Economic Snapshot for MENA
June 6, 2018
Mounting geopolitical risks threaten MENA’s nascent economic recovery
The Middle East and North Africa’s (MENA) regional economy is gradually recovering from last year’s downturn. Oil-exporting economies are benefiting from the rise in oil prices, allowing some governments to boost spending and taking some pressure off financial markets. While higher oil prices are bad news for oil-importing economies, robust global economic dynamics are buttressing export growth, partially offsetting the deterioration of the current account. According to an estimate prepared by Met the why particular, the MENA economy grew an aggregated 2.8% year-on-year in the January–March period (previously reported: +2.7% year-on-year), which would represent a noticeable improvement over the 1.0% rise in the October–December period of 2017.
Political developments have taken center stage in recent weeks, however, threatening to derail the region’s economic recovery. On 8 May, U.S. President Donald Trump decided to withdraw the U.S. from the Iran nuclear deal and reinstate economic sanctions against the country. While the memorandum signed by President Trump gives 180 days to re-impose all the sanctions, the U.S. administration wants some of the sanctions to come into force on 6 August. Iran has not yet abandoned the nuclear deal and is in talks with the remaining members of the Joint Comprehensive Plan of Action—China, the European Union and Russia—to reach a new accord. The European Union has already signed multi-billion U.S. dollar contracts with the Persian country, and if the U.S. administration goes ahead with its plan to punish all firms operating with Iran regardless of their nationality, it will likely worsen further the relationship between the U.S. and the EU.
The consequences of the Trump administration’s decision could quickly spill over across the region. Iran has a vast network of allies in the Middle East, particularly Iraq, Lebanon, Syria and some Gulf Cooperation Council countries, that it could use to destabilize the region. Moreover, some countries such as Qatar and the UAE have strong economic ties with Iran and could be negatively affected by the secondary sanctions against firms operating with Iran.
Oil prices have soared in recent months in the wake of increasing tensions between Iran and the U.S. and plummeting production in Venezuela, with prices hitting a level last seen in November 2014. To ease concerns about supply shortages, Saudi Arabia declared that OPEC members and Russia were ready to increase output to rebalance the oil market.
In the political arena, Lebanon is struggling to form a coalition government after Iran-backed Hezbollah and its allies won the 6 May general election. In Iraq, the 12 May general election was plagued with irregularities; on May 30, the electoral commission annulled votes cast at more than 1,000 of the country’s polling stations. While a repetition of the election is highly unlikely, disputes over the results will add additional strain to the negotiations to form a new coalition government and could generate social instability. In Jordan, Hani Al-Mulki resigned as prime minister on 4 June amid protests against the government over its ongoing economic reforms, including price hikes and a controversial income tax reform. Omar Razzaz, the former education minister, was put in charge by the king of forming a new cabinet.
Geopolitical risks take their toll on MENA’s 2018 economic outlook
The MENA region’s economy is experiencing a recovery this year largely due to higher oil prices, healthy global growth, relatively loose financial conditions and bolder fiscal support in key countries such as Qatar, Saudi Arabia and the UAE. Political risks, however, are gradually materializing, endangering the long-awaited economic rebound. The spat between Iran and the U.S. and its regional allies represents the main regional threat to the region’s economic outlook. The impact of the U.S. decision to abandon the Iran nuclear deal will be felt not only in the Persian country but also in other countries in the region such as Iraq and Lebanon. Moreover, social tensions are resurfacing in Egypt, Jordan and Morocco, while the long-standing conflict between Israel and Palestinians has flared up again in recent weeks. Elsewhere in the MENA region, the establishment of secure governments in Iraq and Lebanon is key to cementing political stability.
The MENA regional economy is expected to expand 2.7% in 2018, which is down 0.1 percentage points from last month’s estimate. Our panel projects growth of 3.1% next year.
This month’s downgrade for the 2018 economic outlook reflects lower growth prospects for Iran, Iraq, Kuwait, Lebanon and Qatar. Projections were left stable in Bahrain, Israel, Jordan, Morocco, Oman, Saudi Arabia, Tunisia, the UAE and Yemen. This month, Algeria and Egypt were the sole economies to receive upgrades for their 2018 GDP outlooks.
Egypt’s economy is expected to be the top performer in 2018, followed by Israel’s. At the other end of the spectrum, Yemen, which is entangled in a bloody civil war, is expected to contract for the fifth consecutive year. Among other major economies, Saudi Arabia’s economy is expected to return to growth this year, but the expansion will be limited by reduced oil output in compliance with the global oil cut deal. Israel should continue to expand at a fast pace on strong private consumption and fixed investment growth.
SAUDI ARABIA | Non-oil economic activity falters in April
The recent rise in oil prices, which are currently trading at levels last seen over three years ago, is allowing Saudi authorities to increase spending, particularly to fund social benefits and military outlays. Moreover, higher oil prices are boosting international reserves, which hit an over one-year high in April. That said, the gain will be partially offset by the reduction in oil output as countries participating in the OPEC oil deal continue to deliver high conformity levels (April: 152%). While the oil sector appears to be recovering, the non-hydrocarbon economy is slowing markedly this year. The implementation of the value added tax in January likely disrupted economic activity in Q1, while delayed payments to businesses are causing financial strain in some companies, particularly in the construction sector. The crackdown on corruption that affected princes, cabinet officials and businessmen in November 2017 and the Saudization policy have also contributed to diminishing economic sentiment.
