Growth remains subdued amid geopolitical tensions and global uncertainly
July 5, 2016
Growth remained weak in the Middle East and North Africa (MENA) at the outset of the year as geopolitical risks and weak global growth continue to hamper economic activity across the region. GDP expanded 2.0% annually in Q1 according to preliminary data for the region. The print was in line with the result tallied in Q4 and thus growth remained at levels last seen in height of the financial crisis in 2009. Taking a closer look at the region’s economies individually, the downward spiral among oil-driven economies seems to have come to an end after a rebound in prices followed a renewed plunge in oil prices, which fell to a multiyear-low in January. However, sharp consolidation processes in an attempt to rein in rampant fiscal deficits are hampering economic growth among oil-rich nations. On the other hand, rising global uncertainty, widespread security risks and mounting domestic challenges are hurting economic activity among oil-dependent economies
Territory under direct control of Islamic State (ISIL) is slowly being taken back. The Iraqi military retook the city of Fallujah in June, which represented the most important victory of the highly-questioned Iraqi army since ISIL’s offensive in 2014 that led the group to control nearly one third of the country. While this represented the first step toward recovering Mosul, Iraq’s second-largest city, ISIL still controls large swaths of land. In Syria, the government and the Kurdish militias are also making important gains on the ground. However, despite the important losses in the last few months, the ISIL’s activity, along with that of other extremist groups, has spread across the region in the form of terrorist attacks. This situation is fanning uncertainty, which translates into low business and consumer sentiment, and threatens any attempt of a sustainable economic recovery.
Spillovers from the United Kingdom’s decision to leave the Euro area are expected to be relatively limited for the MENA region. While the linkage between the region and the United Kingdom is small, a disorderly Brexit has the potential to increase volatility in global financial markets, which could affect the region’s banking system and countries with high external debt. Conversely, a notable deceleration in the Euro area could reduce global demand and have broader impact on the global economy.
MENA's 2016 growth prospects deteriorate due to global headwinds and security threats
Although the recent rally in oil prices represents a breath of fresh air for oil-export-driven economies, in general, crude prices remain well below the break-even cost for the majority of countries in the region—which translates into large fiscal imbalances and less supportive policy backing. Moreover, resurfacing global uncertainty following the Brexit vote and widespread security risks in the region are weighing on growth. Taking recent developments into account, FocusEconomics Consensus Forecast panelists cut their 2016 growth projections for the region by 0.1 percentage points this month. As a result, they expect growth to tally 2.3% in 2016. If confirmed, this will represent the weakest growth since the height of the financial crisis in 2009. For 2017, growth in the region is expected to accelerate to 3.0%.
This month’s downward revision to MENA’s 2016 growth forecast reflects lower projections for 10 of the 16 countries in the region, including Egypt, Israel, Qatar, Saudi Arabia and the United Arab Emirates. The panel made not change to the estimates for Algeria, Iran, Kuwait, Oman and Yemen. Bahrain was the sole country for which the panel upgraded its forecast for the economy.
Qatar is expected to be the best performer in 2016, followed closely by Iran, which is benefiting from the reintegration into the global economy. At the other end of the spectrum, Saudi Arabia and Lebanon are expected to perform poorly, and Yemen, which is entangled in a bloody civil war, will be the worst performer by far. Among the rest of the major economies in the region, Egypt and Israel will likely grow the fastest, with projected expansions of 3.2% and 2.7%, respectively.
SAUDI ARABIA | Economy slows in Q1 on reduced government spending
Austerity measures to trim down the Kingdom’s massive fiscal deficit took a toll on growth in Q1 and the economy expanded at the weakest pace in three years. Moreover, Q1’s economic performance was negatively affected by a base effect stemming from lavish spending associated with the coronation of the new king in January of 2015. In the first three months of the year, GDP expanded 1.5% annually, which was below the 1.8% rise tallied in Q4. Strong crude production and the steady increase in oil prices that started in January were the main pillars of growth in Q1. More recent data suggest that activity in the private sector continues to be constrained by higher costs and reduced policy support, with the PMI remaining at historically-low levels.
This year, the Kingdom will benefit from the slow but steady increase in oil prices. However, initiatives to rein in Saudi Arabia’s soaring fiscal gap and geopolitical threats in the region promise to keep growth subdued this year. If Deputy Crown Prince Mohamed bin Salman’s plan to transition the Kingdom’s economy toward a more sustainable non-oil model is effectively implemented, it could boost long-term growth. FocusEconomics panelists expect that GDP will grow 1.0% in 2016, which is down 0.1 percentage points from last month's forecast. In 2017, the panel sees GDP growth accelerating to 1.7%.
