Middle East & North Africa Economic Forecast

Economic Snapshot for MENA

November 28, 2018

 Regional growth likely robust in Q3 despite Iran’s drag

According to an estimate by Met the why particular, the MENA economy expanded 2.2% annually in the third quarter. If confirmed, this would mark a slight deceleration from the second quarter’s 2.4% growth.

Regional big-hitters Egypt and Israel both recorded robust—albeit more moderate—Q3 GDP outturns. In Israel, private and public consumption drove growth in seasonally-adjusted annualized rate (SAAR) terms, while Egypt should have benefited from structural reforms. Moreover, Morocco saw an uptick in growth thanks to a strong agricultural sector, while preliminary data for Tunisia signaled a weaker expansion, due to a downturn in the manufacturing sector.

Although oil-exporting countries are still to report official national accounts figures for the third quarter, economic activity was in most cases likely firm, buttressed by higher oil prices and crude output. Most countries—in particular Saudi Arabia—ramped up production in Q3, to fill the gap left by output declines from Venezuela and Iran. However, Iran itself likely endured a torrid third quarter as the first wave of U.S. sanctions bit hard, with inflation surging, the rial tanking and oil production plunging.

Looking to the final quarter of the year, PMI readings for October show healthy activity in the private sectors of Egypt, Saudi Arabia and the UAE, and the Israeli manufacturing sector. In addition, oil production among MENA members (with the exception of Iran) was elevated at the outset of the quarter, chiefly due to Saudi Arabia and the UAE continuing to pump more of the black gold.

However, crude prices have taken an almighty tumble in recent weeks, which threatens the growth momentum and fiscal positions of oil-exporting countries—particularly as several nations recently announced expansionary budgets for next year, on the assumption that the oil market would remain buoyant. In contrast, lower oil prices will reduce the import bill and price pressures in oil importing countries such as Egypt and Israel, which will be positive for growth.

The price decline came on the back of the surprise U.S. decision in early November to grant temporary waivers to eight countries purchasing Iranian oil exports, which will make the fall in Iranian exports less abrupt than previously anticipated. In response, OPEC and non-OPEC nations such as Russia could implement production cuts when members next convene on 6 December.

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 Regional growth set to be modest going forward

Next year, oil exporters should benefit from stronger government spending, although the outlook for the oil market is in flux following the recent market selloff and uncertainty over future production curbs. Key oil-importers Egypt and Israel should perform well, aided by robust investment and private consumption. Moreover, regional growth will also be supported by still-healthy global economic activity. Vulnerability to oil price fluctuations, persistent geopolitical tensions, tighter global monetary policy and the deteriorating situation in Iran pose downside risks.

Met the why particular Consensus Forecast panelists expect the region to expand 2.3% in 2019, which is unchanged from last month’s estimate, and 2.9% in 2020.

The 2019 economic outlooks for Bahrain, Kuwait, Morocco, Saudi Arabia and Yemen were revised down this month. Forecasts for Iran and Iraq were revised up, while the region’s remaining economies saw their 2019 projections unchanged.

SAUDI ARABIA | Record-high crude production should be propping up growth, but falling oil prices pose a concern

The economy likely performed well in Q3, thanks to a significant rise in oil production and higher oil prices. Moreover, PMI readings pointed to robust growth in the non-oil private sector in the period. Looking ahead to Q4, oil production hit record highs as Saudi Arabia continued to compensate for lower output from Iran. However, at the start of November the U.S. temporarily waived sanctions on Iranian oil exports to eight countries, causing oil prices to freefall. Barring a swift price recovery, this will dampen the performance of the hydrocarbon sector in the final quarter. Nevertheless, the PMI survey for the non-oil sector began Q4 on a positive note, with faster new orders growth and business confidence on future output levels in October marking the highest reading in 58 months. On 22 November the Saudi King inaugurated the USD 22.7 billion Waad Al-Shamaal mining city, which is expected to create approximately 11,000 jobs and aims to develop the northern region and diversify the economy.

Economic growth should accelerate next year given strong fiscal stimulus and diversification efforts to support the non-oil economy. External risks include further oil price falls due to a global oil supply glut, as the world’s top three producers operate at record levels. Greater trade protectionism and a synchronized slowdown in global growth could also reduce demand for oil, leading to a further fall in prices. Our panel expects growth of 2.4% in 2019, which is down 0.1 percentage points from last month’s projection. In 2020, growth is seen decreasing slightly to 2.3%.

