MENA: Oil deal saga continues to dominate the headlines
November 30, 2016
Economic activity in the Middle East and North Africa (MENA) strengthened in Q3 on the back of accommodative monetary policies in most countries in the region, more stable financial and exchange rate markets, a slight increase in oil prices and stronger crude production. According to our estimates, the region’s aggregate GDP expanded 2.5% year-on-year in Q3, up from Q2’s 2.1% growth. Nevertheless, the region appears to have entered Q4 on a weaker footing as an uncertain global outlook, doubts about the deal among the Organization of the Petroleum Exporting Countries (OPEC) to cut crude production and harsh fiscal adjustment processes are exerting downward pressure on growth. In this context, the PMI for the non-hydrocarbon sector in the majority of MENA countries deteriorated in October.
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Attention remains focused on the possibility that some of the world’s key oil producing countries could agree on a production cut at OPEC’s 30 November ordinary meeting. While markets were mostly optimistic about the pact following a preliminary deal in September, tough negotiations in October and November reflected the level of mistrust among some countries and revealed the sizable obstacles to finding common ground for a successful agreement. Iran and Iraq are reluctant to reduce their output following years of supply restrictions, while Saudi Arabia asserted that any accord has to include lower quotas for all countries, but also claimed that the market would rebalance by itself even without an output cap deal. Libya and Nigeria have boosted production in recent months following serious supply disruptions, which is adding pressure to an already unsettling situation. Moreover, Russia, which is pumping crude at a record high of above 11 million barrels per day, stated that the country is only potentially considering a freeze in crude production. The outcome of the U.S. election has added more complexity to the situation due to Donald Trump’s campaign statements against the nuclear deal with Iran and about banning imports from Saudi Arabia.
The Egyptian Central Bank surprised market analysts and announced the free-floating of the EGP on 3 November. This move prompted the IMF to approve a USD 12 billion loan to the country and is expected to alleviate Egypt’s financial needs. However, the sharp weakening of the pound is pushing up import costs, particularly for food and fuel, which has the potential to trigger social unrest. The implementation of austerity measures in order to reduce fiscal gaps is also affecting other countries in the region. In Kuwait, anti-austerity supporters made significant gains in the 26 November parliamentary election, while tensions resurfaced in Tunisia following the approval of the 2017 national budget. The removal of subsidies and the reduction of fiscal support is hurting economic activity across the region.
Uncertainty about OPEC oil deal and domestic challenges drive this month’s cut to 2017 growth prospects
Growing tensions among OPEC countries are casting a dark shadow on OPEC’s deal to cut oil production, which is scheduled to be sealed on 30 November. The pact is crucial in order to prop up oil prices and improve fiscal and financial positions in a number of countries in the region and, ultimately, to revamp growth. Among non-oil countries, protests have flared up in Tunisia, while Egypt could suffer short-term pain following the implementation of economic reforms. Moreover, security threats are still high due to the widespread activity of jihadist groups. Against this backdrop, our panel of analysts decided to cut MENA’s 2017 economic outlook by 0.1 percentage points to 2.7%. This nevertheless still represents an improvement from the 2.4% growth expected for this year.
This month’s cut to MENA’s growth forecast reflects downward revisions for 4 of the 16 economies in the region, including Egypt and Qatar. Conversely, the panel decided to upgrade its view on the economies of Algeria, Iran, Israel and Morocco. Meanwhile, analysts left the outlooks for Bahrain, Iraq, Jordan, Kuwait, Lebanon, Oman, Saudi Arabia and the United Arab unchanged.
Iran, which is benefiting from its reintegration into the global economy and stronger oil exports, is expected to be the best performer in 2017. At the other end of the spectrum, Saudi Arabia and Lebanon, in that order, are expected to perform poorly, with expansion rates of around 1.5%. Of the rest of the major economies in the region, Egypt and Qatar will likely grow the fastest, with projected expansions of 3.5%.
SAUDI ARABIA | Harsh austerity measures continue to hamper growth
Weaknesses that plagued growth in Q3 have likely carried into the final quarter of the year as the PMI for the non-hydrocarbon sector tumbled to an all-time low in October. Despite stronger oil production and slightly higher oil prices, economic activity has decelerated sharply this year on the back of the austerity measures that the government implemented in an attempt to mitigate the massive fall in oil revenues. Moreover, tighter liquidity conditions, due mainly to the government’s financial needs, have hampered activity in the private sector. Following a successful international bond issuance in October, liquidity conditions should improve in Q4 and next year if the tentative OPEC agreement to reduce production materializes and thereby pushes up oil prices.
