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Moody’s expects economic growth in Middle East countries to accelerate in 2025

Moody’s credit rating agency expects economic growth in most countries of the Middle East and North Africa region to accelerate during the current year, supported by the recovery of oil production and the progress of investment projects.

The agency estimated in its report that economic growth in the Middle East and North Africa region will accelerate to 2.9% in 2025, compared to estimates of about 2.1% for 2024.

It attributed the acceleration to stronger growth in oil-exporting countries in the region, as a result of the partial decline in oil production cuts under the OPEC+ agreement, and that non-oil investments within economic diversification efforts will support economic growth.

Real GDP growth in oil-exporting countries in the region is expected to rise to 3.5% in 2025, compared to estimates of 1.9% for 2024, as increased oil production contributes to raising the overall growth rate by about 0.5% in 2025.

This is due to Saudi Arabia, the UAE, Iraq, Kuwait and Oman starting to abandon some of the oil production cuts implemented in 2023, and will also reflect higher production in the UAE as a result of the agreed increase in the country’s basic share under OPEC+, which will be gradually implemented during the year 2025.

During 2023 and 2024, oil production cuts reduced growth in oil-exporting countries by more than 3% over the two years.

Moody’s noted that there are challenges to increasing oil production due to slower demand growth among major importers, especially China, and increased oil production outside OPEC+, especially in the United States.

In December 2024, OPEC+ countries announced a three-month postponement of the planned production increase to April 2025.

The agency expected that non-oil economic activity in the Middle East and North Africa region would remain strong, supported by tailwinds from structural reforms and large-scale investment projects, including government initiatives for economic diversification.

The impact of large investments is most evident in Saudi Arabia, where government spending and sovereign wealth fund spending linked to the Vision 2030 diversification program continue into 2025.

She noted that projects are gradually entering the implementation phase, supporting strong growth in the construction, real estate and non-oil mining sectors, and she expected strong growth in the retail and hospitality sectors, supported by investment projects related to tourism.

In Qatar, growth will be supported by the development of the petrochemical industry and construction activities related to the expansion of liquefied natural gas production capacity, scheduled to start operating during the period from 2026 to 2030.

In Kuwait, non-oil growth will be driven by large projects such as the construction of a new port and an airport terminal.

If Iraq maintains stable security conditions, non-oil sector growth will remain above pre-pandemic averages, due to the gradual implementation of several transport and energy projects, including the $17 billion Iraqi Development Road project, equivalent to 6.5% of GDP, which is a network of railways, roads and ports linking Asia and Europe.

In the UAE, non-oil growth will slow slightly due to the completion of some earlier infrastructure projects, but will remain robust at around 5% in 2025.

Structural reforms since 2020, including the easing of foreign ownership restrictions, the introduction of long-term residency permits, and the lifting of some social restrictions, have boosted the country’s appeal as a global hub for trade, transport, tourism, and financial services.

These factors will support robust private sector activity in 2025, including in real estate, Moody’s said.

Diversification programmes, such as the Abu Dhabi Industrial Strategy, are also supporting growth in niche sectors that benefit from localisation of manufacturing and high-tech innovation, including artificial intelligence.

Despite the strong momentum for reform and investment, growth in MENA oil importers in 2025 will be similar to the 2.3% forecast for 2024, Moody’s said.

The agency noted that this rate is significantly lower than the average of 3.9% during the 2015-2019 period, mainly due to the slowdown resulting from the ongoing political adjustments in Turkey and Egypt, in addition to the economic turmoil related to the military conflict in Israel and Lebanon.

In Turkey, the largest economy in the region, growth will slow further in 2025, as the authorities are committed to reducing inflation, and high interest rates and tight fiscal policies will help rebalance the economy away from excessive and unsustainable domestic demand, contributing to controlling inflation.

In Tunisia, growth is expected to improve slightly after a long recovery from the pandemic, but difficult financing conditions and weak investment will continue to be constraints on economic activity.

In Jordan and Egypt, expected growth in 2025 depends on the absence of an escalation of conflicts in neighboring regions.

In Jordan, large projects financed by foreign direct investment, including from the GCC, are nearing construction and will support growth, but the biggest impact will be felt from 2026.

In Egypt, the positive outlook for growth in 2025 is based on the recovery of Suez Canal revenues, which fell by more than 75% in 2024 due to Houthi attacks in the Red Sea, knocking more than a full 1% off GDP growth.

In Morocco, climate-related investments have become a key economic driver, supporting the country to achieve strong growth of 4.0% in 2025, above the average before the COVID-19 pandemic.

