Middle East & North Africa: Trump's measures threaten to destabilize region
February 8, 2017
Although recent data corroborate that economic activity in the Middle East and North Africa (MENA) accelerated slightly in 2016, it also revealed that faster regional growth was mostly due to economic improvements in a limited number of countries rather than broad-based progress. According to our estimates, the region’s aggregate GDP expanded 2.8% in 2016, up from 2015’s 2.7% growth. The region mostly benefited from a better political and economic situation in Iraq as the government was able to regain control of large swaths of land in the hands of the Islamic State. As a result, Iraq is expected to have emerged from recession in 2016. Meanwhile, Iran’s reintegration into the global economy propelled growth in the Persian country to a six-year high. The positive effects of the opening of Iran’s economy, however, are not yet being felt across the region due to ongoing political rifts between Iran and Saudi Arabia and a still challenging business environment in the country. Israel also closed 2016 on a strong note due to an accommodative monetary policy, a low unemployment rate and strong private spending.
On the downside, the low oil price environment continued to drag on growth among oil-exporting countries in 2016. Declining oil revenues led to the implementation of severe austerity measures, while heavy borrowing from governments squeezed liquidity in domestic financial markets, shooting up interest rates and hurting non-hydrocarbon activities. Among oil-importing countries, spillovers from regional conflicts continued to pose downside pressure on growth, while harsh weather conditions had a negative impact on the agricultural sector.
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This year, the region appears to have started out on a stronger footing. Higher oil prices, due to the output-cap agreement reached by the Organization of the Petroleum Exporting Countries (OPEC) and other key producers in the final months of 2016, are bringing welcome relief to the battered coffers of some MENA countries. The oil cuts planned for H1 to comply with the deal, however, pose serious headwinds to growth among oil producing countries, in particular Saudi Arabia, which is responsible for the lion’s share of the reduction in oil output. Nevertheless, early economic data for January signal that economic activity in the non-oil sector is picking up, mainly due to improved global demand.
Despite the promising start to the year, concerns that the new U.S. administration could take a tough stance against some Muslim countries have started to materialize in the last few weeks. On 27 January, Donald Trump’s administration issued an executive order imposing a ban on immigrants from Libya, Iran, Iraq, Somalia, Syria, Sudan and Yemen for at least 90 days. Moreover, on 3 February, Trump enacted new economic sanctions on 25 Iranian people and entities in response to a ballistic missile test. For now, the consequences of the aforementioned measures against Iran should be limited as the sanctions do not violate the nuclear agreement or affect the oil industry. That said, Trump’s approach is adding fuel to the fire in an already inflamed region.
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Global headwinds and domestic challenges weigh on this month’s 2017 growth forecast
Although the OPEC deal is pushing up oil prices, the reduction in crude output required to comply with the agreement will plague growth in some oil-producing countries this year. Moreover, higher energy costs will likely weigh on growth among oil-importing nations. Geopolitical risks in the region remain high and Trump’s decision to take a tougher political stance against Iran has the potential to exacerbate the situation. Against this backdrop, our panel of analysts decided to cut MENA’s 2017 growth outlook this month by 0.1 percentage points to 2.5%. If this proves correct, it will represent the weakest expansion since the trough of the financial crisis in 2009. Next year, the panel sees growth picking up to 3.2%.
This month’s cut to MENA’s growth forecast reflects downward revisions for 7 of the 16 economies in the region, including Iraq, Qatar, Saudi Arabia and the United Arab Emirates. Conversely, the panel decided to upgrade its view on the economies of Algeria and Lebanon. Meanwhile, analysts left the outlooks for Bahrain, Egypt, Israel, Jordan, Morocco, Tunisia and Yemen unchanged.
Iran is expected to be the best performer this year as the country is benefiting from its reintegration into the global economy and stronger oil exports. However, rising tensions between Iran and the United States represent a major threat to its economic outlook. At the other end of the spectrum, Saudi Arabia is expected to perform poorly, with an expansion rate of 0.5%. Yemen, which is entangled in a deadly war, will remain the main blackspot in the region and its economy will contract for the fifth year in a row in 2017. Of the rest of the major economies in the region, Egypt and Qatar will likely grow the fastest, with projected expansions of 3.4% and 3.3%, respectively.
SAUDI ARABIA | Oil production cuts to constrain growth in 2017
Economic activity decelerated to a multi-year low in 2016 as weak global oil prices continued to drag on growth. As oil revenues fell, the government slashed public spending and halted a number of investment projects. Moreover, the government’s ample financing needs as a result of its large budget deficit drained liquidity in the Kingdom’s financial markets, pushing up interbank rates and hurting non-oil activities. While OPEC’s 30 November decision to cut production has succeeded in raising global crude prices, Saudi Arabia will not greatly benefit from this situation in the short term as it is responsible for most of the output reduction. To this end, it reduced its crude output from 10.62 million barrels per day (mbpd) in November to 10.47 mbpd in December and will make further cuts going forward.
