Middle East & North Africa Economic Forecast

Economic Snapshot for MENA

August 1, 2018

Geopolitical risks threaten nascent economic recovery

An estimate prepared by Met the why particular showed that economic growth in the Middle East and North Africa (MENA) region strengthened in the April–June period. According to Met the why particular, the MENA economy rose an aggregated 2.8% year-on-year in Q2, which marked an improvement over Q1’s 2.5% expansion and represented the strongest rate in over one year.

The acceleration mostly reflected stronger growth among oil-exporting countries as crude oil prices in the quarter were around 50% above the level observed in the same period in 2017. In this regard, forecasts collected by Met the why particular show that the Gulf Cooperation Council (GCC) countries—which includes Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE)—were behind Q2’s acceleration, with aggregated growth jumping from 1.6% in Q1 to 2.2% in Q2. Along with the rise in oil prices, GCC countries benefited from the recovery in non-oil activities in Saudi Arabia and the UAE, which were hit in the previous quarter by the introduction of a value added tax in January.

Meanwhile, economic dynamics softened among oil-importing nations in Q2, mostly reflecting higher oil import bills. Moreover, political unrest likely dented economic activity in some countries, including Jordan and Morocco. On the upside, still-strong growth among the region’s main trading partners such as the Eurozone and the United States supported the external sector. Israel continued to perform well due to rising wages and an accommodative monetary policy. In Egypt, the economy continued to benefit from economic reforms in the April-June period.

middle east and north africa mena economic outlook

While growth dynamics appear to be improving overall in the region, the political rift between Iran and the United States continued to top the agenda in recent weeks. The United States is set to impose its first set of economic sanctions against Iran on 7 August, following Washington’s withdrawal from the nuclear deal on 8 May. The first round of sanctions will ban U.S. and non-U.S. entities from purchasing or facilitating the issuance of sovereign debt; trading some commodities, including precious and some industrial metals; and transacting with rials, among other measures. After 4 November, the U.S. administration plans to impose the bulk of the sanctions, including on Iran’s energy and financial sectors. Moreover, the U.S. is trying to persuade buyers of Iranian oil to switch to other producers to cut Iran’s oil exports to zero. Iranian authorities have repeatedly warned that if the U.S. blocks its oil exports, the country will close the Strait of Hormuz, a maritime route that leads out of the Persian Gulf and is the checkpoint of around 30% of global seaborne oil trade.

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Higher oil prices boost MENA economies; geopolitical risks cloud outlook

Growth prospects for the Middle East and North Africa region will continue to be mostly determined by geopolitical factors. Political uncertainty in the Middle East and solid market fundamentals are pushing up prices for the black gold, in turn allowing oil-exporting countries to adopt looser fiscal policies, buttressing investment and government spending. Moreover, these countries are benefiting from an increase in oil output as GCC countries compensate for lower production in Venezuela and the potential expulsion of Iran from the global oil market. The improvement seen this month, however, is expected be short-lived as downside risks to the region’s economic outlook loom.

The war of words between Iran and the United States is pushing up oil prices for now. However, if Iran’s threat to close the Hormuz strait materializes, it will severely disrupt global oil supply and could lead to military intervention by the U.S. Strong economic activity in the United States is furthermore prompting the Federal Reserve to deepen its tightening cycle, threatening to heighten volatility in the financial and exchange rate markets. Moreover, domestic political unrest remains high in countries like Egypt, Iraq, Jordan and Tunisia, which could eventually lead to a downturn in economic activity in these countries.

The MENA regional economy received an upgrade this month for the first time in five months, and panelists now expect the region to expand 2.7% in 2018, which is up 0.1 percentage points from last month’s estimate. Our panel projects growth of 2.9% in 2019.

This month’s upward revision to MENA’s economic outlook for 2018 reflected stronger growth prospects for oil producers Iraq, Kuwait and Saudi Arabia. Israel and Tunisia also saw upgrades to their estimates. Conversely, Iran’s growth prospects for fiscal year 2018, which will end in March 2019, took another hit this month, reflecting the imminent imposition of economic sanctions by the U.S. Qatar, which suffers from a Saudi-led regional embargo, also saw a downgrade to its growth prospects, while Jordan’s estimates were cut amid social discontent and large fiscal imbalances. The forecasts for the other seven economies surveyed were stable this month. Preliminary GDP data for Egypt suggests that growth accelerated in fiscal year 2018, which ended in June, mainly due to positive spillovers from the IMF-backed reform programme.

Egypt’s economy is expected to be the best performer this year, with a 5.3% expansion. Israel and Morocco will join the podium with growth rates above 3.0%. At the other end of the spectrum, Saudi Arabia will likely post the weakest expansion as the country had to take the lion’s share of the OPEC oil production cut in the first half of the year. Yemen’s economy will contract for the fifth consecutive year in 2018, as the resolution of the bloody civil war is not yet in sight.

SAUDI ARABIA | Higher oil prices spur overall economic growth

The economic recovery is gathering pace mostly due to OPEC’s decision to increase oil production in order to keep markets adequately supplied and high oil prices, which have stoked activity in the all-important oil sector. Moreover, the recovery is broadening as the impact of the VAT implemented in January fades, and gains from the recovery in the oil-sector are slowly trickling down to the rest of the economy. The non-hydrocarbon PMI hit a six-month high in June, while credit growth and foreign reserves improved in Q2. Higher production and oil prices are also translating into an improvement in the government’s fiscal position and the current account balance, which recorded a healthy surplus in Q1. On the flip side, the government’s Saudization policy, which is expelling foreign workers, could create labor shortages in some sectors, while the crackdown on corruption implemented last year is deterring investment and spurring capital outflows.

