ICAEW Economic

ICAEW Economic
Insight: Middle East
Quarterly briefing Q3 2015
Welcome to the latest edition of ICAEW’s Economic
Insight: Middle East, the quarterly economic forecast
prepared directly for the finance profession. Produced
by Cebr, ICAEW’s partner and acknowledged expert
in global economic forecasting, it provides a unique
perspective on the prospects for the Middle East
as a whole and for individual countries against the
international economic background. We focus on the
Middle East as being the Gulf Cooperation Council
(GCC) member countries (United Arab Emirates [UAE],
Bahrain, Saudi Arabia, Oman, Qatar and Kuwait), plus
Egypt, Iran, Iraq, Jordan and Lebanon, abbreviated to
GCC+5.
In this issue of Economic Insight: Middle East, we
discuss energy with a focus on domestic demand and
consumption. In summary we find that:
• GCC+5 is no longer just a major energy supplier, but
also a substantial demand hub;
• although most of the focus countries have been
progressively getting more energy efficient,
much work still needs to be done to limit wasteful
consumption by households and businesses;
• lower oil prices will make this more challenging and
reducing the price of alternative energy is crucial;
• transport and water desalination sectors are among
the largest energy demand drivers and therefore
offer an opportunity to boost the countries’ energy
efficiency; and
• the private sector will need to play a crucial role in
incentivising more efficient energy use.
Lower oil prices make curbing energy use
a greater challenge
Given that roughly a third of the world’s known oil
reserves and nearly a fourth of natural gas is located in
the GCC+5, the region is often thought of as the global
energy supplier. However, the region has increasingly
also been considered a substantial and growing
energy demand centre. In fact, since the early 2000s
the GCC countries in particular have become massive
energy consumers with demand growth unmatched
by anywhere but China and India. This has served
as a motivating force encouraging governments and
businesses to invest in alternative sources of energy.
However, the recent great drop in global oil prices has
made conventional sources of energy in the GCC+5 even
cheaper – something which may discourage investment
in alternative energy supplies.
Although the price of Brent has recovered somewhat
from the levels seen at the start of 2015, it has still
traded under $65 per barrel during June 2015. This
is substantially below the $112 per barrel average for
June 2014. As we explained in previous editions of this
BUSINESS WITH CONFIDENCE
icaew.com/economicinsight
and a growing population across the GCC+5 mean that
minimising energy intensity should remain a priority.
report, the drastic drop in oil prices is a result of both
supply and demand factors. American shale extractions
have contributed to strong supply growth. This coincides
with weakening demand across key markets, including
China. The second half of 2015 will likely continue to see
comparatively low oil prices, with Brent trading around
$60 per barrel for the remainder of this year.
Energy security concerns are motivating
the region’s net importers to curb and
diversify energy use
Despite recent improvements and a number
of initiatives, GCC+5’s energy intensity
remains far above the world average
As the GCC+5 countries continue to witness strong
population growth and an abundance of economic
activity, the region is also turning into one of the world’s
major energy consumers. As highlighted in the Q2 2015
edition of this report, the GCC’s per capita CO2 emissions
are well above the world average. One explanation for
this is that resource-rich countries may not be highly
motivated to use resources in an efficient manner. One
way to examine this assumption is by comparing energy
intensity across the region. This indicator measures energy
efficiency of an economy and is expressed in units of
energy per unit of GDP. A lower value signifies that a
country is relatively more effective at generating economic
activity from energy use and is hence more desirable.
The term ‘energy security’ broadly refers to a country’s
ability to reliably source its projected energy demand
at a reasonable cost. Due to the unique nature and
diversity of the region, the concept applies very
differently to the GCC and the remaining net oil
importing focus countries. While the GCC nations
are facing growing energy demand, their sources are
almost entirely domestic and hence less impacted
by cross-country developments. On the other hand,
oil importers depend on the continuation of good
international relations and trade flows to obtain a
constant supply of energy.
Figure 2: Net energy imports as share of energy use
%
200
100
0
Figure 1: Units of energy consumption per unit of GDP,
quadrillion British thermal units per $1 of GDP
-100
-200
-300
3E–11
-400
2.5E–11
-500
2E–11
2001
5E–12
2008
2009
2010
2011
2012
Iran
Bahrain
Oman
Egypt
Saudi Arabia
UAE
Qatar
Kuwait
Jordan
Iraq
Lebanon
0
World average (2012)
Source: International Monetary Fund, US Energy Information Administration, Cebr analysis
In 2012, the latest year for which detailed information is
available, all of the focus countries except for Lebanon
were more energy intensive than the world average. An
encouraging sign, however, is that in most instances
energy intensity has been on a downward trend in recent
years. The most drastic drops between 2008 and 2012
were seen in Jordan and Lebanon, with a decrease of 43%
and 33% respectively. The only countries that regressed
in terms of energy efficiency over the same period were
Kuwait, Oman, and Iran.
