Middle East & North Africa: Regional vulnerabilities threaten strong dynamism in non-oil sector
May 10, 2017
While official data for Q1 is still outstanding, high-frequency economic indicators corroborate that non-oil economic activity in the Middle East and North Africa (MENA) started the year on a solid note. According to preliminary estimates, the region’s aggregate GDP expanded 2.5% year-on-year in Q1, which is below the 3.0% growth in Q4.
In general, the region is benefiting from strengthening global demand. Moreover, higher oil prices, coupled with fiscal consolidation, are shoring up fiscal imbalances and taking some pressure off the domestic financial markets, particularly among oil-export-driven economies. Despite remaining high, security threats are slowly receding following the success of some regional governments’ fight against the so-called Islamic State (ISIL), which is boding well for regional growth in the mid-term. Also, the international community redoubled efforts in recent weeks to strike a peace deal in Yemen, which could put an end to years of war in the Arabic peninsula.
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Nevertheless, a series of factors are still dragging overall economic activity in the region. Firstly, some countries, particularly Iraq and Saudi Arabia, are sharply cutting oil production in compliance with the November-December oil deal, which is dramatically hitting growth among oil-exporting countries. While the landmark agreement boosted oil prices late in 2016, crude prices have stabilized at around USD 50 per barrel since the start of the year as other key producers are ramping up shale oil production. Against this backdrop, OPEC will likely announce an extension of the production cuts beyond the June deadline at the cartel’s 25 May regular meeting. In this regard, Russia and Saudi Arabia hinted at the possibility of prolonging cuts into 2018.
Some countries in the region are still undertaking sharp consolidation processes in an attempt to rein in soaring fiscal deficits. That said, improving budgetary performance and widespread social discontent could force some governments to gradually roll back some of the most controversial austerity measures adopted in recent years, as Saudi Arabia unexpectedly did in April. Finally, the region is struggling with long-lasting structural vulnerabilities, which are preventing some economies from reaching a sustainable cruising speed.
Non-oil economies continue supporting MENA’s 2017 growth prospects
The economic outlook for MENA was stable again this month as healthy momentum in the non-oil sector and higher oil prices have been balanced out by structural imbalances, fiscal consolidation in some countries and persistent geopolitical threats.
Analysts left MENA’s 2017 GDP growth outlook unchanged at last month’s 2.4%. If confirmed, it will represent the weakest expansion since the trough of the financial crisis in 2009. Further down the road, the region will benefit from stronger crude production and rising oil prices. Moreover, security risks are expected to ease going forward, while reforms in a number of countries in the region will start to gain traction. As a result, the panel sees growth picking up to 3.3% in 2018.
This month’s stable outlook for MENA reflects unchanged growth estimates for 5 of the 16 economies surveyed, including Algeria and the United Arab Emirates. Projections for Bahrain, Iraq, Israel, Kuwait, Qatar and Saudi Arabia were revised downward, while Egypt, Iran, Jordan, Morocco and Yemen all experienced upgrades to their economic outlooks.
Iran will be the best performer of the year as the country is reaping the benefits of its return to the international markets. At the other end of the spectrum, GCC countries, particularly Saudi Arabia, are expected to perform poorly, as they are responsible for the lion's share of the oil reduction under the OPEC agreement. Of the rest of the major economies in the region, Israel and Qatar will likely grow the fastest, with projected expansions of 3.3% and 3.2%, respectively. Yemen, which has been immersed in a deadly civil war since 2015, will return to growth this year due to increased oil production and expectations that peace talks could finally materialize in the coming months.
SAUDI ARABIA | King rolls back austerity on healthy budget figures
Non-oil activity performed strongly this year due to improving liquidity conditions and higher oil prices. The decline in oil production, however, is weighing heavily on overall growth. In a surprising decision, King Salman bin Abdulaziz Al Saud reinstated perks for public employees and military personnel on 22 April. While this move could derail the Kingdom’s effort to restore public finances, the decision is designed to quell public discontent following two years of austerity and came on the back of better-than-expected budget results last year. Moreover, King Salman announced new appointments in key positions, which aim at cementing the Vision 2030 economic plan and rejuvenating Saudi Arabia’s political structure.
