MENA: Oil market volatility casts doubts on MENA's economic recovery
March 7, 2018
Geopolitical instability and spillovers from the oil production cuts by OPEC members led growth in the Middle East and North Africa (MENA) region to decelerate in the October–December period compared to the July-September period. According to preliminary data for the period, year-on-year economic growth in the region fell from 1.8% to 1.4%. With data still outstanding for many countries in the region, oil-exporting economies were likely behind Q4’s slowdown as harsh austerity measures implemented in 2016 and 2017 to cope with the dramatic fall in oil revenues continued to rattle activity.
Growth in Israel picked up in Q4 as the strong global trade cycle boosted demand for the country’s high-tech goods, while tourism recovered to some extent. Private consumption remained resilient on the back of the Central Bank’s ultra-loose monetary policy. Meanwhile, economic activity in Egypt gathered steam in the October–December period as the IMF-induced reforms implemented from November 2016 onwards continued to bear fruit. Moreover, Egypt’s external sector reaped the benefits from a weak pound. Economic dynamics in Tunisia remained robust, mostly reflecting a strong agricultural sector and healthy demand from Europe.
Recent data for Q1 points to a widespread recovery in the region. The non-hydrocarbon sector continues to benefit from strong global growth, which is spurring activity in the region and fostering job creation. Moreover, higher oil prices allowed some governments including Qatar, the UAE and Saudi Arabia to unveil more expansionary budgets for this year. That said, heightened volatility in U.S. stock markets in early February, amid expectations that sticky inflationary pressures in the country could force the Federal Reserve to accelerate its tightening cycle, sent shockwaves across the region. While the impact on foreign-exchange and financial markets was limited, the equity rout sent oil prices to their lowest level since December.
Although crude oil prices have since gained some ground, volatility in the oil market persisted as U.S. shale producers continued to pump oil at record rates, jeopardizing efforts by OPEC and other key global suppliers, namely Russia, to cut down on global output. Moreover, instability increased following U.S. President Donald Trump’s recently announced decision to impose severe tariffs on imported steel, which could lead to the most serious trade disputes in recent memory.
2018 economic outlook defies growing economic and political challenges
The MENA economy is expected to recover this year on the back of higher oil prices, which will allow oil exporting countries to implement more expansionary fiscal policies, contrasting the austerity adopted in the wake of the 2014–2016 collapse in oil prices. More supportive public budgets will mostly translate into higher capital expenditure. Despite the increase in oil prices, external accounts among the region’s oil-importing nations will not be massively affected, as surging production in the United States will limit the rally in crude oil prices. Furthermore, strong global growth will bode well for the region’s external sectors.
Household spending in the region will, however, be constrained by the removal of subsides and the implementation of higher taxes in some countries such as Egypt and Saudi Arabia. MENA is also grappling with mounting geopolitical risks mostly stemming from the cold war between Iran and Saudi Arabia, large economic imbalances and lack of progress in implementing economic reforms. Moreover, the equity rout in early February signals that last year’s low level of volatility in the financial markets has come to an end and that market jitters could become more frequent this year, threatening the stability of the region’s economic recovery.
The MENA region is seen expanding 2.9% in 2018, which is up 0.1 percentage points from last month’s estimate. Our panel projects regional growth of 3.3% in 2019.
This month’s upward revision to the 2018 economic outlook reflects stronger growth prospects for Algeria, Bahrain, Egypt, Iraq and Lebanon. Panelists downgraded their view of the economies of Jordan, Kuwait, Tunisia and Yemen, while forecasts for Iran, Israel, Morocco, Oman, Qatar, Saudi Arabia and the United Arab Emirates were left unchanged.
Egypt’s economy is expected to be the best performer in 2018, followed by Iran’s. At the other end of the spectrum, Yemen, which is entangled in an unending civil war, is expected to be the region’s worst performer. Among the major economies, Saudi Arabia will log the weakest expansion as the country faces the lion’s share of OPEC oil cuts.
SAUDI ARABIA | Crown Prince consolidates power following military leadership shake-up
Volatility in financial markets, a strong U.S. dollar and surging oil production in the United States sent oil prices down in early February, threatening to derail the Kingdom’s economic recovery. Although oil prices are expected to remain relatively high this year compared to in 2017, Saudi authorities signaled that they will likely tap international bond markets for the third consecutive year in 2018, as early as in March, to ease fiscal pressures. Meanwhile, Crown Prince Mohammed bin Salman continues to cement his political power following November’s massive crackdown on corruption that affected prominent businessmen, princes and top officials. On 26 February, the Saudi government announced that several top commanders had been removed, including the military chief of staff and the leaders of air and land forces.
The economy will benefit this year from higher oil prices and strong global growth. Increased oil revenues will allow the government to adopt a more expansive fiscal stance. That said, persistent geopolitical threats, capped oil supply and risks that oil prices do not rally significantly are expected to limit the 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 2.3%.