UAE | Government merges two government wealth funds to diversify the economy
Oil prices have recovered from early-2016’s multi-year lows, yet they are still comparatively low and do not provide the UAE government enough revenue to cover its expenses. The country reformed its budget last year by cutting spending through a reduction in fuel subsidies and scaling back energy sector investment. This year, a further reduction in subsides has occurred. Electricity subsidies were scaled back in Abu Dhabi and water tariffs were increased. Meanwhile, the Abu Dhabi government announced in late June the merger of two major government wealth funds. The government claims that the merger will help diversify the economy, while some analysts suggest that the cost-saving benefits were the major impetus behind the merger, which represents the latest attempt by the government to rein in spending.
The steady increase in oil prices will grant the government more fiscal leeway this year. However, prices are expected to remain comparatively low, and growth in the UAE will depend on how effectively it can pivot away from hydrocarbon-related growth into other sectors. FocusEconomics Consensus Forecast panelists expect the economy to moderate this year while the oil price shock is still being absorbed, with growth slowing to 2.4% in 2016, which is down 0.1 percentage points from last month's forecast. In 2017, the panel sees the UAE's economic diversification taking shape and foresees growth accelerating to 2.8%.
EGYPT | Economy still in the doldrums; reforms loom on the horizon
Egypt’s economy is suffering from a severe dollar shortage, which is restraining many areas of economic activity and limits vital imports, as a drop in tourism, capital flight and falling exports have caused international reserves to fall by more than half since 2011. While the Central Bank’s notable devaluation of the pound in March aimed to alleviate the dollar crunch, the persistently-large currency black market suggests that another devaluation might be needed. Egypt’s weak fiscal position is another reason for concern as the budget gap has been in the double-digits since 2011 and broadly one-third of government expenditure is spent on servicing public debt. While the government envisaged fiscal consolidation measures in the 2017 draft budget, a final approval of the measures is still outstanding. Particularly, details about the belated and crucial introduction of a Value-added Tax (VAT) are still under discussion in Parliament. The approval of the VAT and other previously-agreed economic reforms would unlock a USD 3.0 billion World Bank loan that was agreed in December.
The dollar shortage, a weak fiscal position and political instability are limiting Egypt’s growth prospects. The UK’s vote to leave the EU adds to downside risks due to the two countries’ close ties in areas such as trade, tourism and investment. Our panelists expect GDP to have expanded 3.2% in FY 2016 and expect growth of 3.9% in FY 2017.
ISRAEL | Israel and Turkey strengthen ties following years of political deadlock
In the first quarter, Israel’s economy decelerated notably over the previous quarter’s increase and GDP expanded at the slowest rate in three quarters. Contractions in government spending and exports were the key factors behind the deceleration. Conversely, fixed investment and private consumption remained buoyant in Q1. An improvement in labor market conditions, record-low interest rates and strong nominal wage growth will continue to support private consumption in the second quarter. Meanwhile, after six years of conflict, Israeli Prime Minister Benjamin Netanyahu signed a reconciliation deal with Turkish PM Binali Yildirim in June in order to normalize relations between the two countries. Israel and Turkey have been at loggerheads since Israeli’s raid on a Gaza-bound flotilla in 2010 that killed nine Turkish citizens. The deal is expected to boost cooperation between the two countries and will also pave the way for the enhancement of commerce and tourism.
The economy is expected to accelerate this year. However, external risks from a slow recovery in global demand are weighing on the country’s economic outlook. FocusEconomics panelists expect the economy to grow 2.7% in 2016, which is down 0.1 percentage points from last month’s forecast. For 2017, the panel forecasts GDP to expand 3.1%.
INFLATION | Inflation hits eight-month high in May
Inflation in the Middle East and North Africa region rose from April’s 3.9% to 4.1% in May, which marked the highest reading since October 2015. The acceleration was mainly due to higher inflation in Algeria, Egypt, Iraq, Israel, Morocco and Tunisia. Inflationary pressures are gradually picking up, particularly in oil-dependent economies, due to the rally in oil prices that began in January. Subsidy reforms are also adding to the upward trend in prices. Moreover, inflation is spiraling upward in Egypt due to scarcity of hard currency and FX pass-through.
FocusEconomics panelists cut their 2016 inflation outlook for the MENA region for the second consecutive month. The panel now sees inflation of 4.6% in 2016, which is down 0.1 percentage points from last month’s forecast. In 2017, inflation is expected to increase to 4.9%.
Written by: Ricard Torné, Head of Economic Research
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