The Middle East is not immune to the global squeeze
Aside from the potential impact on the oil market, the global slowdown due to high inflation and rising interest rates is being felt in the Middle East. The most severe impact is clearly being felt by the oil importers in the region such as Egypt, Lebanon and Jordan which are facing severe twin deficits and looking to the IMF, the GCC and other donors for financing support.
The oil exporters are buoyed by export earnings, which means that their current accounts are very strong, and most are also running sizable fiscal surpluses. The IMF forecasts that the GCC’s aggregated current surplus will be 17% of GDP this year and the fiscal balance will be 7% of GDP, with all the GCC maintaining current surpluses through to 2027 and all, except Bahrain, expect to maintain fiscal surplus. However, our region is still experiencing heightened inflation, and hiking interest rates would constrain credit and non-oil growth.
Inflation hits 11-year high
Inflation in the GCC has been rising steadily since mid-2021, hitting an 11-year high of 4.5% in July 2022. Excluding the impact of VAT changes (particularly its introduction in Saudi Arabia and the UAE in January 2018 and then tripling in Saudi Arabia in July 2020) this upwards trend has been underway since early 2019, when regional deflation hit a low of -2.4% y/y, barring a brief decline at the start of the pandemic.
There was a slight easing in GCC inflation to 4.3% in August, less than half the level of many Western countries. Qatar is, however, undergoing a short-term surge, particularly in rents, in the run up to the World Cup, and inflation saw a spike in September to 6.0%. The expectation, however, is that inflation will ease soon. The IMF forecasts that inflation will average about 3.7% in 2022 and ease to 2.7% in 2023, then hold steady near 2% across the GCC in 2024-27.
As discussed in our March report, the factors driving inflation vary between countries, and this divergence has remained the case so far this year. All countries have seen a significant contribution from food prices (up by between 4% in KSA and 10.4% in Bahrain in August) but local factors and widely different weightings in the CPI basket have had a major impact. Transport prices were up sharply only in the UAE, as other states have capped fuel prices. Recreation, which includes the cost of holiday flights, was only an issue for Qatar and Dubai. Hospitality inflation was mainly an issue in Bahrain, a welcome consequence of recovering tourism. The impact of rents varied widely from a small decline in Bahrain to an 11% y/y increase in Qatar in September, due largely to the temporary surge in demand for housing and holiday rentals for the World Cup. Meanwhile, the strengthening US dollar has helped mitigate imported inflation for the GCC.
Interest rate hikes mirror the US
The GCC’s pegged currencies mean they are largely compelled to mirror US interest rate hikes. So far in 2022, they have followed in lockstep with the Fed across its four hikes totalling 300 basis points. The main exception is Kuwait, which has a little more flexibility due to its peg to a basket of currencies and started the cycle with substantially higher rates, so although it has only hiked by half as much as the Fed, its base rate of 3% is just 25bp behind. There will likely be a further 75bp hike from the Fed at the start of November, which the GCC will once again mirror.
The rate hikes are unlikely to do much to mitigate inflation in the region, which is far lower than in the US and would moderate without monetary intervention. However, there is a concern that the higher rates might not be appropriate for this particular moment in the GCC’s business cycles and could constrict borrowing and hence growth at a time when they are looking to drive investment to diversify their non-oil economies. Although the economic boom in 2005-8 showed that the combination of both high rates and strong non-oil growth is at least possible in the GCC.
Leading indicators suggest strong non-oil growth
There have been indications of strong growth so far in 2022, even as rates have risen. Real non-oil growth picked up in Q2 in three of the four GCC states that have reported Q2 data, including to 9.0% y/y in Bahrain and 9.7% in Qatar. Leading indicators such as purchasing managers indices have also been strong, including Dubai’s hitting a three-year high of 57.7 points in August, although all the PMIs eased back in September.
The region’s banks are in a strong position, with limited signs of non-performing loans and higher rates improving their net-interest margins. They are therefore well placed to continue lending. GCC governments also have significant fiscal space, thanks to (surging) oil revenues, which they can use to support their economies through subsidies and spending. Saudi Arabia, notably, is budgeting 2023 spending that is 18% higher than it was previously projecting. Government initiatives include promoting SMEs, which can be engines for growth and job creation. Saudi Arabia’s SME Bank is gearing up its concessional lending, and the UAE’s Ministry of Economy just launched the second phase of its Entrepreneurial Nation programme to develop start-ups.
There are likely to be some hiccups along the road. Qatar’s construction sector and other parts of the non-oil economy may see a decline after the World Cup, and in Dubai the hot property market will eventually peak . Nonetheless, the broad outlook for the region is much more positive than that for western economies and others that will be on the edge of recession going into 2023. The IMF’s GDP growth forecasts in the October WEO report actually saw a net increase of 0.2pp for the GCC overall to 3.7%, at a time when it has been revising down most countries globally.
Contact us
Richard Boxshall
Global Economics Leader and Middle East Chief Economist, PwC Middle East
Tel: +971 (0)4 304 3100
