MENA: MENA's economy splutters in Q4, but 2018 looks more positive
April 11, 2018
The Middle East and North Africa (MENA) region’s economy lost steam in the October–December period compared to the July–September period. According to a more complete set of data, economic growth in the region dipped to 1.2% in Q4, down from the previous quarter’s revised 1.7% expansion (previously reported: +1.8% year-on-year) and below a preliminary estimate of 1.4%.
Tepid performances from oil exporters—which are responsible for around two thirds of regional GDP—drove the slowdown in the final quarter, as compliance with OPEC production cuts continued to weigh heavily. Saudi Arabia’s economy continued to contract, dragged further down by a softer non-oil sector, while GDP in Kuwait declined sharply and growth in both Bahrain and Qatar lost momentum. Qatar continued to suffer the effects of the GCC-imposed blockade, with tourist numbers down sharply in the second half of the year, hitting the restaurant and hospitality sectors. Economic momentum in regional heavyweight Iran also appeared to have petered out in Q4 (Q3 of the Iranian year) according to a preliminary estimate by the Central Bank. Concerted economic diversification efforts have yet to significantly wean oil exporters off their reliance on hydrocarbons, with the exception of the UAE.
Oil importers fared better in Q4. Egypt’s economy moved up the gears thanks to a more competitive external sector and solid public investment, while Israel’s growth accelerated on greater high-tech and tourism exports. Morocco also picked up steam as the agricultural sector continued to speed up after a severe drought in 2016.
MENA likely saw a broad-based pick-up in growth in the first quarter. This is partly thanks to a favorable base effect, as OPEC production cuts have now been in place for over a year. In addition, oil prices are up markedly year-on-year, despite some temporary softness in February and early March on surging U.S. shale output and volatility in global equity markets. Economic activity readings in Israel were also robust in the first two months of 2018. However, the non-oil private sectors in the UAE and Saudi Arabia have taken a temporary hit from the introduction of VAT, which has dampened new business growth.
After several GCC countries announced more expansionary 2018 budgets at the end of last year, recent weeks have seen more fiscally cautious proposals. Egypt’s draft budget aims to keep chipping away at the huge fiscal deficit in line with its IMF-funded program, while Lebanon recently passed only the second budget in 13 years, aiming for significant cuts to central government spending. The move was key to the country reportedly securing over USD 11 billion at a recent donor conference. Also, in late March, Iraq approved the first budget since the end of the civil war, although Kurdish MPs boycotted the vote and there are concerns of possible constitutional violations.
Iraqi sectarian tensions are only one of a maelstrom of uncertainties which swirled over the last month. Chief among them is the risk that the U.S. could reimpose sanctions on Iran and pull out of the nuclear deal after two foreign policy hawks were recently appointed to senior posts in Washington. Such a move would likely restrict badly needed inward investment and cripple the development of correspondent banking relationships. Elections to be held in Lebanon on 6 May could also strengthen the position of Iran-backed Hezbollah in the country’s government, further ratcheting up tension with Saudi Arabia. Violence has also flared in Gaza and Yemen in recent weeks, although the current economic impact appears to be limited.
2018 should see much-improved growth, although heightened regional uncertainties will remain
Growth in the MENA economy is set to accelerate sharply this year on the back of higher oil prices and more expansionary fiscal policies among key oil exporters such as Saudi Arabi and the UAE, marking a reversal from several years of harsh austerity measures. Strong global growth will provide further impetus to the recovery and strengthen the region’s external sector.
However, the implementation of VAT will hamper private consumption in Saudi Arabia and the UAE, while potential subsidy rises in Egypt later this year could temporarily dent household purchasing power. Tightening financial conditions, as many countries look to protect their dollar pegs, will also limit credit provision. In addition, oil production will be constrained by ongoing OPEC production cuts, and a lack of progress with economic diversification will limit the scope for the non-oil sector to drive growth in most oil-exporting countries. Political risks are also apparent, particularly the ongoing rivalry between Saudi Arabia and Iran, and the potential collapse of the Iranian nuclear deal. The prospect of greater global protectionism—with a possible knock-on effect on financial market volatility and oil prices—also looms large.
The MENA region is seen expanding 2.8% in 2018, which is down 0.1 percentage points from last month’s estimate. Our panel projects regional growth of 3.3% in 2019.
This month’s downward revision to the 2018 economic outlook reflects weaker growth prospects for Algeria, Iran, Iraq, Lebanon, Morocco and Tunisia. Panelists upgraded their view of the economies of Israel, Kuwait and the UAE, while forecasts for other countries were left unchanged.
Egypt’s economy is expected to be the best performer in 2018, followed by Iran’s. At the other end of the spectrum, Yemen, which is embroiled in an unending civil war, is expected to be the region’s worst performer. Among other major economies, Saudi Arabia will see a mild economic rebound on higher oil prices—although continuing OPEC production cuts will hamper growth—while Israel should continue to expand at a robust pace.
SAUDI ARABIA | VAT dampens activity in Q1, but solid oil prices bode well for growth looking forward
Saudi Arabia’s economy remained in recession in the fourth quarter of 2017 on lower oil output, according to recent data. In addition, the non-oil sector lost momentum due to a further decline in construction and slowdowns in retail, finance and transport. The economy has started 2018 in muted fashion. Despite remaining in positive territory, the non-oil PMI dipped to a fresh all-time low in March because of slower new business growth—likely driven by the recent introduction of VAT. In addition, private sector credit continued to shrink in February, and the recent hike in domestic interest rates will likely limit the recovery of credit provision going forward. More positively, oil prices picked up towards the end of March as compliance among OPEC members rose further. This came after the oil market softened in February on soaring U.S. shale production and financial market volatility.