Economic growth will remain subdued next year as fiscal adjustments will persist, albeit at a slower pace. Higher oil prices and the government’s willingness to diversify the economy away from oil should gradually allow growth to pick up in the years to come. FocusEconomics panelists forecast that the economy will grow 1.1% in 2016. In 2017, the panel sees GDP growth accelerating to 1.2%, which is unchanged from last month's projection.
UAE | Authorities give Abu Dhabi National Oil Company green light to boost oil production
The UAE continued to ramp up oil production in October and reached a new high of 2.8 million barrels per day (mbpd). On 3 November, Abu Dhabi’s Supreme Petroleum Council approved the National Oil Company’s five-year plan, which envisages a further increase in production to 3.5 mbpd combined with reforms to boost efficiency. The non-oil sector continued to expand in October, according to the latest PMI figure, albeit at a slower pace since the rise in new works was subdued. On 24 October, the President issued the new bankruptcy law by decree, while Energy Minister Suhail Mohammed Faraj Al Mazroui has recently stated that the government is working on a new mining law, both of which are designed to attract new investment into the country. These recent positive developments are welcome news after the country has long suffered spillovers from the commodities crisis.
Still low oil prices and reduced government spending will continue to constrain the economy next year, albeit to a lesser extent. The well-developed non-oil sector will continue to sustain growth, though not at its full potential due to weak regional and global demand. FocusEconomics panelists expect GDP to rise 2.4% in 2016. In 2017, the panel sees GDP growth accelerating to 2.6%, which is unchanged from last month’s forecast.
EGYPT | Government drops exchange rate controls
A series of landmark events this month could help reverse the country’s dire economic crisis. On 3 November, the Central Bank of Egypt free floated the EGP against a background of dwindling reserves and a widening disparity between official and black market exchange rates. Although this was a belated response to a request made by investors to facilitate their return to the country, the severely weakened pound will likely exacerbate prices for imported goods, most importantly fuel and food products. However, the authorities’ commitment to tackling the economy’s mounting woes has been well received by the IMF, which approved a USD 12.0 billion loan under the Extended Fund Facility program on 11 November. Egypt has received the first tranche of USD 2.75 billion, which will go towards plugging the country’s wide fiscal gap and restoring its FX reserves.
The liberalization of the pound should allow for higher inflows of U.S. dollars, which will improve Egypt’s ailing economy. The IMF plan will also boost growth in the long run by improving the country’s macroeconomic fundamentals and ensuring the implementation of much-needed structural reforms. Nonetheless, IMF-backed austerity measures will see households paying a heavy price in the short-term. Our panelists expect GDP to have expanded 3.5% in FY 2016. The panel also sees growth of 3.5% in FY 2017, which is down 0.1 percentage points from last month’s forecast.
ISRAEL | Low unemployment and loose monetary policy continue to propel growth
Israel’s economy cooled down in Q3 from a strong performance in the first half of the year, but it remained in good shape, expanding 3.2% in seasonally adjusted annualized terms. Private consumption, which accounts for approximately 60% of GDP, decelerated in Q3 to a level which is still healthy thanks to a strong labor market. Heading into Q4, consumer confidence edged up in October, suggesting strong growth momentum. Although Israel’s economy is benefitting from large-scale fixed investment by technology giant Intel, this effect is expected to be temporary. Overall, the ongoing growth momentum is bearing fruit. Fitch Rating upgraded Israel from A to A+, attributing its decision to the continued improvement in the current account balance and the accumulation of foreign reserves.
FocusEconomics panelists expect growth of 2.9% in 2016, as the labor market has supported robust private consumption this year. For 2017, the panel forecasts that GDP will expand 3.3%, which is up 0.1 percentage points from last month’s forecast. An accommodative monetary policy, stronger external demand, low unemployment and growing wages should keep growth healthy.
INFLATION | Inflation hits six-month low in October
Inflation in the MENA region continued to trend lower at the start of Q4 on the back of contained global inflation, weak regional demand and more stable financial market conditions. Inflation fell from September’s 4.2% to 4.0% in October, which was the lowest print since May. The deceleration in price growth mainly reflected lower inflation in Bahrain, Egypt, Iran, Kuwait, Morocco, Qatar, Saudi Arabia and Tunisia. Conversely, inflation in Lebanon and Oman accelerated in the same month, while the drop in prices softened in Israel and Jordan. The existing downward trend in inflation is expected to be short-lived due to the scheduled removal of some subsidies, the expected pickup in global prices and stronger economic dynamics in the region.
FocusEconomics panelists expect inflation for the MENA region to average 4.7% this year. Next year, the panel sees inflation inching up only to 4.8%, which is down 0.3 percentage points from last month’s estimate. The downward revision mainly reflects a cut in inflation projections for Algeria, Iran, Iraq, Israel, Jordan, Morocco, Qatar and Saudi Arabia.
Written by: Ricard Torné, Head of Economic Research