Middle East & North Africa: Regional growth withstands mounting geopolitical risks in Q3
January 9, 2019
The Middle East and North Africa region continued to defy rising geopolitical threats and expanded at a still-robust pace in the third quarter. According to an estimate by FocusEconomics, the MENA economy expanded an aggregate 2.0% annually in Q3. The print was a notch below both Q2’s 2.1% expansion and the 2.2% rise projected last month.
The third-quarter’s solid print was powered by oil-exporting countries, which benefited from higher oil prices and increased production in the quarter. The ramp-up in production followed the output gap left by Iran ahead of the 4 November 2018 deadline established by the U.S. to reimpose the lion’s share of economic sanctions against the country. Meanwhile, although the Central Bank of Iran has not yet published data for the July–September period, the Statistical Institute released an estimate for the period, which shows a contraction of 1.6% in annual terms. A large depreciation of the rial following the announcement of new U.S. sanctions in early May of last year appears to have crippled the economy, while the oil sector managed to post an expansion. Economic data for oil-importing nations, which were mostly covered in the previous edition, revealed that growth moderated slightly in Q3.
Oil prices remained suppressed in recent weeks despite the decision by OPEC and Russia on 7 December to cut oil production by 1.2 million barrels per day, effective January 2019. In the first days of January, the deal to slash oil production does not yet seem to have significantly boosted prices. Downbeat prices reflect surging production in the United States as well as robust output among the OPEC members and Russia in late 2018. There are also doubts over whether the U.S. will extend the waivers granted to eight countries which buy Iranian oil; they are currently set to expire in early May and their removal should increase prices. Moreover, a somber outlook for the global economy this year is threatening to reduce demand for the black gold. On a separate note, Qatar announced on 3 December that it would withdraw from OPEC on 1 January 2019. While Qatar stated that the move was reflective of an increasing focus on the country’s all-important gas sector, analysts note that the political rift with Saudi Arabia largely triggered the decision.
The political climate has been worsening across the region in the last few weeks. On 24 December, Israel announced snap elections for 9 April on the back of the more-than-likely indictment of Prime Minister Benjamin Netanyahu and the current government’s slim majority in parliament following the withdrawal of some junior coalition partners. In Lebanon, politicians are unable to form a government eight months after the first elections in nearly a decade. The political stalemate is impeding the implementation of much-needed economic reform, which triggered credit rating downgrades by key ratings agencies in recent weeks. In Tunisia, the country is bracing for political upheaval this year. The secularist camp, which currently controls both the presidency and the prime ministerial post, is heading to the 2019 December general elections highly divided. Supporters of Prime Minister Youssef Chahed have announced he will unveil a new political party, Amal Tounes, on 27 January, which will compete against Nidaa Tounes of President Beji Caid Essebsi. Around half of current Nidaa Tounes MPs have switched to the new Amal Tounes party.
Oil price volatility and political unrest weigh on MENA’s outlook for 2019
Two factors represent the main risks to the Middle East and North Africa’s growth prospects this year: volatility in the oil market and mounting geopolitical tensions. A sustained period of low oil prices could seriously hit growth prospects for oil-exporting economies, which represent the bulk of MENA’s nominal GDP. Iran still represents the main geopolitical risk in the region. On top of a weak economic performance due to the imposition of new economic sanctions by the United States, a harsher stance taken by the U.S. and its allies in the region against Iran, particularly Saudi Arabia, could prompt the Shia state to use its growing influence in the region to destabilize other regimes. Moreover, domestic political tensions are rising in the region, particularly in Israel, Lebanon, Saudi Arabia and Tunisia.
FocusEconomics Consensus Forecast panelists expect the region to expand 2.1% in 2019, which is down 0.2 percentage points from last month’s estimate, and 2.8% in 2020.
The 2019 growth projections for Algeria, Bahrain, Iran, Iraq, Kuwait, Lebanon, Saudi Arabia and the UAE were revised downwards this month. Forecasts for Jordan, Oman and Qatar were revised up, while the region’s remaining economies saw their 2019 estimates unchanged.
Egypt is expected to be the region’s top performer in 2019, while Iraq and Yemen will complete the podium. That said, the outlook for Yemen, which remains entangled in a civil war, could be severely downgraded in the coming months if recent peace initiatives do not bear fruit. Iran—under siege by new U.S. economic sanctions—will be the weakest performer.
SAUDI ARABIA | An expansionary budget for 2019 to boost growth
The economy benefited from increased crude oil production and higher prices for the black gold in the third quarter, prompting GDP to expand at the fastest pace in two-and-a-half years. Although growth in non-oil private activity accelerated slightly, it remained low compared to historical figures. Subdued dynamics in the private sector, a rising unemployment rate and low levels of foreign investment are casting doubts over the much-trumpeted Saudi Vision 2030. In order to shore up economic growth, on 18 December, the government announced an expansionary budget for 2019, which focuses on boosting capital expenditure. Analysts, however, warn that the projected revenues could be on the optimistic side. While the implied price is about USD 70 per barrel, oil prices have fallen in recent weeks and hit an over one-year low of USD 50.1 per barrel on 26 December.
