Economic Snapshot for MENA

September 5, 2018

Growth picks up in Q2 but risks to the outlook loom on the horizon

Economic growth gained traction in the second quarter as higher oil prices and rising crude oil production boosted economic activity among oil-exporting countries. Conversely, higher crude prices appear to have eroded consumer’s purchasing power among oil-importing economies, while the ongoing monetary tightening by the U.S. Federal Reserve unnerved financial markets in the quarter. According to a preliminary estimate by FocusEconomics, the MENA economy rose an aggregated 2.6% year-on-year in Q2, which marked an improvement over Q1’s 2.5% expansion but was below the 2.8% expansion projected last month. The downward revision mostly reflected deteriorating economic conditions in Iran ahead of the U.S. economic sanctions scheduled for August and November.

With Q2 GDP data still outstanding for most countries in the region, national accounts data for Israel showed that growth dynamics weakened in quarter-on-quarter seasonally-adjusted annualized terms. A seasonal effect and a drop in durable goods consumption prompted private spending growth to decelerate sharply. Moreover, exports shrunk amid mounting global trade tensions. An expansionary monetary policy and supportive fiscal policy, however, will likely shore up growth in the coming quarters.

The Egyptian economy closed FY 2018, which ended on 30 June, on a solid note as the country slowly reaps the benefits from the painful economic reforms introduced in November 2016. Elevated investment due to an improved business environment and solid exports as a result of a weak pound is expected to fuel Egypt’s solid momentum going forward.

Although Q2 GDP data has not yet been released for any of the Gulf Cooperation Council (GCC) countries, economic activity significantly benefited from the near 50% year-on-year increase in oil prices observed in Q2. OPEC countries also started to pump more oil in May in order to compensate for declining production in other key producing countries—especially marked in Libya, Nigeria and Venezuela—as well as in anticipation of U.S. economic sanctions against Iran. The rise in oil prices, however, could have the negative effect of slowing much-needed economic reforms in the region. In Saudi Arabia, King Salman bin Abdulaziz Al Saud halted the public listing of Aramco, the world’s largest oil company. The planned lPO of 5% of Aramco was expected to raise as much as USD 100 billion and represented the cornerstone of Crown Prince Mohammad bin Salman bin Abdulaziz Al Saud’s initiative to diversify the economy away from oil. In Kuwait, the government decided to postpone VAT implementation until 2021 amid improved oil revenues.

In Iran, the economic situation is deteriorating sharply. The announcement of economic sanctions by the U.S. has led the rial to plunge in recent months, spurring inflationary pressures, and causing business sentiment to sour. Moreover, U.S. pressure to reduce Iran’s oil shipments to “zero” by November has started to bite and, in August, oil exports are expected to have fallen by around one third from April’s peak of 3.1 million barrels per day.

Bahrain, the smallest economy in the GCC and severely affected by the low oil price environment in 2014–2017, is seeking to receive economic support from its Gulf allies. The island’s large financing needs and low international reserves are threatening the peg of the Bahraini dinar with the U.S. dollar. The plan supported by Kuwait, Saudi Arabia and the UAE will likely include, along with financial aid, spending cuts and the introduction of a value added tax. Lebanon is also struggling to keep its peg with the dollar due to soaring public debt and low international reserves.

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 Geopolitical risks prompt MENA’s 2018 economic outlook to deteriorate

Although the rise in oil prices promises to support growth in the Middle East and North Africa region, geopolitical risks and heightened volatility in the global financial markets are weighing on the region’s economic outlook. Moreover, U.S. sanctions are crippling Iran’s economy and have sparked concerns over potential military action in the region. The monetary hiking cycle in the United States is slowly tightening financial conditions in the region, which could cause economic conditions to deteriorate further down the road. In addition, political unrest and domestic economic imbalances remain high in countries like Bahrain, Iraq, Lebanon and Jordan, which could eventually turn into sizeable economic downturns.

Against this backdrop, FocusEconomics Consensus Forecasts panelists expect the region to expand 2.6% in 2018, which is down 0.1 percentage points from last month’s estimate. Our panel projects growth of 2.7% in 2019.

MENA’s 2018 economic outlook was revised downward this month due to lower growth prospects for Algeria, Bahrain, Iran, Jordan, Lebanon, the UAE and Yemen. The outlooks for Kuwait, Morocco, Oman, Qatar and Saudi Arabia were revised upward, while growth prospects for the remaining economies in the region were left unchanged. Preliminary GDP data for Egypt suggests that growth accelerated in fiscal year 2018, which ended in June, mainly due to positive spillovers from the IMF-backed reform programme.

Egypt’s economy is expected to be the region’s top performer this year, with a 5.3% expansion in fiscal year 2018. Israel and Morocco will also join Egypt on the podium with growth rates above 3.0%. At the other end of the spectrum, Lebanon and Saudi Arabia will likely post the weakest expansions. Meanwhile, Yemen’s economy will contract for the fifth consecutive year in 2018, as the country remains mired into a seemingly never-ending civil war.

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SAUDI ARABIA | King Salman stops the long-awaited privatization of Aramco

Economic growth likely strengthened in recent months due to a combination of higher oil prices and increased oil production. The Saudi oil industry has ramped up production to pump more than 10 million barrels per day since May, filling the gap left by other key producers in recent months. Against this backdrop, international reserves hovered above USD 500 billion in the April–July period, while credit growth accelerated to an over one-year high in July. Despite the improvement in the oil market, business conditions in the non-oil sector remained relatively weak compared to the previous year. Moreover, the Saudi government indefinitely postponed the long-awaited privatization of Aramco, which has called into question Crown Prince Mohammed bin Salman’s 2030 Vision to diversify the economy.

