MENA Economic Outlook November 2018

MENA: Middle East & North Africa - November 2018

October 29, 2018

Most of the region likely performed well in Q3, although Iran dragged on the performance

According to an estimate by FocusEconomics, the MENA economy should have expanded 2.3% in Q3. If confirmed, this would mark a slight deceleration from Q2’s revised 2.5% growth (previously reported: +2.6% year-on-year).

Although hard data is still outstanding, most oil-producing countries likely reported robust Q3 outturns, thanks to significantly higher oil prices compared to the same period last year and an upturn in oil production. Higher oil production was intended to compensate for declines in other key oil-producing countries, particularly Venezuela and Iran. Moreover, third-quarter PMI data for Saudi Arabia and the UAE suggests that the non-oil sectors of these two regional heavyweights continued to grow at a robust pace.

In contrast, Iran’s economic panorama is rapidly darkening. Oil output is down over 10% since June, and U.S. sanctions coming into force on 4 November will likely further dampen Iran’s exports of the black gold. In an attempt to circumvent the sanctions, Iran has reportedly begun selling oil to private firms for export, while the EU is looking to establish a “special purpose vehicle” in order to allow trade with Iran to continue.


Oil-importing nations generally performed well in Q3, despite higher oil prices pushing up the import bill. High-frequency indicators for Israel, such as the manufacturing PMI, state of the economy index and business confidence, point to a solid showing, likely driven by domestic demand. Egypt should have continued to reap the benefits of the IMF-backed reform program and a tighter labor market, while a bumper harvest appeared to drive a pickup in growth in Morocco.

On the political front, at the end of September the UAE approved a highly expansionary 2019 federal budget. Spending is set to rise by over 17% year-on-year, as the government takes advantage of the fiscal breathing room provided by higher crude prices.

In contrast, Bahrain appears set for a period of belt-tightening. In early October, the country secured a USD 10 billion financial assistance package from its GCC neighbors, in return for a promise to virtually eliminate the budget deficit by 2022 through a mix of spending cuts and tax hikes. While the package will constrain government spending, the economic stability it brings should support business sentiment and fixed investment.

The Saudi government has seen itself engulfed in a diplomatic scandal in recent weeks following the killing of journalist Jamal Khashoggi in the Saudi consulate in Istanbul in early October. While the incident is unlikely to have a significant impact on the economy’s performance, in the near term it could make it more difficult to attract FDI from the West, potentially frustrating economic diversification efforts.

 Iran continues weighing on MENA’s growth prospects

Going forward, the MENA region should continue benefiting from higher oil prices and stronger hydrocarbon production (with the noticeable exception of Iran). In key oil-importers Egypt and Israel, growth should also be strong, aided by reform progress and solid private consumption respectively. Moreover, regional growth will also be supported by healthy global economic activity. However, risks to MENA’s economic outlook are looming. Economic momentum in Iran will likely dim further following the U.S. sanctions, with panelists currently expecting that Iran’s economy will log the largest contraction in seven years in SH 2019, which ends in March 2020. Key risks include ever-present geopolitical uncertainty—particularly if domestic tension causes Iranian authorities to adopt a more belligerent foreign policy—higher global interest rates and rising trade protectionism.

FocusEconomics Consensus Forecast panelists expect the region to expand 2.3% in 2019, which is unchanged from last month’s estimate, and 2.7% in 2020.

The 2019 economic outlooks for Algeria, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, Tunisia, the UAE and Yemen were upgraded this month, while Iran, Jordan, Lebanon and Morocco saw downgrades, and the region’s remaining economies saw no change to their growth forecasts for 2019.

SAUDI ARABIA | Economy gaining steam, although political scandal could hit inward investment

The economic recovery appears to have gained steam in Q3 following Q2’s strong result, which marked the fastest growth in one-and-a-half years. Oil prices averaged higher in Q3 than in the previous quarter, while oil production increased in the same period as Saudi Arabia tries to fill the output gap left by Iran. As a result, both growth in bank lending and foreign reserves hit a nearly two-year high in August. Moreover, the PMI survey for the non-oil sector suggests a further improvement in Q3. That said, political unrest threatens to derail Saudi Arabia’s economic recovery. The killing of journalist Jamal Khashoggi in the Saudi consulate in Istanbul in October has strained the relationship between the Kingdom and the West. While economic sanctions are not on the cards, the incident threatens the Kingdom’s ambitions to attract foreign capital.

Economic growth will accelerate next year as high oil prices and increased crude production will provide room for a more accommodative fiscal stance. While economic reforms will boost business confidence, rising political noise and mounting geopolitical risks could hurt investor sentiment. Moreover, Saudi Arabia’s economic outlook remains vulnerable to oil price fluctuations, especially if oversupply concerns materialize. FocusEconomics Consensus Forecast panelists expect growth of 2.5% in 2019, which is up 0.1 percentage points from last month’s projection. In 2020, growth is seen decelerating slightly to 2.3%.         

estimate, chiefly due to higher expected inflation for Iran. In 2020, regional inflation is expected to decline to 5.9%.