A number of public and private bodies have implemented
programmes aimed at minimising energy wastefulness.
One of many such initiatives is the GCC Energy Intensity
Project which began in late 2011. The project identified
practical and specific target setting and the need for
incentive-driven policymaking as key development
areas. Workshop discussions organised by the initiative
found that the low price of fuel, electricity and water is
a substantial barrier to more efficient energy use in the
region. Given the recent fall in oil prices, this is likely to
remain a concern. However, expanding energy demand
icaew.com/economicinsight
cebr.com
2006
Jordan
Egypt
Iran
Bahrain
UAE
Oman
Lebanon
1E–11
Saudi Arabia
Iraq
Kuwait
-700
1.5E–11
Qatar
-600
2011
Source: The World Bank, World Travel & Tourism Council
Note: A negative value indicates that the country is a net energy exporter
One measure of energy security is the imported
energy share of total use. Unsurprisingly, the two focus
countries that are most reliant on foreign sourced
energy have also been the most proactive in terms
of diversification efforts. Lebanon’s proximity to the
Levant Basin means that the country could begin
extraction of natural gas, thereby reducing its reliance
on imported oil products. However, the complexity
of setting up the required infrastructure means that
this is only an option in the medium and long term.
As discussed in the following section, Jordan has also
made efforts to improve its energy security prospects,
primarily by investing in the development of alternative
energy sources.
Reducing the price of alternative energy
is key to boosting household and business
demand
Motivated by growing energy consumption and
adverse environmental impacts of conventional energy
sources, numerous countries around the world have
been trying to boost their use of alternative energy.
Among them are the GCC+5 countries. In 2011, the
most recent year for which data is available, nearly 0%
of the GCC countries’ energy use was from alternative
sources while the figures for the ‘+5’ countries was
ECONOMIC INSIGHT – MIDDLE E A ST Q3 2 015
consistently below the world average. However, due to
a surge of innovative research and target setting on the
behalf of governments in the region, the GCC+5 countries
are very likely to increase their reliance on alternative
energy in the medium and long term.
Figure 4: Motor vehicles per capita
0.6
0.5
0.4
Figure 3: Alternative and nuclear energy as share of
total energy use
0.3
%
10
0.2
0.1
8
2003
2007
2011
OECD average
(2011)
Egypt
Iraq
Iran
Jordan
Oman
Saudi Arabia
4
UAE
Bahrain
Lebanon
Qatar
Kuwait
0.0
6
World average
(2011)
2
2001
2006
2011
Bahrain
Oman
Saudi Arabia
Kuwait
UAE
Qatar
Iran
Iraq
Lebanon
Egypt
0
Jordan
Source: The World Bank
Note: Data for certain countries and years are missing and have thus been excluded from the graph
World average (2011)
Source: The World Bank
The UAE is one of the countries with a specific alternative
energy target. Dubai is striving to generate 5% of its total
energy consumption from renewables by 2030, with Abu
Dhabi setting a 7% target for 2020. Another notable UAE
instance of promoting the use of alternative energy is the
Mohammed bin Rashid Al Maktoum Solar Park in Dubai.
The plant is scheduled to open in early 2017 and will be
large enough to power 30,000 average UAE homes. The
solar park will also reduce the cost of solar electricity by
an estimated 20%. Other projects of this sort, which
reduce the per-unit cost of alternative energy, will be
key in encouraging households and businesses to lessen
their use of conventional energy. Such developments,
however, require substantial levels of capital investment.
As governments of the region’s oil-exporting countries see
their revenues decrease, they may be reluctant to begin
massive new projects. Hence, the necessary investment
may need to come from the private sector.
The net oil importers among the focus countries
have the additional incentive to limit dependence on
conventional energy as it would improve their energy
security prospects. For example, Jordan’s Ministry of
Energy and Mineral Resources is striving for the country to
obtain 10% of its energy supply from renewable sources
by 2020. The Ministry plans to achieve this through a
combination of wind energy, solar power, and waste-toenergy facilities.
