Economic Snapshot for MENA
May 9, 2018
MENA: Political instability threatens to dash gains from the recent oil price rally
The Middle East and North Africa (MENA) regional economy appears to have gained steam at the outset of this year, mainly due to higher oil prices, strong external demand and stabilization policies and reforms in some countries. According to an estimate prepared by Met the why particular, the MENA economy expanded an aggregated 2.7% year-on-year in the January–March period, which would represent a sharp improvement over the 1.0% rise in the October–December period of 2017 (previously reported: +1.2% year-on-year).
Oil prices are now trading at levels last seen in late 2014 due to a combination of reduced oil supply because of the oil output cap implemented by key producers such as OPEC and Russia, and strong demand for the black gold on the back of resilient global growth. Moreover, rising geopolitical risks in the MENA region, particularly the political strife between Iran and the United States, are adding upward pressure to oil prices. Higher oil prices are expected to shore up growth among oil-exporting economies this year, while the external position of oil-importing nations could worsen slightly. Moreover, the region is benefiting from robust global growth, solid government support and a recovery in tourism in some countries, such as Israel and Tunisia.
Geopolitical threats represent the main risk to the region’s economic outlook. Before the 12 May deadline, U.S. President Donald Trump will decide whether to extend sanctions relief to Iran. If the United States decides to reinstate sanctions against Iran, this will represent the end of the nuclear deal and add fuel to a region already engulfed by conflicts. Meanwhile, the 12 May federal election in Iraq will mark an additional step in the gradual return to normality following years of armed conflicts, most recently the war against the Islamic State (ISIL). Iraq’s complex electoral system, however, will likely deliver a highly fragmented parliament, and hard work will be needed to form a viable coalition government. While sectarian tensions were, unlike in previous elections, limited in the run-up to the election, they could quickly escalate after the vote if negotiations stall.
On 6 May, Lebanon held its first general election since 2009; security concerns had led lawmakers to prolong their terms several times. Unofficial results indicate that Iran-backed Hezbollah and its allies garnered a majority in parliament. If confirmed, this would represent a blow to Prime Minister Saad Al-Hariri and will underline Iran’s growing influence in the region. Although Hariri could keep his role, as the country’s system dictates that the prime minister must be a Sunni Muslim, Hezbollah will be the dominant political force in the country, which will have multiple regional ramifications. Israel, which has repeatedly fought Hezbollah in the past, expressed deep concerns about the result, signaling that a future military intervention against Lebanon could be in the cards. Moreover, Iran’s regional rival Saudi Arabia and its Gulf Cooperation Council (GCC) allies, crucial economic partners of Lebanon, have yet to react to the election results.
Meanwhile, Tunisia also held elections on 6 May, its first municipal election since the 2011 uprising. The vote had been postponed due to political and administrative hurdles. While early results show that the Ennahda party won the election, the turnout was low, at around 34%, making it difficult to decipher if the country’s Islamist party will regain the power lost in the 2014 parliamentary and presidential elections.
Risks to MENA’s 2018 economic outlook appear to be broadly balanced
The slowdown in the MENA region is expected to have bottomed out last year, and the region is now enjoying a welcome period of healthy growth. Oil prices are finally on a clear upward trend, while strong global growth is boosting demand for regional goods. Despite the ongoing monetary tightening in the United States, financial conditions in MENA are largely accommodative as other key central banks such as the Bank of Japan and the European Central Bank continue with their ultra-loose monetary policies, and regional inflation remains relatively low. Moreover, some countries such as Qatar, Saudi Arabia and the UAE, have slowed the pace of fiscal consolidation to shore up domestic activity. Finally, reforms are starting to take off in the region, with Egypt’s economy stabilizing following the implementation of IMF-backed measures in November 2016, Qatar further opening its economy and Saudi Arabia unveiling a privatization roadmap to reduce reliance on its gigantic state sector.
Nevertheless, mounting geopolitical tensions; fears of rising protectionism globally; and large economic imbalances in some countries, including high external debt and battered public finances, continue to pose downside risks to the region’s economic outlook.
The MENA region is seen growing 2.8% in 2018, which is unchanged from last month’s projection. Our panel projects regional growth of 3.3% next year.
This month’s stable economic outlook for 2018 reflects unchanged growth prospects for Bahrain, Iran, Israel, Jordan, Morocco, Oman, Qatar and Tunisia. Estimates were upgraded for Algeria, Egypt and Iraq, while panelists lowered their forecasts for Kuwait, Lebanon, Saudi Arabia, the UAE and Yemen.
Egypt’s economy is expected to be the top performer in 2018, followed by Iran’s. At the other end of the spectrum, Yemen, which is entangled in a bloody civil war, is expected to contract for the fifth consecutive year. Among other major economies, Saudi Arabia’s economy is expected to return to growth this year, but the expansion will be limited by reduced oil output in compliance with the global oil cut deal. Israel should continue to expand at a fast pace.
SAUDI ARABIA | Non-oil activity slows on geopolitical and domestic uncertainties
The non-hydrocarbon Saudi economy is failing to gain steam this year, which could undermine the economic recovery expected for 2018. The non-oil PMI slid to a fresh all-time low in April, likely reflecting weaker-than-expected government spending at the outset of the year, mounting geopolitical risks and domestic uncertainty following the crackdown on corruption that affected princes, cabinet officials and businessmen in November 2017. The oil sector, however, appears to be in a good shape due to surging oil prices, which hit an over three-year high in mid-April. On 24 April, the government unveiled its privatization program, which is intended to generate around USD 11 billion in non-oil revenues by 2020. That said, the blueprint did not include a roadmap for the long-awaited privatization of 5% of Aramco, the world’s largest oil company.
