The Middle East must invest in education and raising skill levels if the region is to remain internationally competitive, according to a report by ICAEW. In its latest quarterly report, the accountancy and finance body says that falling oil prices mean skills shortages coupled with population growth could damage GCC economies if not addressed.

 

Economic Insight: Middle East is produced by Cebr (The Centre for Economics and Business Research) for the Institute of Chartered Accountants in England and Wales (ICAEW). The report provides ICAEW’s 140,000 members with a current snapshot of the region’s economic performance. The report undertakes a quarterly review of the Middle East focussing on the Gulf Cooperation Council (GCC) member countries (United Arab Emirates, Bahrain, Saudi Arabia, Oman, Qatar and Kuwait), as well as Egypt, Iran, Iraq, Jordan and Lebanon (abbreviated to GCC+5).

 

The report warns that whilst GDP growth in the Middle East is above the global average and expected to remain steady in the short term, oil prices will drop as global supplies rise. The combination of the rapid expansion of US shale production and the loosening of international sanctions on Iran mean oil prices will continue to fall at the same time as demand from emerging markets slackens. However, whilst GCC governments have recognised the need to diversify away from oil, they face a challenge in terms of skill shortages. Strong population growth means countries will be in a position to benefit from a ‘demographic windfall’ if they invest in education. Conversely, a lower-skilled population would lead to rising unemployment and a drain on national resources.

 

Peter Beynon, Regional Director, ICAEW Middle East, said: “To compete in skills-intensive industries like engineering or financial services, economies need access to a highly-skilled workforce. Currently, statistics suggest the GCC is lagging behind other developed economies in terms of education. This means firms are forced into buying in expertise from abroad, but if they do not employ enough nationals they are fined. This could place them at a distinct disadvantage in competitive international markets. Investing in education to raise skills levels would be a long-term sustainable strategy that would help GCC countries to diversify whilst also helping nationals into the workforce.”

 

The region’s role as an energy exporter means that its output closely tracks the mood of the global economy, so GDP growth in the Middle East is expected to rise this year. The report notes that the GCC is becoming increasingly reliant on exports to developing economies.

 

Douglas McWilliams, Chief Economist and Executive Chairman of Cebr said: “Twenty years ago advanced economies accounted for nearly three quarters of all goods sold overseas by the GCC+5. Now fewer than half of all goods exported go to advanced economies, and nearly the same again to emerging markets. The trend to increased trade with emerging markets is likely to continue. The centre of economic gravity is shifting eastwards, and the Middle East is at the crossroads of global trade. As well as a finance centre, this means the region should have the opportunity to develop as a logistics hub, with a bigger role for ports and shipping.”

 

The report also shows:

 

• Saudi Arabia raised oil production dramatically to record levels in recent months in response to unexpectedly high prices. This is expected to drive GDP growth of 4% this year, while expansion in the non-hydrocarbon sectors should counteract falling oil prices in 2014, pushing GDP growth up to 4.8%.
• Whilst oil and gas continue to dominate the economy of Oman, Muscat’s new airport opening in 2014 is expected to boost the tourism industry.
•  Bahrain remains slightly more vulnerable than other GCC countries owing to concerns over political tensions, however recovering oil outputs should lead to growth of around 4.5% in 2013.
• Investor confidence in the UAE is recovering since 2009 and foreign direct investment (FDI) is expected to improve, setting the scene for robust long-term growth.
• Kuwait has raised oil production in response to rising prices but uneasy relations between government and parliament mean other reforms are lagging. High oil prices will support the economy in the short term but concerns remain over long term fiscal sustainability.

 

The full Economic Insight: Middle East report can be found here.