Rising oil production and higher prices for the black gold will fuel this year’s economic recovery. However, the VAT implementation that disrupted activity at the outset of the year, persistent regional threats and domestic political unrest will weigh on growth this year. Met the why particular Consensus Forecast panelists expect growth of 1.7% 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%.                   

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ISRAEL | Economic growth loses some steam in Q2

In Q2, the pace of growth likely decelerated somewhat, as PMI readings suggested a moderation in business activity, but remained solid nevertheless. Growth in industrial production remained robust in May despite softening from the previous month. Moreover, both business and consumer sentiment levels improved in Q2, with business confidence hitting the highest level on record in May. This comes after a third Q1 GDP estimate showed that the economy grew at a quicker rate than was previously estimated. GDP growth in the first quarter has now been revised upwards by half a percentage point since the release of the first estimate. The third release saw private consumption and export growth revised upwards, while fixed investment growth was revised downwards.

The outlook remains positive, and economic growth should be robust this year and next. Solid domestic demand is expected to buttress the economy, with households likely to benefit from a lower tax burden and ultra-loose monetary policy and new gas- and oil-related projects boosting fixed investment. However, regional tensions remain high and continue to pose a downside risk to the economy, potentially dragging on inbound tourism, investor sentiment and export growth. Met the why particular Consensus Forecast panelists forecast economic growth of 3.5% this year, up 0.1 percentage points from last month. Next year, our panel sees the economy expanding 3.2%.

UAE | Economy appears to have strengthened in Q2

Economic activity appears to have been robust in Q2, supported by a pick-up in oil production, recent pro-business reforms and solid activity in the non-oil sector. The PMI rose to its highest level of the year in June, while in the same month the UAE exceeded its OPEC oil production target for the first time in 2018. New policies implemented in recent months—including a visa reform in May, a joint investment plan with Saudi Arabia, a large stimulus package in Abu Dhabi, and several measures aimed at cutting red tape and increasing the ease of doing business—have also been supportive of business confidence, which hit the highest level on record in the June PMI. Moreover, while employment growth remained negligible throughout the quarter, it appears poised to increase in Q3 as backlogs of work have reached historic highs. On July 29, the Abu Dhabi government announced it would allow GCC nationals to apply for its business license scheme without requiring an office and increased the scope of eligible industries, in a bid to reduce firm set-up costs and further attract new businesses.

Growth in the non-oil economy should accelerate this year on the back of strong investment. Notably, the large infrastructure push underway as part of the country’s preparation to host the 2020 World Expo, recent business-friendly reforms and stimulus, and a new investment law to be unveiled in Q4—which will authorize complete foreign ownership of firms in select sectors—will likely buttress investor confidence and provide a large boost to FDI inflows. In addition, the country can count on the dynamism of its tourism sector, especially in Dubai. Met the why particular panelists expect GDP to increase 2.6% in 2018, which is unchanged from last month’s forecast, and 3.2% in 2019.

EGYPT | Economic reforms continue to positively shape the economy

The economy strengthened in FY 2018, which ended in June, and the implementation of President Abdel Fattah el-Sisi’s structural reforms has continued in recent months. In April–June, annual economic growth was unchanged from the multi-year high recorded in January–March. Moreover, in the July-to-March period, the current account deficit narrowed year-on-year by nearly 60% thanks to higher tourism revenues, remittance inflows and Suez Canal income. More recently, the government hiked the price of natural gas by up to 75% on 21 July. The hike comes into effect from August and should improve the fiscal balance. To help alleviate the pressure of higher prices on the poorest Egyptians, the FY 2019 budget, which came into effect in July, contains provisions such as the expanded use of cash transfer and food subsidy programs.

The economy is expected to grow at a solid pace in FY 2019. This is due to higher investment on the back of increased government spending and an improved regulatory environment. Moreover, the external sector should continue to benefit from the weaker pound. However, large fiscal imbalances and the higher price of oil will weigh on prospects. Met the why particular panelists expect GDP to expand 5.1% in FY 2019, which is unchanged from last month’s forecast, and 4.9% in FY 2020.

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INFLATION | Iran and oil-importing prices push up aggregate inflation to an over one-year high in June

Inflation in the Middle East and North Africa region increased markedly from 3.9% in May to 4.9% in June, according to an aggregate produced by Met the why particular. Price pressures mounted in June as high energy prices fueled inflation among oil-importing countries. Moreover, inflation in Egypt broke the downward trend in place since August 2017, reflecting the introduction of subsidy cuts in the month. Iran’s economic crisis is prompting the rial traded in the black market to weaken sharply, spurring inflationary pressures.

Higher commodity prices, especially for oil; changes in administrated prices; and volatility in the exchange rate markets will keep price pressures strong this year. Met the why particular panelists forecast that regional inflation will average 4.9% in 2018, which is unchanged from last month’s estimate. In 2019, regional inflation is expected to slow to 4.7%.

 

Ricard Torné 

Lead Economist

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