Middle East & North Africa Economic Outlook June 2017

Bahrain, Egypt, Saudi Arabia, UAE and Yemen cut diplomatic ties with Qatar

Middle East & North Africa: Bahrain, Egypt, Saudi Arabia, UAE and Yemen cut diplomatic ties with Qatar

June 7, 2017

Robust economic activity in the non-oil sector led growth at the outset of the year in the Middle East and North Africa (MENA). According to preliminary estimates, the region’s aggregate GDP growth was 2.6% year-on-year in Q1, below the 3.3% in Q4 and a notch above the 2.5% that our panel of analysts had projected last month.

While official data for Q1 is still outstanding for most countries in the region, available figures show that growth in Israel decelerated as private consumption returned to normal following last year’s surge and due to seasonal effects. This notwithstanding, the country’s growth remains robust overall due to the Central Bank’s near-zero interest rates, policy support to households and an improving labor market. Despite a strong shekel, activity in the external sector remains buoyant due to Israel’s emergence as a gas producer and the increasing prominence of high value-added hi-tech exports. In Tunisia, growth accelerated on the back of a recovery in phosphate production and tourism. Meanwhile, Egypt is gradually recovering from the IMF-induced economic slump that followed the introduction of severe reforms in November in order to receive financial aid. Growth accelerated timidly in Q1, despite stubbornly-high inflation, rising social unrest and budget austerity. A more stable economic environment has boosted capital inflows, which have likely translated into increased investment.

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On 25 May, the Organization of the Petroleum Exporting Countries (OPEC) and other oil producers such as Russia agreed to prolong the duration of the oil cuts to Q1 2018 in order to continue reducing the massive oil glut and supporting prices. Oil prices, however, retreated following the 25 May deal as investors are concerned that further downward adjustments are needed to stabilize the global oil market. Moreover, the nine-month extension is triggering fears that some countries could deviate from their oil-pumping quota and increase supply again. 

In the political arena, political unrest erupted in the region after BahrainSaudi Arabia and the United Arab Emirates decided to sever diplomatic ties with fellow Gulf Cooperation Council member Qatar. Egypt, Libya, the Maldives and Yemen also cut off relations with the country. These countries also ended all land, sea and air contacts with Qatar amid claims that the country is sponsoring terrorism in the region. The conflict has been spurred by Qatar's support of the Muslim Brotherhood and alleged comments to the national news agency made by Emir Sheikh Tamim bin Hamad Al Thani supporting the region’s arch enemy Iran, though Qatar claims that the news website was hacked. Regional carriers have suspended flights to and from Qatar and analysts will be keeping a close eye on developments as they unfold in order to assess their economic impact.

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Risks to MENA’s 2017 economic outlook remain balanced

In June, growth prospects for MENA were left stable for the third consecutive month as risks to the economic outlook appear to be broadly balanced. The limited rise in oil prices is having a positive effect in the region. Even if it is not yet enough to allow most oil-export-driven countries to plug their massive fiscal imbalances and improve their current account balances, the mild price increase is helping alleviate liquidity stress in the domestic financial markets and enabling the economies affected to post better-than-expected budget figures. Similarly, the weaker-than-expected rise in oil prices is shoring up private consumption among oil-importing economies and reducing pressure on their external sectors. Nevertheless, despite some improvements, security risks remain high in the region, hurting investor sentiment. Moreover, macroeconomic imbalances and delays in implementing structural reforms are dampening the potential for a sustained economic recovery in the mid- to long-term.

Analysts left MENA’s 2017 GDP growth outlook unchanged at last month’s 2.4%, which would represent the weakest expansion since the height of the financial crisis in 2009. Reforms in a number of countries in the region will nevertheless start to gain traction going forward, while security risks are expected to ease. This, coupled with stronger crude production and rising oil prices, will prompt growth in the region to accelerate to 3.3% in 2018.

This month’s stable outlook for MENA reflects unchanged growth estimates for 4 of the 16 economies surveyed, including Egypt and Israel. Projections for AlgeriaIranIraqJordanKuwaitLebanonQatar, the United Arab Emirates and Yemen were revised downwards, while the outlooks for Bahrain, Oman and Saudi Arabia were upgraded.

Iran is forecast to be the best performer of the year as the country benefits from its reintegration into the global arena. At the other end of the spectrum, GCC countries, which are responsible for the lion's share of the oil reduction under the OPEC agreement, are expected to perform poorly. Of the rest of the major economies in the region, Israel, Egypt and Qatar will likely grow the fastest in that order. Yemen, which has been immersed in a prolonged civil war since 2015, will return to growth this year due to increased oil production and expectations that peace talks could finally materialize in the coming months. 

SAUDI ARABIA | Economic ties strengthened with the U.S.

The non-oil sector is driving overall economic growth this year, though this remains in a low gear. Liquidity conditions are improving due to less crowding out by the public sector as the government’s coffers are benefiting from higher oil prices and international bond issuances. Moreover, in May, the Ministry of Finance reported a lower-than-expected budget deficit for Q1 due to higher revenues and lower expenditure. On the downside, lower crude production is constraining growth. This situation is expected to carry over into next year after key crude producer countries reached an agreement on 25 May to extend the existing oil cuts into Q1 2018. In the political arena, on 5 June, Saudi Arabia, along with other countries in the region, decided to cut off diplomatic ties and close the borders with Qatar. Saudi Arabia claimed that Qatar is sponsoring terrorist groups and supporting Iran.

