MENA Economic Outlook November 2017

Geopolitical instability threatens to undermine nascent economic recovery

MENA: Geopolitical instability threatens to undermine nascent economic recovery

November 2, 2017

The recent recovery in oil prices and still resilient domestic demand in many countries in the Middle East and North Africa (MENA) suggest that the region’s economy is emerging from rock bottom after recording the weakest rate of expansion in Q2 since the height of the financial crisis in 2009. Our latest estimates show that the region expanded 1.8% annually in Q2, which is below last month’s forecast of a 2.0% rise. While the news is bright, persistent political instability could derail MENA’s economic recovery.


Geopolitical issues rage on. While the international coalition is winning the battle against the Islamic State (ISIL) in Iraq and Syria, this positive news was dampened by the outbreak of an open war between the Iraqi army and Kurdish Peshmergas. The war is the result of the Kurdish authorities’ intention to declare independence following the country’s 25 September referendum. Early in October, clashes erupted on the border of the areas under control of the Kurdish Regional Government’s (KRG) and, unexpectedly, the Iraqi army’s offensive took large swaths of land in just a few days, including oil-rich Kirkuk and other disputed territories. On 27 October, the U.S. brokered a truce between the Iraqi government and the KRG, who are close U.S. allies in the region. On 29 October, Kurdish President Masoud Barzani decided to step down as of 1 November following the military defeat, which has contributed to easing political tensions. While the country enjoys a welcome ceasefire, political tensions remain high between the KRG and the Iraqi government. Should military clashes begin again, this could destabilize one of the key countries in the region and reverberate across Iran, Syria and Turkey, all of which have large Kurdish minorities.


The diplomatic crisis between Qatar and Saudi Arabia is at a standstill. While a successful resolution is not yet in sight, it has not escalated further and it seems that both countries are adapting to the new situation. Initiatives to bring peace to Yemen following more than two years of civil war are far from materializing. Saudi Arabia, which supports the Abdrabbuh Mansur Hadi government, has accused Iran, the main sponsor of the Houthi rebels, of blocking peace efforts.


Oil prices continued to rise in recent weeks and traded at over two-year highs at the end of October. The ongoing rebalancing in the oil market due to supply restraints and strong demand are boding well for oil prices. Crude output remains limited by the successful implementation of the oil production cut deal signed by Russia and key OPEC players. Moreover, signs that the deal will be extended well into 2018 are providing further support to prices. The final decision will be made at the 30 November OPEC meeting in Vienna. On the demand side, global growth remains strong, which is boosting demand for the black gold. Higher oil prices are providing some relief to oil-export-driven economies, which had been struggling amidst low crude pieces since mid-2014. Against this backdrop, the Saudi government announced that it will unveil a more expansionary budget for 2018. Other governments in the region will likely follow this move.


Overall the region is benefiting from benign inflationary pressures, which imply higher real wages for the population and solid private consumption growth. Moreover, healthy global demand and higher commodity prices are propelling the region’s external sector. In Egypt, economic reforms are starting to bear fruit, while growth in Morocco and Tunisia remains strong on the back of a recovery in agriculture and phosphates.


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Brighter prospects for oil prices support 2018 economic outlook 


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Despite mounting geopolitical risks and large domestic imbalances, the gradual rebalancing in the oil market due to the successful implementation of the OPEC oil cut deal is shoring up the outlook for the Middle East and North Africa. The region is expected to grow 3.1% in 2018, which is unchanged from last month’s estimate. 2018’s reading will mark an improvement over the meager 1.9% rise expected for this year, which would represent the weakest expansion in over three decades. Our panel projects regional growth of 3.4% in 2019.


This month’s stable growth prospects for MENA reflect that downgrades to eight out of the 16 economies surveyed were offset by improving projections for seven economies, including Egypt, Qatar and Saudi Arabia. The forecast for Israel was left unchanged.


While the Yemeni economy is expected to be the best performer in 2018, panelists cut 1.9 percentage points to its forecast as analysts are less optimistic about an end to the civil war next year. At the other end of the spectrum, Saudi Arabia is expected to be the region’s laggard as a consequence of the harsh austerity adopted in recent years. Of the remaining major economies in the region, Egypt is expected to experience the fastest growth rate. 


Head on over to our MENA page for more recent economic news on the region.


SAUDI ARABIA | Government announces expansionary budget for 2018


The economy, which has been battered by harsh austerity measures, is struggling to regain momentum following the contraction in output seen in the first half of the year. The government had to slash public spending in order to reduce its massive deficit due to the fall in oil prices. Despite being in better shape than the oil-related and public sectors, as shown by the non-oil PMI, activity in the private sector remains relatively weak as it is heavily reliant on government spending. In an attempt to reverse this situation, Finance Minister Mohammed Al-Jadaan recently announced that the 2018 budget will be more expansionary. That said, he restated the government’s aim of reaching a balanced budget in 2020, as oil prices are expected to rally further and the economic diversification away from oil should lead to additional revenues.


