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Saudi leads MEED’s latest economic activity index

31 January 2023

 

Saudi Arabia has continued to sit atop the MEED Economic Activity Index with the close of 2022, as its repeat of another bumper year of project contract awards set it well clear of the next most competitive regional projects market.

The index has generally seen the division between energy exporters and importers sharpen, with the former enjoying current account and, for the most part, fiscal surpluses, and the latter invariably facing trade deficits and persisting fiscal deficits.

High inflation, compounded by rising interest rates and high fuel prices, continues to erode economic prospects in the region. It has also pressured the finances of countries with artificially high currency pegs. Egypt has been forced to drop its currency peg three times in the past year, leaving it increasingly at the mercy of inflation.

Saudi Arabia stands largely apart from these pressures as the region’s largest oil producer. Its inflation rate in 2023 is projected by the IMF to be a minimal 2.2 per cent. While its rate of real GDP growth is expected to come down from 7.6 per cent in 2022 to 3.7 per cent in 2023, this remains high amid the glum projections that up to a third of the global economy could enter recession this year.

Together with the UAE, Qatar, Kuwait and surprisingly Iraq, Saudi Arabia is expected to maintain a double-digit current account surplus in 2023, as well as a fiscal surplus, despite the kingdom’s rising project spending.

There is a further $95bn-worth of project value in the bidding stage [in Saudi Arabia], boding well for the potential of 2023 to be another bumper – if not record – year for the Saudi contracting sector

Project potential

Saudi Arabia’s project market maintained its momentum in 2022, seeing the award of 53bn-worth of project value, 1.3 per cent more than in 2021 and 46 per cent higher than the annual average over the preceding five years. 

The award figure also exceeded the value of projects coming to completion over the course of the year by $21bn – a strong net positive result for the market. 

There is a further $95bn-worth of project value in the bidding stage, boding well for the potential of 2023 to be another bumper – if not record – year for the Saudi contracting sector.

Mixed performances

The UAE, while retaining the second position in the index, has seen its score slip. Despite having strong real GDP growth and fiscal projections for 2023, the country remains well down from historic highs – the $18.7bn-worth of project awards in 2022 was just 53 per cent of the $35.1bn average in 2017-21. The market also shed $20bn in value as completions outstripped awards. 

The $56.4bn of projects in bidding and due for award in 2023 makes the prospect of a turnround a possibility, but there is no guarantee given the global uncertainty.

Qatar has meanwhile risen strongly in the index since the third quarter of 2022, despite a real GDP growth projection by the IMF of just 2.4 per cent in 2023 – as the boost to non-oil GDP from the Fifa World Cup wears off. 

Qatar’s project awards also fell in 2022 following a spike in 2021. The $14bn of awards in 2022 nevertheless remained almost level with the five-year average.

Kuwait also has a slightly lower real GDP projection in 2023, but strong overall fundamentals. Project activity also continues to tick over in the country, albeit at a slower than usual pace. The country has $27.6bn-worth of projects in the bid stage – a figure nearly 10 times the $2.8bn-worth of awards in 2022, which fell well below the $5.6bn average for the preceding five years.

The remaining GCC nations, Oman and Bahrain, and another Gulf energy exporter, Iraq, all also boast healthy current account surpluses. From there however, the countries diverge. 

Oman is in a much better position heading into 2023, having stabilised its fiscal situation and eliminated its deficit. The country also has the lowest forecast consumer price inflation rate in the region heading into 2023, at just 1.9 per cent. Furthermore, the country has a burgeoning $19.7bn-worth of projects in the bid stage that could soon bolster its projects market.

Bahrain continues to struggle with both a persisting fiscal deficit and a debt burden – equivalent to about 120 per cent of its GDP. The country’s projects market slumped in 2022, with the less than $1bn of contract awards compared to $2.6bn in completions.

Iraq remarkably sits just below the GCC countries in the index thanks to its oil-fuelled GDP growth and twin double-digit current account and fiscal surpluses. Iraq’s project activity nevertheless fell away in 2022, which saw just $5bn-worth of awards – compared to $17bn the previous year and a $12bn five-year average. The $28bn-worth of projects in the bidding stage could nevertheless make for better things to come.