The economic recovery should broaden this year due to renewed fiscal stimulus, which should support domestic demand. Although the Saudi government sees the recent drop in oil prices as temporary, it is still unclear whether the recently-approved oil production cut will be enough to push up oil prices. Our panel expects growth of 2.5% in 2019, which is up 0.1 percentage points from last month’s projection. In 2020, growth is seen decreasing to 2.3%.
ISRAEL | Netanyahu calls snap election; economic dynamics remain robust
The fourth quarter seems to have followed in the footsteps of the rapid domestic-demand-driven economic growth observed in the third quarter. Consumer confidence in November reached its highest level since the survey began on a broad-based improvement. In the same month, the Composite State of the Economy Index edged higher thanks to a solid domestic economy, as the external sector dragged on growth somewhat. The index thus trended markedly above the average reading of the third quarter in October–November. Moreover, November PMI data highlighted improved business conditions in the manufacturing sector thanks to resilient domestic-demand dynamics, which offset a drop in foreign demand. Although exports contracted in the same month, the trade deficit narrowed owing to a moderation of import growth. In the political arena, Prime Minister Benjamin Netanyahu announced snap elections on 24 December, moving the scheduled general elections forward by six months as a police investigation accusing Netanyahu of corruption reached its climax.
The economy is expected to be buttressed by domestic forces: Private consumption should benefit from a lower tax burden and still-favorable financial conditions, while fixed investment should reap the fruits of new gas- and oil-related projects. Regional tensions remain a key downside risk, however, clouding the outlook. FocusEconomics Consensus Forecast panelists forecast economic growth to moderate to 3.2% in 2019, which is unchanged from last month’s forecast. In 2020, our panel sees the economy expanding 3.3%.
UAE | Plummeting oil prices likely drag on the economy in Q4; growth in the non-oil sector steady
Economic momentum appears to have taken a hit in the last quarter of the year due to nosediving oil prices in the period. Nevertheless, growth in the non-oil sector remained steady in Q4, as reflected by PMI data up to November, which suggests annual non-oil GDP growth in 2018 broadly matched the preceding year. However, the stock market in Dubai posted its worst annual performance since 2008 with a 25% fall, owing to oversupply and falling prices in the critical real-estate market; in contrast, the Abu Dhabi stock index performed robustly. Looking at 2019, Dubai unveiled its annual budget on 1 January, which was broadly stable from 2018’s record expenditures, with a continued focus on infrastructure investment to prepare for Expo 2020. This spending will supplement the largest budget in history which was recently enacted at the federal level.
Despite uncertain prospects in the oil market, the economy appears ready for liftoff this year, propelled by multiple tailwinds. In addition to strong fiscal stimulus, both at the federal and emirate level, and the Expo 2020-related infrastructure push—which should buoy construction and tourism activity—the country should benefit from a surge in FDI inflows thanks to its recent landmark investment reform and business-friendly laws enacted in past months designed to ease the cost of doing business. Nevertheless, a global growth slowdown, which is expected to continue to weigh on oil prices, and increased financial volatility could somewhat cloud this rosy outlook. FocusEconomics panelists expect GDP to increase 3.1% in 2019, which is down 0.1 percentage points from last month’s forecast, and 3.3% in 2020.
EGYPT | Growth appears to continue to soften in Q2 of FY 2019
The economy appears to have had some growing pains in the second quarter of fiscal year 2019—which covered October to December 2018—following a small slowdown in the first quarter. The non-oil private sector was stuck in contractionary territory in November for the third consecutive month, according to survey data. The continued downturn in the sector was led by a decline in output and new orders, although both declines were less pronounced than in October. Meanwhile, a deadly bombing of a tourist bus near the Giza pyramids in late December sent shockwaves through the tourism sector, which remains in recovery-mode after the Arab Spring in 2011 and bombing of a passenger jet near Sharm el Sheikh in 2015. More positively, the World Bank signed off on USD 1 billion of financial support to Egypt on 9 December, adding to the USD 3.2 billion already committed since 2015.
This fiscal year, economic growth should be robust thanks to higher government investment spending, rising natural gas production and an improving regulatory environment. However, despite reducing in recent years, fiscal imbalances continue to weigh on economic prospects. FocusEconomics panelists expect GDP to expand 5.2% in FY 2019, which is unchanged from last month’s forecast, and 5.3% in FY 2020.
INFLATION | Iran boosts regional inflation in November
Inflation in the Middle East and North Africa region climbed to a multi-year high in November, mostly reflecting spiraling price pressures in Iran due to a weak rial in the parallel market. Although the rial traded in the black market has strengthened since President Trump announced waivers on Iranian oil sanctions for some countries in early November, the spread between the official and the unofficial rates remains large. According to an aggregate produced by FocusEconomics, inflation in the region rose from 8.4% in October to 8.7% in November.
In order to defend their currency pegs with the U.S. dollar, a number of countries in the region, including Saudi Arabia and the UAE, raised their reference rates just after the U.S. Federal Reserve hiked the target range for the federal funds rate on 19 December.
FocusEconomics panelists forecast that regional inflation will average 7.3% in 2019, which is up 0.6 percentage points from last month’s estimate. The sharp revision reflects a massive upward revision to Iran’s inflation forecast. In 2020, regional inflation is expected to decline to 5.7%.