What are the expected economic trends of the Arab Gulf countries to watch in 2023?

The year 2022 was marked by growing uncertainty from geopolitical tensions, the global energy crisis, continued disruption of supply chains and financial market volatility, and any hopes that the inflationary rise observed towards the end of 2021 would be short-lived as food and energy prices rose, while these issues were not entirely caused by the war in Ukraine, but were greatly exacerbated by it.

According to the International Monetary Fund (IMF), global inflation rose from 4.7% in 2021 to 8.8% in 2022, which led to a rapid dismantling of easy monetary policy, as the US Federal Reserve led a series of interest rate hikes in 2022, and the International Monetary Fund predicted that global growth will decline to 3.2% during 2022 and in 2023 it will decline to 2.7%, down from 6.0% in 2021.

Conversely, the gloomy global picture is somewhat offset by stronger performance in the oil-exporting GCC countries, where the region has been supported by higher oil prices that averaged more than $80 per barrel, reflecting new supply and demand dynamics as policymakers focus on securing energy supplies, experts expect the GCC region to achieve its strongest growth in a decade, with GDP expanding by 6.5% in 2022.

Against this backdrop, what trends and themes will shape the GCC economies in 2023?
GCC countries will survive global slowdown
Downside risks mean that global GDP growth could lose momentum in 2023 to 2.7%, the weakest global growth rate since 2001 (excluding the global financial crisis of 2008-2009 and the extreme phase of the Covid-19 pandemic in 2020).

In contrast, the economic outlook for the Gulf countries is more optimistic in 2023, with GDP expected to grow by about 3.6% this year, which has positively reflected on the stability of their currencies in the foreign exchange market.

Oil prices are likely to maintain levels of US$75-95 per barrel this year, while oil demand growth may be affected by deteriorating global economic conditions, a ban on the import of crude oil and seaborne petroleum products from Russia may increase oil demand, and on the other hand, demand may also support China's gradual recovery albeit bumpy.

High oil prices enable GCC governments to support their economy, as oil is the first and strongest pillar to support the economies of the countries of the region, statistics indicate that the GCC region may record "double digits" surpluses during 2022 and 2023, and the regional fiscal balance will record a surplus of about 5.3% of GDP during 2022, recording the first surplus since 2014, while the external balance surplus will reach 17.2% of GDP, this provides more support to governments To maintain aggregate demand through spending.

While global inflation risks remain, inflation in the region is likely to subside due to higher interest rates and slowing global growth, inflation is expected to average 2.7% in 2023 in the GCC.

The GCC region will also benefit from its relative stability, unlike uncertainty elsewhere, while inbound tourists have yet to recover to pre-pandemic levels, the UAE has succeeded in tripling its share of global tourists from 1% in 2019 to 3% in 2021, as it opened its borders relatively early internationally, tourists are keen to travel once restrictions are lifted.

The return of the non-oil economy

While 2022 was the "Year of Oil", the recovery of the non-oil economy was one of the good news of the year, while non-oil activity as a share of the macroeconomic remained stable, this contrasts with significant growth obscured by high oil prices.

Non-oil purchasing managers' indices (PMIs) remained good in the region for most of the year, in fact the non-oil private sector led the recovery after the coronavirus outbreak in the GCC region.

We expect the momentum for the non-oil economy to continue in 2023, and while economies in the region still have a long way to go to decisively decouple growth from oil prices, governments seem determined to continue on this current trajectory, for example:

National economic and development strategies refer to commitments to diversify the economy through coordinated policy interventions and investments, and are likely to double Qatar's third National Development Strategy, which is currently under development, the "We are the UAE 2031" vision launched in November 2022 sets a target to increase non-oil exports to AED 800 billion ($ 217 billion) from current levels (approximately AED 350 billion).

Similarly, tourism occupies a prominent place in most development plans, huge investments are being made in Saudi Arabia to develop non-religious tourism as the Kingdom aims to increase the economic contribution of this sector from 3% to 10% of GDP by 2030, meanwhile, the UAE Tourism Strategy 2031 aims to raise the contribution of the tourism sector to GDP to AED 450 billion by attracting 40 million hotel guests, one of the main pillars of Oman's economic vision. 2040 in increasing tourism revenues to US$22.5 billion annually by 2040 from US$2.5 billion in 2019.

Liquidity pressure will ease

The outlook in the Gulf region is relatively optimistic but there are some risks, especially as countries adjust to a tighter monetary policy environment.

The unprecedented speed of increase in the Federal Reserve rate, largely reflected in GCC countries that maintain fixed exchange rates, has put significant pressure on market liquidity, particularly in Saudi Arabia.
The sudden and sharp increase in interest rates especially after a long period of low interest rates led to a rapid rise in lending that was not matched by deposit growth, which is unusual for a period of high oil prices, and as a result, liquidity conditions, as shown in Saudi Arabia's prevailing interbank rate (SIBOR) which measures the cost of interbank lending are the strictest on record.

We expect liquidity pressure to eventually ease as corrective action is taken, open market operations provided the Saudi Arabian Monetary Agency (SAMA) with temporary additional liquidity, first in June 2022 when it placed SAR 50 billion in deposits with commercial lenders at SIBOR discount, followed by another round of support in October 2022.

Future gaps are likely to be addressed through rapid intervention, but banks are likely to increase their share of long-term sources of financing, which may also be useful in stimulating domestic capital markets as banks begin to issue more long-term debt.