MENA: Economic Snapshot for the Middle East & North Africa
February 7, 2018
Election cycle could undermine economic recovery
The impact of the oil production cuts by OPEC members and heightened geopolitical tensions led economic growth in the Middle East and North Africa region to moderate to an all-time low last year. MENA economies rose an aggregated 1.7% in 2017, down from 2016’s five-year high of 4.7%. Oil-exporting economies were behind last year’s economic slowdown, as they had to cut oil production by a combined total of 1.2 million barrels per day (mbpd) in compliance with the November 2016 deal between OPEC and other key global suppliers, namely Russia. Reduced oil production translated into lower government revenues and weaker fiscal support to the economy. However, the effects of lower production were partially offset by rising oil prices that allowed some governments, including Saudi Arabia, to unravel some of the austerity measures adopted in the wake of the 2014–2016 collapse in oil prices.
The cold war between regional powers Iran and Saudi Arabia also weighed on growth last year. Warming relations between the Persian country and Qatar prompted Saudi Arabia and other Arab allies to sever diplomatic ties and impose an economic blockade on Qatar in June. In November, Prime Minister of Lebanon Saad Al-Hariri abruptly announced his resignation while he was in Saudi Arabia. While he cited Iran’s involvement in domestic politics through its ally Hezbollah as the main reason behind his decision, some politicians in Lebanon, including President Michel Aoun, suggested Hariri was actually being detained by Saudi Arabia, which was attempting to curb Iran’s influence in Lebanon. Hariri returned to Beirut on 21 November and suspended his resignation. The proxy war between Iran and Saudi Arabia continued in Syria and Yemen, with both countries supporting opposite sides in the conflicts that have already caused thousands of deaths and led to the displacement of millions of refugees.
While the rivalry between Iran and Saudi Arabia will continue to dominate headlines this year, elections in Egypt, Lebanon and Iraq will also top the political agenda. Egyptian President Abdel Fattah el-Sisi is set to comfortably win the 26–28 March presidential election after the main opposition candidates were blocked, arrested or they withdrew due to intimidation. The lack of an alternative to el-Sisi could fuel popular unrest, threatening to derail Egypt’s nascent economic recovery. Lebanon will hold its first general election in nearly a decade on 6 May, which could help cement a more stable political environment and represent a turning point for the Lebanese economy. The election has been postponed three times since 2009 due to political crises and security concerns.
Economic prospects in Iraq will largely depend on the outcome of the 12 May general election, in which a new parliament will be chosen; the parliament will then elect both the president and the prime minister. While Prime Minister Haider al-Abadi is enjoying a surge in popularity because of the recent victory against the Islamic State and the suppressing of Kurdish ambitions for statehood, he is facing severe competition, particularly from former Prime Minister Nouri al-Maliki. In any case, the outcome of the election will likely lead to a highly fragmented parliament, in which difficult talks to form a coalition government could lead to political paralysis.
Geopolitical risks threaten 2018 economic growth prospects
Higher oil prices will boost economic growth among oil-producing economies this year, which will have a positive impact on regional growth in MENA for 2018. Moreover, countries in North Africa will benefit from improved agricultural output and a mild recovery in
While economic activity is expected to gather steam this year following the dismal performance in 2017, growth will remain at relatively low levels. Although the rally in oil prices is helping the economic recovery among oil-exporting economies, fiscal imbalances remain large and continue to put a dent in governments’ ability to shore up the real economy. Dynamics among oil-importing nations will improve slightly this year on the back of economic reforms and strong global demand. High levels of public debt will, however, continue to limit fiscal support. Overall, risks to the outlook are skewed to the downside: Geopolitical threats remain elevated, oil prices could collapse again if participants in the oil-cap deal deviate from their quotas and economic reforms could stall due to domestic tensions in some countries, particularly in Egypt, Iraq and Lebanon.
The MENA region is seen expanding 2.8% in 2018, which is down 0.1 percentage points from last month’s estimate. Our panel projects regional growth of 3.3% in 2019 as fiscal adjustments across the region ease and economic reforms bear fruit.
This month’s downward revision to the 2018 MENA economic outlook reflects lower growth prospects for Algeria, Bahrain, Iran, Iraq, Israel, Jordan, Kuwait, Morocco, the United Arab Emirates and Yemen. Panelists upgraded their view of the Egypt, Lebanon, Oman and Qatar economies, while forecasts for Saudi Arabia and Tunisia were left unchanged.
Egypt is expected to be the fastest growing economy in 2018, followed by Iran. At the other end of the spectrum, Saudi Arabia, which is facing the lion’s share of OPEC’s oil-cut reduction, is expected to be the region’s worst performer.
SAUDI ARABIA | VAT introduction hits non-oil economy in January
The most recent data for 2018 suggests that the non-oil economy was hit by the introduction of the value-added tax (VAT) on 1 January, with the PMI for the non-hydrocarbon sector falling to an all-time low in January. That said, the survey also signaled that demand will recover in the coming months: Businesses continued to increase their staffing levels, and the forward-looking economic gauge climbed to an eight-month high. Moreover, the economy will benefit from higher crude prices, which reached an over three-year high in late January. Rising oil revenues and higher tax collection due to the VAT introduction will help reduce the government’s fiscal gap, despite the approval of a more expansionary budget for this year. Furthermore, the government announced on 30 January that it has seized over USD 110 billion in financial settlements stemming from its November crackdown on corruption.
