Economic Snapshot for MENA
February 6, 2019
MENA losing momentum in Q4 as economic and political headwinds manifest
More complete economic data for the Middle East and North Africa for the second half of 2018 reveals that the region has started to feel the pinch of weaker global growth, volatility in financial markets and ongoing domestic threats. According to an estimate by Met the why particular, the MENA economy expanded an aggregate 1.8% annually in Q3. The print was below both Q2’s 2.1% expansion and the 2.0% rise projected last month. That said, Iran represented the lion share of the slowdown in Q3 as the country was negatively affected by the reintroduction of economic sanctions by the United States.
Economic dynamics among the oil-exporting countries, excluding Iran, gained steam in Q3 on the back of stronger oil production and rising oil prices. Nevertheless, this trend likely came to an end in Q4 due to the sharp drop in oil prices observed since mid-October and reduced oil production in December ahead of the oil cap deal, which came into effect in January 2019. Economic growth among oil-importing nations seems to have decelerated slightly in Q3 due to higher oil prices and tighter global financial conditions. That said, solid domestic demand, a healthy influx of tourists and robust agricultural production allowed growth to remain robust overall.
Looking forward, growth prospects are gradually clouding. According to recent surveys, OPEC’s participants in the oil cap deal have sharply reduced output in January, which will have a dramatic impact on growth in H1 despite the approval of lavish budgets by some oil-rich countries. The planned curbs were compounded by involuntary cuts such as supply disruptions in Libya, reduced shipments by Iran due to the U.S. sanctions and the lamentable state of Venezuela’s oil industry.
In Iraq, several ministerial posts remain unfilled three months after the formation of a new government, while political unrest is mounting in Tunisia amid anti-austerity protests. Meanwhile, in Israel, the emergence of the Israel Resilience Party has livened up the 9 April legislative election. In Egypt, around 120 parliamentarians submitted a petition to extend presidential terms, which, if approved, will allow President el-Sisi to remain in power beyond the end of his second term in 2022. Moody’s downgraded Lebanon’s credit rating deeper into junk territory, citing the country’s massive debt burden and despite Qatar’s pledge to buy USD 500 million in government bonds. On the upside, Lebanon finally agreed on a new government nearly nine months after May's general election, which should help unlock much-needed economic reforms.
Oil production cuts, tighter financial conditions and mounting geopolitical threats are trimming MENA’s outlook for 2019
Economic growth for the Middle East and North Africa is quickly deteriorating on the back of multiple headwinds. The oil cap deal led by OPEC appears to be holding up well. While it has the potential to push up oil prices, it will certainly reduce crude oil volumes among oil-exporting nations, which account for the bulk of MENA’s nominal GDP. Moreover, higher oil prices will propel the import bill among oil-importing nations, eroding households’ purchasing power and reducing fiscal space. Global financial conditions are gradually tightening with major central banks starting to rein in monetary stimulus, which threatens to heighten volatility in the region’s financial markets. The U.S. Federal Reserve’s dovish tone at its January meeting, however, should have ushered in a period of calm, at least until the end of H1.
Finally, political unrest remains elevated with protests spreading across the region. Long-standing sectarian conflicts, with Yemen as the paradigm; widespread poverty; and stagnating progress in social and economic reforms seem to be igniting the region.
Met the why particular Consensus Forecast panelists expect the region to expand 1.9% in 2019, which is down 0.2 percentage points from last month’s estimate, and 2.8% in 2020.
The 2019 growth projections for Algeria, Bahrain, Iraq, Jordan, Kuwait, Lebanon, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, the UAE and Yemen were revised downwards this month. In contrast, the forecast for Egypt was revised up, while estimates for Iran and Israel saw their 2019 estimates unchanged.
Egypt is expected to be the region’s top performer in 2019, followed by Iraq. Iran will contract again in fiscal year 2019 as U.S. sanctions continue to bite.
SAUDI ARABIA | Oil production cuts start to bite
While the economy appears to have ended 2018 on a solid footing, prospects for this year are quickly deteriorating. This is predominantly the consequence of oil production cuts agreed in December among OPEC+ countries, which will drag on GDP growth this year. That said, the oil production caps have started to boost oil prices, which should shore up government revenues somewhat. Moreover, the economy remains constrained by the government’s Saudization policy, which intends to boost the number of jobs for Saudis in the private sector by imposing labor restrictions on foreigners. According to analysts, the amount of expat jobs in the country—especially in the retail sector—declined by around 1.5 million people in the 2017–2018 period; the unemployment rate among Saudis in the same period has nevertheless remained virtually unchanged, hovering around 13%.