See the Full FocusEconomics Middle East & North Africa Report

ISRAEL | High-frequency indicators point to healthy Q3 performance

The economy appeared to hum along quite nicely in the third quarter, after economic growth in quarter-on-quarter terms slowed considerably in the second. The Central Bank’s State of the Economy Index showed robust growth in July and August, supported by a pickup in industry, services and retail. Moreover, although the PMI reading in September for the manufacturing sector declined compared to August, the average reading in Q3 was marginally higher than in Q2. Business confidence also improved in Q3, although consumer confidence deteriorated slightly. On the external front, the merchandise trade deficit widened annually in Q3 on the back of lower exports and higher imports.

Robust domestic demand should keep economic momentum afloat next year, while a lower tax burden and favorable financial conditions should support private consumption. Meanwhile, new gas- and oil-related projects will likely buttress fixed investment. However, regional tensions remain a downside risk to the country’s economic outlook. FocusEconomics Consensus Forecast panelists forecast economic growth of 3.2% in 2019, which is unchanged from last month’s forecast. In 2020, our panel sees the economy expanding 3.2% again.

UAE | Economic activity stays solid, federal government presents expansionary 2019 budget

A ramp-up in oil output likely helped the economy accelerate in the third quarter, although the non-oil economy appears to have softened somewhat, as indicated by a lower average PMI reading over Q3 compared to Q2. Nevertheless, prospects appear bright heading into Q4 and beyond. Following a flurry of business-friendly reforms in recent months, the government should enact its new investment law—which will authorize complete foreign ownership of firms in select sectors—by year-end. This reform is poised to significantly boost FDI inflows—which were already up by more than a quarter year-on-year in Dubai in H1 2018. On 30 September the government approved a three-year budget, which includes the largest budget in history for 2019, with funding increasing by 17.3% compared to the 2018 budget. The largest share of expenditure will be dedicated to social development, education and health. Lastly, in mid-October the country issued a law allowing the federal government to emit sovereign bonds.

Growth appears poised to accelerate in 2019 and 2020. On top of the large fiscal expansion and the upcoming investment reform, both of which should significantly buttress business activity and confidence, the country will benefit from the ongoing infrastructure push related to the 2020 World Expo in Dubai. This will notably buoy the construction sector and increase the Emirates’ attractiveness to tourists. Finally, rising oil production amid sustained higher prices should further bolster economic growth and help the government maintain a fiscal surplus. FocusEconomics panelists expect GDP to increase 3.2% in 2019, which is up 0.2 percentage points from last month’s forecast, and 3.3% in 2020.

EGYPT | Economy performs well in Q2, momentum should have largely carried over to Q3

The economy performed well in the fourth quarter of FY 2018, with GDP growth remaining at the multi-year high recorded for Q3, primarily due to higher investment and exports. The current account deficit also fell to a near five-year low, while the unemployment rate declined to a seven-and-a-half year low. More recent signs have been mixed. After operating conditions in the non-oil private sector improved in July and August due to increased new business inflows, conditions deteriorated in September, although businesses grew more optimistic about prospects. Meanwhile, the recent investor retreat from emerging-market assets has not left Egypt completely unscathed: in October, the 10-year government bond yield hit highs last seen in July 2017.

Economic growth is expected to remain robust this fiscal year and next. Increased government investment spending, rising natural gas production, an improved regulatory environment and construction activity related to the building of the new capital city should boost activity. However, large fiscal imbalances and the higher price of oil will weigh on prospects. FocusEconomics panelists expect GDP to expand 5.2% in FY 2019, which is unchanged from last month’s forecast, and 5.2% again in FY 2020.

INFLATION | Regional inflation rises in September

Inflation in the Middle East and North Africa region continued to increase in September, mostly reflecting surging price pressures in Iran due to the depreciation of the rial. Moreover, subsidy cuts caused price pressures to intensify in Egypt. According to an aggregate produced by FocusEconomics, inflation in the region jumped from 6.4% in August to 7.4% in September.

Inflation should dip next year, as the impact of VAT implementation in Saudi Arabia and the UAE disappears and price pressures in Egypt decline as the effect of subsidy reforms fade. FocusEconomics panelists forecast that regional inflation will average 7.3% in 2019, which is up 2.3 percentage points from last month’s estimate, chiefly due to higher expected inflation for Iran. In 2020, regional inflation is expected to decline to 5.9%.

See the Full FocusEconomics Middle East & North Africa Report


Ricard Torné 

Lead Economist

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