Rising geopolitical threats and an uncertain global economic outlook dampen growth in MENA
February 10, 2016
Growth in the Middle East and North Africa (MENA) region decelerated in Q3 as the fall in oil prices took its toll on crude-export-driven nations, while the economies that are less reliant on oil revenues managed to maintain their growth momentum. The region expanded 2.4% annually in the third quarter, which was below the 2.8% increase tallied in Q2. Results of note in Q3 include a sizeable deceleration among the countries that are integrated into the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates). On the other hand, most of the oil-dependent nations benefited from low crude prices. Our panel foresees growth broadly stable at 2.5% in Q4.
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Developments in the region continue to be mainly dominated by the fall in oil prices and rising geopolitical tensions. The main factors that caused oil prices to decline last year remain as weaknesses carried into 2016. Strong supply from key oil producers in an attempt to retain market share or narrow rampant fiscal deficits and still-resilient drilling in the United States are adding to the global oil glut. Moreover, the lifting of economic sanctions on Iran following 16 January’s Implementation Day promise to exacerbate the situation. On the demand side, turmoil in financial and exchange rate markets in China early in January sparked concerns about the health of the global economy. Although fundamentals remain weak, oil prices recovered some of the ground lost in recent days on rumors that Russia and some OPEC members are considering a coordinated action to cut production and prop up prices.
Despite some progress in fighting the Islamic State (ISIL) in Iraq and Syria, security threats remain elevated in the Middle East and North Africa. ISIL is increasing its presence in other parts of the region, particularly in North Africa. In Yemen, while the Saudi-led coalition is slowly approaching the capital, Sana'a, the conflict is resulting in hundreds of victims and a political solution that could effectively end the conflict has yet to be seen. Finally, a political struggle between the region’s principal powers Iran and Saudi Arabia will likely continue in the coming months. Saudi Arabia’s announcement that it could intervene in Syria to support the rebels against both ISIL and Bashar al-Assad, an ally of Tehran, could add more fuel in a region that is already in flames.
Rising security threats and low commodity prices pose a serious challenge for most of the region’s key players. Moreover, uncertainty in emerging markets, exemplified by China, and the start of the tightening cycle in the United States, which has the potential to restrict credit growth in the MENA region, could derail any attempt at economic recovery. That said, the impact of the aforementioned risks will be uneven as countries that are less exposed to abrupt swings in global commodity prices will weather this situation better.
Declining oil prices and rising geopolitical risks hit MENA’s 2016 economic outlook
The 2016 economic outlook for the Middle East and North Africa was cut this month for the third consecutive period amid worsening perspectives for oil prices and mounting geopolitical risks. FocusEconomics Consensus Forecast panelists cut the region’s growth forecast for 2016 by 0.2 percentage points to 2.8%. The downward revision was driven by deteriorating projections for 15 of the 16 countries in the region, including Egypt, Iran, Qatar, Saudi Arabia and the United Arab Emirates. Panelists kept their projections unchanged for only one economy: Israel. Growth in the MENA region is expected to accelerate to 3.3% in 2017.
Qatar is expected to be the best performer in 2016, followed by Iran as analysts believe that the country will benefit greatly from its reintegration into the global economy. At the other end of the spectrum, Yemen and Saudi Arabia will be the worst performers, followed by Kuwait. Among the rest of the major economies in the region, Egypt and Israel will likely grow the fastest, with projected expansions of 3.5% and 3.0%, respectively.
SAUDI ARABIA | Falling revenues pose a serious challenge to the Saudi economy
While the country’s all important oil sector was the main drag behind the deceleration observed in Q3, recent data suggest that the current cheap-oil environment is also eroding activity in the non-oil sector. In January, the non-hydrocarbon PMI hit its lowest value in the six-and-a-half-year history of the survey. Moreover, on 20 January, oil prices hit a 14-year low, which promises to put a dent in the Kingdom’s economic performance and the government’s coffers. Although Saudi Arabia’s huge reserves and low debt shield the country against a sharp economic downturn, prolonged low oil prices have the potential to severely hurt the economy. In this regard, the 2016 budget included spending cuts and a gradual removal of some subsidies. Moreover, Saudi authorities have started to consider the possibility of selling shares of Aramco, the giant oil company owned by the Saudi Arabian state.
Despite the fact that the country has a strong financial situation due to its massive international reserves and low debt, the fall in oil prices is taking a toll on the economy. Moreover, the economy will be negatively affected this year by the government’s sharp consolidation process in an attempt to rein in soaring fiscal deficit. Analysts see GDP expanding 1.6% this year, which is down 0.2 percentage points from last month's forecast. Next year, the panel expects GDP growth to accelerate to 2.1%.