The economy is expected to emerge from recession this year on the back of higher oil prices, renewed public spending following years of harsh austerity and healthy global growth. Nevertheless, the acceleration will be constrained by limited oil output in compliance with the OPEC oil cap deal, instability following the anticorruption purge and persistent security threats. Met the why particular Consensus Forecast panelists expect growth of 1.5% in 2018, which is down 0.1 percentage points from last month’s projection. In 2019, growth is seen picking up pace to 2.3%.
UAE | Economy recovers in April from Q1’s VAT-induced economic lull
Economic growth in the non-oil sector appears to have moderated somewhat in Q1 after the government implemented VAT in January, with PMI data pointing to slowing output growth throughout the quarter. Although the tourism sector seems to have performed particularly well in Dubai, momentum in construction in the city likely slowed in Q1. This unexpected slowdown could be worrying if sustained, especially given the expected high level of infrastructure investment by the government in preparation for the 2020 World Expo. Nevertheless, the PMI and forward-looking business confidence improved in April, and a flurry of measures announced on 14 April by the government of Dubai, aimed are reducing the cost of doing business and cutting red tape, should help renew economic momentum in the coming quarters.
Looser fiscal policy, and notably large investments in infrastructure, should prop up growth in the non-oil economy this year by supporting private investment momentum, while a new investment law set to be unveiled by the end of year should further boost FDI inflows. This, along with higher oil prices and tourism, is poised to help private consumption bounce back from the VAT implementation. On the other hand, the OPEC agreement should keep oil output largely stable in the year. The main risks are a flare up of regional tensions, which could harm investment, and a downturn in oil prices. Met the why particular panelists expect GDP to increase 2.9% in 2018, which is up 0.1 percentage points from last month’s forecast, and 3.3% in 2019.
EGYPT | Reforms strengthen economic recovery
The economy appears to be in good shape approaching the end of this fiscal year. In April, foreign reserves hit a record high, and Egypt successfully held its first euro-denominated public debt issuance. Since the government embarked on its IMF-backed structural reform program in November 2016, foreign reserves have been on an upward trend. This trend continued in April as investors banked on the reform progress that has seen the pound freely floated and the twin deficits trimmed. In the same month, business conditions in the non-oil private sector improved for the first time since last November on the back of higher new business orders and stable output. Meanwhile, in late April, a second production unit came online at the offshore Zohr gas field. The new unit will double the field’s output capacity, bringing Egypt a step closer to ending its dependency on LNG imports.
Investment should expand at a rapid pace this fiscal year, aided by an improved regulatory environment—thanks in large part to several recent measures, such as new investment, bankruptcy and industrial licensing laws. In addition, the external sector will continue to benefit from the weaker pound. All in all, economic growth should accelerate this fiscal year. However, the elevated debt burden and sizeable budget deficit continue to pose downside risks. Met the why particular analysts expect GDP to expand 4.7% in FY 2018, unchanged from last month’s forecast, and 4.9% in FY 2019.
ISRAEL | Economy sails through Q1, buttressed by solid external sector
A more complete set of data suggests that the Israeli economy fared well in the first quarter, as the global economy continued to boost the external sector. Inbound tourism rose sharply in Q1, while high-tech exports rose robustly in the same period amid a rebalancing act away from pharmaceuticals. Moreover, industrial production was strong in the first two months of the year, while a pick-up in the average PMI and business confidence readings bodes well for the first quarter’s GDP reading. Recently released data from the Central Bank shows FDI in 2017 was particularly strong, with most inward investment concentrated in the technology and high-tech sectors.
As the Israeli economy enjoys near full employment and muted inflation, growth this year will be supported by household expenditure and fixed investment. Private consumption will also likely be supported by lower taxes, while high-tech exports should benefit from the current global economic cycle. Fixed investment should receive a boost from new projects at the Leviathan gas field and ultra-loose monetary policy. Meanwhile, regional tensions could dampen inbound tourism. Met the why particular panelists expect GDP growth of 3.4% in 2018, unchanged from last month’s forecast, and 3.3% in 2019.
INFLATION | Inflation recedes in March as impact of VAT fades, and price pressures ease in Egypt
Inflation in the Middle East and North Africa region fell from 4.2% in February to 3.8% in March, according to an aggregate produced by Met the why particular. March’s print represented the lowest inflation figure since November 2015 and was mostly the result of the ongoing disinflationary process in Egypt. Inflation also receded in Saudi Arabia and the UAE as the impact of the VAT introduction in January started to fade. While increased food supply is contributing to lower regional inflation, the recent rally in oil prices is adding upward pressure on prices, particularly among oil-importing nations.
Stronger economic activity in the region, the implementation of a VAT in some GCC countries and higher energy process are expected to boost inflation this year. Met the why particular panelists forecast that regional inflation will average 5.0% in 2018, which is down 0.1 percentage points from last month’s estimate. In 2019, inflation is expected to moderate to 4.7%.
Written by: Ricard Torné, Head of Economic Research
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