Low oil prices and rising geopolitical threats led growth in MENA to decelerate in 2015
March 8, 2016
Growth in the Middle East and North Africa (MENA) region decelerated markedly in 2015 on the back of lower oil prices, heightened geopolitical threats and a weak global economic recovery, in particular among emerging-market nations. According to preliminary estimates that account for around 55% of the region’s nominal GDP, the region’s economy expanded 2.6% in 2015. The print was below the 2.9% rise tallied in 2014 and marked the weakest growth rate since the trough of the global financial crisis in 2009. That said, the brunt of the pain was unevenly split across the region. Growth among oil-export-driven economies recorded the steepest decelerations, while most of the oil-dependent nations actually benefited from the low-crude-price environment and fared better within the complicated economic scenario.
Despite remaining at very low levels, the possibility of an agreement to hold production among key oil producers led crude prices to rebound slightly in the last weeks. On 16 February, officials from Qatar, Russia, Saudi Arabia and Venezuela held talks in Doha to freeze oil production at January’s levels in an attempt to shore up crude prices. While oil prices responded positively to the nascent accord, the recovery was limited as there are still significant hurdles to overcome. The fact that Iraq and Iran decided not to participate in the deal for now represents a serious setback. Moreover, what currently in store is a mere halt in production. Against this backdrop, and taking into account relatively-weak global growth, the global oil glut is likely to persist in the short- and mid-term. That said, any deal between the Organization of Petroleum Exporting Countries (OPEC) and Russia at the upcoming 20 March meeting has the potential to strengthen cooperation between key crude producers and increases the possibility of a more ambitious joint action in the future.
Most recent data for the region suggest that weaknesses that weighed on growth last year carried over into 2016. Despite the oil price increase observed in the last few weeks, prices are still at historical lows. This situation prompted some oil-reliant countries to cut subsidies, halt investment projects and introduce new taxes in order to balance their budgets. In this regard, the Gulf Cooperation Council (GCC) announced that the first Value-added Tax would be implemented. The 5.0% VAT will be effective in GCC countries (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates) from 1 January 2018.
Somber global prospects and falling oil prices continue to weigh on MENA’s prospects for 2016
Mounting geopolitical threats, a subdued global economic recovery and the fall in 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 for the fourth consecutive month to 2.6%, which is down 0.2 percentage points from last month’s estimate. The downward revision was driven by deteriorating projections for 10 of the 16 countries in the region, including Iran, Israel, Qatar, Saudi Arabia and the United Arab Emirates. Panelists kept their projections unchanged for the rest of MENA’s economies. Growth in the region is expected to accelerate to 3.2% in 2017.
Qatar, which enjoys a diversified economy compared to its regional peers, 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 after years of sanctions. At the other end of the spectrum, Yemen and Saudi Arabia will be the worst performers, followed by Algeria. 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 2.9%, respectively.
SAUDI ARABIA | Government acts to rein in rampant fiscal deficit
Although the country is in a fortunate positon to withstand the sharp fall in crude prices thanks to its massive international reserves and low debt, low oil prices are having a strong impact on revenues and growth. In an attempt to bolster confidence in international crude markets and support prices, Saudi Arabia, along with Qatar, Russia and Venezuela, announced on 16 February that they would freeze their oil production at January’s levels. While this is the first time OPEC members and non-OPEC key producers have cooperated since 2001, oil prices did not rebound significantly in the days that followed. Analysts are skeptical as to how effective such an agreement could be due to a variety of factors including Iran’s refusal to join the agreement, the decision not to consider a cut in production and historical distrust among some of the signatories. Moreover, Saudi Arabia will also be affected by implementation of the 1 January 2018 VAT.
