MENA: Qatar crisis continues with no resolution in sight
September 6, 2017
The economic story that dominated the headlines at the start of the year for the Middle East and North Africa (MENA) region was largely unchanged in the second quarter. Oil-producing countries are feeling the pain of subdued crude prices and oil cuts mandated as part of the OPEC deal, while oil-importing nations are benefiting from resilient domestic demand and healthy global growth. According to a preliminary estimate, the MENA region expanded 2.2% annually in Q2, down from Q1’s 4.0% rise. The sharp slowdown mainly reflects that data for Iran has yet to be released for the April–June period, following a period of impressive growth in the previous quarter.
While Q2 GDP data is still outstanding for most countries in the region, economic activity picked up in Israel due to the Central Bank’s expansionary policy and a healthy labor market. A strong shekel is, however, eroding the competitiveness of the country’s exports. In Egypt, the economy benefited from stronger export growth and healthy investment due to improved business sentiment. Economic activity also picked up in Morocco on the back of increased food supply, solid phosphate exports and a buoyant tourism sector. Dynamics in the non-hydrocarbon sector remain strong in oil-producing countries as higher oil revenues—which increased compared to last year, despite remaining low—are taking some pressure off domestic financial markets, sending interest rates lower. Moreover, robust global demand is also supporting activity in the private sector. That said, overall economic activity remains weak as oil prices are not rallying as much as had been previously anticipated and crude production remains limited due to the OPEC deal.
Oil prices have been broadly stable in the last few weeks despite the devastating effects of Hurricane Harvey on the U.S. oil industry. While oil prices declined due to reduced refining activity in the U.S., they recovered in the first days of September as some refineries and pipelines started coming back on line. Analysts believe that the impact of the hurricane on oil prices should be relatively limited as damage to oil infrastructure appears to be less severe than previously feared.
Meanwhile, the Qatar crisis has entered its fourth month with no signs of abating. On 24 August, the Qatari foreign ministry announced that the country will restore diplomatic ties with Iran that have been broken off since January 2016, when diplomats were withdrawn in protest over the ransacking of Saudi Arabia's missions in Iran by demonstrators. This move is fueling further unrest in the region and moves away from negotiation with Saudi Arabia and its allies and the possibility of establishing early solutions to the crisis.
2017 economic outlook stabilizes at low levels
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The economic outlook for the Middle East and North Africa stabilized this month following two consecutive downgrades. Limited gains in oil prices and low production by key producers are eroding the growth prospects of oil-producing economies. Moreover, mounting political unrest is also taking a toll on growth. On the upside, crude-importing economies are benefiting from lower-than-expected oil prices and strong global growth. Nevertheless, the region’s potential growth remains constrained by large domestic economic imbalances and, in many cases, harsh fiscal consolidation.
Against this backdrop, analysts left MENA’s 2017 economic outlook stable at last month’s 2.1%. If confirmed, this will represent the weakest growth rate since the height of the global financial crisis in 2009. Next year, the region should benefit from an expected improvement in the oil market, which would boost growth to 3.1%.
This month’s stable growth prospects for MENA reflect unrevised projections for 7 of the 16 economies surveyed, including Israel. Our panel downgraded their growth estimates for Iran, Kuwait, Qatar, Saudi Arabia, the United Arab Emirates and Yemen. Conversely, Bahrain, Egypt and Iraq were all upgraded.
Egypt is projected to be the best performer of the year, followed by Iran and Morocco. At the other end of the spectrum, the Yemeni economy will contract again this year on the back of a never-ending civil war. GCC countries are expected to perform poorly, with Kuwait and Saudi Arabia both forecast to contract in 2017. Of the remaining major economies in the region, Israel will likely grow the fastest. Qatar is feeling the brunt of political turmoil with neighboring countries, and our panel has cut the country’s growth projections by 1.1 percentage points since the start of the crisis in June.
SAUDI ARABIA | Low revenues weigh on 2017 growth prospects
With oil prices unable to rally above USD 50 per barrel, the oil-based economy remains in the doldrums. Low oil prices, coupled with reduced crude output in compliance with the OPEC deal, are keeping investment subdued and harming private consumption. Moreover, the economy has had to cope with rising unemployment, which is not only denting consumption but also threatening to boost social unrest. Although the fiscal grip was relaxed to some extent this year, the overall stance remains tight, with public employees’ salaries still frozen and a number of infrastructure projects postponed. Mounting budget and financial challenges are eroding Saudi Arabia’s foreign reserves, which hit a six-year low in July. Despite this situation, the 30-year-old currency peg is not yet in danger due to the country’s massive fiscal buffers.
