Middle East & North Africa: All eyes on a potential oil cap deal at September's meeting
September 7, 2016
A comprehensive dataset showed that growth in the Middle East and North Africa (MENA) fared worse at the outset of the year than initially expected. Despite rising, oil prices remained at low levels, which prompted some countries to remove subsidies and cut public expenditure, hitting growth in Q1. Moreover, economic dynamics were negatively affected by tepid global demand and challenging domestic conditions. GDP for the region expanded 1.8% annually in Q1 (Q4: +2.1% year-on-year), which was below the 2.0% increase reported in the previous month. However, some tentative signs of improvement have since emerged.
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Oil prices recovered some ground in August following the decline observed in July in the wake of the Brexit vote and fears of oversupply. The upward trend reflected a drop in inventories and mounting expectations that major producers could reach an agreement on oil production at the 26–28 September meeting in Algeria. While previous initiatives to set a crude cap failed due to the lack of trust among some key players, the situation has since changed and the possibility of an agreement now appears more likely. Iran had refused to participate in any deal until the country hit its pre-sanctions production levels of around 4.0 million barrels per day (mbpd) but it is getting close to this figure: according to Iran’s oil minister, Bijan Zanganeh, the country is now pumping around 3.85 mbpd. Moreover, other members of the Organization of Petroleum Exporting Countries (OPEC) such as Iraq, Qatar and Saudi Arabia have made positive comments about a possible oil freeze.
In an attempt to address their macroeconomic imbalances, some countries have initiated a number of actions to secure funding. On 11 August, Egypt and the IMF reached an agreement on a three-year USD 12 billion loan in order to shore up Egypt’s battered finances and tackle the crippling fall in foreign reserves. On top of the IMF deal, Egypt is seeking USD 9 billion in additional funding from other international institutions including the World Bank and the African Development Bank, and through the issuance of government bonds in the global markets. Similarly, on 25 August, the IMF granted Jordan USD 723 million in order to support its economy. Meanwhile, Saudi Arabia is moving forward with its plan to raise more than USD 10 billion from its international bond sale in October. Moreover, most governments in the region are heavily tapping into the domestic bond markets to plug the holes in their finances.
MENA's 2016 growth prospects remain stable
Speculation that an oil deal could be struck at September’s informal OPEC meeting reinvigorated oil markets and alleviated fears about a severe economic crunch in the region. Moreover, economic sentiment improved amid signs that some of the economies worst hit by the fall in oil prices in the last two years have started to stabilize following the implementation of harsh fiscal consolidation processes. That said, the region remains vulnerable to geopolitical risks and volatility in the oil markets. Against this backdrop, our panel of analysts maintained its wait-and-see approach for the second consecutive month and kept the 2016 growth projections for the region stable at 2.3%. For 2017, growth in the region is expected to accelerate to 3.0%.
The stable outlook for this month’s 2016 MENA growth forecast reflects unchanged projections for 10 of the 16 countries in the region, including Egypt, Iran, Israel and the United Arab Emirates. The panel raised the estimates for Kuwait, Oman, Saudi Arabia and Qatar. Morocco and Yemen were the sole countries for which the panel downgraded its forecasts.
Qatar and Iran, in that order, are expected to be the best performers in 2016. At the other end of the spectrum, Saudi Arabia and Lebanon are expected to perform poorly, and Yemen, which is entangled in a bloody civil war, will be the worst performer by far. Among the rest of the major economies in the region, Egypt and Israel will likely grow the fastest, with projected expansions of 3.1% and 2.6%, respectively.
SAUDI ARABIA | Growth remains subdued in Q2 despite higher crude prices
Economic conditions appear to be stabilizing following Q1’s dismal performance, which drove the economy to slow to a three-year low. Activity in the non-oil sector is gradually improving, while the pace of FX reserve depletion has moderated in recent months. Moreover, the fall in oil prices observed in July has been short-lived and crude prices are on the rise again due to speculation that major oil producers could reach an agreement to stabilize prices in September. Overall growth nevertheless remains constrained by the ongoing fiscal consolidation. Despite the possibility that the United States Federal Reserve will hike rates in September, Saudi Arabia is planning to issue its first international bond of around USD 10 billion in October in order to plug the Kingdom’s large budget deficit.
The gradual upward trend in oil prices and the country’s massive fiscal buffers are supporting the Kingdom’s economic outlook. Moreover, a successful implementation of Saudi Vision 2030—the government’s economic diversification plan to reduce dependence on oil—could boost the potential for growth. The panel forecasts that the economy will grow 1.1% in 2016, which is up 0.1 percentage points from last month's projection. In 2017, the panel sees GDP growth accelerating to 1.7%.