Investments in public transport will only
limit energy consumption if the rate of
public pick-up is substantial – something that
businesses can help with
Having established that boosting energy efficiency must
remain a priority for the region despite falling oil prices,
we now examine a couple of the sectors driving energy
demand. We first turn our attention to the transport
sector and consider the number of motor vehicles (cars,
SUVs, trucks, vans, buses, commercial and freight vehicles)
per capita in each focus country.
icaew.com/economicinsight
cebr.com
With the exception of Lebanon, all of the ‘+5’ countries
have fewer motor vehicles per capita than the GCC
nations. This can be partially explained by the GCC’s
government-driven investment in roads and other
transport infrastructure which encourages individuals to
own cars. Additionally, based on the booming regional
car sales, especially in Saudi Arabia and the UAE which are
considered the largest regional markets, many individuals
may own multiple cars.
As the GCC’s already highly urban population continues
to swell, it will become necessary to expand public
transport capacity and encourage its use over cars.
A substantial portion of planned GCC infrastructure
spending over the coming years will go towards
minimising road traffic by providing convenient and less
energy-intensive alternatives. A particularly ambitious
cross-country project is the GCC-wide rail network. Due
for completion by 2018, the massive undertaking is
expected to cost $200bn, with each of the six member
countries responsible for the portion of the rail within
its borders.
Additionally, contracts worth billions of dollars have
been awarded to contractors across the region for metro
line construction in Abu Dhabi, Kuwait, Jeddah, Mecca
and Medina. As well as being a less energy intensive
form of transport compared to cars, boosting the public
transport infrastructure will also improve efficiency by
shortening transport times for many commuters. However,
the question remains how great the public’s take-up of
public transport will be. Heavy dependence on private cars
is motivated by both cheap fuel and lifestyle preferences.
The private sector’s ability to support the development of
public transport, for example by building facilities around
major railway stations, may encourage a higher rate of use.
The regional move towards limiting or eliminating fuel
subsidies will also play a part in minimising car use. For
example, since August a government-appointed committee
has met monthly in the UAE to set the country’s petrol
prices in accordance with global benchmarks. As global oil
prices remain comparatively low at the moment, the
impact on consumers at the point of use should not be
drastic. Still, the knowledge that the government will no
longer shield households and businesses from price
movements is likely to impact behaviour and lead to more
rational and efficient energy use.
ECONOMIC INSIGHT – MIDDLE E A ST Q3 2 015
Growing water demand requires a shift to
desalination plants powered by alternative
energy
Another driver of regional energy demand has been
desalination ie, the process of converting seawater into
freshwater. With water demand on the rise across the
GCC+5 and most of the countries having little or no
access to freshwater sources, desalination is often the
only way to ensure water security. Heavy dependence on
desalination as a source of water supply has numerous
advantages and disadvantages. On the one hand,
seawater supply is plentiful and much of the region is
located near the sea. However, the process itself is energy
and cost intensive. Additionally, if not managed properly,
brine (a partially salty water solution) discharge from
desalination plants can affect the environment.
Conditions under which desalination capacity tends to
develop fastest are growing demand for freshwater, lack of
conventional water sources, access to saltwater, capacity
to develop the necessary infrastructure and availability of
financing. Given that so many of the GCC countries fulfil
all of these criteria, it is not surprising that Saudi Arabia,
the UAE, Kuwait, and Qatar are all among the world’s top
nations in terms of desalination capacity.
Figure 5: Total installed desalination capacity since 1945
million m3 of water per day
12
10
Iran sanctions: A progress report
After a decade of crippling economic isolation and almost
a year and a half of negotiations, on 14 July, Iran and the
P5+1 (the five permanent UN Security Council members,
plus Germany) reached a nuclear deal. The agreement
will see Iran limit its capacity to build a nuclear bomb
in exchange for the lifting of international economic
sanctions.
As the Q2 2015 edition of this report noted, two of the
most contentious points throughout the negotiations
process have been the permission for regular nuclear
sight inspections by the International Atomic Energy
Agency (IAEA) and the extent and speed of sanction
relief. A compromise has been reached that will permit
UN inspectors to monitor nuclear sites, including military
ones, but Iran reserves the right to delay or challenge
requests for access. Regarding sanctions, a UN arms
embargo would remain intact for another five years with
the UN missile sanctions staying in place for another
eight. This means that limitations on the country’s
offensive weapons will stay in place for longer than
restrictions on defensive arms.