Egypt’s projects market has recently been in the ascendant, but its broader economic fortunes are now in sharp decline. The full impact of the country’s currency crisis has yet to be revealed, but Cairo already has twin current account and fiscal deficits.

Iraq remarkably sits just below the GCC countries in the index thanks to its oil-fuelled GDP growth and twin double-digit current account and fiscal surpluses

Facing challenges

Algeria, Morocco, Jordan and Tunisia are all struggling to break even in the current economic climate and have double-digit unemployment. This is ironic in the case of Algeria, which is an energy exporter with a current account surplus and yet double-

digit fiscal deficit.

Below this, Iran continues to be hampered by sanctions, creeping economic malaise and an estimated 40 per cent consumer price inflation rate amid a steadily collapsing import subsidies regime.

Libya, despite resurgent oil growth, has nearly 20 per cent unemployment and 50 per cent youth unemployment due to the civil war. Reconstruction efforts in the country also showed signs of stalling in 2022 as the project award value dropped off, with many projects stuck in the bid stage.

Yemen and Lebanon close out the index with dismal economic performances due to their respective ongoing conflict and economic crisis. Remarkably, with almost one-in-three out of work and unchecked inflation, Lebanon is managing to underperform even Yemen.

About the index

MEED’s Economic Activity Index, first published in June 2020, combines macroeconomic, fiscal, social and risk factors, alongside data from regional projects tracker MEED Projects on the project landscape, to provide an indication of the near-term economic potential of Middle East and North African markets.

View the November 2022 index here

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John Bambridge

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    On 21 April, as a fragile ceasefire held between the US and Iran, the Trump administration halted a $500m shipment in cash headed for Iraq, as it sought to clamp down on Iranian-backed Shia militias in the country. 

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    This was not the first time that Iraq’s financial system has felt the US’s warm breath on its neck.

    Back in February 2025, the US Treasury Department blacklisted five Iraqi banks from participating in dollar transactions, citing concerns about their role in illicit financial flows that benefited Iran’s Islamic Revolutionary Guards Corps.

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    In July 2023, the CBI banned 14 banks from conducting dollar transactions in a crackdown on dollar smuggling. In February 2024, it banned a further eight banks from dollar transactions as part of a crackdown on fraud and money laundering.

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    The recent halt in US dollar cash shipments has nevertheless added pressure to Iraq’s parallel currency market gap, says Lucila Bonilla, lead emerging market economist at Oxford Economics.  

    “The gap between the parallel exchange rate has widened noticeably against the official peg, to around 20%,” she says.

    “Dollar demand has risen as citizens and traders seek to hedge uncertainty – dollar deposits are up, and there are reports of a notable shift in the composition of cash holdings toward dollars.”

    Ratings agencies see the US move on Iraqi dollar use as a challenge, but one that might not prove too onerous.

    “Iraq can overcome a short-term war as it has $100bn of reserves and its debt profile is bearable,” says Gilbert Hobeika, a director at Fitch Ratings.

    “But a longer-term conflict will hurt Iraq as the economy is reliant on oil revenues and government involvement, while facing at the same time risk from the US stopping delivery of US dollars.”

    How persistent the pressure proves will depend largely on the duration of the Hormuz shock and how the relationship with the US evolves.

    “Forming a new government that is palatable to the US could ease the pressure, though Iraq’s protracted government formation process adds uncertainty to that timeline,” says Bonilla.

    The US-Iran war is putting even more pressure on banks.

    “There are uncertainties with regard to depositors,” says Hobeika. “The public sector banks have weak management and governance structures. Financial reporting is weak, and that puts pressure on asset quality and capitalisation.”

    If the conflict lasts a long time, the government will start withdrawing funds to pay salaries and contractors.

    “That will affect deposits at the public sector banks in the near term,” says Hobeika.

    State-heavy system

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    “Private banks have struggled to compete in a market with limited opportunities, small deposit bases and a narrow range of products, often focusing on very basic activities,” says Lea Hanna, an analyst at Moody’s.

