Middle East & North Africa Economic Outlook July 2017

Political turmoil adds to woes of an economy chugging along in low gear

Middle East & North Africa: Political turmoil adds to woes of an economy chugging along in low gear

July 5, 2017

The oil cap deal signed by key producers drove the Middle East and North Africa’s (MENA) economy to expand at the weakest pace in over one year in Q1. According to preliminary estimates, the region’s aggregate GDP growth was 2.7% year-on-year in Q1, sharply down from the revised 4.9% in Q4. Recently released and revised data for SH 2014, SH 2015 and the first three quarters of SH 2016 in Iran led to a sizeable revision of the region’s growth estimates for the Q3 2014–Q4 2016 period. 

Saudi Arabia lead the deceleration as the country delivered the lion’s share of the oil output reduction under the November deal among OPEC and non-OPEC members to reinvigorate crude prices. That said, growth in the non-oil private sector accelerated as reduced government domestic borrowing took some pressure off financial markets, resulting in lower interest rates. The strong health of the non-oil sector is evident across the region as growth in the relatively-diversified Qatari economy accelerated in the same period and leading indicators for some countries in the region are pointing to resilient non-oil activity in Q2. Among non-oil-exporting countries, growth in Israel decelerated in Q1 as private consumption and investment returned to normal following last year’s surge. In Tunisia, higher production of phosphate and a recovering tourism sector fostered economic growth. 

While the regional economy decelerated in Q1, the political environment is heating up as the crisis in the Gulf seems far from being over. On 3 July, Saudi Arabia and its allies extended Sunday’s deadline for Qatar to meet the list of 13 demands by two days after the Qatari government submitted its response to Kuwait, which is acting as a mediator, the day before. BahrainEgypt, Saudi Arabia and the United Arab Emirates had issued a list of 13 demands on 23 June that Qatar had to agree to before 2 July, including the shutdown of broadcaster Al-Jazeera, a scale down in its ties with Iran and closing a Turkish military base. Qatari foreign minister Sheikh Mohammed bin Abdulrahman Al Thani has already stated that Qatar is ready to discuss security issues in the region but that the country will never agree to any limitation on its sovereignty. Moreover, he stated that Saudi demands are made to be rejected, suggesting that the end of the political crisis is nowhere in sight.

The political strife between Qatar and other Arab countries reflects the rising influence of the small island in the region and also its independence from Sunni superpower Saudi Arabia. Qatar enjoys a close relationship with Iran and both countries share ownership of the world’s largest natural gas field. The U.S. role in the crisis has been controversial as President Donald Trump endorsed the blockade while some U.S. officials encouraged further dialog. At this stage it is difficult to assess the impact of the crisis on the global economy, but it certainly has the potential to trigger an escalation in the region. 

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Mounting political risks hit MENA’s 2017 economic outlook 

The political unrest that erupted on 5–6 June when Saudi Arabia and other Arab countries cut off diplomatic ties with Qatar and imposed an air, land and sea embargo is weighing on MENA’s economic outlook. While the economic impact for the region, excluding Qatar, has been rather limited for now, the possibility of an escalation that could negatively reverberate across the region cannot be ruled out. Moreover, evidence that the global oil glut is not fading is adding extra pressure on oil-producing countries. Against this backdrop, analysts cut MENA’s 2017 GDP growth outlook by 0.2 percentage points to 2.2%, which would represent the weakest expansion since the height of the financial crisis in 2009. Growth in the region is expected to accelerate to 3.3% in 2018.

This month’s downgrade to MENA’s 2017 economic outlook reflects downward revisions for 6 of the 16 economies surveyed, including Iran, Qatar, Saudi Arabia and the United Arab Emirates. Growth prospects improved in Egypt, Iraq and Lebanon, while projections were left stable in Algeria, Bahrain, Israel, JordanMorocco, Tunisia and Yemen

Iran is forecast to be the best performer of the year as the country benefits from its reintegration into the global arena. At the other end of the spectrum, GCC countries are expected to perform poorly. Of the rest of the major economies in the region, Egypt will likely grow the fastest followed by Israel. Yemen, which has been immersed in a prolonged civil war since 2015, will barely return to growth this year due to increased oil production and expectations that peace talks could finally materialize in the coming months. 

SAUDI ARABIA | Economy contracts for first time since 2009 in Q1

The economy contracted in Q1, reflecting the implementation of November’s oil cut deal. On the upside, growth among non-oil private activities due to improved liquidity conditions and higher crude prices compared to the previous year. In the political arena, Mohammed bin Salman cemented his grip on Saudi politics after King Salman bin Abdulaziz Al Saud issued a decree on 21 June appointing him as the new crown prince and, consequently, the next in line for the throne. Salman is expected to continue with the implementation of the reform agenda, which aims at diversifying the country’s economy away from the oil sector. That said, we could see a rise in political instability as Salman also supports a tougher approach to Iran, the Kingdom’s arch-rival in the region. Other pressures are mounting within the region due to the economic and diplomatic blockade against Qatar that Saudi Arabia and its allies implemented on 5 June. While the economic impact of the embargo on the Saudi economy is expected to be limited, an escalation of the crisis cannot be ignored.