The country’s strong financial positon shields its economy against a sharp economic downturn. That said, the continued fall in crude prices has started to erode not only the all-important oil industry, but also non-hydrocarbon activities. Furthermore, the decline in revenues has prompted the government to massively cut spending, which promises to impact overall growth. Analysts expect that the economy will rise 1.3% this year, which is down 0.3 percentage points from last month's forecast. Next year, the panel sees GDP growth accelerating to 1.9%.
UAE | Despite VAT introduction, corporate and income taxes are not on budget-balancing agenda
While sound economic policies are impeding an abrupt slowdown, the decline in oil prices continues to weigh on UAE’s economic growth and is putting a dent in government revenues. In an attempt to restore fiscal sustainability, the Minister of State for Financial Affairs Obaid Humaid Al Tayer announced the 5.0% VAT mentioned above. Nevertheless, at the same press conference, Al Tayer affirmed that the introduction of corporate and income taxes was not on the agenda for the time being. February’s PMI figures suggest that dynamics in the non-hydrocarbon sector remain positive, although they are much weaker than they were a year ago.
While growth is expected to remain subdued this year due to the low-oil-price environment, the UAE’s fundamentals remain strong. The country’s solid banking system, low debt and relatively-diversified economy shield the UAE against any sharp economic downturn. Panelists see GDP rising 2.7% in 2016, which is down 0.2 percentage points from last month's projection. In 2017, the panel sees GDP growth accelerating to 3.1%.
EGYPT | Authorities struggle to lower import bill
According to data for the July–September period of 2015 (the first quarter of FY 2016), economic growth slowed to 3.0%. The result was driven by a large drop in exports driven by faltering activity in the tourism sector amid persistent security concerns. Recent indicators suggest that the situation remains difficult; the PMI was in contractionary territory for the fifth consecutive month in February. Currency shortages are weighing heavily on economic activity. This was evident in early February when General Motors—which accounts for nearly a quarter of Egypt’s car production—temporarily suspended production as it could not clear the imports that were held up in customs. On 6 March, the Central Bank auctioned USD 500 million that would allow companies to import strategic goods. While the move may momentarily ease pressure on importers, pressure is mounting on the Central Bank to devalue the currency as importers are having to resort to the black market for their currency needs.
Ongoing security issues and the slow implementation of new projects and structural reforms will likely limit growth going forward. FocusEconomics panelists expect GDP to expand 3.5% in FY 2016, which is unchanged from last month’s forecast. For FY 2017, the panel sees GDP growing 4.1%.
ISRAEL | Parliament passes legislation to foster growth
Israeli’s economy recovered strength in the second half of 2015 and GDP expanded at the fastest rate in a year in Q4. The economy benefited from strong domestic demand, in particular from a double-digit expansion in public spending as the government frontloaded some of the spending for 2016. Despite escalating violence in the country, private consumption benefited from a tight labor market and ultra-low interest rates. Conversely, the external sector was a drag on growth as imports jumped in Q4. Alongside recent measures to cut transportation fees and a reduction in the VAT, the 14.5% cut in water tariffs that the Parliament approved last month will benefit private consumption and help stimulate growth.
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 2.9% in 2016, which is down 0.1 percentage points from last month’s estimate. For 2017, the panel projects GDP to expand 3.2%.
INFLATION | Removal of subsidies and higher food prices prop up inflation in January
Inflation in the Middle East and North Africa region jumped significantly in the first month of the year as the effects of the gradual removal of subsides in some countries in an attempt to rein in rampant fiscal deficits and higher food prices have started to kick in. According to preliminary data, inflation in the MENA region rose from December’s 3.9% to 4.4% in January, marking a six-month high. That said, low oil prices, slow regional growth, somber perspectives for global inflation and strong currencies in some oil-export-driven economies all promise to keep inflationary pressures largely contained.
Against this backdrop, FocusEconomics panelists see regional inflation averaging 4.8% in 2016, which is up 0.1 percentage points from last month’s estimate. In 2017, inflation is expected to increase to 5.0%.
Written by: Ricard Torné, Head of Economic Research
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