharp decline in economic growth

Economic growth in the Middle-East is expected to face a sharp decline in 2019, from the 1.5 percent in 2018 to 0.6 percent this year, in what is being considered the steepest annual fall in over a decade.

However, Kuwait and its oil-rich neighbors would pull through the economic slump and maintain rudimentary growth this year, but the key to sustaining and spurring growth and development over the medium- to long-term will necessarily have to come from the non-oil sector sector.

This economic assessment has been reiterated in the latest report on Middle-Eastern economies by the UK-based Institute of Chartered Accountants in England and Wales (ICAEW). The report noted that the slow growth in the region is being driven by lower than expected global oil prices, and a deeper than projected recession in Iran, one of the region’s largest economies

The ICAEW report titled, ‘Economic Insight: Middle East Q2 2019’, which was produced in partnership by ICAEW and Oxford Economics, says the downward revision to Middle East GDP growth is because the Iranian economy is expected to contract by 7 percent in 2019. Iran’s economic outlook is particularly dire given the tougher American sanctions and the US administration’s decision to stop granting waivers to Iran’s oil import partners from May of this year.

Moreover, the report adds that oil producers in the Middle East will only see limited growth in the oil sector — the traditional engine of economic growth and the primary source of government revenues — due to the extension of the output cuts by the Organization of Petroleum Exporting Countries (OPEC) and its non-OPEC partners aiming to balance the international oil markets.

Oil prices are now forecast to average around US$67 per barrel in 2019, down by around 5.6 percent from the average of US$71 per barrel last year. Lower oil prices pose a challenge for a number of Gulf Cooperation Council (GCC) countries that rely heavily on hydrocarbon receipts to balance their budgets, notably Bahrain and Oman. In the GCC, the burden of generating economic growth and employment this year, and in the immediate future, is expected to shift more and more to the non-oil sector.

According to the latest ‘Economic Report’ by the National Bank of Kuwait (NBK), non-oil growth in Kuwait is estimated to have risen to 2.8 percent in 2018 from 2.2 percent in 2017, and is forecast at 3.0 percent in 2019. Despite the non-oil sector witnessing a mild upswing in the last couple of years, continued growth in this sector will depend to a large extent on continued government commitment to economic diversification and funding infrastructure projects.

Though consumer spending may have peaked, with inflation still remaining low and employment growth in public sector remaining steady, prospects of consumer sentiment driving non-oil growth in the short-term are reasonable, said the bank. In addition, NBK pointed out recent business credit growth suggests that private investment may be recovering, potentially helped by the central bank’s decision to hike interest rates more slowly than the US Fed. But the bank warned that economic growth will remain constrained by the slow pace of reforms, a tepid economic diversification and a potential slowdown in global growth.


Despite lower oil prices, the government is reluctant to implement any serious financial reforms and is expected to continue relying on its considerable reserves to see it through any shortfalls.Fiscal policy is therefore expected to remain broadly supportive and capital spending is forecast to rise, which is good news for the non-oil sector.

Notwithstanding the relatively improved economic performance and the outlook for growth remaining generally encouraging, lower oil prices have resulted in a weakened fiscal outlook and a fall in Kuwait’s oil GDP. Slower growth in oil GDP has been attributed to continued production-cut strategy of OPEC and its non-OPEC partners. Commitment to production cuts could see Kuwait’s crude production fall by an estimated 2 percent in 2019, from its October 2018 reference level of 2.76 million barrels per day.

However, fortunately, the impact on oil GDP will probably be offset to a certain extent by continued rise in condensate output, which is projected to reach 0.18 mb/d in 2019 from 0.1 mb/d in 2018. Moreover, an agreement reached recently with Saudi Arabia on production in the Neutral Zone could further boost output, but this output will likely be balanced by production shortfalls from aging oil fields such as in Burgan. Overall oil GDP is expected to rise by1.5 percent in 2019 from 3.0 percent in 2018.

In addition to decreasing oil revenues, a serious challenge for the government is the public sector employment situation, where the humongous monthly wage bill continues to remain a millstone around the budget. In this regard, non-oil growth, especially in the private sector, is critical to ameliorating the unemployment situation in the years ahead. But, at present, the private sector accounts for only 15 percent of job growth for citizens, there is clearly a long way to go before the private sector employment begins to entice young nationals.

The authorities need to realize that freezing the hiring of expatriates and retrenching existing foreign workers is not the answer to the employment situation as long as there are no capable replacements available among nationals. The emphasis clearly has to be on addressing the underlying skill mismatch through better and more targeted training of national human resource.

Meanwhile, elsewhere in the region, various pro-growth government initiatives, expansionary budgets and fiscal stimulus plans, especially in Saudi Arabia and the UAE, the two largest economies among the GCC states, are likely to support and encourage non-oil growth in 2019. But in Bahrain, which is the most economically diversified of the GCC countries and where oil’s share of GDP is less than 20 percent, the performance of the non-oil sector has been dismal. Non-oil growth in Bahrain almost halved from 4.9 percent in 2017 to 2.5 percent in 2018, and is now expected to fall further to around 1.5 percent in 2019. Analysts say that as a whole, non-oil sector in the GCC, which is expected to accelerate from an estimated 2.3 percent last year to 2.6 percent in 2019, will need to further boost growth through economic diversification efforts and infrastructure spending.

Commenting on outcomes in other Middle Eastern economies, the ICAEW report says the scenario will remain challenging in 2019 as global developments continue to impact the region, especially geopolitical risks from those involving Iran. Moreover, running large deficit budgets have done little to strengthen employment prospects for the local population or drive growth in these economies. Also, continued uncertainty in the global oil market means increasing non-oil revenues will become crucial for regional oil producing economies. Though governments in the region have been proactive, they must continue to support their economies with more pro-growth initiatives in the non-oil sector, concludes the report.

– The Times Report