Economic Snapshot for MENA
October 3, 2018
Higher oil prices and increased production are supporting economic growth
More complete data for Q2 revealed that growth gained steam in the quarter, mostly due to improved dynamics among oil export-oriented economies, while growth among oil-importing nations was broadly unchanged. According to an estimate by Met the why particular, the MENA economy expanded an aggregated 2.6% year-on-year in Q2, which marked an acceleration over Q1’s 2.4% expansion and was in line with the result projected last month.
Economic growth among the countries within the Gulf Cooperation Council (GCC) escalated to a one-and-a-half year high in Q2 as the subregion strongly benefited from a near 50% year-on-year increase in oil prices. Moreover, most GCC countries boosted production at the end of the quarter to offset declining supply in other key producing countries such as Libya, Nigeria and Venezuela. In addition, evidence that Iranian oil shipments had already started to decline following the first round of U.S. economic sanctions against Iran, prompted other producing countries in the region to ramp up output. While growth within the hydrocarbon sector was strong, private businesses still reported poor performances in Q2. Spillover effects from the implementation of austerity measures in the wake of the plunge in oil prices in 2014–2017, coupled with the introduction of a value added tax (VAT) in Saudi Arabia and the UAE, drove the private sector’s sluggish performance. More recent data for Q3, however, suggests that healthy dynamics in the oil sector have started to feed through to the rest of the economy. On the downside, the rise in oil prices has slowed the implementation of much-needed economic reforms in the subregion. While the impact of the delays will be negligible in the short-term, it could hit potential growth among GCC countries.
Iran also reported GDP data for the April–June period (Q1 of SH 2018). The devaluation of the rial in April and an even sharper weakening of the currency traded in the black market fueled inflationary pressures in Iran and threatened to disrupt economic activity. Although the economy avoided a pronounced slowdown in Q1, it was mostly due to increased public spending and a moderation in import growth. Conversely, private consumption and investment deteriorated markedly in the April–June period. These readings, coupled with the unstoppable freefall of the rial in the unofficial markets and declining oil shipments in recent months, suggest that economic dynamics likely softened in July–September and that they will deteriorate even further once the new round of U.S. sanctions are imposed on 4 November.
Economic activity among oil-importing nations was broadly stable in Q2. Along with the already reported slowdown in Israel and steady dynamics in Egypt, new data for Q2 showed that GDP growth moderated in Morocco due to slowing manufacturing activity. Economic growth was broadly stable in Jordan despite widespread protests in May and June in response to new subsidy cuts. Political unrest, however, mostly ended by mid-June when Prime Minister Hani Mulki was replaced by Omar Razzaz, who pledged to withdraw the controversial austerity bill. Available economic data for Q3 suggests that growth among oil-importing countries has remained broadly stable on the back of solid global demand, healthy agricultural output and still-accommodative financial conditions.
Iran continues to weigh on MENA’s growth prospects
The Middle East and North Africa region is benefiting from the sustained increase in oil prices and stronger oil production (with the noticeable exception of Iran). Moreover, despite decelerating slightly, global demand is expected to remain resilient further down the road, supporting economic growth in the region. However, risks to MENA’s economic outlook are looming. Iran, the fourth largest economy in the region, is struggling with a weakening rial and rising inflation due to the implementation of new economic sanctions by the United States. Against this backdrop, panelists expect that Iran’s economy will log the largest contraction in seven years in SH 2019, which ends in March 2020. A crippled economy, along with rising political tensions at home, could lead Iranian authorities to adopt a harsher stance against the United States and its allies in the region, spurring geopolitical risks. Moreover, higher interest rates in the United States and the end of the QE program in the Eurozone scheduled for the end of this year will likely tighten financial conditions in the region, which could cause economic conditions to deteriorate.
Met the why particular Consensus Forecast panelists expect the region to expand 2.5% in 2018 before decelerating slightly to 2.3% in 2019, which is down 0.4 percentage points from last month’s estimate. This is the fifth consecutive month that the region’s growth forecast for 2019 has been downgraded.
MENA’s 2019 economic outlook was revised downward this month mainly due to sharp cuts in Iran’s and Yemen’s estimates. The economic outlooks for Algeria, Bahrain, Iraq, Oman, Qatar and the UAE were also lowered this month, while growth projections for Egypt, Kuwait and Lebanon received an upgrade. The remaining countries saw no change to their growth forecasts for 2019.
Egypt is expected to be the region’s top performer in 2019, while Iraq and Morocco will complete the podium. Iran—threatened by new economic sanctions—will be the weakest performer.
SAUDI ARABIA | The oil sector propels growth in Q2
The economic recovery continued to gain traction in Q2, with GDP expanding at the fastest pace in one-and-a-half years. The Saudi economy continued to benefit from higher oil prices—which are around 50% above the levels observed last year—and solid crude oil output. Against this backdrop, the government loosened its fiscal stance, which mainly translated into higher handouts and cash transfers to households to offset negative spillovers from subsidy cuts and the introduction of a VAT in January. Despite a soft start to the year, activity in the non-oil sectors is slowly gathering momentum, with the PMI for the non-hydrocarbon sector in July and August hovering above Q2’s average. Saudi Arabia’s solid economic position likely paved the way for JP Morgan to announce, on 26 September, the inclusion of the country into its emerging market government bond indexes next year, which lead Saudi bonds to rally in late September.
