MENA: Economic Snapshot for MENA
July 4, 2018
All eyes on Iran and evolution of oil prices
The Middle East and North Africa’s (MENA) regional economy gained steam at the outset of the year as higher oil prices and steady production boosted economic activity among oil-exporting countries. Moreover, the region benefited from largely accommodative financial conditions and robust global growth that spurred demand for regional goods. According to an estimate prepared by Met the why particular, the MENA economy expanded an aggregated 2.6% year-on-year in the January–March period (previously reported: +2.8% year-on-year). The figure marked a sharp turnaround from Q4’s 0.9% increase, which had marked a multi-year low. More recent data suggests that the region’s economy kept up momentum in Q2 on the back of higher oil prices.
Meanwhile, oil-importing countries delivered a mixed picture in Q1, with their growth trajectories mostly related to domestic developments. Israel continued to benefit from loose financial conditions, which propelled private consumption. In Morocco, poor agricultural output dampened growth in Q1, while Tunisia benefited from healthy external demand, especially from the Eurozone.
While MENA’s nascent economic recovery appears to be materializing, political developments continued to dominate headlines in recent weeks. The U.S. pushed ahead with planned economic sanctions against Iran, and on 26 June, officials stated that they expect to cut most of Iran’s oil exports by 4 November. The subsequent expected reduction in global oil output triggered concerns that the oil market could be undersupplied, putting upward pressure on oil prices that are already trading at levels last seen nearly four years ago. To alleviate shortage fears, Saudi Arabia and the United States stated that the Saudi oil industry is ready to fill the gap. While no numbers were disclosed, President Trump said on 30 June that Saudi Arabia could add up 2 million barrels per day (mbpd). Analysts are more cautious and estimate a smaller increase of up to 1 mbpd. Earlier in the month, OPEC and Russia agreed on enforcing a compliance level of 110% to the oil cap deal from current levels of around 150%, which would imply an increase in global oil supply of between 700,000 barrels per day and 1 mbpd.
Iran again drags on MENA's 2018 outlook
The 2018 outlook for the Middle East and North Africa region deteriorated for the second consecutive period this month. The main downside risks to the region’s economic outlook remain intact, namely geopolitical threats and political unrest. Moreover, faster-than-expected monetary tightening in the United States could fuel financial volatility, hampering business activity and strengthening the currencies in the MENA region that move with the U.S. dollar.
The recent decision to increase oil supply to offset declining production in Venezuela and, most likely, Iran, was good news for economies driven by oil exports. Moreover, the direct impact of a potential trade war among major global players to the region is expected to be limited given MENA’s low exposure to the United States, except for Israel. Indirect effects, however, could stem from lower global growth, particularly in China, via reduced oil exports. The MENA regional economy is expected to expand 2.6% in 2018, which is down 0.1 percentage points down from last month’s estimate. Our panel projects growth of 3.0% in 2019.
Growth estimates for Iran took another hit this month, reflecting U.S. efforts to effectively isolate the country from the rest of the world. Jordan and Tunisia also saw their economic outlooks downgraded as social discontent and street protests are delaying long-awaited economic reforms. The UAE was the other country to see a cut to its 2018 growth projection, mainly reflecting a tough start to the year following the implementation of a value added tax in January. On the flip side, higher oil prices boosted the outlook for Algeria, Bahrain, Kuwait and Saudi Arabia. The forecasts for the other eight economies surveyed were stable this month.
Egypt’s economy is expected to expand at the fastest rate in 2018, with a 5.2% increase, followed by Israel and Morocco. At the other end of the spectrum, Yemen will contract for the fifth consecutive year as the country remains engulfed in an endless civil war. Although the Gulf Cooperation Council (GCC) countries will return to growth this year, limited oil output will constrain growth—despite the recent loosening of OPEC’s production cap.
SAUDI ARABIA | Economy gains steam in Q2
The economy emerged from recession in Q1 as higher oil prices compared to last year and steady production propelled the oil sector. Moreover, strong global growth and government support boosted activity in the manufacturing sector, which compensated for poor retail and transportation dynamics due to the implementation of a value added tax (VAT) and higher petrol prices. Recent data for Q2 suggests that the economy is gaining traction. The PMI for the non-oil sector rebounded in May from April’s all-time low. Moreover, higher oil prices are providing greater fiscal space and improving Saudi Arabia’s external position. On 30 June, Saudi Arabia agreed to increase oil supply to offset falling production in Venezuela and negative spillovers from the U.S. sanctions against Iran. The Saudi oil industry has an unused capacity of around 2 mbpd and could quickly ramp up production.
Economic growth is slowly recovering from the plunge in 2017, mainly due to higher oil prices. That said, the rebound will be limited as geopolitical risks in the region remain high, and the VAT implementation in January may have disrupted economic activity at the outset of the year. Met the why particular Consensus Forecast panelists expect growth of 1.6% in 2018, which is up 0.1 percentage points from last month’s projection. In 2019, growth is seen picking up pace to 2.3%.
