Economic activity in the Middle East and North Africa (MENA) likely improved in Q3 due to a combination of different factors. According to our estimates, the region’s aggregate GDP expanded 2.3% year-on-year in Q3, up from Q2’s 2.1% growth. The region is benefiting from accommodative monetary policies in most countries in the region and a more stable financial environment. In this context, the PMI for the non-hydrocarbon sector in the majority of MENA countries improved in the three months up to September.
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The pressure on struggling oil-producing economies diminished in Q3 as a result of slightly higher oil prices and stronger crude production. Oil prices are expected to gradually recover in the coming months if the expected deal among the Organization of the Petroleum Exporting Countries (OPEC) to cut crude production materializes at the upcoming 30 November meeting. However, oil prices will not climb to the levels seen before 2014 as global demand remains weak and supply is expected to remain high, as non-OPEC countries could ramp up production while mistrust among OPEC members threatens to wreck the deal.
While growth appears to have improved in Q3, the region is still facing severe headwinds. Despite the increase, oil prices remain low. This is straining fiscal balances, which has led most countries to tighten their fiscal policies and to resort to foreign capital to plug their budget gaps. On 19 October, Saudi Arabia sold USD 17.5 billion in international government bonds in the largest sale of emerging market sovereign bonds on record. This was the latest in a series of government bond sales by Gulf Cooperation Council (GCC) countries. Qatar had issued USD 9 billion in sovereign bonds in May, while Abu Dhabi and Oman sold USD 5 billion and USD 4.5 billion respectively earlier this year. Saudi Arabia’s successful issuance—demand reached USD 67 billion and the Kingdom borrowed at a lower price than initially expected—highlights that investors are regaining their appetite for riskier assets, which could trigger further international bond sales in developing markets. Kuwait, for example, is on track to tap the global bond markets in the coming months and sell USD 10 billion in sovereign bonds.
MENA is plagued by mounting geopolitical risks. The war in Yemen between the Houthis, supported by Iran, and the Abdrabbuh Mansour Hadi government, sponsored by Saudi Arabia and other Sunni governments, threatens to destabilize the region. In Iraq, the government and Kurdish militias are penetrating the Islamic State’s (ISIL) stronghold of Mosul. The retaking of the city will deal an enormous blow to ISIL and could represent the start of the end of the Caliphate. ISIL has however proved itself capable of launching attacks on any part of the region, suggesting that security concerns in the region will remain firmly on the agenda in the future.
MENA's 2016 forecast stable for fourth consecutive month ahead of OPEC oil deal
Despite doubts about its implementation, prospects that OPEC’s oil deal will be sealed in November pushed up oil prices in October. However, weak global growth, substantial geopolitical risks and still low oil prices continue to jeopardize any sustained recovery in the region. Against a backdrop of broadly balanced risks to MENA’s economic outlook, our panel of analysts maintained their GDP growth forecasts for the region stable for the fourth month in a row at 2.3%. For 2017, growth in the region is expected to accelerate to 2.8%.
The stable outlook for this month’s 2016 MENA growth forecast reflects unchanged projections for 6 of the 16 economies in the region, including Iran, Iraq and Saudi Arabia. The panel decided to upgrade their view for the economies of Algeria, Bahrain, Egypt, Israel and Jordan. In contrast, the outlook was downgraded for Morocco, Oman, Qatar, the United Arab Emirates and Yemen.
Iran, which is benefiting from its reintegration into the global economy and stronger oil exports, is expected to be the best performer in 2016. At the other end of the spectrum, Lebanon and Saudi Arabia are expected to perform poorly, with expansion rates of around 1.0%. Yemen, which is engulfed in a never-ending civil war, will be the worst performer by far. 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 | Proceeds from record bond sale to plug fiscal gap
Economic activity likely remained in the doldrums in Q3 following Q2’s dismal performance, when GDP decelerated to multi-year lows. The PMI for the non-hydrocarbon sector improved in Q3, though it remained at historically low levels. Oil prices were broadly stable and they only picked up in late September as markets reacted to the possibility of an OPEC agreement to reduce production. In Q4, growth will benefit from higher oil prices, but activity will remain weak as the government is slashing public spending in an attempt to reduce its fiscal deficit. In order to plug the country’s fiscal gap, Saudi Arabia issued its first ever international bond on 19 October. The Kingdom sold a massive USD 17.5 billion in sovereign bonds, the largest sale of emerging market bonds in history.