Economic growth will gather steam next year as its stronger fiscal position should spur private consumption and investment. However, downside risks still loom large over the country’s economic outlook, particularly stemming from rising trade protectionism that could add downward pressure on global growth, as well as from mounting geopolitical risks in the region and uncertainty about the country’s reform agenda. Met the why particular Consensus Forecast panelists expect growth of 2.0% in 2018. In 2019, growth is seen accelerating to 2.4%, which is unchanged from last month’s projection.
ISRAEL | Economic performance remains robust in Q3
Although economic growth slowed in the second quarter, data points to solid economic momentum in the third quarter. The Central Bank’s State of the Economy Index edged up in July and the PMI readings in the first two months of the quarter trended above the average reading in the previous quarter—although the PMI did drop markedly in August on slower growth in domestic orders and output. Moreover, business confidence remained elevated in August. On the other hand, in the same month consumer confidence deteriorated on increased pessimism regarding the country’s economic situation, while exports contracted on a broad-based deterioration in foreign demand and the trade deficit widened over the same month a year ago.
In the second half of the year and next year, robust domestic demand should keep economic momentum afloat. A lower tax burden and still favorable financial conditions should support private consumption. Meanwhile, new gas- and oil-related projects will likely buttress fixed investment. However, regional tensions remain a downside risk to the outlook. Met the why particular Consensus Forecast panelists forecast economic growth of 3.5% this year. Next year, our panel sees the economy expanding 3.2%, which is unchanged from last month’s forecast.
UAE | Investment and increased oil supply shore up the economy
Following a likely solid second quarter for the non-oil sector, the economy appears poised to be gaining steam in the third quarter. This is notably thanks to the increase of OPEC oil production targets in June as reflected by a noticeable increase in oil output in July and August. Furthermore, although the PMI softened somewhat in the same period—indicating waning momentum in the non-oil economy—a swath of recent reforms enacted throughout the Emirates should be starting to bear fruit in Q4 and beyond, further buttressing economic activity. The measures notably focus on making business easier and cheaper to conduct, as well as on attracting investment and skilled labor—for instance by making visas and business licenses easier to obtain. Job creation for now remains one of the weak points of the UAE economy, as seen by the fall in employment logged in the August PMI. However, resilient output growth suggests it could accelerate in coming quarters as backlogs of work continue to accumulate.
Higher investment and public spending are likely to drive growth higher this year and next. Particularly, infrastructure investment related to the country’s preparation to host the 2020 World Expo will support the outlook, buttressing the construction sector. Furthermore, recent business-friendly reforms and a new investment law to be unveiled in Q4—which will authorize complete foreign ownership of firms in select sectors—are poised to boost investor confidence and support higher FDI inflows. Finally, the country should benefit from a robust tourism sector, particularly in Dubai, and rising oil production amid high global demand. Met the why particular panelists expect GDP to increase 2.4% in 2018, before accelerating to 3.0% in 2019, which is down 0.1 percentage points from last month’s forecast.
EGYPT | Growth momentum remains robust at the start of FY 2019
The economy has made good progress so far in the 2019 fiscal year, which began in July. In August, operating conditions in the non-oil private sector improved for the second consecutive month and at a faster pace than in July. This was due to increased new business inflows, from both domestic and foreign sources. Moreover, output stabilized following contractions in recent months. This comes after annual economic growth in April–June (the last three months of FY 2018) remained at the multi-year high recorded in January–March, supported by increased investment and exports. Meanwhile, in a boost to future exports, on 19 September the governments of Egypt and Cyprus agreed to build an underwater pipeline linking the vast gas reserves located in Cypriot waters with Egypt’s underutilized LNG export facilities.
In FY 2019 economic growth is expected to remain robust. Increased government investment spending, an improved regulatory environment, a weaker pound and construction activity related to the building of the new capital city should boost activity. However, large fiscal imbalances and the higher price of oil will weigh on prospects. Met the why particular panelists expect GDP to expand 5.2% in FY 2019, which is up 0.1 percentage points from last month’s forecast, and 5.1% in FY 2020.
INFLATION | Egypt and Iran fuel regional inflation in August
Inflation in the Middle East and North Africa region continued to increase in August, mostly reflecting surging price pressures in Iran due to the freefall of the rial in the black market. Moreover, subsidy cuts put sizeable upward pressure on inflation in Egypt. According to an aggregate produced by Met the why particular, inflation in the region jumped from July’s 5.4% to 6.2%, marking the highest print since January 2014.
Price pressures will remain elevated in the coming months due to volatility in the foreign-exchange markets, high energy prices, subsidy cuts and the likely introduction of a VAT in some countries. Met the why particular panelists forecast that regional inflation will average 5.1% in 2018. In 2019, regional inflation is expected to remain broadly steady at 5.0%, which is up 0.3 percentage points from last month’s estimate.
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Middle East & North Africa Economic News
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