MENA: Long-lasting vulnerabilities continue to dampen regional growth
May 11, 2016
The decline in oil prices, weak global growth and rising geopolitical risks plagued economic activity in the Middle East and North Africa (MENA) in 2015. According to a more complete set of data that accounts for around 75% of the region’s nominal GDP, MENA’s economy expanded 2.6% annually in 2015, which was below the 2.9% increase tallied in 2014. Oil-producing countries felt the brunt of the pain as the Organization of the Petroleum Exporting Countries’ (OPEC) strategy to keep oil prices low in order to retain market share backfired. While oil-importing nations weathered the situation relatively well at the outset of 2015, worsening global growth prospects and subdued dynamics in the region took a toll on their economies.
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More recent data suggest that weaknesses observed in 2015 carried into this year. Although prospects for the global economy stabilized in recent weeks mainly due to improved economic conditions in China and easy monetary policy worldwide, uncertainties about a sustained global recovery remain high. Moreover, security threats continue to cloud the region’s economic outlook. While international coalitions and domestic forces seem unable to quell the menace of the Islamic State (ISIL), longstanding social unrest in some countries is resurfacing again as political and economic reforms are stalling. In this regard, the storming of the Iraqi parliament by Shiite cleric Muqtada al-Sadr supporters on 30 April highlights the fragility of Prime Minister Haider al-Abadi.
Nevertheless, the flare-up between Iran and Saudi Arabia likely represents the main threat to MENA’s economic outlook in the mid- and long-term. While the ongoing wars in Syria and Yemen are the most visible consequences of the sectarian rivalry between the two regional powers, the unsuccessful 17 April meeting in Doha aimed at shoring up oil prices represents a new chapter in this tense relationship. Saudi Arabia decided not to sign a deal that did not include Iran, which, in turn, refused to be part of the agreement as the country is regaining market share following the lifting of economic sanctions early this year. Despite the inconclusive pact, oil prices rallied in recent weeks due to supply disruptions in some countries and diminishing crude output in the United States. While this will temporarily take the pressure off of some battered government finances, low oil prices are expected to remain in play for the foreseeable future, which makes economic reforms unavoidable. In this regard, Saudi Arabia unveiled Vision 2030, an economic plan to cope with the end of the black gold era.
Regional uncertainty and still low oil prices drive down MENA’s 2016 economic outlook
The unsuccessful deal to freeze oil production has dashed any hope, at least temporarily, of a coordinated action among key oil producers to prop up oil prices. This situation, coupled with ongoing geopolitical risks and an uncertain global outlook, is exerting downward pressure on the economic outlook for the Middle East and North Africa. FocusEconomics Consensus Forecast panelists cut their 2016 growth forecasts for the region for the sixth consecutive month and they now expect growth to tally 2.4%, which is down 0.1 percentage points from last month’s estimate. 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 3.1%.
This month’s downward revision to MENA’s 2016 outlook was driven by deteriorating projections for 7 of the 16 countries in the region, including Egypt, Iran, Iraq, Kuwait, Morocco, Tunisia and Yemen. Panelists kept their projections unchanged for eight countries, while Algeria was the sole country for which panelists upgraded its view of the economy.
Qatar’s relatively diversified economy is expected to be the best performer in 2016, followed by Iran, which is benefiting 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 Lebanon. Among the rest of the major economies in the region, Egypt and Israel will likely grow the fastest, with projected expansions of 3.3% and 2.9%, respectively.
SAUDI ARABIA | Monarchy unveils Vision 2030 aimed at reforming the economy
On 25 April, the government approved a blueprint to reform the country’s economy and reduce its dependence on oil. While the program, dubbed Vision 2030, covers a wide range of areas, analysts believe that the lack of details regarding its implementation could derail the initiative as a whole. Moreover, on 7 May, the monarchy announced a far-reaching shake-up of the government. Ali al-Naimi, the powerful oil minister for 21 years, was replaced with Khalid al-Falih. Despite this change, which came in ahead of the 2 June OPEC meeting, Saudi Arabia is unlikely to change its oil policy as Deputy Crown Prince Mohammed bin Salman has repeatedly stated that the Kingdom would only consider a freeze in production if Iran is included in the agreement.