ISRAEL | Growth softens slightly in Q2 on weak external demand
A second release of Q1 GDP data shows that the economy grew at a quicker pace than previously estimated, driven by a strong domestic economy—especially private consumption—that offset a weak external sector. Looking at Q2, industrial production expanded robustly in April, and the monthly state of the economy index remained resilient through May. On a less positive note, activity in the manufacturing sector contracted in May on weakening domestic demand, and merchandise exports declined sharply on lower foreign demand for high-tech goods. Against this backdrop, the government is reportedly planning to loosen oil drilling restrictions in the leadup to the next round of license auctions in October–November. Restrictions that are likely to be lifted include the amount that can be exported and the need to supply the domestic market. The move could boost energy exports in the medium-term. However, disputes with Cyprus and Lebanon over extraction rights remain.
Domestic demand is expected to propel economic growth this year, which Met the why particular Consensus Forecast panelists see at 3.4%, unchanged from last month’s forecast. New gas- and oil-related projects should buttress fixed investment growth, which should further benefit from ultra-loose monetary policy. Household consumption will likely benefit from a lower tax burden. Downside risks are present in regional tensions that could drag on inbound tourism, investor sentiment and export growth. Met the why particular panelists forecast the economy will expand 3.2% next year.
UAE | Government acts to diversify the economy
The UAE has been ramping up plans in recent weeks to diversify its economy away from oil and to stimulate investment, which is already starting to reflect positively in economic data for Q2. Following a visa reform approved in May—which should support a flagging housing market— the government announced on 7 June a comprehensive joint investment plan with Saudi Arabia focused on the agricultural and hydrocarbon sectors as well as industrial SMEs, with further calls for cooperation in education and military ventures. Meanwhile, on 5 June, Abu Dhabi unveiled a three-year, USD 13.6 billion stimulus package aimed at fostering growth in new industries, boost tourism, and facilitate business, while aiming to create 11,000 jobs. This bodes well for business confidence, which shot up to the highest level ever recorded in the May PMI.
The non-oil economy should be largely fueled by strong investment momentum this year. Aside from a large infrastructure push—particularly as Dubai prepares for Expo 2020—the country will benefit from the flurry of measures announced recently, further reinforced by a new investment law authorizing complete foreign ownership of firms in select sectors to be unveiled in Q4, which will likely attract large FDI inflows. Solid tourism growth should also support private consumption while the effects of VAT introduction in January subside. Met the why particular panelists expect GDP to increase 2.6% in 2018, which is down 0.1 percentage points from last month’s forecast, and 3.2% in 2019.
EGYPT | Economic reforms propel growth in January–March
The economy appears to be in good shape, and President Abdel Fattah el-Sisi’s ongoing efforts to shore up government finances are showing results. Annual economic growth accelerated in January–March, the latest period for which government data is available, to reach a multi-year high. Meanwhile, in the July–February period, total government revenues were up nearly 11% compared to the same period a year earlier, while growth in expenditures was noticeably less, at nearly 30%. In recent weeks, structural reforms to the economy have kept up pace. On 2 June, the price of piped drinking water was increased by nearly 50%; electricity prices were hiked on 19 June; and the government increased prices for a range of subsidized energy products on 23 June. These reforms helped unlock a loan of over USD 2 billion from the IMF on 29 June, as part of its three-year support program. Meanwhile, to help alleviate financial pressure on consumers, President el-Sisi approved an increase in public-sector salaries and pensions, which came into effect on 1 July.
In FY 2019, which started this month, the economy is expected to maintain its strength, primarily due to strong investment, which should benefit from an improved regulatory environment—on the back of new investment, bankruptcy and industrial licensing laws—and higher investment in the oil and gas sector. In addition, the external sector will continue to benefit from the weaker pound. However, the high debt burden and fiscal deficit will continue to pose downside risks. Met the why particular analysts expect GDP to expand 5.1% in FY 2019, which is up 0.1 percentage points from last month’s forecast, and 5.0% in FY 2020.
INFLATION | Inflation jumps to three-month high in May
Inflation in the Middle East and North Africa region increased markedly from 3.6% in April to 4.0% in May, according to an aggregate produced by Met the why particular. May’s reading represented the highest rate in three months and reflected faster price increases in nine of the fifteen countries that report monthly figures. Algeria led the pack due to higher food prices, followed by Iran, which is suffering from a sharp currency depreciation in the black market. Moreover, Iraq posted the first increase in consumer prices in four months. Conversely, inflation declined sharply in Egypt as the negative impact of the IMF-backed reforms continues to fade. In Saudi Arabia, sluggish growth and a relatively strong currency tamed price pressures in May.
Price pressures in the region are expected to strengthen this year on the back of higher commodity prices, reduced economic slack, the implementation of a VAT in some GCC countries, and higher energy prices. Met the why particular panelists forecast that regional inflation will average 4.9% in 2018, which is down 0.2 percentage points from last month’s estimate. Along with the aforementioned factors, this month’s decline in the inflation forecast for 2018 reflected a change in the definition for Algeria inflation. Starting from this publication, the headline inflation for the country will be the national result instead of the figure for the city of Algiers; inflation in Algeria’s capital is higher than the national average. In 2019, regional inflation is expected to slow to 4.6%.