For more than two years, our team has provided thoughtful, fact-based insights into economic happenings in the region through the Middle East Economy Watch. As part of our 2019 New Year’s resolutions, we have committed to provide economic insights on a more frequent basis through this blog. It only makes sense for us to kick off the new year with a list of economic trends we will be watching closely in 2019.
Without further ado, we are pleased to introduce top five (5) economic themes we are monitoring for 2019 for the Gulf countries.
Oil prices collapsed in 2015 and early 2016 from over $100 a barrel to just below $28 a barrel. Countries began to adjust their fiscal policies in 2016 and 2017 to account for this “new normal” of low oil prices. Numerous reforms were introduced in the last 2 years as governments cut subsidies, cancelled employee bonuses, halted salary increases, and slowed contract and investment spending. While not called austerity, regional leaders acknowledged reductions in the growth of expenditures were necessary.
During 2018 things changed. Oil prices rose, diversification efforts begun to bear fruit, and new revenue streams (notably VAT and excise tax) came online. The end of 2018 marked a departure from austerity as countries approved: long overdue government employee promotions (Oman), resumed annual bonuses for government employees (KSA), introduced new bonus schemes (Ajman Free Zone), halted (or slowed) planned reforms for citizen subsidies (Bahrain), among others. The announcement of 2019 budgets for many governments affirmed that austerity is over:
While some governments – notably Qatar with a 1.7% increase (including a projected budget surplus) and the Emirate of Dubai with a 0.3% increase – maintained an austere budget stance, it does seem Gulf leaders have signaled the good times have returned, but…
Oil and gas remains an outsized portion of Gulf countries’ budget revenues and overall GDP. While diversification of government revenues has begun to bear fruit in some of these countries, economic diversification is still a work-in-progress as governments execute on their economic plans. 2018 [Brent] oil prices peaked at $86/barrel in October before declining over 24% to close 2018 at $50/barrel. Closing prices for 2018 averaged $71/barrel.
Oil prices will remain a hot topic this year – especially given the spending increases governments have planned. Most analysts see prices rising from December’s lows, but the average price is expected to remain lower compared to previous years:
In the last two years, Gulf countries have introduced policies and programs that focus on creating additional opportunities for Gulf nationals. These programs sometimes create trade-offs wherein expat labourers are replaced with nationals. In 2017 and 2018 these efforts accelerated with the Saudi expat levy, Oman’s ban on new visas in nearly 90 professions, and Kuwait’s reduction of expat labour in the government sector (and, subsequent requirement that expats leave the country before receiving end-of-service dues). The results of these efforts have been most stark in Saudi Arabia – where the number of expats reportedly declined by 700,000 from 2017 Q1 to 2018 Q1 – and Oman – where the expat population declined by 0.4% for the first 11 month of 2018 based on NCSI statistical bulletins.
The focus on how to best utilize expat labour will continue into 2019. Oman started the year with a ministerial decision restricting expats from holding certain leadership positions in the education sector while Saudi Arabia has committed to releasing a report on the expat levy in January. These headlines are proxies for the larger issue: how should Gulf countries balance employment for nationals with the desire for real GDP growth supported by skilled expat labourers filling necessary gaps?
As our PwC Middle East’s ADAPT report highlighted last year, the technological disruption is here and it is time to ADAPT. PwC estimates growth of AI in the regional economy will average +20% per annum through 2030. The growth – and subsequent – disruptions will likely occur first in eCommerce and financial services.
While eCommerce accounted for 15% of retail shopping in developed countries in 2015, it accounted for only 2% in the Middle East. The impact of eCommerce is accelerating in developed countries as major retailers shutter stores and malls begin to shut down. Consumption preferences in the region are converging with those in developed countries, which will fuel the shift to eCommerce; this has confirmed as such in some of our past PwC surveys.
Similarly, FinTech has been a hot topic in the region, and we now are beginning to see its impact. Digitalization in retail banking is leading to productivity gains, less overhead, and – ultimately – further consolidation in the market. The UAE is at the forefront, but is not alone. As we enter 2019, there are several major banking sector mergers on the horizon, driven – in part – by technological disruption.
Gulf leaders have ambitious economic visions. The upcoming round of visions and plans is expected to present some of the most ambitious visions to date in the face on the youth budge finally hitting the job market and oil prices remaining a concern. Areas to watch this year include:
If the last two years of Middle East Economy Watch have taught us anything it is to expect the unexpected. Ambitious and visionary leaders, changing demographics, technological innovations, regional geopolitics, and broader global economic pressures all coalesce here unlike anywhere else on Earth. Our Middle East Economy Watch team looks forward to covering all the twists and turns in 2019.
Middle East Chief Economist, PwC Middle East
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