Middle East & North Africa Economic Outlook August 2017

Geopolitical risks continue to dominate the headlines

Middle East & North Africa: Geopolitical risks continue to dominate the headlines

August 2, 2017

The Middle East and North Africa’s (MENA) economy is struggling with the reduction in crude oil production required to comply with the November deal among OPEC and non-OPEC members and lower-than-expected prices for oil. That said, booming economic activity in Iran and healthy dynamics among oil-importing nations are putting a floor underneath regional growth. According to a preliminary estimate that accounts for around 75% of the region’s nominal GDP, the MENA region expanded 4.0% annually in Q1, down from Q4’s 5.1% rise.


Oil-producing countries, led by Saudi Arabia, were behind Q1’s poor performance in MENA, mostly reflecting reduced crude output. The main exception was Qatar as the country has a relatively diversified economy and a strong position as a natural gas producer. Although Iran's GDP growth decelerated slightly in Q1, it still posted a double-digit expansion for the third quarter in a row on the back of strong crude output. While the country is benefiting from its reintegration into the global economy, economic data for SH 2016, which ended in March 2017, signals that Iran is still facing huge domestic vulnerabilities. Private consumption is still weak on the back of high unemployment and inflation levels. Moreover, the construction sector remains in the doldrums following years of economic mismanagement. If Iran is able to address its large economic imbalances and domestic demand shifts into higher gear, it could stimulate demand across the region. Better weather conditions, subdued oil prices and strong global demand supported economic activity among oil-importing nations in Q1.


While more recent data suggests that non-oil activities remained robust in Q2, volatility in the oil market, along with the ongoing oil cuts, likely put a lid on MENA’s economic growth in the period. If the economic environment is at least uncertain, political risks are quickly escalating, threatening to dash any glimpse of a recovery. BahrainEgyptSaudi Arabia and the United Arab Emirates declared on 30 July that they are ready to negotiate with Qatar. Far from offering Qatar an olive branch, the four countries reiterated their positions and stated that before starting any negotiation, Qatar has to respond to the “13 demands” that the Saudi-led bloc issued on 23 June and stop “funding terrorism”. Qatari Foreign Minister Sheikh Mohammed bin Abdulrahman Al Thani dismissed the statement and restated that both the blockade and the expulsion of Qatari citizens from the alliance countries were illegal. The two chambers of the U.S. Congress overwhelmingly voted in favor of a new round of sanctions against Iran, North Korea and Russia on 27 July, and the next day White House officials stated that President Donald Trump was ready to sign them into law. The sanctions against Iran target Iranian firms with ties to the country’s ballistic-missile program. With no resolution to the Gulf crisis in sight and renewed tensions between Iran and the U.S., geopolitical risks will remain in the spotlight for the foreseeable future.


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Political unrest continues to weigh on 2017 growth prospects 


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Political tensions in the Gulf continue to cloud the economic outlook in the region, while fears that the global oil glut is not subsiding are hurting growth prospects among some of the region’s largest economies. Against this backdrop, analysts cut MENA’s 2017 economic outlook for the second month in a row and they now expect the region to expand 2.1%, which is down 0.1 percentage points from last month’s estimate. Growth in the region is expected to accelerate to 3.2% in 2018.


This month’s downgrade to MENA’s 2017 economic outlook reflects lower growth prospects for 8 of the 16 economies surveyed, including Qatar and Saudi Arabia. The economic outlook improved in Egypt, Israel and Tunisia, while projections were left stable in IranJordanLebanon, the United Arab Emirates and Yemen


Iran is projected to be the best performer of the year followed by Morocco. At the other end of the spectrum, GCC countries are expected to perform poorly, with Kuwait and Saudi Arabia both contracting in 2017. Of the rest of the major economies in the region, Egypt will likely grow the fastest followed closely by Israel. 


SAUDI ARABIA | Geopolitical risks and worsening oil outlook put a lid on growth prospects


Latest available data suggests that the economy remained in the doldrums in Q2, following the first contraction since the global financial crisis in Q1. The economy continues to feel the brunt of Saudi Arabia’s compliance with the OPEC oil cut deal, which is dampening activity in the all-important oil sector. This situation is gradually feeding into the non-oil sector, with the non-oil PMI averaging lower in Q2 than in Q1. Moreover, the Kingdom is increasingly concerned over overall OPEC and non-OPEC compliance with the deal as most key producing countries boosted crude production in June. Meanwhile, the political rift between Qatar and the Saudi-led alliance is not showing signs of abating following Qatar’s decision to reject the bloc’s 13 demands early in July. While Saudi Arabia and its allies did not announce any measure to force Qatar in compliance, the political spat remains tense in the region.


