Economic Snapshot for MENA

June 5, 2019

Economic activity in Middle East and North Africa to deteriorate on the back of elevated geopolitical risks

Growth prospects for the Middle East and North Africa are deteriorating on the back of elevated geopolitical risks, weak global demand and severe oil production cuts. Moreover, escalating trade tensions between China and the United States threaten to hit global economic growth, which could, in turn, reduce demand for the black gold.

The MENA economy is projected to expand 1.6% in 2019, down 0.2 percentage points from last month's forecast. For 2020, the MENA economy is projected to expand 2.8%.

Saudi Arabia Economic Outlook

Saudi Arabia’s strict compliance with the OPEC+ deal likely caused GDP growth to slow sharply in the first quarter. The Kingdom pumped 700,000 barrels per day less in Q1 compared to Q4. Moreover, the housing market remained depressed in Q1, with the real estate price index falling to a new low in the period. On the upside, the rally in oil prices observed in Q1 increased government spending and prompted the budget balance to post its first surplus in five years in the quarter. Stronger public spending likely boosted activity in the non-oil sector, while higher oil prices supported private lending. Economic activity, however, could worsen in the months ahead after escalating trade tensions between China and the United States dramatically ended the rally in oil prices in late April, with oil prices trading lower on a year-on-year basis in recent days.

Economic growth will moderate this year due to a cut in oil production, negative spillovers from Saudization in some sectors, especially in the wholesale and retail sector, and a fragile real estate sector. However, the economy should benefit from higher oil prices, while an expansionary fiscal policy should support the non-oil sector.

FocusEconomics panelists expect growth of 1.6% in 2019, which is down 0.1 percentage points from last month’s projection, and 2.2% in 2020.

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Israel Economic Outlook

The economy surged in the first quarter of the year. Although this was partly on a frontloading of vehicle purchases ahead of fiscal changes on 1 April, underlying growth was still solid, buoyed by a healthy labor market and a stronger external sector. Turning to the second quarter, available indicators point to a fairly robust start, notwithstanding external weakness. In April, growth in the Composite State of the Economy Index ticked up, while business and consumer sentiment improved; however, merchandise exports plummeted in the same month, which also fed through to a lower manufacturing PMI reading. In the political arena, MPs voted to dissolve Parliament on 29 May, triggering fresh elections for September, after incumbent Prime Minister Benjamin Netanyahu failed to form a coalition government. While this increases political uncertainty, the economic fallout should be limited.  

Growth should be sprightly this year, supported by the strong labor market, fairly loose fiscal policy and healthy external demand for high-tech service exports. Moreover, the development of the Leviathan gas field should boost investment. Rising global trade protectionism and geopolitical tensions pose downside risks to growth.

FocusEconomics analysts expect growth of 3.3% in 2019, which is up 0.1 percentage points from last month’s forecast, and 3.4% in 2020.

UAE Economic Outlook

Although the economy appears to be revving up in the second quarter after a likely subdued first quarter, external headwinds continue to constrain momentum. Chiefly, OPEC+ oil production cuts since January continue to drag on growth and, with the U.S.-China trade war weighing on oil prices, the cuts are likely to be extended past June, which would further dampen growth in the coming quarters. Moreover, a supply overhang continues to undermine the real estate sector. Nevertheless, in April, momentum in the non-oil economy picked up despite weak job creation, while business confidence reached a record high, according to PMI data. Furthermore, the government recently waived fees for many government services and created a permanent residency framework for investors and skilled foreigners, which should support investment and business activity going forward

Growth should ramp up this year, supported by a large fiscal stimulus focused on infrastructure investment for Expo 2020, as well as by a swathe of business-friendly reforms to attract foreign investment. Nevertheless, the evolution of OPEC+ output decisions will be key to the outlook, while lower global growth and a fragile real estate sector pose additional risks.

FocusEconomics panelists expect GDP to increase 2.6% in 2019, which is unchanged from last month’s forecast, and 3.1% in 2020.

Egypt Economic Outlook

Economic growth ticked up in January–March from the prior period. While details are not yet available, higher government consumption likely supported the expansion, as reflected by the government’s fiscal accounts which show spending rose sharply in July–March compared to the same period a year earlier. Fixed investment also likely increased, given a large chunk of the government’s extra spending went on public investments. In addition, higher public wages, a lower unemployment rate and a moderation in inflation should have buoyed private spending. More recently, the non-oil private sector PMI rose above the 50-point mark that separates expansion from contraction in April for the first time in eight months. Meanwhile, on 17 May, the IMF announced it would shortly release the remaining USD 2 billion of the Egyptian government’s USD 12 billion financial support program.

The economy is seen accelerating slightly next fiscal year, which starts in July, primarily due to higher private and government consumption, while fixed investment is projected to continue growing rapidly. Still-fragile government finances, an uncertain global trading environment and internal security problems threaten the outlook, however.

FocusEconomics panelists expect GDP to expand 5.5% in FY 2020, which is unchanged from last month’s forecast, and 5.5% again in FY 2021.

MENA Monetary & Financial Sector News

Regional inflation jumped from 7.7% in March to 8.2% in April. The rise reflected mounting inflationary pressures in Iran on the back of U.S. sanctions. In contrast, inflation receded in Egypt, although remained high nonetheless, while price pressures among the rest of the economies remain muted, especially in the GCC region. Inflation is expected to slow from current levels. 

Accommodative financial conditions and contained price pressures allowed all central banks in the region which use interest rates to tune their monetary policies to leave their benchmark rates unchanged. That said, most central banks in MENA cannot fully manage their monetary policies as they have currency pegs, mostly against the USD.

The Egyptian pound strengthened in recent weeks on solid economic dynamics, while the Tunisian dinar and the Israeli shekel were broadly stable. Nevertheless, a large majority of countries in the region maintain a de jure or de facto currency peg against the U.S. dollar or a basket of currencies mostly composed of the USD and the EUR.

See the Full FocusEconomics Middle East & North Africa Report