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Trump factor weighs on the region’s economies

2 January 2025

 

If 2024 was a slow road back to stabilisation for economies in the Middle East and North Africa (Mena) region, with lower interest rates and generally improved fiscal positions providing some ballast against tumultuous geopolitical risk events, the coming year portends yet more instability with the return to the White House of Donald Trump. This will, for good or ill, have a decisive impact on the region’s economic trajectory. 

The region is looking at a more rapid economic growth rate in 2025 than the previous year. The World Bank, which estimated real GDP growth in the Mena region of 2.2% in 2024, sees region-wide growth at 3.8% in 2025, with Gulf economies driving this improvement. 

This reflects the gradual phasing out of voluntary oil production cuts starting from December 2024. 

Mena oil importers will see real GDP growth expand from just 1.3% in 2024 to 3.4% in 2025, says the World Bank. 

Interest rates are a key ingredient in the mix, linking to the second Trump presidency, with its likely ramp-up of  global trade-war pressures. 

If the president-elect follows through on his tariff plans, which range from a proposed 60% on Chinese imports to 20% on the rest of the world, it will trigger higher inflation, thereby slowing the Federal Reserve’s moves to cut interest rates.

So while Mena exports to the US are unlikely to suffer direct fallout from planned tariffs – according to consultancy Capital Economics, the share of Mena goods exports going to the US stood at just 3.5% this decade – it is the secondary effects that could knock regional economies off their stride.

“If we do get the tariffs, and that leads to higher inflation in the US, that also means there will be tighter monetary policy in the Gulf countries with dollar pegs than would otherwise be the case,” says James Swanston, Mena economist at Capital Economics.

The possibility of a stronger dollar in 2025 means that for those economies with dollar pegs, their domestic industries could become less competitive. This jars with the thinking behind regional economic diversification schemes such as Saudi Arabia’s Vision 2030, which are predicated on developing manufacturing sectors that are mainly export-oriented.

Regional fortitude

The largest Gulf economies should at least be well positioned to withstand such headwinds, even if a trade war hits the global economy. According to the World Bank, a lower interest rate environment, together with further investment and structural reform initiatives, will yield non-oil growth of more than 4% in the region’s two largest economies, Saudi Arabia and the UAE. This – plus higher oil production – should be enough to offset any loss of momentum from lower oil prices and weaker fiscal balances.

Saudi Arabia is expected to show steady growth in 2025, with its Q3 2024 average GDP growth of 2.8% underscoring the kingdom’s stronger performance. However, the robust spending of past years is giving way to a more conservative fiscal approach, and that will inevitably impact project activity.

Riyadh’s 2025 pre-budget statement revealed a tougher fiscal stance for 2025, with anticipation of a deficit of 2.9%. With revenues expected to be 3.5% weaker in year-on year terms in 2025, this will mean reduced spending – around 3% lower than that outlined in the 2024 budget. 

“Saudi Arabia is being a bit more prudent about how they spend their money,” says Swanston. 

While there will be continued support for current spending, and for the official gigaprojects, capital expenditure will shoulder the burden of cuts. This will likely feed through to weaker non-oil GDP growth.

The UAE should see comparatively stronger growth momentum in 2025, driven by a combination of healthier dynamics in its touchstone real estate and tourism sectors, and the impact of infrastructure investment programmes. 

NBK Economic Research sees the UAE non-oil economy enjoying another year of 4%-plus growth in 2025, possibly as high as 5.1%. However, the bank’s economists offer a note of caution, as this is still below the 7.2% annual average growth rate the government requires to achieve the Vision 2031 target of a doubling in GDP by 2031.

On the fiscal front, the UAE is looking at a better situation in 2025. “The UAE has diversified its revenues to the point where non-oil revenues are larger than oil revenues. So, even if oil prices turn negative, they still wouldn’t run a deficit,” says Swanston.

Qatar is maintaining a tight fiscal policy, but from late 2025 it will begin to feel the effects of a significant predicted revenue boost when the first phase of its liquefied natural gas (LNG) expansion comes on stream. This will eventually add 40% to the country’s existing LNG export capacity of 77 million tonnes a year.

Kuwait, meanwhile, is set to run continued budget deficits, although the country’s non-oil economy has emerged from two years of negative growth and is forecast by NBK Research to expand by 2.6% in 2025. But Kuwait faces structural challenges, including a low investment rate and the need for fiscal consolidation, which will absorb policymakers in 2025. 

