Economic Snapshot for the Middle East & North Africa
March 8, 2017
OPEC members comply with oil cut deal
Economic activity in the Middle East and North Africa (MENA) ended 2016 on a strong footing on the back of a pick-up in global growth and higher oil prices. According to preliminary data, the region’s aggregate GDP expanded 2.9% year-on-year in Q4, which was above the 2.8% growth in Q3. Q4’s strong result brought full year growth for 2016 to 2.9%, up from 2.6% in 2015.
2016’s result mostly reflects Iran’s reintegration into the global economy following years of tough economic sanctions. Higher oil exports and moderately strong investments from overseas led the economy to expand at the fastest pace in six years in 2016. Iraq was also one of 2016’s winners after the government was able to halt the progress of the Islamic State (ISIS) and slowly regain control of large swaths of the country. Moreover, Iraq benefited from stronger crude output as most of the oil fields were unaffected by the war as they are concentrated in the south of the country.
Despite the success of Iran and Iraq, growth slowed in most of the other countries in 2016. Low oil prices, scarce liquidity in domestic financial markets and falling government spending impacted other oil-exporting countries. Although economic activity showed more resilience among oil-importing nations, adverse weather conditions weighed on the agricultural sector. Overall, spillovers from regional conflicts continued to put downside pressure on growth.
Recent data corroborate that the Organization of the Petroleum Exporting Countries (OPEC) members are meeting they output quotas agreed upon in the 30 November summit. In January, the aggregate crude production among participants in the OPEC cartel was 32.14 million barrels per day (mbpd), a reduction of 1.25 mbpd compared to November’s output. Therefore, OPEC members are now pumping oil below the agreed joint quota of 32.5 mbpd, with Saudi Arabia carrying the bulk of the reduction with a cut of 679 thousand barrels per day. Despite the sharp fall in output, oil prices have stagnated below the USD 55 per barrel mark as U.S. shale producers are gradually coming back online to take advantage of higher oil prices.
Weak fiscal support and lower crude production will keep 2017 growth subdued
This year, economic growth in the MENA region will remain constrained by weak fiscal policies. Most of the oil-exporting economies will continue to suffer from harsh austerity as they still have to absorb the shock from low oil prices in the previous two years. Moreover, oil-importing nations already had limited fiscal buffers to support their economies and this will continue to be the case this year.
On top of fiscal strains, lower crude production in compliance with the November OPEC deal will limit the economic performance among oil-exporting nations, while higher oil prices will erode consumers’ purchasing power in non-oil countries. Against this backdrop, analysts decided to cut MENA’s 2017 growth outlook this month, bringing the Consensus Forecast down by 0.1 percentage points to 2.4%. If the year ends at this rate, it will represent the weakest expansion since the trough of the financial crisis in 2009. Next year, the panel sees growth picking up to 3.2%.
This month’s cut to MENA’s growth forecast reflects a downward revision to economic prospects for Iran and Kuwait. Analysts are concerned about escalating political tensions between Iran and the new U.S. administration, which could derail Iran’s strong economic recovery. Conversely, panelists upgraded their economic outlook for Iraq and Lebanon. Meanwhile, our panel of analysts left unchanged their growth estimates for 12 of the 16 economies in the region, including Egypt, Israel, Qatar, Saudi Arabia and the United Arab Emirates.
Iran, which is benefiting from its return to the international markets, is expected to be the best performer this year. At the other end of the spectrum, Saudi Arabia is expected to perform poorly, with an expansion rate of 0.5%, as the oil production cut in compliance with the OPEC accord will hit growth. Yemen, which is engaged in a deadly war, will remain the main blackspot in the region and its 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% and 3.3%, respectively.
SAUDI ARABIA | Non-oil activity remains buoyant at the outset of the year
Saudi Arabia has continued to implement oil production cuts in compliance with OPEC’s 30 November deal. In January, oil production fell below the 10 million barrels per day mark for the first time since February 2015. Lower production is expected to drag on the all-important oil sector throughout this year. On the upside, an improved outlook for oil prices and signs of stronger global growth are propelling activity in the non-oil sector. In February, the PMI for the non-hydrocarbon sector remained firmly entrenched in positive territory. Interbank rates declined markedly in February, signaling improving liquidity conditions following the liquidity crunch that persisted for most of last year. Moreover, improving economic conditions will ease some of the austerity that plagued growth in 2016.