A more supportive fiscal stance and the recovery in oil prices should lead the economy to rebound in 2018. That said, the recovery will be limited by the expected extension of the OPEC oil curb deal well into 2018 and the implementation of VAT. Met the why particular Consensus Forecast panelists pencil in growth of 1.7% next year, which is up 0.2 percentage points from last month’s projection. In 2019, growth is seen picking up pace to 2.6%.


UAE | Economic dynamics continue to improve in October


Once again in Q3, the expansion of the non-oil sector appeared to drive economic growth. Despite ticking down in September, the PMI signaled higher employment and lower input cost inflation. Moreover, with September’s reading, the monthly PMI through Q3 pointed to the strongest quarterly expansion of the non-oil economy in two years. Furthermore, a decline in export orders in September appeared to confirm that domestic demand drove economic activity despite the sluggishness of the oil sector, which could face an extension of OPEC production cuts if the market fails to adequately rebalance before year end. Additional oil production cuts next quarter would almost certainly widen the spending gap in 2018 despite the recent implementation of a broad array of new excise taxes. That said, despite the red ink, the economy’s improved health is apparent; the Central Bank clawed back excess liquidity from the market for a third consecutive month in September amid the ongoing influx of bank deposits.


Stronger external demand is expected to support the economy next year through higher oil prices and the ongoing expansion of the non-oil sector. Fixed investment is also expected to get a boost from preparations for the Dubai 2020 World Expo. Met the why particular panelists expect GDP to rise 3.0% in 2018, which is down 0.1 percentage point from last month’s forecast, and 3.2% in 2019.


EGYPT | Economic reforms gain further traction  


The IMF is currently conducting its second review under the Extended Fund Facility, amid a gradually brightening economic panorama. In view of the strong progress the government has made on reforms, the Fund is likely to approve the disbursement of a further tranche of bailout funding before the end of the year. These reforms are underpinning investor confidence, as evidenced by international reserves, which rose to a multi-year high in September. However, the flipside of this influx of foreign currency has been a rapid rise in external debt, as investors pile into Egyptian assets. The PMI sunk further into contractionary territory in September on the back of lower new export orders, despite a weak pound. In early October, the Central Bank continued to tackle painfully high inflation by raising the reserve requirement from 11% to 14%, following substantial rate hikes earlier this year. There are signs the battle is being won: Although inflation remained above 30% in September, underlying price pressures ebbed.


Economic growth should pick up going forward. Recent investment and industrial licensing laws are likely to boost investment, consumer spending should recover as inflation recedes, and exports and tourism should also strengthen. However, the high public debt ratio could become a concern if the pace of reform implementation slows. Met the why particular analysts expect GDP to expand 4.2% in FY 2018, up 0.1 percentage points from last month’s forecast, and 4.8% in FY 2019.


ISRAEL | Economic momentum continued in Q3


The economy appears to have gathered considerable momentum in Q3 despite having hit the brakes temporarily in September. Leading data from September indicated that household spending and merchandise exports—mainstays of the economy—stumbled briefly after each posted formidable readings in August. Consumer confidence edged down in September as apprehension about the broader economy rose despite strong employment data and near-zero inflation in recent months. Moreover, exports nosedived in September as high-tech shipments were hurt by the recent strengthening of the shekel, standing in sharp contrast to August’s robust growth. Furthermore, both business confidence and the PMI eased in September, suggesting that the contraction in industrial output recorded in August may have persisted for another month.


A tight labor market and soaring asset values are expected to support household spending next year, while fixed investment should benefit from the government’s medium-term infrastructure plans and the Bank of Israel’s accommodative monetary policy. Downside risks continue to include the possibility of a flare-up in Israeli-Palestinian tensions. Met the why particular panelists expect growth to reach 3.4% in 2018, which is unchanged from last month’s forecast. For 2019, our panel expects 3.2% growth.


INFLATION | Regional inflation stable for second consecutive month in September


According to a regional aggregate produced by Met the why particular, inflation came in at an over one-year low of 4.1% in September, mirroring the result in the previous two months. Lower price pressures were recorded in Kuwait and Lebanon and, to a lesser extent, in Bahrain and Tunisia. Although inflation declined in Egypt, it still remained close to 30%. Conversely, inflation accelerated in six countries, including the UAE. Despite remaining in negative territory, the decline in consumer prices softened to a seven-month high in Saudi Arabia.                                                 


While inflation will remain subdued in the region this year, price pressures are expected to rise in 2018 as a result of the implementation of a VAT in GCC countries and higher commodity prices. Met the why particular panelists forecast regional inflation to accelerate from 4.8% in 2017 to 5.1% in 2018, which is down 0.1 percentage points from last month’s estimate. The downward revision to the region’s 2018 inflation forecast reflects lower projections for eight countries, including Algeria, Egypt and Qatar. In 2019, inflation is expected to moderate to 4.6%. 


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