While low oil prices and this year’s fiscal consolidation are dampening the country’s economic outlook, a somewhat longer perspective foresees the adoption of a more reformist agenda likely boosting Saudi Arabia’s economic growth. FocusEconomics panelists expect that the economy will expand 1.2% this year, which is unchanged from last month's projection. Next year, the panel sees GDP growth accelerating to 1.8%.
UAE | Activity in the non-hydrocarbon sector moderates in April
The UAE enjoys a relatively diversified economy and has managed to sidestep the worst of the collapse in oil prices. That being said, the country still counts on oil revenues to account for approximately 65% of government revenues, which has had a significant impact on the economy since public spending makes up roughly a quarter of GDP. The resulting fall in government spending is starting to show up in the non-oil sector. The PMI, which measures growth in the non-oil sector, has exhibited a decelerating trend since mid-2015, with recent data showing a cessation of employment growth in the sector. The good news is that oil prices have rallied since February, which will take some of the pressure off of government finances.
Steadily-increasing oil prices will brighten UAE’s economic prospects. However, elevated debt levels still pose a risk to financial market stability. This risk is exacerbated by weakness in Dubai’s all-important property market. FocusEconomics Consensus Forecast panelists see GDP rising 2.5% in 2016, which is unchanged from last month's projection. In 2017, the panel sees GDP growth accelerating to 2.9%.
EGYPT | Growth accelerates in the October-December period
Egypt’s economic growth accelerated from an annual 3.0% in Q3 to 4.0% in Q4 of calendar year 2015. While the GDP reading and the Central Bank’s recent decision to devaluate the pound are positive developments, Egypt’s overall economic situation remains far from rosy. The acute shortage of U.S. dollars in the economy—caused by a decline in tourism and foreign investment after the Arab Spring protests in 2011—continues to restrain imports and economic activity. Depleted foreign currency reserves and rapidly-growing external financing needs make Egypt dependent on outside financial support, which is normally granted by Saudi Arabia and the UAE. Moreover, the political situation took a turn for the worse recently. President Fattah el-Sisi’s announcement in mid-April to hand over two Red Sea islands to Saudi Arabia aggravated dissent against the government and provoked protests, with critics arguing that el-Sisi ceded the islands in return for financial support.
Egypt’s economic outlook is clouded by the ongoing dollar crunch, persistent macroeconomic imbalances, slow implementation of structural reforms and political instability. Our panelists expect GDP to expand 3.3% 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
Israel’s economy accelerated notably in the final quarter of 2015 and GDP grew at the fastest rate in a year. Growth was underpinned by a double-digit expansion in government spending. Moreover, private consumption was supported by favorable labor market conditions and ultra-low interest rates. The most recent data point to a slight deceleration of the economy in Q1. In March, the State of the Economy Index expanded at a softer pace and exports contracted for the third consecutive month. Meanwhile, geopolitical tensions in the country remain elevated. The ongoing security situation involving the longstanding conflict in Gaza intensified earlier this month. Aggressive firing along the Palestinian territory was recorded from both sides, thus leading to a further deadlock in the peace process.
The economy is expected to accelerate this year. However, external risks from geopolitical factors and a slow recovery in global demand weigh on the country’s economic outlook. FocusEconomics panelists 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 | Inflation falls to a record-low in March
Inflation in the Middle East and North Africa region fell from 3.8% in February to 3.5% in March, which represented the lowest print on record. An uncertain global outlook, weak regional growth, still-low oil prices and less volatile global financial markets are all keeping inflationary pressures contained. That said, the removal of subsidies in some countries in an attempt to balance rampant fiscal deficits is expected to spur inflation going forward.
As risks to the inflation outlook continue 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 5.0%.
Written by: Ricard Torné, Head of Economic Research
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