    “In 2019, we had a wave of Islamic banks getting bans on dealing with US dollars – reducing what had been a primary source of business.”

    A few private banks have benefitted since then, namely those with majority ownership by foreign banks such as National Bank of Iraq, a subsidiary of Capital Bank of Jordan, and Bank of Baghdad, a subsidiary of Jordan Kuwait Bank.

    “Supported by their affiliates, these banks are relatively well run compared to domestic peers and have ample capital buffers,” says Hanna.

    “They have captured a large market share of US dollar transfers thanks to their strong US correspondent banking relationships that allow them easier access to US dollars. They have seen a surge in their profitability and an increase in their deposit base.”

    Financial reform

    The CBI has attempted to introduce reforms to the banking system, as part of a wider effort to enable it to channel funding to the private sector.

    In early 2025, it increased the minimum issued and paid-up capital requirement to ID400bn ($305m), along with a requirement to establish correspondent banking relationships for foreign-currency trading. The plan was to increase these in ID50bn increments every six months, to hasten sector consolidation.

    However, of Fitch’s rated banks, just two – state-owned Trade Bank of Iraq and Mansour Bank, a subsidiary of Qatar National Bank – met the full capital requirement.

    “While a lot of banks managed to increase their capital, a number of them didn’t and have been struggling to improve their systems and compliance with anti-terrorism and anti-money laundering regulations,” says Hobeika.

    “These systems take a long time to improve, and it costs the banks too. For that reason, they have agreed with the central bank to postpone implementation to 2027/28.”

    The expectation is that the number of private Iraqi banks will shrink from 60 to about half that number by 2028.

    “Iraq’s banking sector is undergoing a significant overhaul, with the Central Bank pushing through higher capital requirements, improved anti-money-laundering compliance, and a shift towards commercial banks managing their own international correspondent relationships. These moves are welcomed,” says Bonilla.

    But the harder work remains, argues Bonilla: state-owned banks still carry high levels of non-performing loans, weak governance and a history of politically directed lending, while private sector credit remains among the lowest in the region.

    “The stakes are high as the IMF estimates that a comprehensive reform of the financial sector, alongside broader governance and regulatory changes, could double Iraq’s non-oil growth potential over the medium term, adding around 4 percentage points to GDP,” says Bonilla.

    “For now, the reforms address the plumbing. The structural transformation of a banking system to serve the private sector is still largely ahead.”

    Clouded outlook

    So far, Iraq’s financial system seems to have averted a worst-case scenario of large-scale deposit withdrawals related to the Iran conflict.

    Any deposit withdrawals seem to be more related to the introduction of a digital custom system ASYCUDA (Automated System for Customs Data) aimed at helping the government collect revenues, which saw a lot of traders trying to bypass the custom charges.

    “This drove some exporters or traders to source US dollars outside the banking system, in the parallel market, to avoid stricter requirements and up-front payment of customs duties. That has now eased,” says Hanna.

    Looking ahead, Fitch anticipates that most government financing is likely to come from the CBI through indirect purchases of government securities.

    The central bank’s total claims on the central government represented about 52% of the domestic debt stock and 25% of the total debt stock at end-2024, notes the agency.

    It envisages that a smaller portion will come from the government’s cash deposits, anticipated to fall to an average 12% by 2027.

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    Algeria’s state-owned oil and gas company, Sonatrach, is taking advantage of concerns about global gas and crude supplies to sign deals and push ahead with major upstream projects.

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    Saudi Arabia-based industrial investment company Rawas and China’s Zhejiang Hailiang Company have signed a joint-venture agreement to establish a copper products manufacturing plant in the kingdom.

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    Shenzhen Stock Exchange-listed Zhejiang Hailiang is a subsidiary of Hailiang Group, one of the world’s largest copper pipe manufacturers and exporters.

    Rawas is based in Riyadh. Obeikan Investment Group and Al-Khorayef Group are among its founding shareholders, while other investors include Al-Muhaidib Group and Mohammed Abunayyan Investment Group.

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