Sharp reductions in crude production associated with the OPEC oil deal will bring the economy to decelerate to multi-year lows this year. However, looking further ahead, growth will benefit from higher oil prices and the government’s initiatives to promote the non-oil sector. FocusEconomics Consensus Forecast panelists expect that the economy will grow 0.5% this year, which is unchanged from last month's projection. Next year, the panel sees GDP growth accelerating to 1.9%.
UAE | Non-oil sector set to support growth this year
The UAE’s economy has shown renewed vigor at the start of 2017, with the country’s PMI rising in February to a 17-month high on the back of stronger domestic and external demand. This follows an uptick in economic activity in the final quarter of last year thanks largely to a boost in oil production. However, growth for 2016 as a whole is likely to have been fairly lackluster as a result of low oil prices, significant fiscal consolidation in Q1 and the strong dirham, which hurt the country’s tourism sector. In February of this year it was revealed that the UAE is thus far failing to comply with OPEC-agreed oil production cuts of 139,000 bpd. However, the government has pledged to improve compliance over the six-month duration of the supply cut.
Growth is likely to rise slightly this year, driven by a predicted uptick in investment, while the oil sector will be hampered by production cuts agreed as part of the OPEC deal despite a modest uptick in prices. Looming interest rate hikes linked to the U.S. Federal Reserve’s monetary normalization will partially counteract the healthy performance of the non-oil sector. FocusEconomics panelists expect GDP to rise 2.5% in 2017 and 3.2% in 2018.
EGYPT | Encouraging signs are starting to emerge
The latest economic indicators show that Egypt’s economy may slowly be turning a corner in the first few months of 2017. The PMI improved in February for the third consecutive month, thanks to more gradual contractions in output and new orders, although operating conditions remain difficult. Investors are venturing back to the country and dollars have come flooding back into the financial system, with the Central Bank’s reserves at the end of February standing at their highest level since June 2011. In a sign of more upbeat investor sentiment, the pound appreciated significantly in February following a precipitous decline late last year. The good news comes after the government subjected the economy to shock therapy at the end of 2016 in order to secure IMF funding, which involved floating the pound, cutting fuel subsidies and hiking tariffs, causing inflation to skyrocket. Following the successful enaction of painful structural reforms, Egypt is likely to receive the second tranche of IMF funding this spring, following a staff visit to the country at the end of February.
Egypt’s economy is expected to slow in FY 2017, with private consumption severely impacted as high inflation takes a large chunk out of consumers’ purchasing power. However, looking further ahead the economy should benefit from greater foreign investment and improved competitiveness. Analysts expect GDP to expand 3.4% in FY 2017 and 3.8% in FY 2018.
ISRAEL | Buoyant external sector propels growth in Q4 2016
According to preliminary data from Q4 2016, Israel’s economy closed the year on a high note. Domestic demand grew at a steadily high level, but it was the external sector that spearheaded Q4’s expansion with exports of goods and services rebounding and rising by more than 10%, largely thanks to buoyant service exports. Q4’s acceleration in private consumption can largely be explained by one-time effects, as consumers anticipated car purchases ahead of a regulation change at the outset of 2017. That said, two consecutive declines in consumer confidence in December and January suggest that private consumption is starting to cool off. In other news, USD 3.75 billion in investment was approved for the development of the Leviathan gas field in late February. Natural gas from the site in the Mediterranean Sea is expected within three years and will ensure energy security for Israel.
Private consumption and fixed investment will continue to sustain a healthy growth rate but they are seen decelerating this year, while the external sector is expected to continue improving. FocusEconomics panelists expect growth of 3.3% in 2017, which is unchanged from last month’s forecast. For 2018, the panel also projects growth of 3.3%.
INFLATION | Inflation stabilizes in 2016
Inflationary pressures in the MENA region were broadly stable in 2016. According to final estimates, inflation came in at 4.4% in 2016, which was a notch below the 4.5% recorded in 2015. Far from being a general trend, inflation declined slightly in 2016 mainly due to more benign inflationary pressures in Iran as a result of improving macroeconomic conditions. Conversely, inflationary pressures mounted in many countries in the region due to a combination of factors. Some oil-producing countries decided to hike some administered prices in an attempt to rein in their rampant fiscal deficits while adverse weather conditions caused food prices to rise in other countries. In Egypt, inflation skyrocketed at the end of the year following the free-floating of the pound in November.
For this year, FocusEconomics panelists expect inflation for the region to rise to 4.8%, which is down 0.1 percentage points from last month’s estimate. The panel sees inflation at 5.0% in 2018.
Written by: Ricard Torné, Head of Economic Research
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