UAE | Activity in the non-hydrocarbon sector remains robust at the outset of the year
The strong tailwinds that were in place in 2017 are keeping the non-oil economy sailing smoothly in the early months of 2018, despite a slowdown following the introduction of a 5% VAT in January. The non-oil PMI receded to a five-month low in February on lower output growth but remains in expansion territory, buttressed by strong domestic demand. Moreover, despite the constraints imposed by the OPEC agreement to cut oil production, the hydrocarbon sector is benefiting from higher oil prices compared to last year. Looking ahead, stronger oil revenues are poised to support government spending this year. Notably, a large increase in infrastructure spending is expected, especially in Dubai, which hosts the 2020 World Expo and is already benefitting from a boom in construction.
Strong public sector support should drive a sharp increase in growth in the non-oil economy this year, while household consumption remains constrained following the implementation of VAT. Public spending should furthermore be reinforced by higher oil prices amid healthy global growth. Finally, tourism growth will likely remain robust, particularly in Dubai as the city prepares for the 2020 World Expo. However, downside risks related to regional instability remain, notably the ongoing feud with Qatar, as well as risks of volatility in oil prices. Met the why particular panelists expect GDP to increase 2.8% in 2018, which is unchanged from last month’s forecast, and 3.3% in 2019.
EGYPT | El-Sisi set to easily win a second term as economic recovery gains traction
Economic signals are positive leading up to the 26-28 March presidential elections. Growth accelerated in the October–December period thanks to a robust external sector and solid pubic domestic demand, while the squeeze on living standards is beginning to ease, as inflation has plunged in recent months. Other signs are also encouraging; although the PMI hovered below the 50-point threshold in February, new orders grew, while international reserves soared in the same month and the unemployment rate dipped to a seven-year low in Q4. In mid-February, a USD 15 billion agreement with Israel was reached, which will see the country export around 64 billion cubic meters of natural gas to Egypt over ten years. This will help satisfy buoyant domestic demand and support Egypt’s longer-term aim of adding value to gas imports by becoming an LNG export hub.
Growth should accelerate in FY 2018. Investment will likely rise sharply, boosted by higher business sentiment and an improved regulatory environment—thanks in part to recent amendments to the capital markets law. In addition, the external sector will benefit from the weaker pound. However, the elevated debt burden and sizeable budget deficit could become pressing concerns if reform momentum ebbs. Met the why particular analysts expect GDP to expand 4.7% in FY 2018, up 0.2 percentage points from last month’s forecast, and 4.9% in FY 2019.
ISRAEL | Economy starts 2018 on a solid footing despite increasing political noise
Israel’s economy wrapped up last year with unexpectedly robust annualized growth in the fourth quarter. Although growth eased from the third quarter on slower consumer spending, it remained elevated thanks to the strength of the external sector. Household spending, however, experienced a sharp correction from a quarter earlier, slowing despite near-full employment and record-high consumer sentiment. Meanwhile, exports of goods and services closed the year impressively on buoyant exports of high-tech services and a surging tourism sector—both proving resilient despite the strengthening of the shekel. Leading data from the first quarter has been mostly positive, with upbeat survey data suggesting that consumers are still benefiting from the tight labor market, while external trade appears to be reaping gains from a booming global economy. Prime Minister Benjamin Netanyahu has been weathering a dramatic series of corruption allegations, but his political fate over the short term is unlikely to meaningfully alter the balance of power, given the broad support from his Likud party.
A booming global economy is expected to sustain last year’s robust growth in exports, while household spending should get a boost from near full employment and resilient property values. Accommodative fiscal policy and ultra-loose monetary policy will lift spending and incentivize investment, respectively. Heightened Israeli-Palestinian tensions could, however, 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 forecast, and 3.2% in 2019.
INFLATION | VAT causes regional inflation to shoot up
According to a preliminary aggregate produced by Met the why particular, inflation in the Middle East and North Africa region rose from December’s 4.0% to a nine-month high of 4.6% in January. The marked increase in inflation mainly reflected a strong rise in prices in Saudi Arabia and the United Arab Emirates because of the introduction of the value-added tax in January. Other countries that contributed to the rise were Bahrain, Lebanon, Qatar and Tunisia.
Inflation for most of the remining economies in the region was lower in January compared to the previous month. Notably, inflation in Egypt dipped below 20% for the first time since November 2016 as the impact of the government’s reform measures lessened. Although inflation ticked down in Iran, overall price pressures remain high on the back of a weakening rial.
The implementation of a VAT in some GCC countries and reduced slack will add upward pressure to inflation this year. That said, Egypt’s strong disinflationary process will partially offset the regional rise in inflation. Met the why particular panelists forecast that inflation will average 5.1% in 2018, which is down 0.1 percentage points from last month’s estimate. In 2019, inflation is expected to moderate to 4.6%.
Written by: Ricard Torné, Head of Economic Research