Economic activity will decelerate further this year due to the ongoing cut in oil production. If successful, the government’s plan to diversify the Saudi economy away from oil will however boost growth in the longer term. Panelists expect that the economy will grow 0.5% this year, which is down 0.3 percentage points from last month's projection. The panel sees GDP growth accelerating to 1.9% in 2018.
UAE | Non-oil activity remains strong at the outset of the year
The UAE’s economy strengthened in the last few months of 2016 and has started the current year on a positive note, underpinned by improving economic conditions in the non-oil sector and an uptick in exports, with the country’s PMI rising uninterruptedly from October onwards. However, growth over last year as a whole is likely to have disappointed, due in part to lower oil prices. In addition, the non-oil sector was subdued, as the strength of the dirham hurt firms’ competitiveness and dented tourism, while fiscal austerity suppressed domestic demand. Looking ahead, Dubai’s World Expo 2020 plans to award USD 3 billion of construction contracts this year, which should provide a boost to the economy.
A recovery in the oil market should lift growth this year, although headwinds will remain in the form of the country’s tight fiscal stance and a strong currency, as the UAE will be forced to increase interest rates in lockstep with the U.S. Federal Reserve. FocusEconomics panelists expect GDP to rise 2.5% in 2017, which is down 0.1 percentage points from last month's forecast. In 2018, the panel sees GDP growth accelerating to 3.2%.
EGYPT | Government sells its first bond after FX revamp
The economy continues to suffer from the immediate effects of the liberalization of the pound and the arduous fiscal reform program the government has embarked on. A still bleak, albeit gradually improving PMI reading in January exposes the hardships businesses in Egypt are dealing with, including soaring costs of raw materials and subdued demand on the back of skyrocketing inflation. This, however, has not deterred the Egyptian government from pushing ahead with its reform-oriented agenda. Egypt’s compliance with many of the toughest reforms included in the IMF’s three-year plan has prompted a hasty return of many foreign investors to the country. With renewed trust in the currency, billions of U.S. dollars have made their way to local banks, alleviating the shortage of dollars that has plagued the economy for years. Upbeat sentiment in international markets was also confirmed on 26 January, when Egypt’s first tap into international markets since the devaluation saw the USD 4.0 billion Eurobond offering oversubscribed multiple times. These inflows will be partially used to further bolster the Central Bank’s international reserves, which in December rose to the highest level since August 2011.
Notwithstanding the severe short-term effects of the floating of the pound and structural reforms on both producers and consumers, Egypt is expected to gradually benefit from improved competitiveness and a return of foreign investment to the economy. FocusEconomics panelists expect GDP to expand 3.4% in FY 2017. The panel sees growth of 3.9% in FY 2018.
ISRAEL | Political developments take center stage at the start of the year
Israel’s economy grew at the fastest rate in three years in 2016 according to a preliminary result and the latest monthly indicators confirm the bright picture. In December, the state of the economy index grew at the fastest pace in two years and business confidence came in at a three-year high. The positive momentum was also reflected in the labor market, with the unemployment rate for 2016 the lowest on record. Although the country’s growth engines are ticking along nicely, some downside risks are clouding the horizon. Rating agency Moody’s praised Israel’s success in reducing debt but highlighted political tensions as a potential drag on growth going forward. On 6 February, the Knesset approved a controversial bill on the legalization of Israeli settlements in Palestinian-owned areas, which could heighten tensions with both international institutions and Palestine. Ongoing bribery investigations against Prime Minister Benjamin Netanyahu could prompt an early end to his term and therefore snap elections.
Israel’s economy is set to cool this year after 2016’s strong performance. Fiscal and monetary policy, which contributed to last year’s growth, are expected to be broadly steady this year. FocusEconomics panelists expect growth of 3.3% in 2017, which is unchanged from last month’s forecast. For 2018, the panel also projects growth of 3.3%.
INFLATION | Inflation jumps to an over one-year high in November
Inflation in the MENA region continued to rise in December, mainly due to higher readings among oil-importing countries. Inflation rose from 5.0% in November to 5.3% in December, the highest rate since June 2015. Far from being homogeneous, December’s print reflects divergent trends within the region. Inflation is declining among most oil-exporting nations, particularly in GCC countries, as the base effect related to subsidy removals at the start of 2016 has vanished and the strong U.S. dollar is making imports cheaper for those countries with a peg to the greenback. Conversely, higher energy prices due to the recent rise in commodity prices is pushing up prices among oil-importing economies. Moreover, in Egypt, the weakening of the pound caused inflation to hit a multi-year high in December.
FocusEconomics panelists expect inflation for the region to be 4.9% this year, which is up 0.1 percentage points from last month’s estimate. The panel sees inflation at 4.8% in 2018.
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Written by: Ricard Torné, Head of Economic Research