The economy will benefit this year from higher oil prices and strong global growth. Increased oil revenues will allow the government to adopt a more expansive fiscal stance, boosting domestic demand. However, persistent geopolitical threats and capped oil supply are expected to limit the economic recovery. FocusEconomics Consensus Forecast panelists expect growth of 1.6% in 2018, which is unchanged from last month’s projection. In 2019, growth is seen picking up pace to 2.3%.
UAE | Economy remains in solid shape despite short-term VAT headwind
Despite a slight slump resulting from the introduction of VAT in January, the non-oil economy has been cruising along in the first quarter. In February, the Dubai travel and tourism sector index reached a 13-month high. Moreover, although the non-oil PMI dipped slightly in March for the third consecutive month on decelerating output growth, it remains robustly in expansionary territory. Firms also grew much more optimistic in March, reflecting increased confidence in the global economic expansion and the boon provided by the upcoming 2020 World Expo in Dubai. Indeed, the event is already fueling a boom in construction, aided by large-scale investments from the government and the prospect of surging tourism.
Growth in the non-oil economy is poised to accelerate this year despite a slowdown in private consumption following the implementation of VAT. Indeed, stronger support from government spending, particularly with large investments in infrastructure preparing for the 2020 World Expo in Dubai, should buoy private investment momentum. Strengthening oil prices will also provide a welcome windfall to public finances, although the OPEC agreement to restrain production will largely limit oil-sector growth. FocusEconomics panelists expect GDP to increase 2.9% in 2018, which is up 0.1 percentage points from last month’s forecast, and 3.3% in 2019.
EGYPT | El-Sisi romps to victory, draft budget continues to pare back fiscal shortfall
Incumbent President el-Sisi stormed home in the 26–28 March elections. His victory signals a continuation of IMF-backed policy prescriptions which in the last 18 months have seen costly subsidies cut, the currency floated and several pro-business reforms passed. El-Sisi will continue to preside over an economy which likely grew at a healthy pace in January–March on solid export and public spending growth. However, difficulties remain; the PMI was in contractionary territory last month due to flat new orders and faster job shedding. On the positive side, foreign reserves rose to a fresh multi-year high at end-March despite lower domestic interest rates, aided by a recent USD 4 billion bond sale. Raising funds internationally will substantially lower the government’s borrowing costs—albeit at the cost of rising external debt—and a further debt issue is slated for the coming weeks. In mid-March, the cabinet approved the draft FY 2019 budget, which aims to continue paring back the fiscal deficit thanks to robust revenue growth, while boosting public investment.
Growth should accelerate in FY 2018. Investment should expand at a rapid pace, aided by an improved regulatory environment—thanks in large part to several recent measures, such as new investment, bankruptcy and industrial licensing laws. In addition, the external sector will continue to benefit from the weaker pound. However, the elevated debt burden and sizeable budget deficit pose downside risks. FocusEconomics analysts expect GDP to expand 4.7% in FY 2018, up 0.2 percentage points from last month’s forecast, and 4.9% in FY 2019.
ISRAEL | Economy sails through Q1, buttressed by solid external sector
Early data suggests that Israel’s economy breezed through the first quarter on the continued strength of the external sector, which has been benefiting from strong global tailwinds. Since the outset of the year, exports have shown resilience through a rebalancing away from pharmaceutical exports in the wake of Teva Pharmaceuticals’ woes and towards electronics exports as Intel Corporation’s upgraded facilities came online. Moreover, inbound tourism has been booming. Household spending likely saw healthy gains in the quarter given full employment, record-high consumer sentiment in February and the persistently-weak inflation environment. That said, the rise in house prices has slowed as new sales have moderated, a trend hinting at greater uncertainty in the once-hot housing market over the months to come.
A thriving global economy will push exports—especially high-tech services exports—higher this year, while the tight labor market and lower taxes should support household spending. Meanwhile, ultra-loose monetary policy and new projects at the Leviathan gas field are likely to boost fixed investment. Although political scandal could justify early elections this year, the balance of power is unlikely to shift. Meanwhile, a flare-up in regional tensions could threaten inbound tourism. FocusEconomics panelists expect GDP growth of 3.4% in 2018, up 0.1 percentage points from last month’s forecast, and 3.3% in 2019.
INFLATION | Inflation dips slightly in February as price pressures in Egypt ebb
According to an aggregate produced by FocusEconomics, inflation in the Middle East and North Africa region dipped from 4.6% in January to 4.2% in February. The decline in inflation came on the back of a continuation of the strong disinflationary process in Egypt, and smaller price rises in regional heavyweights UAE and Iran. Kuwait, Lebanon, Morocco, Oman and Qatar also saw lower inflation in February, while prices in Iraq fell year-on-year.
Inflation in Saudi Arabia was unchanged from January, as the VAT hike continued to feed through to prices, and slightly higher in Israel, despite remaining far below the Central Bank’s target. Price pressures also increased in Bahrain, Jordan and Tunisia, and were stable in Algeria.
The implementation of a VAT in some GCC countries and reduced slack will add upward pressure to inflation this year. However, lower inflation in Egypt will partially offset the regional rise in inflation. FocusEconomics panelists forecast that regional inflation will average 5.1% in 2018, which is unchanged from last month’s estimate. In 2019, inflation is expected to moderate to 4.7%.
Written by: Ricard Torné, Head of Economic Research