Oman, in contrast, looks to be in a better position than in previous years. According to an Article IV assessment released by the Washington-headquartered IMF in November, reform implementation under Oman Vision 2040 is proceeding decisively, along with initiatives to improve the business environment, attract large-scale investments and empower small and medium-sized enterprises. 

The sultanate’s economy continues to expand. Growth, says the IMF, is set to rebound starting in 2025, supported by higher hydrocarbons production and the continued acceleration of non-hydrocarbons growth. 

Bahrain faces a challenge when it comes to containing the country’s rising debt-to-GDP ratio, which grew from 100% in 2020 to just under 130% in 2024. The country needs to press ahead with fiscal consolidation moves if it is to improve the debt position.

Wider region

Outside the GCC, the picture will vary in 2025. Egypt has realistic expectations of a better year ahead, with falls in inflation and interest rates providing relief after a tough 2024. But foreign investors may feel a note of alarm at recent indications from President Abdul Fattah El-Sisi that the challenges associated with the country’s reform programme – a hint at the tough impact of reform on Egyptian consumers – might lead it to review its existing IMF deal. 

Tunisia presents a similar challenge. President Kais Saied’s proposed bill stripping the central bank of its ability to set interest rates and influence exchange rate policy without government consent is unlikely to encourage investors. 

In Egypt at least, there are silver linings that should assure investor confidence, even if the government’s commitment to reform wavers. “When it comes to the debt issue, everything’s in a pretty good place in Egypt,” says Swanston. 

“Yes, interest service payments on the debt have risen over the past 12 months, and the feed-through means that they will still be paying quite high debt servicing costs over the next six months. But yields are coming down in terms of its dollar-denominated debt. Worries about default are not as strong as before.”  

President El-Sisi may also find support from other sources. Given his previous close ties with the Trump administration in 2016-20, there may be a greater willingness in Washington to disburse funds to such an integral partner of US foreign policy, particularly when it has been buffeted by the Gaza conflict and the impact of Houthi attacks in the Red Sea.

Iraq’s economic fortunes remain bound up with the price of oil, which accounts for 90% of state revenues. The IMF has forecast a 4.1% GDP growth rate for Iraq in 2025, reflecting in part its surprising resilience to regional conflicts. However, lower oil prices may yet erode the country’s economic momentum. 

Progress on major projects such as the Development Road would at least suggest prime minister Mohammed Shia Al-Sudani’s government is focused on long-term delivery and tackling Iraq’s overreliance on hydrocarbons exports. 

Meanwhile, Iraq’s larger neighbour Iran, which saw GDP growth increase to 5% in the 2023-24 Iranian year, faces still bigger challenges linked to Trump’s return. It can expect to face a much tighter sanctions regime on its oil sector in 2025, with efforts to curb its ability to sell its crude oil on international markets expected to gain traction. The effects of these moves are still in the balance. 

The positive news for Tehran is that several of its crude buyers appear to be undaunted by a reimposition of deeper curbs on exports. For example, Chinese refiners have been importing Iranian oil to the tune of 1.5 million barrels a day. The country’s seeming imperviousness to international financial pressures could undercut the impact of a beefed-up US sanctions regime, although few would relish being in the shoes of Iranian economic policymakers right now.

 

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James Gavin

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    What we are seeing in the global energy sector is that there are very clear beneficiaries of the ongoing conflict … exporters that aren’t reliant on the Strait of Hormuz can take advantage of high oil prices to post profits and sanction new projects
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    “The most important factors right now are the damage caused to infrastructure from strikes on energy facilities and how quickly those can be remedied,” he said. “Even if this war ends tomorrow, many will remain concerned about political tensions in the region and the potential for future disruptions.

    “What we are seeing in the global energy sector is that there are very clear beneficiaries of the ongoing conflict … exporters that aren’t reliant on the Strait of Hormuz can take advantage of high oil prices to post profits and sanction new projects.”

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    Commenting on the outlook for Qatari LNG, Doleman said: “Over the long term, the ongoing conflict could weaken Qatar’s bargaining position when the country is negotiating long-term gas contracts due to perceived risk associated with using the Strait of Hormuz.

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    “Though a lot of damage is being done, Middle East producers still have the advantage of some of the world’s cheapest and easiest-to-produce oil and gas,” Doleman said. “This means they are likely to retain their clients and a functioning business model once the Strait of Hormuz reopens.”

    However, if the conflict continues for an extended period, the prospect of a swift recovery would diminish and more dramatic structural changes to the global oil and gas industry would become more likely.

    That, in turn, could make the Middle East’s future role in global energy markets significantly smaller than previously forecast.

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    Wil Crisp
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