Economic growth will be plagued this year by a decline in crude production in compliance with the OPEC deal and the ongoing lack of government support. Nevertheless, the economy will recover next year as the country will benefit from increased crude production and higher oil prices. Panelists expect the economy to grow 0.4% this year, which is up 0.1 percentage points from last month's projection, before accelerating to 2.0% growth in 2018. 

UAE | Diversified economy and solid financial buffers boost credit rating

The UAE has begun 2017 on a fairly firm footing, with the PMI staying well in expansionary territory as firms in the non-oil sector enjoy strong demand at home. This comes on the back of a slowdown last year as a result of the government’s belt-tightening measures and a deterioration in the external sector due to a strong dirham, which was partially offset by strong private consumption growth. The IMF recently praised the adjustment to the lower oil price environment, highlighting the country’s significant fiscal buffers and relatively diversified economy. These same factors recently led credit rating agency Moody’s to upgrade the country’s outlook from negative to stable on 27 May. However, the Fund also encouraged the UAE to rationalize spending and ensure a timely introduction of VAT and excise duties in order to pare back the budget deficit.

Growth will remain modest in 2017, as OPEC oil production cuts and a tighter monetary policy dampen economic activity. However, looking further ahead the economy should pick up steam, as preparations for the Dubai 2020 World Expo boost investment and more oil production comes on stream. Met the why particular panelists expect GDP to rise 2.3% in 2017, down 0.2 percentage points from last month’s forecast, and 3.4% in 2018. 

EGYPT | Economic growth accelerates at start of 2017

Growth accelerated slightly in the January-March period according to recent figures, likely buoyed by greater investment and a resurgent external sector. A raft of other indicators also paint a picture of an economy gradually finding its feet, with industrial production soaring so far this year, the PMI markedly higher than November’s nadir and international reserves ticking up in April as foreign investors flock back to the country. Adding to the positive news, in May the IMF agreed to a second USD 1.25 billion loan installment and praised the implementation of recent measures such as the introduction of VAT and fuel subsidy cuts. The government’s reform agenda is continuing at pace, with a new investment law, designed to cut red tape and entice foreign investors, recently approved by parliament. Taking advantage of the fairly ringing endorsement from the Fund, Egypt recently tapped bond markets to the tune of USD 3 billion in a heavily oversubscribed sale.

The economy is expected to lose steam in FY 2017, which ends on 30 June, as fiscal consolidation measures dampen economic activity, while elevated inflation saps private consumption. However, looking further ahead growth should pick up as the country reaps the rewards of painful structural reform measures and an improved business environment. Analysts expect GDP to expand 3.1% in FY 2017 and 3.9% in FY 2018. 

ISRAEL | Growth decelerates in Q1 on seasonal effects 

Israel’s economy lost momentum in the first quarter of the year according to recently released figures, although this was largely due to tough Q4 comparatives, as private consumption fell sharply compared to Q4 due to fewer car imports. The country’s economic fundamentals remain fairly solid, with business confidence hitting a multi-year high in April as firms enjoy healthier global demand and exports growing significantly in Q1, despite dropping in April. Although the shekel remains strong, hurting companies’ price competiveness, the effective exchange rate remained relatively stable last month thanks to a stronger euro. In a bid to boost household incomes, the government recently approved the "Net Family" plan, which includes tax breaks and subsidies for families with young children. While the cost of the program is expected to amount to ILS 5 billion (USD 1.4 billion), critics claim that the plan contains no extra revenue-raising measures and will increase the budget deficit this year.

Growth is set to slow this year, as the return of inflation dents household spending and investment moderates following last year’s surge. However, an accommodative monetary policy and a robust labor market will prop up the economy. Met the why particular panelists expect growth of 3.3% in 2017, which is unchanged from last month’s forecast. For 2018, the panel projects growth of 3.4%. 

INFLATION | Inflation inches down in April

According to a regional aggregate produced by Met the why particular, inflation came in at 4.9% in April, a notch below the 5.0% recorded in March. Relatively stable commodity prices are alleviating inflationary pressures among oil-importing countries, while strong currencies are preventing oil-exporting economies from experiencing a surge in inflation. This month’s reading mainly reflected that lower price pressures in Algeria, Israel, Jordan, Lebanon, Qatar, Saudi Arabia and the United Arab Emirates were partially offset by higher inflation in Egypt, Iran and Morocco.                                     

Inflation is expected to remain near its current level for the rest of this year. Met the why particular panelists foresee regional inflation at 5.1% on average in 2017, which is up 0.1 percentage points from last month’s estimate. This month’s upgrade to the inflation outlook for 2017 reflects upward revisions to the projections for 8 of the 16 economies surveyed, including Egypt, Iran and the United Arab Emirates. The panel sees inflation broadly stable at 5.2% in 2018. 

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Written by: Ricard Torné, Head of Economic Research

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