Economic Snapshot for the Middle East & North Africa
January 11, 2017
MENA growth accelerates in 2016 despite GCC’s weak performance
Economic activity in the Middle East and North Africa (MENA) showed surprising resilience in 2016 despite mounting political and economic headwinds. According to our estimates, the region’s aggregate GDP expanded 2.7% in 2016, up from 2015’s 2.6% growth. Far from being a broad-based improvement, 2016’s figure was the result of diverging economic trends within MENA. The region greatly benefited from Iran’s reintegration into the global economy and its consequent surge in oil shipments. The Persian country is projected to expand at the fastest pace in six years in the Iranian fiscal year 2016, which ends in March 2017. Another positive note for 2016 was Iraq’s economic rebound following 2015’s dismal performance, when the Islamic State (ISIL) occupied large swaths of land in the country.
Accommodative monetary policies and improving external positions due to low oil prices prompted growth in most of the region’s net oil importers to accelerate this year. Morocco was the major outlier as poor weather conditions hit the all-important agricultural sector. Economic dynamics in Jordan and Lebanon were limited by spillovers stemming from the ongoing war in Iraq and Syria.
While the region managed to accelerate despite a challenging economic and political context, the Gulf Cooperation Council (GCC) countries felt the brunt of the pain in 2016. The low oil price environment since mid-2015 forced GCC countries to implement harsh austerity measures in order to rein in their soaring budget deficits. Lower subsidies and a sizeable reduction in government expenditures, particularly in infrastructures, took their toll on non-oil activities. As a result, growth in GCC countries fell from 3.8% in 2015 to 1.9% in 2016, the weakest performance since the global financial crisis in 2009.
In order to jumpstart their economies and replenish their crippled coffers, the Organization of the Petroleum Exporting Countries (OPEC) reached an agreement on 30 November to cut oil production by around 1.4 million barrels per day. On 10 December, non-OPEC countries led by Russia joined the deal, committing to slash their output by around 550,000 barrels per day. Since then, oil prices have been trading above USD 50 per barrel for the first time in one and a half years. Despite the initial success, uncertainty lingers on the horizon as OPEC countries have a poor track record in sticking to oil production deals.
Global and regional headwinds plague this month’s 2017 growth prospects
Despite the OPEC’s deal to cut oil production, the region is facing severe headwinds this year. While the reduction in crude supply will boost crude prices, they will remain at relatively low levels. Moreover, the oil output cut that some key producers in the region have to implement in compliance with the OPEC’s accord will limit the gains of higher crude prices. Economic growth in MENA will be negatively affected by austerity as government budgets in a number of countries in the region are far from being balanced. Among non-oil-exporting countries, the rise in oil prices will lead to a deterioration in their external positions.
Widespread security risks in the region and global uncertainties, such as the yet unclear economic and geopolitical policies of President-elect Donald Trump and crucial elections in some countries in Europe, are also casting a dark shadow on the region’s outlook for this year. Against this backdrop, our panel of analysts decided to cut MENA’s 2017 economic outlook this month by 0.1 percentage points to 2.6%. Next year, the panel sees growth picking up to 3.2%.
This month’s cut to MENA’s growth forecast reflects downward revisions for 8 of the 16 economies in the region, including Egypt, Iraq, Qatar and Saudi Arabia. Conversely, the panel decided to upgrade its view on the economies of Iran, Lebanon and Tunisia. Meanwhile, analysts left the outlooks for Algeria, Bahrain, Israel, Morocco and the United Arab Emirates unchanged.
The best performer in 2017 is expected to be Iran as the country is benefiting from its reintegration into the global economy and stronger oil exports. At the other end of the spectrum, Saudi Arabia is expected to perform poorly, with an expansion rate of below 1.0%. Yemen, which is entangled in a bloody civil war, will remain the main blackspot in the region and the economy will contract for the fifth year in a row in 2017. Of the rest of the major economies in the region, Egypt and Qatar will likely grow the fastest, with projected expansions of 3.4%.
SAUDI ARABIA | Doubts mount about viability of fiscal plans in 2017 budget
Tough austerity measures in response to a deteriorating fiscal position prompted the economy to slow to an over three-year low in Q3. High interbank rates due to the government’s heavy borrowing in local financial markets, reduced spending and the delay of some investment projects are hurting economic growth. On the upside, the rise in oil prices, coupled with high oil supply, is cushioning the economy against a sharp downturn. That said, the expected reduction in oil production following the OPEC’s meeting in November is clouding the outlook for the all-important hydrocarbon sector. In an attempt to avoid a repeat of 2016’s austerity, the government included higher spending in the 2017 budget. However, its oil revenue projections appear to be too optimistic and analysts warn that spending will not actually increase this year if some payments made last year are finally included in the 2016 budget.
