MENA: Non-oil activity enters 2017 on a strong footing
April 5, 2017
Economic activity in the Middle East and North Africa (MENA) started the year on a mixed note as non-oil activities remained strong, while the oil sector deteriorated notably on the back of lower crude supply. China’s surprisingly robust start to the year and resilient domestic demand in the European Union and the United States are propping up global demand, which is reverberating positively across the MENA region. Moreover, higher oil prices are taking some pressure off the domestic financial markets, sending interest rates lower and stimulating private activity.
Nevertheless, overall economic activity has been hit by reductions in crude production in compliance with the November-December oil deal among major players, in particular the Organization of the Petroleum Exporting Countries (OPEC) members and Russia. According to preliminary data, the region’s aggregate GDP is set to expand 2.6% year-on-year in Q1, which is below the 2.9% growth in both Q3 and Q4.
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The Joint OPEC/Non-OPEC Ministerial Monitoring Committee announced on 26 March that the countries participating in the accord had achieved a conformity level of 94% in February, an increase of eight percentage points from January’s performance. That said, the level of compliance differs largely among the signatory countries. Saudi Arabia is shouldering most of the burden, while other countries have still far to go. Despite the reduction in supply, oil prices have stabilized at a narrow band of around USD 55 per barrel as inventories remain at historically-high levels and other producers have started to ramp up output. Against this backdrop, the OPEC will convene on 25 May to decide whether to extend their output cuts beyond June.
Despite Q1’s promising start to 2017, economic and political headwinds blowing in the region do not seem to be receding. Large fiscal deficits and inadequate fiscal buffers continue to limit fiscal support at a time when the U.S. Federal Reserve’s tightening cycle is curtailing monetary stimulus. Oil-producing countries in the region are facing a dilemma whereby their oil-production cuts have been jeopardized by increased oil supply by other producers, in particular the United States. Moreover, geopolitical risks remain elevated despite the success in the fight against the Islamic State, mainly due to ongoing sectarian tensions and the rivalry between the two regional powers Iran and Saudi Arabia.
MENA’s 2017 growth prospects stabilize this month
The economic outlook for the MENA was stable this month following four consecutive downward revisions. Although the increase in oil prices has lost some of the impetus that followed the November OEPC deal, the cartel’s compliance with the accord and prospects that the oil production cuts will likely be extended are putting a floor under crude prices. Moreover, prospects that global growth will pick up in the coming quarters bode well for the region’s economic activity, particularly for oil export-driven economies. Nevertheless, risks are still tilted to the downside due to severe macroeconomic imbalances, sharp fiscal consolidation processes and geopolitical threats.
Against this backdrop, analysts kept MENA’s 2017 GDP growth outlook stable at last month’s 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 stable outlook for MENA reflects unchanged growth prospects for 7 of the 16 economies surveyed, including major players Iran, Qatar and the United Arab Emirates. Estimates for Bahrain, Israel and Morocco were revised upward, while Algeria, Egypt, Jordan, Kuwait, Saudi Arabia and Tunisia all experienced cuts to their economic outlooks.
Iran will be the best performer of the year as the country is reaping the benefits from its return to the international markets. At the other end of the spectrum, Saudi Arabia is expected to perform poorly, with an expansion rate of 0.4%, as the country is responsible for the lion's share of the oil reduction under the OPEC agreement. Growth among other oil-producing countries such as Iraq, Kuwait and Oman will also decelerate sharply due to the aforementioned oil cuts. Yemen, which has been immersed in a deadly civil war since 2015, 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, Israel and Qatar will likely grow the fastest, with projected expansions of 3.4% and 3.3%, respectively.
SAUDI ARABIA | Oil production cuts are hitting the economy
The economy ended 2016 on a relatively strong footing, with growth in the oil sector accelerating in Q4 and the non-oil sector rebounding mildly. The private sector benefited from reduced interbank rates as more favorable oil prices meant the government did not have to drain as many resources from the domestic financial sector and could adopt a more proactive fiscal policy. Data available for this year suggest that activity in the non-oil sector remains strong, but the agreed reduction in crude production is expected to weigh heavily on growth in the first half. The gradual rise in oil prices following OPEC’s November deal has not been sustained as inventories remain high and production in some key non-OPEC members has increased. Against this backdrop, the oil cartel will likely extend oil cuts to the second half of the year at its 25 May ordinary meeting.