Strong crude production and higher oil prices in the wake of a possible landmark agreement among key suppliers to prop up prices are expected to spur growth going forward. Oil prices, however, are still expected to remain at low levels for the foreseeable future, which will necessitate further austerity to curb the government’s stubbornly high fiscal imbalances. FocusEconomics Consensus Forecast panelists forecast that GDP will grow 1.0% in 2016, which is unchanged from last month's projection. In 2017, the panel expects GDP growth to accelerate to 1.2%.
UAE | Non-hydrocarbon sector activity slows in September
The UAE’s economy is holding its comfortable position among the best performing economies in the region. The country’s more diversified economic base compared to that of neighboring Gulf countries has made the Emirates more resilient to the ongoing regional slowdown triggered by the crude slump. Moreover, Energy Minister Suhail Mohammed Faraj Al Mazroui recently stated that the government is working on a new mining law aimed at attracting more investment to the industry. The PMI from September points to slower growth in the non-oil private sector, although the indicator did stay comfortably within expansionary territory. Oil production hit a record high in Q3 as OPEC has been hesitant to take a strong stance on capping oil production in recent months despite September’s preliminary deal.
Despite the Emirates’ relatively solid economic performance, weak regional and global demand will negatively affect the export-oriented service sector, which is fundamental to the overall performance of the non-oil sector. FocusEconomics panelists expect GDP to rise 2.3% in 2016, which is down 0.1 percentage points from last month's projection. In 2017, the panel sees GDP growth accelerating to 2.6%.
EGYPT | Low international reserves threaten currency stability
Egypt’s economic woes remain acute. The country is required to raise USD 6.0 billion for the IMF Board to consider granting it a USD 12.0 billion loan, which is proving very challenging. Although it received USD 2.0 billion from Saudi Arabia in mid-October, relations between the two countries are dire and they worsened in the same month when Saudi Arabia decided to halt shipments of fuel to Egypt at subsidized prices. The consequent shortfall of 700,000 tons of low-cost refined fuel per month will increase the need for imported oil from elsewhere, becoming another drag on a country already beset by a U.S. dollar shortage, a widening disparity between the official and black market rates and soaring inflation. Egypt’s net international reserves rose in September but remain well below the levels seen before former president Hosni Mubarak was overthrown. Although the increase provides some respite to the state’s coffers, delaying the free-floating of the Egyptian pound—a condition for the IMF deal—will continue to burn through the country’s foreign currency reserves.
Soaring prices for imported food products, coupled with severe austerity measures, are fueling higher social discontent and risk sparking yet another revolt. Nonetheless, our panelists expect GDP to have expanded 3.4% in FY 2016, which is up 0.1 percentage points from last month’s forecast. Our panel sees growth of 3.6% in FY 2017.
ISRAEL | Growth momentum remains strong
Although political tensions in the region have heightened, Israel’s economy continues to perform strongly. After buoyant second quarter growth, activity appears to be keeping up the momentum. This is reflected in confidence among business owners and consumers, which edged up in September after having dipped slightly in August. Adding to the positive sentiment is a record-low unemployment rate, which has in turn led to growing real household income, making private consumption a strong driver of growth. According to a company survey released by the Bank of Israel on 26 October, the business sector grew rapidly in Q3 thanks to healthy activity in manufacturing, services and trade. The prospects for the fourth quarter are also optimistic, the survey participants reported.
The robust labor market will continue to provide positive impulses to Israel’s economy and private consumption is projected to accelerate this year. Additional stimulus will come from fixed investment, which is expected to surge this year after two years of stagnation. FocusEconomics panelists expect growth of 2.8% in 2016, which is up 0.1 percentage points from last month’s forecast. For 2017, the panel forecasts that GDP will expand 3.2%.
INFLATION | Inflation edges down in September
Inflation in the MENA region ticked down from August’s 13-month high of 4.5% to 4.3% in September. The print mainly reflected lower inflation in Algeria, Egypt, Qatar and Saudi Arabia. Although inflation in Egypt moderated in September, price pressures remain high as core inflation is on an upward trend and the introduction of a VAT tax in September will keep them elevated. Elsewhere in the region, weak economic growth and more stable financial and exchange rate markets are exerting downward pressure on prices.
FocusEconomics panelists decided to cut their 2016 inflation forecast from last month for the MENA region by 0.2 percentage points to 4.6%. The downward revision mainly reflected a cut in the inflation projections for Iran, Iraq, Israel, Jordan, Lebanon, Morocco, the United Arab Emirates and Yemen. In 2017, inflation is expected to increase to 5.1%.
Written by: Ricard Torné, Head of Economic Research