• Supported by elevated oil prices and an ongoing post-pandemic recovery, the Middle East is poised to grow strongly in 2022 and conditions will remain relatively good for much of the region in 2023‑24.

• Energy exporters will benefit from bullish energy market conditions, large-scale investment projects and rising non-energy exports—especially Saudi Arabia and the UAE.

• The region’s net energy importers will face a financial squeeze caused by rising import costs that will further undermine fiscal and external balances.

• Consumer price inflation will remain fairly contained within the wealthy and highly subsidised Gulf Co-operation Council (GCC) economies, but rising prices will be more problematic in non-GCC states and raise the risks associated with popular social unrest.

• Competition to attract foreign participation and investment will intensify—especially between Saudi Arabia and the UAE—although new avenues of co-operation will also emerge as commercial pragmatism prevails in the medium and long term.

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Most countries in the Middle East are expected to post economic growth rates in excess of 4% in 2022 despite disruption caused by the war in Europe, an ongoing slowdown in China and fresh but manageable outbreaks of covid‑19. Economic growth rates—as measured by the annual percentage change in real GDP—will moderate but remain relatively robust in 2023‑24. Bullish energy market conditions, large-scale investment projects and rising non-energy exports will be key drivers of growth across the region in the short to medium term. However, the region’s net energy importers will face a further financial squeeze, while the troubled states of Lebanon, Syria and Yemen will remain in a precarious economic position.

Energy sector boost to growth

The region’s net energy exporters will benefit from strong demand, rising production and elevated prices during 2022, while bullish energy market conditions are expected to persist in 2023‑24. Demand for the region’s energy products and international energy prices have surged since major economies eased pandemic restrictions in 2021, while Russia’s invasion of Ukraine has pushed up demand and prices even further. Following intense lobbying from the US and the EU, the members of OPEC and non-OPEC producers—the so-called OPEC+ alliance—agreed at a meeting in June to accelerate oil production increases beyond the amounts previously agreed in September 2021. Saudi Arabia and the UAE will lead the increase in supplies but not by enough to counteract falling Russian output. Moreover, an EU decision in June to impose a partial ban on Russian oil imports by the end of 2022 and waning prospects for an Iran nuclear deal will contribute to oil trading in a range of US$100‑120/barrel for the remainder of the year, then above US$90/b in 2023 and much of 2024. Similarly, demand will remain strong and prices high for the Middle East’s natural gas and liquefied natural gas supplies.

The boost to export earnings and fiscal revenue from strong demand for Middle Eastern energy supplies and high international energy prices will keep current-account balances firmly in positive territory for all OPEC+ members in the Middle East during 2022‑24, while fiscal balances will be positive for all except Iran and Oman. These dynamics will aid the process of rebuilding financial buffers and support investment in energy and non-energy sectors. For example, Saudi Arabia will be better placed to increase expenditure on priority areas such as healthcare, education and defence, while “off-budget” capital spending channelled through the Public Investment Fund (PIF, the sovereign wealth fund) will continue to expand at a rapid pace. Meanwhile, the UAE will seek to diversify its economy away from oil and build on its reputation as a business hub, while promoting environmentally friendly economic development.

Financial squeeze on commodity importers

Net energy importers will face a more intense financial squeeze in 2022 and this will continue in 2023‑24 because of large energy import bills, as well as high import costs associated with industrial materials and food supplies. All net energy importers, with the sole exception of Israel, will run twin (fiscal and current-account) deficits through to 2024 and some of these countries will be the worst affected by elevated domestic price pressures in the form of rampant or uncomfortably high consumer price inflation. Part of that story relates to high prices for import commodities (mainly fuel and food), as well as currency weakness and ongoing supply-chain disruption.

High and rising inflation beyond the GCC is adding to the pain of consumers who were hit hard by the pandemic. Moreover, it is driving pressure for increased government support at a time when public finances are stretched and governments are under market pressure to narrow fiscal deficits and get a grip on public debt ratios, which were driven up during the early stages of the pandemic. In addition, the cost of capital on international markets is rising as major central banks—the US Federal Reserve, the European Central Bank and the Bank of England—embark on a monetary policy tightening cycle to tackle inflation, which will raise borrowing costs in the Middle East and especially for the weaker, more vulnerable, non-GCC states in 2022 and further in 2023‑24.

Intense competition to attract more FDI

Middle Eastern countries, and especially members of the Gulf Co-Operation Council, have made attracting higher levels of foreign direct investment (FDI) a central tenet of their economic development and diversification plans. Saudi Arabia attracted almost US$19.3bn of FDI in 2021, which was the highest level for ten years, and has set a highly ambitious target of attracting more than US$100bn annually by 2030. The UAE attracted a record US$20bn in 2021 and aims to become one of the world’s ten largest FDI destinations by 2030. Qatar, Bahrain, Kuwait and Oman have economic plans that include measures to boost FDI inflows.

Economic competition between Saudi Arabia and the UAE will intensify as both countries strive to develop some of the same sectors—notably financial services, transport and logistics, petrochemicals, technology, and tourism—and cement their status as regional business hubs with the help of foreign investment. The UAE will continue to enjoy first-mover advantage, having already established hubs for global travel, trade and investment and continually pushing ahead with policies to improve its attractiveness as a destination for foreign business and investment. However, Saudi Arabia will offer large market opportunities while implementing reforms to attract investors, international companies and foreign talent. The Saudi government will push ahead with “Project RHQ”, which requires foreign companies to establish their regional headquarters in the kingdom by January 2024 or face the prospect of being denied access to commercial arrangements with the government, government agencies, state-owned companies and the PIF. Saudi Arabia will have some success in closing the gap with the UAE by attracting foreign business and additional investment but eroding the UAE’s lead as the dominant regional business hub will be a slow process and difficult to achieve in the short to medium term.

The pragmatic side of Middle Eastern commerce will create new avenues of co-operation rather than outright competition and confrontation. For instance, DP World—the UAE’s leading multinational logistics company that is based and will undoubtedly remain based in Dubai—was awarded a 30‑year concession agreement in 2020 to develop and modernise Saudi Arabia’s Jeddah Islamic Port and specifically the South Container Terminal under BOT (build, operate and transfer) arrangements. In June 2022 DP World was awarded another 30‑year concession to create a new fully integrated smart logistics park at Jeddah Islamic Port. Similar deals have been reached with the French shipping company CMA CGM and the Danish shipping company Maersk. The awards come with promises of substantial financial investment, as well as operational and commercial expertise, from these foreign companies to help to develop the port complex as a global maritime transport and logistics hub.

Major headwinds and risk factors

The economic environment in the Middle East during the remainder of 2022 and 2023‑24 will be defined by a combination of strong drivers and extraordinary headwinds that create a divide in terms of economic growth and stability across the region. However, the region as a whole faces a range of risk factors that could lead to a much worse outcome; these include fresh outbreaks of covid‑19 at home and abroad that stall the recovery, a sharper than expected slowdown in China that derails trade and investment, and much tighter global financial conditions coupled with subdued export markets in the US and Europe.

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