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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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    In a region where geopolitical turbulence has amplified by an order of magnitude, Jordan is managing to stand out as a beacon of relative stability, with the Hashemite kingdom’s banking sector acting as a case in point.

    Lending has grown in recent years, with credit up by an average 4.9% between 2020 and 2025, according to the Central Bank of Jordan (CBJ) – a faster rate than average nominal GDP growth of 2.3% over the same period.

    The IMF took care to note an increase in credit to the private sector in its latest Article IV assessment of Jordan, standing at 80.1% of GDP at end-2024, compared to just 66.6% 10 years earlier.

    Banks in the kingdom ended 2025 in a liquid state, but caution remains the watchword for local lenders. The loan-to-deposit relationship bears that out. For that year, deposits ended up 7.1% to JD50bn ($70.5bn), while credit facilities were up just 3.7% to JD36.1bn ($50.9bn).

    Analysts see this as a case of Jordanian banks being prudent, given the tricky operating environment and limited lending opportunities, rather than banks being excessively defensive. 

    According to Christos Theofilou, an analyst at Moody’s Investors Service, it is cautious lending in fraught macroeconomic conditions.

    “On the one hand, we’ve seen a structurally strong and stable deposit base that has been growing more compared to lending. That indicates a certain degree of limited risk appetite, but also the fact that, given the challenging operating conditions, there were limited business opportunities in the market,” says Theofilou.

    Liquidity banked

    Jordan’s banks look able to withstand further shocks, given solid capital positions and relatively strong earnings performances. Arab Bank, the largest lender, saw net profits grow 12% last year to $1.13bn, despite a highly charged geopolitical situation across Jordan and the neighbouring Palestinian territories.

    As Moody’s notes, Jordanian banks’ funding base remains stable, with banks mainly deposit-funded – with deposits at 67% of total assets as of December 2025 – mostly comprising well-diversified retail deposits. The ratings agency noted that banks retain the capacity to increase lending without relying on more volatile and costly external funding, as indicated by the 72% loan-to-deposit ratio.

    The earnings outlook in Jordan may be better than other banking sectors in the immediate region, but this does not translate into a picture of booming profits going forward.

    “Profits should remain resilient, but we’re not expecting any significant improvement,” says Theofilou. “We have the challenging operating conditions, and the lower interest rates that have come down over the past few years. On the other hand, banks have had lower provisioning in the past 12 to 18 months compared to the period prior to that.”

    Asset quality remains a strong point, despite some weakening over recent years. Moody’s sees non-performing loans (NPLs) falling below 5.5% this year from 5.8% in June 2025.

    However, the continuing Iran conflict and its deleterious regional impacts – including on the West Bank, where about 9% of Jordanian banks’ loans are located – suggest that bank exposures to troubled sectors will require focus.

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    The real estate exposures are meaningful, but Moody’s views overall concentration risk as more material rather than real estate risk per se.

    “So, on the one hand, Jordanian banks have real estate loans, both commercial and residential, slightly below a fifth of the total credit facilities,” says Theofilou. “Banks also face challenges in quickly disposing of properties, but within the context of a relatively lengthy foreclosure process. On the flipside, we see Jordanian banks having fairly high collateralisation, so they do hold a lot of collateral against the real estate exposures.”

    The CBJ has earned plaudits for its regulatory oversight, with the IMF lauding its strengthening of the Financial Stability Committee, while refocusing its role on macroprudential policies and systemic risks. 

    Jordanian banks’ brisk uptake of digital technologies has also been a positive.

    Last year, digital payment systems in Jordan recorded over 184 million digital transactions, exceeding $38bn in value. The CBJ has introduced an AI regulatory framework for the sector and the authorities are now working to burnish the country’s credentials as a fintech hub, based on a 90% plus internet penetration. 

    In the year ahead, Jordanian banks will be looking to find exposures to new lending opportunities, given the past risk aversion that has prevented them from building stronger growth avenues.

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    Big new infrastructure projects could yet come to the fore as bankable opportunities for local players. For example, the National Water Carrier Project, costed at $5.8bn and aiming to increase water supply by 40%, is looking to achieve financial close this summer. It is the type of project that could prove significant in helping diversify local lenders’ exposure away from real estate towards infrastructure.

    “If we see a lot of these infrastructure projects requiring financing coming to the market, then we could see a bit of a pickup in lending growth as well,” says Theofilou.

    New lending opportunities will come from large corporates and infrastructure-related lending. Those will play the key role in any significant pickup in credit growth, says the Moody’s analyst, in contrast to the small- and medium-enterprise (SME) sector, which poses a different challenge for banks.

    “The SME segment does represent a potential growth opportunity and it’s supported by policy focus, however its expansion is constrained by the operating environment. The sector is exposed to high overall credit risks, and when conditions are challenging, banks tend to be more cautious in lending to the SME markets,” says Theofilou.

    So long as the regional conflict persists, banks will be inclined more towards caution than exuberance in their lending approaches. And yet that strong and stable inclination may be what serves them best in a notably turbulent year in the Middle East’s recent history.

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