Economic growth will likely rebound this year mainly due to a combination of higher oil prices and stronger production. Subdued growth in the non-oil sector, mounting geopolitical risks and uncertainty about the country’s reform agenda led by the Crown Prince, however, cloud Saudi Arabia’s economic outlook. FocusEconomics Consensus Forecast panelists expect growth of 1.8% in 2018, which is up 0.1 percentage points from last month’s projection. In 2019, growth is seen accelerating to 2.4%.              

ISRAEL | Private consumption leads Q2’s deceleration

The economy decelerated significantly in the second quarter on weakening foreign and domestic demand. Private consumption growth was nearly flat and likely suffered from a large base effect, as consumption of durable goods expanded strongly in the first quarter. Furthermore, government consumption and fixed investment contracted in the second quarter. The third quarter has begun in positive fashion. In July, the monthly index on the state of the economy showed that activity picked up pace, while the PMI jumped to a near one-year high on the back of new orders growth from home and abroad. Meanwhile, consumer confidence edged up on the back of households’ rosier views on their personal finances, while business confidence remained elevated despite edging down. However, the trade deficit widened to a multi-decade high. In mid-August, Prime Minister Benjamin Netanyahu presented the ‘2030 Security Concept’ which aims to bring defense spending up to 6% of GDP. The plans have been criticized by the Central Bank, which warned against the negative effects of the plan on government finances and the public debt burden.

Robust domestic demand is expected to keep economic momentum afloat this year and the next. Private consumption should benefit from a lower tax burden and ultra-loose monetary policy, while new gas- and oil-related projects are expected to boost fixed investment. Regional tensions remain a downside risk to the outlook, however. FocusEconomics Consensus Forecast panelists forecast economic growth of 3.5% this year, which is unchanged from last month. Next year, our panel sees the economy expanding 3.2%.

UAE | Economy appears to have strengthened in Q2

The non-oil economy appears to have accelerated somewhat in the second quarter, as suggested by the average PMI reading over April-to-June. Meanwhile, although oil production remained constrained, it started to pick up at the end of the period as the OPEC production targets were relaxed. Furthermore, and despite a softer PMI reading in July, economic momentum looks poised to gain steam in Q3. This is due both to higher oil output and to a flurry of reforms implemented in recent months to stimulate investment and business activity. These measures include a joint investment plan with Saudi Arabia, a large fiscal stimulus program in Abu Dhabi, as well as visa and business licensing reform which aims to reduce the cost of doing business and attract foreign companies and skilled workers. Going forward, the country should also benefit from strong external demand, notably from GCC countries and Europe as reflected by foreign order growth in the July PMI; as well from a likely improvement in employment growth, which was anemic in the first half of the year.

Economic activity should accelerate this year thanks to higher investment and public spending. Notably, infrastructure investment related to the country’s preparation to host the 2020 World Expo, recent business-friendly reforms, and a new investment law to be unveiled in Q4—which will authorize complete foreign ownership of firms in select sectors—are poised to boost investor confidence and support higher FDI inflows. In addition, the country should benefit from a robust tourism sector, particularly in Dubai, and higher oil production starting in H2 2018. FocusEconomics panelists expect GDP to increase 2.5% in 2018, which is down 0.1 percentage points from last month’s forecast, and 3.1% in 2019.

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EGYPT | Healthy growth in FY 2018 carries over into FY 2019

The 2019 fiscal year got off to a good start in July as operating conditions in the non-oil private sector improved for the first time in three months. The improvement was due to increased demand, both domestic—benefiting from healthy inbound tourism activity—and foreign. However, shortages of raw materials and higher costs weighed on operating conditions in July. This comes after annual economic growth in April–June, the last three months of FY 2018, remained at the multi-year high recorded in January–March, supported by increased investment and exports. Furthermore, in the same period, unemployment fell to the lowest level in seven-and-a-half years. Meanwhile, on 28 August, Moody’s raised Egypt’s credit rating outlook from stable to positive, citing progress made by the government in its implementation of IMF-backed structural reforms.

Economic growth is expected to moderate slightly in FY 2019 but remain robust nevertheless. Increased government investment spending and an improved regulatory environment, coupled with an external sector that continues to reap the benefits of a weaker pound, should underpin growing output. However, large fiscal imbalances and the higher price of oil will weigh on prospects. FocusEconomics panelists expect GDP to expand 5.1% in FY 2019, which is unchanged from last month’s forecast, and 4.9% in FY 2020.

INFLATION | Inflation hits an over four-year high in July

Inflation in the Middle East and North Africa region continued to build in July, which mostly reflected surging prices in Iran on the back of the plunging rial amid the reintroduction of U.S. economic sanctions. Higher prices for key commodities, mostly oil and its derivatives and food, also played a role in July’s increase. According to an aggregate produced by FocusEconomics, inflation in the region jumped from June’s 4.9% to 5.4%, marking the highest print since February 2014.

Volatility in the foreign-exchange markets, the tumbling of the rial in Iran, subsidy cuts and high commodity prices will continue to stoke price pressures this year. FocusEconomics panelists forecast that regional inflation will average 4.8% in 2018, which is down 0.1 percentage points from last month’s estimate. In 2019, regional inflation is expected to slow to 4.7%.

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Ricard Torné 

Lead Economist