The decline in crude production related to the OPEC oil deal is weighing on growth this year. However, the country is expected to benefit from higher oil prices and increased supply, plus the reform agenda should bear fruit further down the road. Panelists expect the economy to grow 0.2% this year, which is down 0.2 percentage points from last month's projection, before accelerating to 2.0% growth in 2018. 

UAE | Non-oil activity remains strong in H1 2017

The economy remains in fairly good shape, with the PMI staying firmly in expansionary territory so far this year as non-oil sector firms benefit from solid domestic demand, while the number of tourist arrivals increased significantly in Q1 despite a stronger dirham. The economy has weathered the storm of low oil prices better than its GCC neighbors thanks to a relatively diversified economy and significant fiscal buffers. In addition, the relative ease of doing business in the country is a major draw for foreign investors, with the UAE rising five places to 10th in the latest World Competiveness Ranking. However, these strengths didn’t stop growth from dropping last year as a result of fiscal consolidation and depressed hydrocarbon exports. On the political front, although the ongoing diplomatic spat with Qatar has disrupted trade and finance flows, mercifully for domestic firms vital gas supplies remain unaffected.

Growth will decelerate further in 2017, as the extension to OPEC oil production cuts dampens economic activity. However, the non-oil sector should pick up some of the slack, thanks to more gradual fiscal consolidation, stronger external demand and greater investment in preparation for the Dubai 2020 World Expo. FocusEconomics panelists expect GDP to rise 2.1% in 2017, down 0.2 percentage points from last month’s forecast, and 3.4% in 2018. 

EGYPT | Central Bank scraps currency controls 

The economy looks to be on the mend, and the Central Bank recently felt confident enough to lift restrictions on foreign exchange transfers. This is a reflection of international reserves which are now substantially higher than a year ago, after a sizeable uptick in May that was likely spurred by the approval of the second tranche of IMF bailout funding. The move should make it easier for firms to import inputs and boost industrial production, which is already booming so far this year following a dire performance in calendar year 2016. However, ordinary Egyptians are hurting and have shouldered a large part of the burden of recent reforms; inflation is eroding purchasing power, while unemployment, particularly among the young, is still worryingly high. Price pressures are likely to be stoked further by a second fuel subsidy cut in June. In a bid to ease the pain, the government recently announced a USD 4.2 billion social package, which sets out plans to roughly double food subsidies and raise pensions. 

The economy will gather pace in FY 2018, as investment grows strongly thanks to an improved business environment and structural reforms, while slowly declining inflation should boost consumers’ purchasing power, aiding private consumption. Analysts expect GDP to have expanded 3.4% in FY 2017, and forecast growth of 3.9% in FY 2018, which is unchanged from last month’s forecast. 

ISRAEL | Economy in good shape in Q2  

The slowdown in GDP was confirmed when revised data for Q1 showed that the economy had grown just 1.2%, down from 4.6% in Q4. Private consumption declined sharply on the back of fewer durable goods purchases and car imports. As large investment projects were concluded by the end of Q4, fixed investment recorded a drop in Q1 as well. In Q2, however, economic fundamentals appear to be relatively solid. Although business confidence recorded a slight decrease compared to the previous month in May, the index remains firmly in positive territory. Consumer confidence jumped up in the same month to reach a multi-year high on the back of rising wages and low unemployment. Moreover, exports rebounded strongly in May, expanding at the fastest pace in eight months. Imports, however, contracted sharply in the same month. 

Growth momentum is expected to moderate slightly this year as one-off developments that boosted growth last year will fade away. That said, strong labor market conditions and an accommodative monetary policy should buttress private consumption. Recovering exports will further propel GDP growth. FocusEconomics panelists expect growth of 3.3% in 2017, which is unchanged from last month’s forecast. For 2018, the panel projects growth of 3.4

INFLATION | Inflation falls to seven-month low in May

According to a regional aggregate produced by FocusEconomics, inflation came in at 4.2% in May, well below the 4.9% recorded in April. Recent volatility in commodities prices is alleviating inflationary pressures among oil-importing countries, while strong currencies are preventing oil-exporting economies from experiencing a surge in inflation. This month’s reading mainly reflected lower price pressures in Algeria, Bahrain, Egypt, Iran, Lebanon, Qatar, Saudi Arabia, Tunisia and the United Arab Emirates.

Inflation is expected to rise in the coming months. FocusEconomics panelists foresee regional inflation at 5.0% on average in 2017, which is down 0.1 percentage points from last month’s estimate. This month’s downward revision to the inflation outlook for 2017 reflects lower prospects for 7 of the 16 economies surveyed. The panel sees inflation broadly stable at 5.1% in 2018. 

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