Despite the turmoil in Iraq and the Palestinian territories, the Middle East was the second fastest growing region in the world after China last year. A combination of high oil prices, low interest rates, ample liquidity in the banking system and expansionary government budgets were the key driving forces for the region's stellar economic growth rate of about 6 per cent in 2004. That compares to China's 9.4 per cent, the United States' 4 per cent, and a world average of 5 per cent. The region's strong economic growth looks set to continue this year as well, although at a slightly lower rate than in 2004.
Key economic trends and developments at the international level are likely to have their impact on the regional economic landscape. Though oil prices ended 2004 at $40.30 a barrel for Brent crude after reaching a high of $51 in October of last year, a combination of high oil prices, tighter monetary policy in the United States and a weaker dollar might slow global economic growth this year by curbing US demand for imports. Global growth is likely to experience a moderation to 4 per cent in 2005, with that of the United States and China easing to 3.5 per cent and 8 per cent, respectively. Growth in world demand for oil will continue to be strong at 1.8 million barrels a day (mbd), compared to 2.5 mbd in 2004. This together with tightness in oil supplies, as Iraq's production is likely to remain constrained, will add up to another likely year of high oil prices. Average price for Brent crude is expected at $32 a barrel down from $38.40 in 2004.
Rise in GDP
In the Gulf region, nominal GDP growth rates are likely to rise sharply in 2005, supported by firm oil and natural gas prices. Real GDP growth rates, which reflect oil production levels, are forecast to edge slightly lower this year, at least for Saudi Arabia, as the kingdom reduces its production to 9.0 mbd from last year's average of 9.5 mbd. The region's non-oil activities, however, will witness substantial growth, leaving overall real GDP growth slightly lower than last year's levels.
Oil revenues for the Gulf countries grew by 35 per cent in 2004, thanks to a 25 per cent rise in oil prices and a 10 per cent increase in production. This year's revenues will be slightly lower, but will be sufficient to allow governments in the region to pursue expansionary fiscal policies, as indicated in their 2005 budgets.
The region's private sector activities will also do well, especially wholesale and retail trade, manufacturing, transport, telecom, real estate, banking, finance and health care.
Private consumption expenditures will continue to be propelled by the same factors that were behind their accelerated growth last year. These include rapid expansion in consumer loans, low interest rates, more domestic investments and the positive impact of the wealth effect on the average consumer in the region.
Saudi Arabia's real GDP growth for 2004 is estimated at 5.3 per cent, while nominal GDP increased by 16.9 per cent, to a total of $248.5 billion. This is bigger than the combined GDP of the second and third largest Arab economies, Egypt and the UAE. Growth in the oil sector, which accounts for about a third of the kingdom's GDP, is estimated last year at 5.9 per cent.
The non-oil private sector, which makes up about 44 per cent of GDP, has grown by an equally impressive 5.7 per cent. Real GDP growth in 2005 is forecast at about 4 per cent, with the non-oil sectors continuing to outperform and set to grow at about 6 per cent.
Real GDP growth in the UAE is estimated at 10.4 per cent in 2004, up from 7 per cent in 2003. This was driven mainly by construction, financial services, tourism and whole sale/retail trade. The underlying drivers for growth in 2005 remain strong. The stimulus from private investment, booming real estate and stocks markets, as well as consumer expenditures, could see the economy growing at 7 per cent this year.
Kuwait's economy has also been booming, following a surge of 16.4 per cent in nominal terms in 2003, and 6 per cent in real terms. The corresponding growth rates for 2004 are estimated at 15 per cent and 5 per cent, respectively. The strong growth is attributed to good performance of both the oil and the non-oil sectors of the economy. The government has remained accommodative, as economic policies have positively promoted business investment and stimulated consumer spending, with abundant liquidity in the banking sector reinforcing the trend.
The Central Bank of Kuwait acknowledged the robust state of the economy and raised interest rates five times in 2004, to 4.75 per cent. Nominal GDP is expected to register an above-trend growth of 13 per cent in 2005 in nominal terms, and a 4.5 per cent in real terms.
The star performer in the region last year was Qatar, with real GDP growth of 10 per cent expected to decline only slightly to 8 per cent in 2005. Oman also did well with growth of 4.5 per cent in 2004, compared to 4 per cent in 2003, and the sultanate is forecast to grow at 3.5 per cent this year. Real GDP for Bahrain is estimated at 6 per cent for 2004, following a 5.1 per cent growth in the year before. Oil revenues account for 24.3 per cent of Bahrain's GDP, and 73 per cent of its government revenues. The Abu Sa'afa oilfield, which Bahrain shares with Saudi Arabia, contributed about 84.2 per cent of the total crude oil production of Bahrain. The major concern is that recently Saudi Arabia decided to suspend its supply of 50,000 barrels per day of oil to Bahrain. If this issue is not sorted out soon, the economy of Bahrain will experience a major blow that will greatly restrict its growth prospects this year.
For the Arab countries of West Asia Jordan, Lebanon, Syria and Egypt the economic outlook this year promises to be a continuation of last year's good performance. A combination of low domestic interest rate environment, expansionary fiscal budgets, a decline in the number of non-performing loans reported by most banks and a surge in workers' remittances helped their economies.
In addition, the rise of more regional tourism, strong corporate earnings and a rise in mostly dollar denominated exports to Europe, the Gulf states and the United States are all positive factors supporting further growth. Jordan real GDP growth is forecast at 6 per cent in 2005, following a record year of 7 per cent growth in 2004. Egypt also had an excellent year growing at 5.3 per cent in 2004 with real GDP growth edging slightly higher to 5.8 per cent this year. Syria benefited last year from higher oil prices and a surge in regional tourism, with real GDP estimated at about 4.5 per cent, dropping to 3.5 per cent this year.
For the third year in a row, the region is expected to record strong economic growth. Most Arab countries are still, however, far away from attaining their full potential. Annual growth rates of 5 per cent to 6 per cent in the region's private sectors are needed for several years to come, in order for growth to be associated with strong job creation.
With unemployment in the region averaging 15 per cent, while 50 per cent of the population are below the age of 20, the only way to absorb all the entrants to the labour force is to have a dynamic private sector capable of creating new jobs.
While high oil revenues, excess regional liquidity, and inward-looking investments could all help promote prosperity in the region, the deteriorating conditions in Iraq and the turmoil in the Palestinian territories will continue to undermine regional stability. It is hoped the elections planned for early 2005 in the two countries would unfold into something positive, and change the perception of future risk and uncertainty in the M