MUFG: Middle East 2023 outlook

January 31, 2023

In a world mired by a multitude of headwinds, with some places poised for recession, the Middle East region stands out as the global outlier.

At first, the buoyant view of the Middle East was a result of the highly effective response the region offered to the pandemic, which set the foundations for the subsequent rapid recovery in activity. Thereafter, the outlook improved further still as surging energy prices triggered a transfer of wealth and purchasing power from energy consuming to regional producer nations. This has sparked a surge in activity which, lifted by robust sentiment, tight labour markets and an increasingly expansionary fiscal stance, has delivered the strongest economic outcomes in a decade.

Our base case which forecasts Brent crude averaging USD94/b over the next four years, will further bolster the firepower of the region’s sovereign wealth funds, taking total net financial wealth to USD5.6tn (247% of GDP) by 2026 – a cumulative increase of USD1.8tn, from USD3.8tn today. Such an unprecedented quantum of surpluses will fortify the region’s balance sheets, support regional risk assets in the medium term and further strengthen its position as a critical creditor region in the global economy.

With confidence high, inflation low and activity still building momentum backed by strong public finances, falling debt and a trade-driven current account surplus, we remain resolutely constructive on the Middle East’s prospects – both in absolute terms, and in comparison with tepid prospects elsewhere. Yet, we acknowledge that the cycle may have peaked with some signs of imbalances that may threaten the near-term performance – most critically given the rigidities of the US dollar peg and the misalignment of the region’s economic cycle with that of the US.

Taken collectively, the outlook for the Middle East in 2023 and over the medium-term is clear – the giga-speed economic and social transformation, alongside the expected decade long supply-constrained energy supercycle, is strengthening the compelling story for a region which continues to see its stars align.