MENA: All eyes will be on the 17 April meeting in Doha
April 13, 2016
Growth in the Middle East and North Africa (MENA) region was broadly unchanged in the final quarter of 2015 as economic activity picked up in non-oil-export countries. According to a more complete set of data that accounts for around 55% of the region’s nominal GDP, MENA’s economy expanded 2.5% annually in Q4, which was a notch above the 2.4% increase tallied in Q3. Results of note in Q4 include steady year-on-year growth in Saudi Arabia due to stronger activity in the non-hydrocarbon industry and an acceleration in Israel’s economy as domestic demand more than compensated for sluggish dynamics in the external sector. Ongoing low oil prices, less lavish government spending in some countries, rising security threats and protracted global economic uncertainty all likely hit regional growth in the first months of the year.
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Headlines were dominated in recent weeks by the tentative agreement announced by Qatar, Russia, Saudi Arabia and Venezuela in February to cap oil production at January levels in an attempt to stabilize oil prices. The possibility of an accord among some of the world’s largest producers halted the sharp downward spiral in crude prices that began in mid-2015 and pushed prices to levels last seen in December of last year. While the meeting was initially scheduled for 20 March, Qatari authorities confirmed that the gathering will take place on 17 April in Doha. So far, 15 oil-producing countries have confirmed that they will attend the meeting. That said, it is not yet clear whether oil-producing countries will be able to reach an agreement and, specifically, is unknown if the deal will help to substantially boost oil prices. The fact that Iran has refused to cooperate as the country is regaining market share following years of tough economic sanctions and uncertainty regarding the position of Iraq are two factors casting doubts about the feasibility of the deal. Moreover, as most of the world’s largest oil producers are pumping oil at record levels and the global economy is failing to gain momentum, the global oil glut is expected to persist for the foreseeable future.
Despite the rally observed in recent weeks, oil prices remain at very low levels, which does not bode well for economic activity in the region, particularly among oil-export-driven economies. Deteriorating public imbalances have forced some countries to drastically cut public spending and reduce subsidies. With the aim of diversifying the Saudi economy away from oil, on 1 April, Deputy Crown Prince Mohammed bin Salman disclosed plans to sell a stake of its gigantic state-owned oil company, Aramco, as early as next year. The Saudi government plans to transfer the rest of the shares to the Public Investment Fund, which will become the world’s largest wealth fund and the key driver in transforming the Saudi economy.
MENA’s 2016 economic outlook worsens for fifth consecutive month
Despite expectations that it is possible for participating countries to reach a deal to freeze oil production during the 17 April meeting in Doha, the outlook for the region worsened for the fifth consecutive month. Mounting geopolitical threats, a subdued global economic recovery and fears that the accord will not be enough to boost oil prices are all exerting downward pressure on the economic outlook for the Middle East and North Africa. This month, FocusEconomics Consensus Forecast panelists cut their 2016 growth forecasts for the region by 0.1 percentage points to 2.5%. If confirmed, this will represent the weakest growth since the height of the financial crisis in 2009. For 2017, growth in the region is expected to accelerate to 3.2%.
This month’s downward revision to MENA’s 2016 outlook was driven by deteriorating projections for 13 of the 16 countries in the region, including Iraq, Qatar, Saudi Arabia and the United Arab Emirates. Panelists kept their projections unchanged for Israel and Kuwait. On the upside, Iran’s economic outlook was revised upward as the country is expected to greatly benefit from its reintegration into the global economy after years of sanctions.
Qatar, which enjoys a relatively diversified economy compared to its regional peers, is expected to be the best performer in 2016, followed by Iran. At the other end of the spectrum, Yemen and Saudi Arabia will be the worst performers, followed by Lebanon. Among the rest of the major economies in the region, Egypt and Israel will likely grow the fastest, with projected expansions of 3.4% and 2.9%, respectively.
SAUDI ARABIA | Government plans multi-billion IPO to tackle the end of the oil era
Deputy Crown Prince Mohammed bin Salman announced in an interview on 1 April that the country is ready to sell less than 5.0% of state-owned oil company Aramco. Aramco is the world’s largest oil company and, once listed, it could be worth more than USD 2.5 trillion. The remaining shares would be transferred to the Public Investment Fund, thus becoming the world’s largest sovereign wealth fund. With this move, the government is intending to prepare the country for the end of the oil era. Meanwhile, major oil-producing nations will meet on 17 April in Doha in an attempt to reach an agreement to stabilize oil prices. While a freeze in output at January’s level is on the cards, analysts warn that Iran’s refusal to participate in the deal has the potential to jeopardize any pact.