The country will only see sanction relief begin after it has
fulfilled its end of the agreement. Estimates for how long
this may take vary widely from a few weeks to the end of
2015. It has also been agreed that if Iran violates any of
the agreed-upon terms, sanctions can be restored within
65 days. However, the complexity and cost of restoring
sanctions and again interrupting international trade flows
may be higher than the involved parties estimate.
Iran holds substantial oil reserves that it can add to the
global supply almost immediately after sanction relief,
thereby placing further downward pressure on prices.
While the rest of the region stands to lose out from lower
oil prices, it may benefit from the deal in numerous other
ways such as a trade boost.
8
6
4
Economic outlook 2015
2
Figure 6: Real GDP growth forecasts, Q3 2015
Australia
Qatar
Algeria
Japan
China
Kuwait
Spain
UAE
US
Saudi Arabia
0
%
7
6
5
Source: Global Water Intelligence
4
icaew.com/economicinsight
cebr.com
2
2015
2016
2017
Iran
Kuwait
Iraq
Lebanon
Bahrain
Egypt
Oman
Jordan
0
UAE
1
Saudi Arabia
However, despite some recent efforts, a number of
countries still have a way to go in ensuring uninterrupted
freshwater supply in the long term. This task is made
all the more challenging by the energy-intensive nature
of desalination. For example, the Kuwait Institute for
Scientific Research estimates that presently the country
spends about $1.2bn annually ensuring adequate levels of
freshwater supplies. Based on consumption projections,
by 2050 the country’s freshwater bill may use up the
majority of annual oil revenues.
3
Qatar
The combined impact of growing water demand and
already swelling levels of energy consumption has
motivated some of the focus countries to consider
how they can transform current desalination processes
to meet future needs in a sustainable manner. One
example is Saudi Arabia’s King Abdullah City for Atomic
and Renewable Energy which, among other aims, is
striving to encourage the use of alternative energy in the
desalination sector.
Source: IMF, national statistics offices, Cebr analysis
On 15 June Saudi Arabia opened its stock market
to direct investment by foreigners, albeit with some
restrictions on the level of foreign investment. Still, the
Kingdom’s substantial reserves and expanding population
will likely act as a draw for investors which may translate
into substantial inflows. Last year marked the first time in
over a decade that the country posted a fiscal deficit, with
government spending in excess of government revenues
ECONOMIC INSIGHT – MIDDLE E A ST Q3 2 015
– something which is likely to happen again in 2015. While
in the short term, currency reserves can be used to offset
a budget deficit, persistently lower oil prices will require a
more significant economic shift. Regional safety concerns
and increased defence spending also pose a challenge for
the Kingdom. We expect GDP growth over 2015 to reach
2.4%.
A final deal on lifting Iran sanctions has now been reached.
As anticipated, gradual sanction relief and permission for
international bodies to monitor nuclear sites to a limited
degree are key features of the agreement. Keeping in mind
that many Iranian oil wells were shut down in an orderly
manner, the country’s fields could boost global supply
within months of sanction relief, which will begin after Iran
has fulfilled its end of the deal. Whether or not this has
an impact on oil prices will depend primarily on domestic
capability to get oil on the market. Assuming Iran fulfils
its end of the accord by the end of the year, we anticipate
1.2% growth over 2015.
The UAE began diversifying its economy earlier and with
more intensity compared to some of its neighbours. This
should mean that the country is better placed to continue
growing strongly despite lower oil revenues. One concern
is that oil revenues are a major source of funding for infant
industries. For example, the country has invested heavily
in developing a tourist-friendly art scene. However, some
of these projects, such as the Abu Dhabi branch of the
Louvre museum, are now being delayed due to funding
shortages. Additionally, heightened safety concerns in the
region require a reconsideration of spending priorities. Still,
a number of the UAE’s non-oil sectors, including hospitality
and banking, will contribute to strong 3.9% GDP growth
in 2015.
As a net oil importer, Egypt stands to benefit somewhat
from lower prices, however the effect of this should not be
overstated as the oil trade balance is only a small portion
of the country’s current account deficit – meaning that
the value of the country’s imports will continue to stand
above export value. Hotel occupancy rates were improving
at the start of the year, providing hope that one of the
country’s main industries, tourism, will contribute strongly
to economic growth. However, the recent terrorist attack
on a hotel beach in nearby Tunisia is likely to deter many
prospective tourists for at least the remainder of this year.
On the upside, foreign direct investment into the country
remains healthy and will contribute to 3.4% GDP growth
in 2015.
Qatar’s planned construction project investment of nearly
$30bn this year will contribute to strong 6.9% GDP growth.