Low crude production, limited gains in oil prices and mounting geopolitical threats will dominate the economy in the months to come. Panelists expect GDP to fall 0.1% this year, which is down 0.3 percentage points from last month's projection, before accelerating to 1.8% growth in 2018. 


UAE | Government unveil details on 2018 VAT implementation


The non-oil sector continues to hum along, with the PMI remaining well within expansionary territory so far this year thanks to solid domestic demand and strong growth in output and new orders, although employment growth has been anemic due to pressure on margins. In contrast, the oil sector is looking peaky; even though the UAE complied with oil production cuts in May and June, and despite the OPEC deal extension until November, prices remain fairly depressed. However, the country is still navigating the choppy economic waters of low oil prices better than GCC neighbors, thanks to a rock-solid fiscal position and a relatively diversified economy. In order to boost revenues and broaden the tax base, from 2018 VAT will be implemented for the first time at 5.0%. The specificities of the policy are gradually crystalizing, with the government recently announcing exemptions for residential real estate, some financial services and local transport. 


Growth will decelerate further in 2017 due to lower oil production. However, the non-oil sector should act as a countervailing force, thanks to stronger external demand and greater investment in preparation for the Dubai 2020 World Expo. FocusEconomics panelists expect GDP to rise 2.1% in 2017, unchanged from last month’s forecast, and 3.3% in 2018. 


EGYPT | IMF releases second aid tranche 


The government’s bold economic strategy was vindicated in mid-July, with the IMF formally signing off on the second tranche of bailout funding worth USD 1.25 billion. In its first review of the Extended Fund Facility (EFF), the Fund gave a fairly ringing endorsement, lauding the progress on the reform agenda, with new investment and industrial licensing laws recently approved and a new insolvency law currently in Parliament. Nevertheless, consumers could be forgiven for not sharing the IMF’s enthusiasm, as recent hefty fuel and electricity subsidy cuts have the potential to further stoke already-high price pressures in the coming months. They can however take some solace from plans to phase out energy subsidies more gradually than previously expected and a social package announced by the government in June. In the face of higher inflation, the Central Bank is taking no chances, pulling up the monetary drawbridge further at its most recent meeting despite the fragile economy. 


Growth will accelerate in FY 2018, as investment grows strongly thanks to recent laws designed to improve the business environment, while slowly-declining inflation should boost consumers’ purchasing power, driving up private consumption. Analysts expect GDP to have expanded 3.5% in FY 2017, and forecast growth of 4.0% in FY 2018, which is up 0.1 percentage points from last month’s forecast


ISRAEL | Economy ends Q2 on a mixed note 


The economy is in sound health, yet recent data paint a mixed picture. While economic activity increased a healthy 4.4% on an annual basis in June, the PMI fell significantly—although it did remain in expansionary territory for the 12th consecutive month—and industrial production decelerated in May. Imports rebounded strongly in June on the back of increased demand for consumer goods, but exports recorded their worst performance of the year and contracted notably in the same month. On the political front, the Labor Party elected Avraham Gabbay as its leader. Although Israel’s next elections are scheduled for 2019, analysts have speculated that early elections could take place due to investigations into alleged corruption in Prime Minister Netanyahu’s circle. The party’s supporters are hopeful that Gabbay, who has drawn comparisons to French President Macron for being an outsider to the establishment, is the man that will oust the current Prime Minister. 


Growth is expected to pick up this year. Unemployment remains low and improving consumer confidence supported by an accommodative monetary policy should stimulate private consumption. The recovery of the export sector, despite June’s weak performance, ought to help spur growth too. FocusEconomics panelists expect growth of 3.4% in 2017, which is up 0.1 percentage points from last month’s forecast. For 2018, the panel projects GDP growth to be 3.5%. 


INFLATION | Inflation broadly stable in June


According to a regional aggregate produced by FocusEconomics, inflation came in at 4.3% in June, slightly above May’s seven-month-low of 4.2%. The drop in consumer prices eased in Saudi Arabia, while Bahrain, Jordan and Qatar posted higher inflation readings in June. Price pressures eased in Algeria, Iran, Israel, Kuwait, Lebanon and Oman. In Egypt, inflation inched up and the upward trend is expected to continue in the coming months as the government hiked administered prices. Against this backdrop, the Central Bank increased the overnight deposit rate by 200 basis points at its 6 July meeting.


Inflation is expected to rise in the coming months. FocusEconomics panelists foresee regional inflation at 4.9% on average in 2017, which is down 0.1 percentage points from last month’s estimate. This month’s downward revision reflects lower prospects for 9 of the 16 economies surveyed. The panel sees inflation broadly stable at 5.1% in 2018.


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