Despite the rise in oil prices, growth will remain subdued due to the reduction in oil production included in the 30 November oil cut deal and subdued policy support. In the longer run, the Kingdom’s effort to transition its economy away from oil should gradually allow growth to pick up. FocusEconomics Consensus Forecast panelists forecast that GDP will grow 0.8% in 2017, which is down 0.4 percentage points from last month's projection. In 2018, the panel expects GDP to rise 1.8%.
UAE | Weak regional dynamics and low oil prices dampen growth in 2016
The UAE economy switched into lower gear in 2016 as harsh austerity measures, weak growth among key trading partners and low oil prices continued to dampen economic activity. PMI data for 2016 showed that, despite remaining in positive territory, the index was well below the average of the previous year, suggesting a slowdown in non-hydrocarbon activities. On the upside, infrastructure investment continued to sustain the relatively diversified economy and greater oil production helped to cushion the fall in oil prices. Going forward, the Abu Dhabi National Oil Company (Adnoc) aims to more than double petrol and petrochemicals production under a five-year plan announced last year.
Reduced government spending will continue to constrain the economy in 2017, albeit to a lesser extent thanks to the recovery in the oil market. The non-oil sector will continue to sustain growth, though not at its full potential due to weak regional and global demand. FocusEconomics panelists expect GDP to rise 2.6% in 2017, which is unchanged from last month's forecast. In 2018, the panel sees GDP growth accelerating to 3.2%.
EGYPT | Foreign reserves rise following FX liberalization
The effects of the liberalization of the Egyptian pound and the scrapping of fuel subsidies, both of which took place in early November, continue to be felt in the economy. The pound has lost more than half its value since then, severely impacting both the costs of production as well as those of living. December’s negative PMI and multi-year high inflation in November both confirm the adverse effects of a heavily weakened currency on the net importing country. Nonetheless, the government continues to push forward reform-oriented policies aimed at encouraging investment and reviving the economy, which only managed to grow a mediocre 4.3% in FY 2015/16. These include, but are not limited to, removing profit repatriation restrictions and approving Egypt’s first bankruptcy law. On an upbeat note, the floating of the pound has allowed the Central Bank to bolster international reserves, which had halved since the 2011 Arab Spring uprising. On top of disbursements from major lending institutions, Egyptian authorities are expected to tap international markets soon in a bid to maintain the recent trend seen in the state’s reserves.
The floating of the pound and structural reforms, albeit harmful at first both to producers and consumers, will gradually yield results, particularly in terms of increased inflows of U.S. dollars and investors into the economy and improved fiscal governance. Our panelists expect GDP to expand 3.4% in FY 2017. The panel sees growth of 3.8% in FY 2018.
ISRAEL | Increase in fixed investment bodes well for exports in 2017
A preliminary estimate of 3.8% growth in 2016 confirmed the robust expansion suggested by the quarterly national accounts up until Q3. Activity is expected to have stayed strong in Q4 as low inflation and declining unemployment fueled private consumption, while accommodative monetary conditions buttressed fixed investment, which was mainly made in the manufacturing sector. Exports of goods and services swung back to a moderate expansion in 2016 after contracting in 2015, despite the strength of the shekel against the U.S. dollar and imports soaring—implying a remarkable improvement in the exporting sector. After a hiccup in U.S.-Israeli political relations in late December due to disputes over Israeli settlers in Palestinian-claimed regions, President Trump’s imminent inauguration promises smooth continuation of ties with Israel’s most important importer.
Last year’s increase in fixed investment bodes well for Israel’s exports going forward. Investment in manufacturing, which accounts for the lion’s share of goods shipped abroad, should help to improve competitiveness and thereby to offset the effects of the strong shekel. Household expenditure is expected to cool down in 2017 after rising strongly last year. FocusEconomics panelists expect growth of 3.3% in 2017, which is unchanged from last month’s forecast. For 2018, the panel foresees a moderate acceleration to 3.4% growth.
INFLATION | Inflation jumps to an over one-year high in November
Inflation in the MENA region rose markedly in November due to higher inflationary pressures among non-oil countries. Inflation jumped from October’s 4.3% to 4.8% in November, the highest rate since July 2015. November’s print reflected a divergent trend between oil and non-oil countries. Inflation decelerated among most oil-exporting countries due to the strengthening of their currencies and the fading effect of the removal of some subsidies at the start of 2016. Conversely, higher energy prices led inflationary pressures to rise in some oil-dependent economies. Moreover, in Egypt, the depreciation of the pound caused inflation to hit a multi-year high in November.
FocusEconomics panelists expect inflation for the MENA region to average 4.8% this year, which is unchanged from last month’s estimate. Next year, the panel sees inflation inching up only to 4.9%.
Written by: Ricard Torné, Head of Economic Research
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