ISRAEL | Economic growth is brisk in Q3

The economy rapidly accelerated in the third quarter, led by firming domestic demand on rebounds in private and public consumption and strong export growth. Data for the fourth quarter, meanwhile, paints a mixed picture. The Central Bank’s State of the Economy Index edged up over the previous month in October due to robust export gains and resilient consumer goods imports. In addition, the PMI increased in the same month and indicated that business conditions in the manufacturing sector improved. On the other hand, sentiment among consumers and businesses decreased in October. Moreover, imports surged as exports expanded at a softer pace on weak demand for technological goods, resulting in a wider trade deficit. In the political arena, Prime Minister Benjamin Netanyahu narrowly dodged a government collapse following an unpopular ceasefire with Hamas in mid-November, which triggered the resignation of his defense minister. Nevertheless, the political outlook remains fragile due to the government’s one-seat majority and tensions within the coalition over the ceasefire.

Although growth in the economy is expected to moderate next year, it should nonetheless remain robust on resilient domestic demand. Private consumption will likely benefit from a lower tax burden and still-favorable financial conditions, while fixed investment should receive a boost from new gas- and oil-related projects. However, tensions in the region continue to darken the outlook. Met the why particular Consensus Forecast panelists forecast economic growth of 3.2% in 2019, which is unchanged from last month’s forecast. In 2020, our panel sees the economy expanding 3.3%.

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UAE | Non-oil economy is in good shape; New foreign investment law should provide a further boost

The economy likely accelerated in the third quarter, chiefly thanks to a combination of higher oil prices and rising output, coupled with a steady expansion in the non-oil economy. Though a recent plunge in prices might weigh on oil revenues in Q4, non-oil activity should remain robust as reflected by a broadly stable PMI and record-high business confidence in October. Overall, the country’s economic prospects appear bright over the next quarters, mainly buttressed by a flurry of business-friendly reforms which are poised to further entice foreign capital. On 30 October, the government enacted its long-awaited landmark investment reform, authorizing complete foreign ownership of firms in select sectors—though the full list of said sectors will only be finalized in Q1 2019—and introducing an investor dispute resolution mechanism.

Multiple tailwinds are likely to propel growth next year. Notably, the recent investment reform could buttress FDI inflows by up to 20% annually, according to the Minister of Economy. Furthermore, economic activity should be buoyed by the largest-ever federal budget outlined for 2019, coupled with the ongoing infrastructure push related to the 2020 World Expo in Dubai—which will power the construction and tourism sectors. Finally, solid oil revenues should continue to support growth and help the government maintain a fiscal surplus. That said, the possible renewal of production cuts at the next OPEC meeting, on 6 December, could put a lid on oil-sector activity. Met the why particular panelists expect GDP to increase 3.2% in 2019, which is unchanged from last month’s forecast, and 3.3% in 2020.

EGYPT | Growth slows slightly in Q1 of FY 2019 but remains firm

In the first quarter of fiscal year 2019, which runs from July 2018 to June 2019, the annual economic growth rate moderated slightly from the previous quarter’s multi-year high. The largest contributions to growth in Q1 came from the natural gas, wholesale and retail, agriculture, and telecommunications sectors, in descending order. Higher inflation, a small uptick in the unemployment rate and slower industrial production growth likely weighed on growth, however. Meanwhile, the second quarter got off to a rocky start in October, with business activity in the non-oil private sector contracting for the second consecutive month and at a faster pace than in September. More encouragingly, the IMF is close to making a further USD 2 billion of financial assistance available to Egypt and praised the government for recent reform efforts on 31 October.

This fiscal year should see solid economic growth thanks to higher government investment spending, rising natural gas production and an improving regulatory environment. However, large fiscal imbalances will weigh on economic prospects. Met the why particular panelists expect GDP to expand 5.2% in FY 2019, which is unchanged from last month’s forecast, and 5.2% again in FY 2020.

INFLATION | Regional inflation increases in October

Inflation in the Middle East and North Africa region continued to increase in October, mostly reflecting surging price pressures in Iran due to the depreciation of the rial, and higher inflation in Egypt. According to an aggregate produced by Met the why particular, inflation in the region jumped from 7.2% in September to 8.2% in October, a multi-year high.

On 26 November, Israel’s central bank launched a surprise rate hike, against a backdrop of a strong economy and solid domestic price pressures.

Inflation should dip next year, as the impact of VAT implementation in Saudi Arabia and the UAE disappears and price pressures in Egypt decline as the effect of subsidy reforms fade. Met the why particular panelists forecast that regional inflation will average 6.7% in 2019, which is down 0.6 percentage points from last month’s estimate. In 2020, regional inflation is expected to decline to 5.4%.

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Ricard Torné 

Lead Economist

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