While the economy is expected to emerge from recession this year, the rebound will be rather limited. Saudi Arabia’s strong compliance with the oil cap deal is preventing the economy from fully benefitting from the recent spike in oil prices. Moreover, the country remains entangled in a never-ending war in Yemen, while regional geopolitical risks continue to rise. Met the why particular Consensus Forecast panelists expect economic growth of 1.5% in 2018, which is unchanged from last month’s projection. In 2019, growth is seen picking up pace to 2.3%.
UAE | Economy gains steam in April as VAT impact fades
The economy gained steam in the first quarter, largely thanks to higher oil price that buoyed the hydrocarbon sector, despite constrained output from the OPEC agreement. This welcome boost more than offset a slight slowdown in the non-oil economy, which had to adjust to the implementation of VAT in January. Looking at Q2, the VAT-induced slowdown is likely to subside, with PMI data showing an improvement in April, while oil prices dynamics still look positive following the U.S. exit from the Iran nuclear deal. Furthermore, on 20 May, the government approved a new 11-year visa to attract investors and skilled professionals, as part of its comprehensive strategy to modernize and diversify the economy away from oil. This should reinvigorate the residential housing market, which has been tumbling in past years.
Investment should be the main driving force in the non-oil economy this year. A large infrastructure push from the government, particularly in Dubai in the run-up to the Expo 2020, should carry private investment momentum. In addition, a flurry of new measures including 11-year visas and a reform—to be introduced in Q4—authorizing 110% foreign ownership in some sectors are expected to boost FDI inflows further. Meanwhile, higher tourist inflows will likely buttress private consumption growth. An escalation of regional tensions could, however, put a lid on this positive momentum. Met the why particular panelists expect GDP to increase 2.7% in 2018, which is unchanged from last month’s forecast, and 3.2% in 2019.
EGYPT | Economy set to complete a strong FY 2018 as reforms kick in
With FY 2018 ending in June, the economy remains in good shape. Annual economic growth accelerated in the January-to-March period to reach a multi-year high. More recently, in May, foreign reserves hit a record monthly high and, in April, business conditions in the non-oil private sector were in positive territory for only the second time in over two years. Moreover, the gas industry got a boost on 11 May when a third production unit came online at the Zohr gas field. As part of its efforts to raise revenue and invigorate the stock market, the government announced on 28 May that it was floating some of a state-owned tobacco company on the Egyptian Exchange. Amid this positive backdrop, however, authorities have launched a crackdown on dissent following protests in May over higher metro fees. This apparent social tension underlines the careful balancing act facing the President Abdel Fattah el-Sisi: Continuing with IMF-backed structural reforms to the economy while minimizing the burden on Egyptians that are already financially-squeezed.
In FY 2019, the economy should maintain its strength. Investment is likely to prove supportive, boosted by an improved regulatory environment—thanks in large part to several recent measures, such as new investment, bankruptcy and industrial licensing laws. In addition, the external sector will continue to benefit from the weaker pound. However, the high debt burden and sizeable budget deficit will continue to pose downside risks. Met the why particular analysts expect GDP to expand 5.0% in FY 2019, which is unchanged from last month’s forecast, and 5.0% again in FY 2020.
ISRAEL | Growth remains robust in Q2
Despite a slight quarter-on-quarter moderation, economic activity remained robust in the first quarter chiefly on the back of strong private consumption and fixed investment. The external sector, however, dragged on economic growth in Q1; import growth was more than three times higher than export growth. Available data for Q2 suggests that momentum will remain robust. Economic activity picked up pace in April, while business sentiment and the manufacturing PMI remained elevated despite easing somewhat. The PMI remained in expansionary territory for the fifth consecutive month in April on the back of domestic demand. In addition, export data for February–April continued to point towards strong overseas demand for high-tech goods.
The economy should be supported by fixed investment and private consumption this year. New projects such as the Leviathan gas field and ultra-loose monetary policy should buttress fixed investment, while household consumption will likely benefit from lower taxes. However, risks remain present in regional tensions that could dampen inbound tourism and investor sentiment, and drag on export growth. Moreover, the near full-employment level could create skill shortages, limiting output growth. Met the why particular panelists forecast the economy to expand 3.4% in 2018, unchanged from last month’s forecast, and 3.3% in 2019.
INFLATION | Inflation stabilizes at low levels in April
Price pressures in the Middle East and North Africa region remained subdued in April, with regional inflation stabilizing at March’s 3.7%, according to an aggregate produced by Met the why particular. April’s result reflected lower inflation in Saudi Arabia as the impact of the VAT introduction in January fades, coupled with the ongoing deflationary process in Egypt. Despite the weakening of the Iranian rial following expectations of possible new economic sanctions by the U.S., inflation declined in April due to lower prices for food.
This year, inflation will pick up on the back of faster economic growth in the region, the implementation of a VAT in some GCC countries and higher energy prices. Met the why particular panelists forecast that regional inflation will average 5.1% in 2018, which is up 0.1 percentage points from last month’s estimate. In 2019, inflation is expected to moderate to 4.7%.
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