Still low oil prices and the reduction in crude production will cause the economy to decelerate to multi-year lows this year. Further down the road, however, growth will benefit from increased global activity and higher oil prices. Panelists expect the economy to grow 0.4% this year, which is down 0.1 percentage points from last month's projection, before accelerating to 1.9% growth in 2018.
UAE | Non-oil activity remains robust at the outset of the year
The UAE’s economy has looked fairly perky in the first few months of this year, with the PMI remaining firmly in expansionary territory, likely as a result of higher oil prices. In a sign of the stable fiscal position, the government was able to raise spending in Q2 and Q3 2016 year-on-year according to recently released data, following a period of contraction. The UAE has navigated the sharp fall in oil prices observed towards the end of 2014 better than its neighbors, aided by a diversified economic base and high competitiveness. The latter has been given a boost this year with the coming into force of a new bankruptcy law, which modernizes restructuring and insolvency procedures and should prove to be a boon to SMEs.
The economy should gain speed this year, with preparations for the Dubai 2020 World Expo giving domestic demand a shot in the arm. However, the oil sector will remain hampered by OPEC production cuts, which could extend beyond the original June deadline, while tighter monetary policy linked to monetary normalization in the U.S. will dampen economic activity. FocusEconomics panelists expect GDP to rise 2.5% in 2017 and 3.2% in 2018.
EGYPT | Benefits from economic reforms yet to be felt by the population
The Egyptian government continues to walk a tightrope as it attempts to reignite its economy and improve its external position while easing tensions among frustrated Egyptians, who have borne the brunt of the government’s measures. Downbeat consumer sentiment and dwindling purchasing power were behind the economy’s tepid performance in the second quarter of FY 2016/17. As painful as the reforms are to the average Egyptian, the respectable pace of reform implementation observed so far has granted the country support from financial institutions and has led to a hasty return of foreign investors to the country. The latter group is now expected to benefit from the belated approval of an investment law that will tackle bureaucracy and cut red tape. Meanwhile, the country’s cabinet approved the 2017/18 budget on 29 March. The draft envisages a decline in the fiscal deficit to 9.1% of GDP—a whole percentage point above the IMF forecast for the year.
The economy is expected to lose steam in FY 2017. While the government is betting on fiscal consolidation and enhanced reform implementation to improve Egypt’s long-term prospects, this will weigh on both household consumption and capital spending in the near term. Analysts expect GDP to expand 3.0% in FY 2017, which is down 0.4 percentage points from last month’s forecast. For FY 2018, the panel sees growth accelerating to 3.8%.
ISRAEL | Business confidence rises following Mobileye’s takeover by Intel
The economy has started 2017 on a broadly steady footing after growing robustly in 2016 on the back of surging domestic demand. In January and February, monthly indicators painted a mixed picture: the state of the economy index compiled by the Central Bank saw little change, business confidence surged to a record high but consumer confidence declined and remains lingering in pessimistic territory. The upbeat sentiment among businesses is likely related to the USD 15 billion takeover of Israeli Mobileye by the American tech giant Intel, a deal secured in March. Aside from lifting fixed investment and boosting job growth, the deal is expected to yield government revenues of USD 1.1 billion. Israeli leaders have hinted that they will use the windfall to decrease taxes.
Israel’s economy is expected to decelerate this year as household consumption cools after buoyant growth last year, due to the return of inflation and its effect on real income. FocusEconomics panelists expect growth of 3.4% in 2017, which is up 0.1 percentage points from last month’s forecast. For 2018, the panel also projects growth of 3.4%.
INFLATION | Inflation ticks up in February
Inflationary pressures are gradually resurfacing in the MENA region and they are expected to pick up steam going forward. According to a regional aggregate elaborated by FocusEconomics, inflation came in at 4.8% in February, which was above the 4.4% recorded in January. The acceleration mainly reflected rising inflation in non-oil-exporting countries as higher energy prices are slowly feeding into the real economy. Moreover, inflation in Egypt continues to climb as a result of the IMF-backed measures approved at the end of last year in order to restore economic stability. Although inflation among oil-exporting nations also accelerated in February, price pressures remain more contained due to the strength of their currencies.
For this year, FocusEconomics panelists expect inflation for the region to rise to 5.0%, which is up 0.2 percentage points from last month’s estimate. This month’s upward revision to the region’s inflation prospects reflects higher projections for 6 of the 16 economies surveyed, including Algeria, Egypt and Jordan. The panel sees inflation stable at 5.0% in 2018.
Written by: Ricard Torné, Head of Economic Research