The economy will rebound this year on the back of stronger government support, which will translate into increases in capital expenditure and cash transfers to individuals. However, large public imbalances, restrained oil supply in response to OPEC’s oil-cap deal and mounting geopolitical risks will put a dent in the Kingdom’s economic recovery. Met the why particular Consensus Forecast panelists expect growth of 1.6% in 2018, which is unchanged from last month’s projection. In 2019, growth is seen picking up pace to 2.5%.
UAE | Economy buoyed this year by more expansionary fiscal policies
The non-oil economy continues to purr along at the start of 2018. The non-oil PMI was well in positive territory in January thanks to greater output and new orders from home and abroad, while employment growth was the fastest in 12 months and wage growth picked up. On the downside, real wages are likely to come under pressure from higher inflation this year following the introduction of 5% VAT on 1 January. The hydrocarbon sector continues to be held back by OPEC oil production cuts, although the recent significant uptick in oil prices is good news for the already solid fiscal position. On the back of higher oil prices, the slew of 2018 budgets presented by different emirates and the federal government over the last few months are more fiscally expansionary, with Dubai’s budget containing a notable uptick in infrastructure spending as part of preparations for the 2020 World Expo.
Growth should rise sharply this year, as higher oil prices support confidence and financial conditions. The non-oil sector will also benefit from capital spending on the Dubai 2020 World Expo, while a looser fiscal stance will provide further impetus. Downside risks stem from regional instability—particularly concerning the ongoing dispute with Qatar—and potential oil price volatility. Met the why particular panelists expect GDP to rise 2.8% in 2018, which is down 0.2 percentage points from last month’s forecast, and 3.2% in 2019.
EGYPT | El-Sisi prepares for unopposed presidential election amid improving economic panorama
The economy is slowly turning a corner. In January international reserves rose for the 15th straight month, while the PMI reading suggested business conditions largely stabilized, thanks in part to greater new export orders. In addition, the primary budget deficit for July–December fell to a multi-year low, due to tight wage bill control and higher tax revenue. The improved macroeconomic position led Fitch Ratings to recently revise its outlook to positive. The government is pushing ahead with reforms: On 28 January parliament passed Egypt’s first bankruptcy law, to simplify the bankruptcy procedure and entice foreign investment. However, the country still faces myriad challenges, and the IMF recently urged the government to boost the private sector and strengthen the labor market. On the political front, President el-Sisi looks set to romp home in presidential elections scheduled for end-March. Most challengers have dropped out of the race due to intimidation, with the one remaining candidate accused by some of being in cahoots with the current leader.
Growth should accelerate in FY 2018. Investment will likely rise sharply, boosted by stronger business sentiment and an improved regulatory environment, while the external sector will benefit from the weaker pound. However, the elevated debt burden could become a pressing concern if reform momentum ebbs. Met the why particular analysts expect GDP to expand 4.5% in FY 2018, up 0.1 percentage points from last month’s forecast, and 4.9% in FY 2019.
ISRAEL | Economic growth remains robust at the end of 2017
Robust leading data for the fourth quarter suggests that last year’s momentum continued in the October–December period; survey data through December showed both consumer and business confidence hovering near their respective all-time highs, while economic activity trended higher in the closing months of last year. Notwithstanding, initial estimates for annualized economic growth in the third quarter were revised downwards as household spending and fixed investment both came up short against early projections. The most significant revisions, however, were left for the external sector as export growth in the quarter was slashed and import growth was revised higher.
Fiscal policy will get even more accommodative this year, with the 2018–19 state budget set to increase spending and reduce taxes in an effort to support economic growth. Moreover, ultra-loose monetary policy will keep interest rates low and incentivize investment. Household spending will benefit from near-full employment and resilient asset values, while an improving global economy should sustain last year’s robust growth in exports. That said, a flaring-up of Israeli-Palestinian tensions could upend economic sentiment and threaten inbound tourism. Met the why particular panelists expect GDP growth of 3.3% in 2018, down 0.1 percentage points from last month’s estimate, and 3.2% in 2019.
INFLATION | Ongoing disinflationary pressures in Egypt continue to drive down regional inflation
According to a regional aggregate produced by Met the why particular, inflation in the Middle East and North Africa fell from November’s 4.4% to a four-month low of 4.3% in December. The drop in regional inflation mostly reflected the ongoing disinflationary process in Egypt because of a stabilizing economy and a favorable base effect. That said, inflation in Egypt remained in the double digits for the 21st consecutive month. Inflation also moderated in Bahrain, Jordan and Kuwait, while it accelerated in most of the remaining economies.
The implementation of a VAT in Saudi Arabia and the United Arab Emirates, higher oil prices and a weaker U.S. dollar will push regional inflation up this year. Met the why particular panelists forecast it will average 5.2%, which is up 0.1 percentage points from last month’s estimate. In 2019, inflation is expected to moderate to 4.6%.