UAE | New bankruptcy law expected by year end
The fact that the UAE has a relatively diversified economy compared to its neighboring Gulf countries enabled it to perform quite well this year despite low oil prices and the adverse external environment. However, the crude slump has strained public finances and increased the need for a tighter fiscal adjustment. On a positive note for the business environment, the UAE’s authorities agreed on a final version of the federal bankruptcy law—in the absence of which many residents had had to flee the country since they risked being jailed because they were unable to repay their debts after the 2008 financial crisis. The reform should be finalized by the end of the year and should also allow majority foreign ownership of firms in some sectors where it is currently restricted to 49%.
The expected recovery of oil prices will likely mitigate some of the downward pressure on growth. So too will large-scale investments in the run-up to Expo 2020, which are expected to start materializing this year and will help to continue diversifying the economy. FocusEconomics Consensus Forecast panelists forecast that the economy will rise 2.4% this year, which is unchanged from last month's projection. Next year, the panel sees GDP growth accelerating to 2.8%. .
EGYPT | EGP drop in parallel market suggests another currency devaluation is on the horizon
Egypt’s economy remains in the doldrums amid plummeting tourist numbers, a dollar shortage and severe capital outflows. In order to restore confidence in its lackluster economy and ease the crippling currency shortage, the government plans to raise USD 21 billion to spend in a three-year economic program. This will be coordinated with the IMF, who announced on 11 August its intention to provide the country with a USD 12 billion loan in order to plug the financing gap. The Fund said that the loan will be contingent on Egypt committing to a quick implementation of much-needed economic reforms, which include a further devaluation of the Egyptian pound as well as the belated introduction of a Value-Added Tax. In addition, the deal is subject to Egypt’s ability to secure up to USD 6 billion from bilateral creditors. Against this backdrop, Moody’s affirmed Egypt’s B3 rating in mid-August, citing the IMF loan as a much-needed source of respite which will help alleviate some of Egypt’s external liquidity pressures as well as promote its reform agenda.
While the government’s program could help stabilize the country’s macroeconomic fundamentals, soaring inflation, weak private sector activity and a severe dollar crunch will continue to weigh on growth this year. Our panelists expect GDP to have expanded 3.1% in FY 2016 and forecast growth of 3.6% in FY 2017
ISRAEL | Resilient domestic demand propels growth in Q2
Israel’s economy accelerated in the second quarter on the back of strong total consumption, according to preliminary figures. Private consumption was supported by record-low unemployment, while accommodative monetary policy further fueled household spending. Government consumption rebounded from a contraction in Q1 to a strong increase in Q2, backed by growing tax revenues. Data for the third quarter confirm the bright picture for the domestic economy. Unemployment hit a record low in July and consumer confidence increased in the same month. However, the external side of the economy does not look so rosy. Exports of goods and services decelerated in Q2 compared to Q1 on the back of a strong shekel and sluggish global demand, which also caused goods shipped abroad in July to plunge on an annual basis. The budget for the 2017–2018 period released on 8 August foresees cuts on both sides of the government’s income statement, public spending and taxes.
While the domestic economy is showing positive momentum, a slow recovery in global demand is weighing on the country’s economic outlook. FocusEconomics panelists expect the economy to grow 2.6% in 2016, which is unchanged from last month’s forecast. For 2017, the panel forecasts that GDP will expand 3.0%.
INFLATION | Inflation hits one-year high in July
Inflation in the Middle East and North Africa region inched up from June’s 4.2% to 4.4% in July, which represented the highest reading since August 2015. The print mainly reflected higher inflation in Algeria, Iran and Qatar. Moreover, the drop in consumer prices softened in Israel, Jordan and Lebanon. The slow but steady upward trend in regional inflation mostly reflects that higher commodity prices are gradually feeding through to oil-dependent economies. The scarcity of hard currency in some countries such as Algeria and Egypt and the removal of subsidies in the Gulf countries are also exerting upward pressure on inflation. That said, tepid regional growth and subdued global economic dynamics are expected to contain any surge in inflation.
FocusEconomics panelists decided to increase their 2016 inflation forecast for the MENA region by 0.1 percentage points to 4.7%. In 2017, inflation is expected to increase to 5.0%.
Written by: Ricard Torné, Head of Economic Research