UAE | Drop in oil prices weighs on 2015 economic performance
Against a backdrop of a drastic drop in oil prices, estimates from the Central Bank reflect that activity in non-oil activities helped to sustain growth in 2015. According to the Central Bank, the economy expanded 3.1% in 2015, which was below the 4.6% tallied in 2014 and, if confirmed, it will represent the weakest growth in five years. Recent data suggest that the weaknesses observed in 2015 have likely carried into 2016. Although PMI in the non-oil private sector remained in positive territory in January, it hit the lowest level since 2010. Moreover, a strong dirham, as a result of its peg to the U.S. dollar, is hurting the competitiveness of the UAE’s goods and services. On the upside, the country is expected to benefit the most from the implementation of Iran’s nuclear deal given the solid links between the two economies.
The UAE is in a fortunate position to deal with the current low oil price environment, as the country succeeded in diversifying its economy away from oil and enjoys an enviable amount of foreign assets. That said, both an uncertain global economic outlook and the slump in oil prices will dampen government-related spending and domestic activity. FocusEconomics panelists expect GDP to grow 2.9% in 2016, which is down 0.2 percentage points from last month’s estimate. For 2017, the panel projects the economy to accelerate slightly and expand 3.4%.
EGYPT | Authorities struggle to preserve financial stability
The release of GDP figures for FY 2014/2015 provided positive news for the Egyptian economy. GDP expanded 4.2%, which was double the 2.1% expansion in FY 2013/2014 and marked the strongest growth in five years. Recent indicators point to a more difficult situation, however, as in January the PMI remained in contractionary territory for the fourth consecutive month. Faced with currency shortages, which are supporting inflationary pressures, weakening real incomes and limiting the ability to move ahead with spending projects, Egyptian authorities are implementing measures to reduce the import bill. At the end of 2015, the Central Bank tightened controls to plug loopholes that allowed importers to dodge customs tariffs. At the beginning of February, the government raised taxes on a range of imported goods, in particular luxury items. Aid inflows are also expected help improve Egypt’s external position and release pressure on international reserves. At the beginning of January, Egypt received USD 1 billion in cash deposits from China, which added to a total of around USD 11 billion in commitments from the World Bank and Saudi Arabia that were announced in late 2015.
Ongoing security issues and the slow implementation of new projects and structural reforms will likely restrict growth going forward. FocusEconomics panelists expect GDP to expand 3.5% in FY 2016, which is down 0.1 percentage points from last month’s forecast. For FY 2017, the panel sees GDP growing 4.2%.
ISRAEL | Growth slows to a six-year low in 2015 on subdued external demand
The Israeli economy rose 2.3% last year according to preliminary figures, thus expanding at the slowest pace of expansion in six years. Last year, the economy benefited from robust private consumption. Despite escalating violence in the country, private consumption was buttressed by ultra-low interest rates, an improvement in labor market conditions, low oil prices and a series of fiscal measures the government undertook throughout 2015. Conversely, the external sector was a weak spot of the economy last year as exports were negatively affected by a relatively strong shekel and subdued demand in core export markets. Recently, the government approved a 14.5% cut in water rates. The move followed a similar reduction in public transport fares passed by the Knesset in late-January.
The economy is expected to accelerate this year, sustained by robust fiscal performance and strong domestic demand. However, external risks from geopolitical factors and a slow recovery in global demand will likely weigh on the country’s economic outlook. FocusEconomics panelists expect the economy to grow 3.0% in 2016, which is unchanged from last month’s estimate. For 2017, the panel projects GDP to expand 3.3%.
INFLATION | Inflation inches up in December
Inflation in the Middle East and North Africa region rose slightly in December from November’s over-ten-year low of 3.8% to 3.9%. Inflationary pressures remain largely contained due to low energy prices, strong currencies in some oil-export-driven economies and subdued global food prices. Against this backdrop, preliminary data revealed that regional inflation was 4.6% in 2015 (2014: 4.7%), which represented the lowest value since 2004.
Going forward, inflationary pressures are likely to resurface in the months to come as commodity prices are expected to stabilize in the mid-term and the gradual removal of subsides in some countries will add upward pressure on prices. FocusEconomics panelists see regional inflation averaging 4.7% in 2016, which is unchanged from last month’s estimate. In 2017, inflation is expected to increase to 4.9%.
Written by: Ricard Torné, Head of Economic Research
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