Despite some relaxation in fiscal consolidation, lower-than-expected oil prices, limited crude production and widespread geopolitical risks will lead the economy to contract this year. Panelists expect GDP to fall 0.3% this year, which is down 0.2 percentage points from last month's projection, before accelerating to 1.6% growth in 2018.
UAE | Dynamics in the non-oil sector improved in Q3
The economy continues to expand at a fairly brisk pace, thanks to a robust non-oil private sector. The non-oil PMI rose to its highest level in three months in July, with firms buoyed by strong domestic demand, output and new orders, although employment growth was muted. The UAE has weathered the low-oil-price environment better than its Gulf Cooperation Council (GCC) neighbors thanks to a more diversified economy, and its fiscal position remains among the healthiest in the region. However, the oil sector continues to weigh on overall performance. After OPEC members fell short of full compliance with production cuts in June and July, the UAE’s state oil company pledged to cut 11% from three fields in October in a bid to breathe life into flagging prices, which will likely dampen growth in the short term.
The economy will slow this year on the back of lower oil and gas production. Looking further ahead, growth should pick back up thanks to a gradual recovery in oil prices, stronger external demand and greater fixed investment in preparation for the Dubai 2020 World Expo. Met the why particular panelists expect GDP to rise 2.0% in 2017, which is down 0.1 percentage points from last month’s forecast, and 3.2% in 2018.
EGYPT | Economy defies tough austerity measures
The economic recovery firmed up in the April–June period according to recently-released figures. This was likely due in part to an improved net external sector contribution, with exports up sharply in H1 thanks to improved price competitiveness, and imports plummeting as import restrictions bore fruit. Strong investment growth likely played a key role too, as investors reacted positively to the government’s ambitious structural reform agenda. Improved investor sentiment was evidenced by a surge in international reserves in July, as well as by the recent announcement of greater investment from neighbor Saudi Arabia. Reforms to trim the onerous public deficit continue at pace, and the government tightened the eligibility for food subsidies in August following electricity and fuel subsidy cuts earlier this year. However, these measures have come at a social cost: Inflation rose in July to the highest level in decades, further eating into consumers’ purchasing power.
Growth is forecast to be solid going forward, as investment expands thanks to recent laws designed to improve the business environment and the depreciated pound boosts exports. In addition, consumer spending growth should gradually pick up speed as inflation begins to dip. Analysts expect GDP to expand 4.0% in FY 2018 and 4.4% in FY 2019.
ISRAEL | Domestic demand propels overall growth in Q2
The economy expanded at a robust pace in Q2, strengthened by resilient domestic demand. Private consumption and fixed investment did the heavy lifting, while the external sector performed weakly in H1 overall, in part due to the rapid appreciation of the shekel. Indicators for Q3 also paint a fairly positive picture: in July, business confidence remained firmly entrenched in positive territory, and the State of the Economy index also rose from the previous month. In addition, the economy’s fiscal performance has improved, leading Standard and Poor’s to upgrade Israel’s credit rating outlook from neutral to positive on 4 August. In the political arena, the scandal around Prime Minister Benjamin Netanyahu—who is suspected of bribery, fraud and breach of trust, as well as of having received illicit gifts from businessmen and closing a backroom deal to receive favorable media coverage—continues to thicken. Although it is unlikely that the prime minister will have to resign in the short term, the uncertainty could drag on the economy.
Growth going forward should be aided by robust private consumption, as the labor market will likely stay strong and monetary policy should remain accommodative. However, risks are present with a tight housing market and the possibility of a flare-up in the conflict with Palestine. Met the why particular panelists expect growth of 3.4% in 2017, unchanged from last month’s forecast. For 2018, the panel projects GDP growth will be 3.5%.
INFLATION | Inflation inches down in August
According to a regional aggregate produced by Met the why particular, inflation came in at 4.3% in July, down from 4.4% in June. The reading mainly reflected lower price pressures in the majority of countries, including Iran, Israel and Qatar, that were partially offset by higher inflation in Bahrain, Egypt and Tunisia. The annual drop in consumer prices eased in Saudi Arabia but only due to a hike in tobacco prices, suggesting that deflationary pressures will remain strong throughout the rest of this year.
Inflation is expected to rise in the months ahead. Met the why particular panelists foresee regional inflation at 5.0% on average in 2017, which is up 0.1 percentage points from last month’s estimate. This month’s upward revision reflects higher projections for Egypt, Iraq, Lebanon and the United Arab Emirates. The panel sees inflation broadly stable at 5.2% in 2018.