This is supported by Chinese companies investing in multi-billion dollar projects related to electric vehicle (EV) batteries, which are strengthening the country’s existing automotive infrastructure.

Support from development financial institutions is also helping Morocco become a regional leader in renewable energy, according to Moody’s.

In 2024, Morocco received a $1.3 billion (1% of GDP) resilience and sustainability facility from the International Monetary Fund to support climate-related reforms and investments.

Clean and renewable energy is a key area of ​​investment for many countries in the region, and while much of the region still lags behind the rest of the world in reducing dependence on fossil fuels, recent investments are helping to gradually reduce their carbon footprint.

For oil importers such as Jordan, Morocco and Turkey, this means reducing dependence on costly imports, reducing external exposure risks.

For oil-exporting countries, renewable energy projects represent an opportunity to mitigate some of the risks associated with the long-term carbon transition by developing green alternatives for energy-intensive industrial sectors such as steel, aluminum and cement.

There is already significant solar and wind power generation capacity in Jordan, Morocco, Turkey and the UAE, and several large solar power plants are nearing completion or entering operation in Saudi Arabia, the UAE, Oman, Iraq and Kuwait, adding 2%-5% to existing power generation capacity in these countries.

Oman launched its green hydrogen strategy in late 2022 and aims to produce 1.4 million tons per year by 2030 through eight projects with foreign direct investment funding worth $49 billion, equivalent to 46% of GDP.

In the UAE, the Barakah nuclear power plant is expected to be fully operational in late 2024, contributing around 20% of the country’s electricity generation capacity. In addition, hydroelectric plants in Turkey produce around 20%-30% of the country’s total electricity generation.

Egypt and Morocco have initiated projects to build transcontinental transmission lines, including the EuroAfrica project linking Egypt to southern Europe, and the proposed Xlinks Power project between Morocco and the United Kingdom.

Moody’s said that public finance reforms will support improvements in the fiscal balance in Jordan and Morocco, as well as debt burdens.

In Turkey, fiscal tightening will largely lead to the phasing out of spending related to the devastating 2023 earthquake, in addition to a number of new revenue-raising measures adopted in 2024.

It expects the primary balance (the difference between revenues and expenditures excluding debt interest) to turn positive in 2025, and the overall fiscal deficit to decline to 3% of GDP compared to 5% of GDP estimated for 2024.

It expected that Turkey’s debt burden will remain among the lowest in the region, below 30% of GDP.

It said: “Challenges in achieving fiscal balance will remain in Tunisia and Egypt, and external exposure and government liquidity risks will remain high.”

In Tunisia, the deficit will remain high at around 6% of GDP, despite the continued focus on increasing tax revenues and reducing the wage bill in real terms, she noted.

She said that relying on domestic financing and resorting to direct monetary financing, as is the case in 2024, will increase risks to financial stability.

She explained that Tunisia’s forecasts do not include a new IMF program, which would reduce refinancing risks and provide stability to the fiscal path, attributing this to the lack of political consensus in the country.

Moody’s said that in Egypt, the ongoing IMF program remains key to reducing government liquidity risks and supporting reforms aimed at increasing tax revenues and reducing primary expenditures in general.

But with the easing of some of the Fund’s conditions due to the exceptional impact of the current conflict in the Middle East, especially with the loss of Suez Canal revenues, it expected the fiscal deficit to widen to about 8% of GDP in fiscal years 2024/25 and 2025/26, compared to about 4% of GDP in 2023/24, with the decline in exceptional revenues resulting from the Ras Al-Hikma investment deal and the increase in financing costs due to higher local interest rates.

It expected that the region’s ability to bear debt as a whole would weaken due to the refinancing of existing debts at higher interest rates.

The agency stated that interest costs in Egypt will reach about 60% of revenues in 2025, which is one of the highest levels among the countries it evaluates.

In Bahrain and Sharjah, about 30% of government revenues will be allocated to interest costs.

Overall, interest payments will consume around 10% of government revenues across the region, the highest level in the past decade except for 2020.

As global credit conditions ease with further rate cuts by the US Federal Reserve, countries with improved fiscal fundamentals such as Oman, Turkey and Jordan will benefit most from lower rates.

Countries with regular market access such as Bahrain and Sharjah will also benefit.

Lower funding costs are particularly supportive for countries with large government financing needs, especially where foreign currency debt represents a significant portion of those needs.

Geopolitical tensions remain the main source of credit risk, but most of the region will remain largely immune from the fallout, according to the report.

While the credit environment has remained largely unchanged from early 2024, regional geopolitical tensions have escalated and continue to pose a risk

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