PwC predicts Middle East 2019 economic pick-up despite oil slump

12 February 2019 3 min. read
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PwC has tipped a strong year ahead for the Middle East economy – despite the recent oil slump.

In its latest quarterly Middle East Economy Watch report, Big Four professional services firm PwC has taken a look back at the economic trends of the past year – including a review of the VAT roll-out impact in the UAE and Saudi Arabia one year on – and provided a preview of the year ahead, predicting ongoing positive growth in the face of faltering oil prices.

A combination of stronger prices and earlier structural and fiscal reforms during the commodities cycle low-points have seen Middle Eastern oil exporters enjoy their best year in five years last year, outlines the PwC report, with these economies now on more stable ground for 2019. Additionally, the region’s connected oil importing countries should experience some positive flow-on from remittances, tourism, aid and investment.

And the oil market will again play a central driving role in 2019, following a sharp decline in prices toward the end of the year which led to a cut in production quotas. The market correction (and broader global economic risks), PwC describes as having ‘dampened the animal spirits that had begun to emerge last summer’, with Bain having at the time cautioned against capex profligacy in the local oil & gas sector.

For PwC, whether or not these new cuts are adhered to beyond June will sign significantly shape real growth prospects – with weaker oil putting pressure on spending in countries with higher break-even prices such as Saudi Arabia, which has budgeted for a 20 percent capital expenditure increase, although the report notes that the Kingdom can finance a larger debt deficit if required due to its low debt level of around 19 percent of GDP.Middle East economic data and projections for 2019“2018 was the best in five years for Middle Eastern oil exporters, driven by two main factors - rising oil prices and increased government spending,” remarks PwC Middle East Senior Economist Richard Boxshall, former head of the global macroeconomic analysis branch of the British Exchequer. “This combination of stronger prices, as well as fiscal and structural reforms put these economies on a solid footing for 2019.”

Elsewhere, the firm predicts an active year ahead for corporate transactions – including major M&A and IPO activity – regardless of ultimately transpires at the macroeconomic level. The PwC analysis points to the discussions concerning banking sector mergers already underway in a number of countries, and here, consolidation will help to support growth, with the sector’s capacity to finance projects and businesses given a boost.

Lastly, the report takes a look at the impact of the VAT roll-out in the UAE and Saudi Arabia at the beginning of last year, while noting that will take a couple years still before the full impact of the implementation including secondary and indirect effects can be properly assessed. So far, says PwC, the signs are good, with initial data suggesting that the new tax policy has been reasonably successful in diversifying government revenue while avoiding excessive inflation.

While data isn’t yet available from the UAE, the $12.2 billion in VAT revenues raised in Saudi Arabia last year is said to be close to a third more than anticipated – with the UAE likely to be higher again in relative terms due to its more consumption-based economy as compared to KSA. PwC expects a fuller picture will emerge over the next six months, in part through further input from the latest VAT implementation in Bahrain at the turn of this year.