Outlook 2007: From Great to Good (page 1 of 4)

In short, the region's performance is expected to go from Great in 2003-2006 to Good in 2007. This should not, however, bring on the doomsayers. The deceleration in growth is due to both much higher base effects and lower oil prices and production. Fiscal accounts will, in the main, remain deeply in positive territory for the oil producing nations, and this should allow investment to become an increasingly important driver of growth going forward. Finally, we expect inflation rates to ease somewhat in most countries, although remain high in Qatar and the UAE.

At a more structural level, and using the themes and terminology developed by Jim Collins in his book Good to Great, few countries are showing qualities that will lead their economies on the road from Good to Great, irrespective of what happens to oil prices. This does not rule out economies continuing to perform well as oil prices remain high. However, it does suggest that few will fully leverage the opportunity that huge oil revenues create. Indeed, high oil prices may get in the way of any such transition. In the words of Collins himself, 'Good is the enemy of Great'.

The recent economic performance of the Middle East region has been spectacular. Nominal growth is expected to have averaged 17.6% in the four years to 2006 (according to IMF data), compared to China's 15.1%. However, economic growth in the Middle East is likely to have peaked in the second quarter in 2006 as oil prices fell back in Q3, undermining GDP growth for the oil producers. Indeed, we continue to forecast oil prices to average USD 57pb in 2007 (West Texas Crude), down from an average USD 66pb in 2006. Add in the production cuts that OPEC has announced (1.2mbpd in October and a further 500kbpd from Feb 1) and it is clear that nominal and real growth will slow from the rapid pace of the past four years.

While the region is expected to decelerate, this is not a time for the doomsayers. Nominal growth is expected to post around 9.6% in 2007, based on the countries covered on pages 8 and 9. This compares to 16.9% in 2006.

For Gulf Cooperation Council (GCC) countries, the deceleration in growth notwithstanding, fiscal positions will remain extraordinarily healthy. Indeed, for the region as a whole, we expect the fiscal surplus to remain a healthy USD 155bn, still over 10% of GDP, with the GCC accounting for over 95% of this and averaging 19% of GDP. This should allow investment to become an even more important component of growth going forward. Outside of the GCC, Libya, Iran, and Algeria will face similar forces to the GCC countries in terms of lower oil prices and production and thus growth is expected to slow. For Algeria and Libya, with their strong fiscal positions remaining intact, investment will also remain strong and for the former, rising gas exports will likely offset declining oil revenues. For Iran, the focus is on social spending, and the country's weak fiscal position means that it may pay a price for this in the medium-term.

Outside of the major oil producers, Egypt is expected to slow only moderately as reform continues in 2007. Morocco is expected to see growth slow in 2007, but Tunisia is expected to see a modest improvement (to 6% from 5.8% in 2006). Finally, oil-importing Jordan's economy is expected to slow in both nominal and real terms, despite immediate benefits from lower oil prices as the base of comparison has risen dramatically and lower oil prices may slightly reduce the level of inward FDI.