Additionally, a number of the country’s key businesses,
including banks and petroleum firms, have announced
plans to expand internationally. An area of risk may be the
international investigation into the awarding of the 2020
FIFA world cup, as it may have wider repercussions on
international investors’ views of the country.
In June, OPEC reported its highest level of output in nearly
three years and the greatest increase came from Iraq where
output averaged 4.39m barrels per day. Despite this, the
country recently cut its long-term production targets.
icaew.com/economicinsight
cebr.com
The move was partially motivated by an agreement
between the government and major oil companies to
implement spending cuts beyond this year, which will
make boosting output a challenge. Instability continues
to weigh on economic prospects; which is one of the
reasons we expect growth of just 1.7% in 2015.
Healthy consumer spending and government
investment in key development areas such as youth
employment, will support 1.7% 2015 growth in
Kuwait. A substantial sovereign wealth fund will allow
the country to deal with this year’s projected fiscal
deficit without major spending cuts, but continuing to
develop non-oil industries will be essential. Recent safety
concerns in the country have resulted in tightening
of security procedures which may require increased
spending in the sector.
We expect the economy of Oman to expand by 3.5%
in 2015. Economic growth will be partially fuelled
by infrastructure projects such as the newly-opened
desalination plant in Ghubra. The facility will also help
address a significant concern and growth constraint
– water shortages. Despite the fall in oil revenue, the
Sultanate plans to meet all spending commitments (in
the short term at least) with a focus on boosting noncommodity sectors such as trade and manufacturing.
Faced with declining oil revenues and increasing
national debt, Bahrain has announced preliminary
plans to reduce energy and water subsidies which were
expected to reach $866m and $840m in 2015 and 2016
respectively. The details of the cuts are still unknown
and may only impact the country’s foreign population.
Compared to many of its neighbours, Bahrain has
relatively low reserves which may jeopardise a part of
planned infrastructure spending. As such, economic
growth is expected to slow from 4.0% last year to 2.6%
in 2015.
The usual drivers of economic growth in Lebanon,
tourism and construction, have been somewhat
hindered recently by negative spillovers from the Syrian
conflict. Another source of growth in recent years
has been an abundance of capital inflows, especially
from the GCC countries. Given the GCC’s lower oil
revenues there is a risk of a slowdown. In light of this
uncertainty, the country’s substantial stock of foreign
currency reserves serves as a source of stability for the
financial services sector. We anticipate that the Lebanese
economy will expand by 1.9% this year.
At least in the short term, Jordan’s economic growth
will continue to be hindered by its geographic position
between Syria and Iraq – both of which are engulfed in
civil wars. An influx of nearly 630,000 Syrian refugees
has placed significant pressure on the country’s
resources. However, growth of 3.6% in 2015 will be
supported by lower oil prices, foreign aid inflows, and
the US’s commitment to support regional stability by
providing sovereign bond guarantees. In late June, the
Kingdom issued $1.5bn of US-guaranteed bonds.
ECONOMIC INSIGHT – MIDDLE E A ST Q3 2 015
Cebr
The Centre for Economics and Business Research is an independent consultancy with
a reputation for sound business advice based on thorough and insightful analysis.
Since 1993 Cebr has been at the forefront of business and public interest research.
They provide analysis, forecasts and strategic advice to major multinational companies,
financial institutions, government departments and trade bodies.
ICAEW is a world leading professional membership organisation that promotes,
develops and supports over 144,000 chartered accountants worldwide. We provide
qualifications and professional development, share our knowledge, insight and
technical expertise, and protect the quality and integrity of the accountancy and
finance profession.
As leaders in accountancy, finance and business our members have the knowledge,
skills and commitment to maintain the highest professional standards and integrity.
Together we contribute to the success of individuals, organisations, communities
and economies around the world.
Because of us, people can do business with confidence.
ICAEW is a founder member of Chartered Accountants Worldwide and
the Global Accounting Alliance.
www.charteredaccountantsworldwide.com
www.globalaccountingalliance.com
For enquiries or additional information, please contact:
Lara Khouri, Marketing Manager, Middle East
T +971 (0)4 408 0000
E [email protected]
ICAEW
Currency House Unit 4 Level 4
Dubai International Financial Centre
PO Box 506836
United Arab Emirates
icaew.ae
ICAEW
Chartered Accountants’ Hall
Moorgate Place
London
EC2R 6EA UK
icaew.com
© ICAEW 2015 MKTDIGI14207 08/15