Despite greater fiscal support, the economic recovery is likely to lose some steam this year as an uncertain global oil outlook, oil production cuts in compliance with the OPEC+ deal and negative spillovers from the Saudization policy are expected to hit economic activity. Moreover, key economic reforms appear to have stalled, which threatens long-term economic growth in the country. Our panel expects growth of 2.2% in 2019, which is down 0.2 percentage points from last month’s projection, and 2.2% again in 2020.
ISRAEL | Economic growth remains robust in Q4
The Israeli economy accelerated strongly in the third quarter from the meager growth rate recorded in the second quarter, on the back of a stronger-than-previously-estimated performance from the external sector. Domestic demand, meanwhile, remained largely unchanged, barring a downward revision to private consumption growth. Looking at the final quarter of last year, the economy is expected to have maintained a robust pace of expansion. This is reflected by solid Composite State of the Economy data and a higher average manufacturing PMI, suggesting an improved performance by the manufacturing sector. Moreover, household consumption should have been buttressed by moderating inflationary pressures and significant gains in consumer sentiment, which—despite reaching a survey-record high in November—still remained entrenched in pessimistic territory. On the other hand, sentiment among businesses waned somewhat towards the end of the year.
Domestic demand should continue to support economic growth this year. Private consumption will likely benefit from a lower tax burden and still-favorable financial conditions. New gas- and oil-related projects are expected to boost fixed investment growth. On the other hand, regional tensions remain a key downside risk and cloud the outlook. Met the why particular Consensus Forecast panelists forecast economic growth to moderate to 3.2% in 2019, which is unchanged from last month’s forecast. In 2020, our panel sees the economy expanding 3.3%.
UAE | Non-oil dynamics moderate in December
Growth in the non-oil economy was likely broadly robust in the fourth quarter but nevertheless softened noticeably in December, when the PMI fell to an over two-year low on the back of weaker external demand. Meanwhile, although oil prices plunged in the quarter—which likely hit fiscal revenues in turn—oil production increased significantly in the same period, which bodes well for GDP growth in Q4. The December slowdown was also likely temporary, as indicated by still-upbeat business confidence in the month. Looking ahead, fiscal stimulus measures—both at the federal and emirate level—should support economic activity in Q1 and beyond. On 1 February, the IMF released its Article IV consultation report, in which it praised the country’s sound fiscal management and recent reforms to liberalize investment flows.
Although the economy remains relatively sensitive to oil market fluctuations, prospects appear promising this year. A strong dose of fiscal stimulus and the ongoing infrastructure investment push related to the preparation of Expo 2020—which will notably buttress the construction sector—should drive momentum. The recent landmark investment law, relaxation of visa rules and other business-friendly reforms also all appear poised to both attract qualified foreign workers and to significantly boost FDI inflows. Nevertheless, slower global growth, trade protectionism and financial volatility constitute important downside risks. Met the why particular panelists expect GDP to increase 3.0% in 2019, which is down 0.1 percentage points from last month’s forecast, and 3.4% in 2020.
EGYPT | Economy maintains momentum in Q2 of FY 2019
The economy grew at a strong but unchanged pace in the second quarter of fiscal year 2019—which covered October to December 2018—following a small slowdown in the first quarter. Although comprehensive data is outstanding, this came on the heels of increased investment. Moreover, the government expects unemployment to have fallen in the same period, which, combined with higher public-sector pay, likely supported private consumption growth. Meanwhile, on 25 January the IMF paved the way for the disbursement of a USD 2 billion loan payment to Egypt, which would bring total disbursements to USD 11 billion out of a possible USD 12 billion under the three-year financial support program agreed in November 2016. On the political front, around 120 of the 596 lawmakers in parliament submitted a petition on 3 February to extend the presidential term to six years from four years, which would leave President el-Sisi in office until a minimum of 2024 instead of 2022. If the bill garners sufficient support in parliament, this would require a change to the country's constitution and, thus, a national referendum.
Economic growth should be robust this fiscal year thanks to higher government investment spending, rising natural gas production and an improving regulatory environment. However, despite moderating in recent years, fiscal imbalances continue to weigh on economic prospects. Met the why particular panelists expect GDP to expand 5.3% in FY 2019, which is up 0.1 percentage point from last month’s forecast, and 5.4% in FY 2020.
INFLATION | Regional inflation falls for the first time in nine months in December
Inflation in the Middle East and North Africa region descended from November’s multi-year high of 8.6% to 8.2% in December, according to an aggregate produced by Met the why particular. The decline reflected December’s fall in oil prices, which put downward pressure on energy prices. Nevertheless, inflation in Iran continued to climb mainly due to spillovers from U.S. sanctions.
Met the why particular panelists forecast that regional inflation will average 7.2% in 2019, which is down 0.1 percentage points from last month’s estimate. In 2020, regional inflation is expected to decline to 5.6%.
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