Despite the possibility of an agreement to stabilize oil prices, the low oil price environment is continuing to weigh on growth prospects. Going forward, while the country’s strong financial positon shields its economy against a sharp economic downturn, challenging domestic economic conditions and the government’s spending cuts promise to impact overall growth. FocusEconomics Consensus Forecast panelists forecast that the economy will expand 1.2% this year, which is down 0.1 percentage points from last month's projection. Next year, the panel expects GDP growth to accelerate to 1.8%.
UAE | Activity in the non-hydrocarbon sector continues to support growth
The UAE’s Minister of Energy stated in early April that the decline in energy prices has not had a significant impact on the economy, citing that low oil prices have stimulated investment in the non-hydrocarbon sector. The NBD PMI, which gives an overview of the non-oil private sector, lends support to the minister’s claim that investment had risen, as it climbed solidly during the first quarter of the year. Although this is positive, it is worthwhile to note that the PMI followed a steady depreciatory trend throughout 2015 and hit a four-year low in January. New capital projects are also declining and the country’s real-estate market is still languishing following its collapse in early 2015.
The economy lost momentum in 2015 and this likely carried into 2016 as capital expenditure in the hydrocarbon sector, a slowdown in world trade and reduced government spending extended into Q1, and may persist further into 2016. FocusEconomics Consensus Forecast panelists expect that GDP will grow 2.5% this year, which is down 0.2 percentage points from last month's forecast. Next year, the panel sees GDP growth accelerating to 2.9%.
EGYPT | Central Bank devalues currency to ease FX crunch
Egypt has recently seen several positive developments following a prolonged political standstill amid stagnating growth. In an effort to alleviate the foreign currency crunch that is hampering economic activity and foreign investment, the Central Bank devalued the pound against the U.S. dollar on 14 March and announced that it would move toward a more flexible exchange rate policy. Moreover, President Abdel Fattah Al-Sisi reshuffled his cabinet on 23 March, tapping reformists to fill relevant economic positions, including that of the finance minister. The 2016–2017 draft budget, which was approved by the government on 30 March, set a more ambitious growth target than the last budget while simultaneously striving to reduce the ballooning fiscal deficit. However, recent indicators suggest that Egypt’s current economic situation is still far from rosy.
The recent policy changes are a step in the right direction to revive the economy and reduce macroeconomic imbalances in the longer term. Nevertheless, growth prospects are still restrained by slow implementation of structural reforms, particularly a fiscal reform, and ongoing security concerns. Our panelists expect GDP to expand 3.4% in FY 2016, which is down 0.1 percentage points from last month’s projection. In FY 2017, panelists expect GDP to grow 3.9%.
ISRAEL | Economic dynamics remain positive at the outset of the year
The Israeli economy expanded a respectable 2.5% last year mainly on the back of robust domestic demand. An improvement in labor market conditions, low interest rates and subdued energy prices supported private consumption. Government spending also recorded robust growth in 2015, in particular in the final quarter of the year. Moreover, the government’s fiscal stance improved notably, mainly due to an increase in tax collection. Recent data show that the economy kept the positive momentum in the first quarter of this year. Exports accelerated slightly in February despite the relatively-strong shekel and business confidence recorded a strong reading in March.
The economy is expected to accelerate this year, sustained by robust fiscal performance. However, external risks from geopolitical factors and a slow recovery in global demand will likely weigh on the country’s economic outlook. The panelists we surveyed this month expect the economy to grow 2.9% in 2016, which is unchanged from last month’s estimate. For 2017, the panel forecasts GDP to expand 3.2%.
INFLATION | Risks to the inflation outlook remain largely balanced
Inflation in the Middle East and North Africa region inched down from 3.9% in January to 3.8% in February. Inflation dynamics continue to face both upward and downward pressure. The removal of subsidies in some countries in an attempt to balance rampant fiscal deficits is fanning inflationary pressures. Moreover, the recent depreciation of the Egyptian pound is also promising to add upward pressure on prices. On the other hand, a combination of still-low oil prices, slow regional growth, somber perspectives for global inflation and strong currencies in some oil-export-driven economies all are expected to keep inflationary pressures largely contained.
As risks to the inflation outlook appear to be broadly balanced, FocusEconomics panelists left their 2016 estimates for the MENA region unchanged at last month’s 4.8%. In 2017, inflation is expected to increase to 4.9%.
Written by: Ricard Torné, Head of Economic Research
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