Dubai: Economies in the Middle East ended 2017 on a high note, with a strong final quarter in 2017, despite some short-term weaknesses surfacing in early 2018 — this pattern is in part explained by the rollout of value added tax (VAT) in the UAE and Saudi Arabia and the ensuing inflation (3.0 per cent year-on-year in Saudi Arabia in January).
However, variations in purchasing manager indices (PMIs) both within the UAE (declining in Abu Dhabi, rising in Dubai) and in countries such as Egypt and Bahrain, suggest that other factors are also at play.
“Notwithstanding the impact of VAT and inflation, if oil prices remain buoyant, which seems likely, and regional investment flows are boosted by IPOs and a rise in foreign inflows, non-oil GDP growth in 2018 should be slightly stronger than in 2017, which combined with flat (rather than reduced) oil production, should result in stronger overall growth for the year," Richard Boxshall, Senior Economist at PwC Middle East, said.
While foreign direct investment (FDI) is down sharply from its 2008 peak, the 2017 data is expected to show signs of recovery and lead to a pick-up in both FDI (owning to reforms in foreign ownership rules), as well as broader improvements in the business environment.
“The Gulf countries are rethinking the role of foreign investors as they look to ease fiscal burdens and restructure their economies for the twilight of the oil era, with a strong focus on technology-intensive sectors. This is leading to a series of new investment and companies’ laws and changes to capital market rules. There is a similarly encouraging story for portfolio investment, which has already benefited from market reforms, and if, as expected, MSCI decides to add Saudi Arabia to its benchmark Emerging Markets Index, this could sharply increase inflows into the region as a whole,” Boxshall noted.
Higher oil prices are now boosting confidence in the non-oil economy. Although adjustments such as subsidy cuts and the introduction of VAT this year have had short-term negative impacts (e.g. seen in the PMI), they should make the economy more efficient. The latest IMF forecasts point to growth rebounding to 2.0 per cent in 2018 and averaging 3.1 per cent in 2019-23.
In the longer term, the economy will benefit from a wave of investment in Abu Dhabi’s oil sector and efforts by Dubai to take a lead in many new technologies. The UAE leads the region in both quantified medium-term planning such as the Vision 2021, as well as much longer-term thinking such as the Strategy for the Future.