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UAE, Saudi economies to reap benefits of diversification

Wider GCC growth dampened by oil cuts

Published: Mon 11 Mar 2024, 8:32 PM

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The UAE’s gross domestic product is likely to expand by 4.4 per cent this year, according a new report on Monday.

The latest Economic Insight report for the Middle East, commissioned by ICAEW and compiled by Oxford Economics, projects a slowdown in 2024 as oil production cuts persist. The GCC growth forecast has been revised down to 2.7 per cent from 3.9 per cent three months ago, while non energy-sectors are expected to drive growth in Saudi Arabia and the UAE.

Despite the energy sector exerting downward pressure on GCC economic growth, robust non-energy performance is expected to offset some of the impact. However, disruptions in shipping routes through the Red Sea and Suez Canal have pushed up freight and raw material costs, suggesting possible loss of momentum in the coming months.

GDP growth projections for Saudi Arabia and the UAE have been revised to 2.1 per cent and 4.4 per cent, respectively, down from 4.4 per cent and 4.8 per cent three months ago. These adjustments reflect strong non-oil economy and the gradual easing of oil cuts from Q3. Recent data for Q4 2023 shows a 3.7 per cent y/y decline in Saudi GDP, following a 4.4 per cent contraction in Q3. Meanwhile, the UAE’s non-oil GDP is estimated to have expanded by 5.6 per cent in 2023, driving overall GDP growth of 3 per cent.

The sharp decline in GCC oil output last year, resulting from the introduction of oil cuts, set a very low baseline, the report notes. Even with the Opec+ group’s voluntary extension of output cuts through Q2, the regional energy sector is poised for growth this year. The report forecasts a cumulative expansion of the energy sectors by 1.3 per cent, a notable turnaround from last year’s 5.7 per cent decline. In Saudi Arabia, specifically, oil activities are expected to grow by 0.7 per cent this year after a 9.5 per cent y/y plunge in 2023.

Scott Livermore (left) and Hanadi Khalife

Scott Livermore (left) and Hanadi Khalife

Non-energy sectors in the GCC are positioned to continue benefiting from government and private investment. Saudi Arabia is pushing forward with Vision 2030 by directing funds into giga and mega projects and turning its attention to Expo 2030 and the FIFA World Cup 2034. Investment activity is expected to be strong in the UAE too as plans around ‘We the UAE 2031’, Dubai Economic Agenda D33, and other strategies are implemented. Meanwhile, Qatar’s plans for LNG capacity expansion in the latter part of this decade are expected to have a positive medium-term impact.

Hanadi Khalife, head of Middle East, ICAEW, said: “Despite the GCC economic outlook facing mounting headwinds from the war in Gaza and disruptions in Red Sea trade, we are encouraged by the resilience of non-energy sectors to drive recovery. The UAE and Saudi Arabia’s unwavering commitment to diversifying their economies away from oil and meeting ambitious vision deadlines, speaks volumes about their pragmatic and fiscally prudent approach. Initiatives such as the Kingdom’s bond sales abroad to address fiscal deficits and the UAE’s removal from the Financial Action Task Force (FATF) grey list will enhance both countries’ reputations and help attract more foreign direct investment.”

Scott Livermore, ICAEW economic advisor, and chief economist and managing director, Oxford Economics Middle East, said: “The Middle East faces escalating pressures, with most economies poised for a slowdown and regional fiscal policies remaining relatively unsupportive this year. Nevertheless, Saudi Arabia’s successful raise of $12 billion in its largest bond sale since 2017, signals market confidence in the Saudi Arabia’s creditworthiness. This issuance covers about half of the year’s projected borrowing needs as the government continues spending on diversification projects.”

The tourism sector will remain key to both Saudi and UAE growth agendas with Dubai International Airport welcoming 86.9 million passengers last year, above pre-pandemic numbers, and the kingdom’s airports welcoming 106.2 million visitors last year, up 12 per cent on 2022.

The report also predicts GCC inflation to hover around 2.5 per cent, primarily driven by housing costs. Positive trends in inflation have eased concerns of additional rate hikes by the Federal Reserve and GCC central banks. The first cut is expected to come in Q2, with interest rates gradually declining thereafter. Looser monetary policy will help stimulate regional credit growth and momentum in the real estate sector, supporting domestic investment.



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