The economy will decelerate to multi-year lows this year due to a decline in crude production in compliance with the OPEC deal and still low oil prices. Further down the road, however, growth will strengthen on the back of improved global economic dynamics, higher oil prices and ongoing structural reforms. Panelists expect the economy to grow 0.3% this year, which is down 0.1 percentage points from last month's projection, before accelerating to 2.1% growth in 2018.
UAE | Non-oil activity is supporting growth this year
The UAE’s economy has looked fairly sprightly so far this year thanks to a solid non-oil sector, with the PMI staying firmly in expansionary territory as firms enjoy supportive market conditions and stronger demand at home and abroad. This comes after likely limp growth last year, as a result of fiscal consolidation measures and a weak showing from the hydrocarbon sector. However, the UAE has weathered the storm of low oil prices better than many of its neighbors, thanks to its diversified economic base and high competitiveness, which has been strengthened by a new bankruptcy law which recently came into force. On the downside, the real estate market has remained weak, dented by the strong currency and the oil price fall.
Despite rising slightly, growth will remain modest in 2017, as OPEC oil production cuts and a tighter monetary policy dampen economic activity. However, looking further ahead the economy should pick up steam, as preparations for the Dubai 2020 World Expo boost investment and more oil production comes on stream. FocusEconomics panelists expect GDP to rise 2.5% in 2017 and 3.3% in 2018.
EGYPT | Green shoots need to keep on growing
Egypt’s economy seems to be gradually picking itself up, according to recent data. Although business conditions continue to deteriorate in the non-oil sector, the PMI rose to its highest level in nine months in April. Industrial production has surged so far this year, making up some of the ground lost in 2016, while Central Bank reserves shored up again last month as investors flock back to the country. Inflation looks to be near peaking, albeit at an excruciatingly high rate, with consumers’ purchasing power withering as a result. The IMF is currently in Cairo to assess the country’s progress since a bailout deal was signed last November, with a view to releasing the second tranche of funding in the coming months. The Fund is likely to give the green light, as economic reforms have so far been carried out at pace, with a new investment law to simplify business regulations and entice foreign investors the latest measure to be approved.
The economy is expected to lose steam in FY 2017, as fiscal consolidation measures dampen economic activity, while elevated inflation saps private consumption. However, looking further ahead growth should pick up as the country reaps the rewards of painful structural reform measures and an improved business environment. Analysts expect GDP to expand 3.1% in FY 2017, which is up 0.1 percentage points from last month’s forecast. For FY 2018, the panel sees growth accelerating to 3.8%.
ISRAEL | Cabinet approves stimulus package for families
The economy ended Q1 on a bright note as economic fundamentals remain strong. A tight job market and cheap loans are boosting sentiment among households, bringing consumer confidence to a multi-year high in March. Moreover, the country’s healthy growth momentum and increased global demand are supporting business confidence, which moved at record highs in the first months of the year. While exports remain in positive territory, the Central Bank is intervening in the foreign-exchange market to tame the appreciation of the shekel as it could derail Israel’s positive growth trajectory. On 3 May, the government approved the "Net Family" plan, which includes tax breaks and subsidies for families with children. While the cost of the program is expected to amount to ILS 5 billion (USD 1.4 billion), critics claim that the plan contains no extra revenue and that it will increase the budget deficit for this year
Domestic demand will decelerate this year as higher inflation will dent household spending and investment will moderate following last year’s surge. That said, a still accommodative monetary policy and a robust labor market will support growth this year. FocusEconomics panelists expect growth of 3.3% in 2017, which is down 0.1 percentage points from last month’s forecast. For 2018, the panel projects growth of 3.4%.
INFLATION | Inflation climbs again in March
Inflation increased in March to a three-month high, reflecting rising inflationary pressures across the region. According to a regional aggregate elaborated by FocusEconomics, inflation came in at 5.0% in March, which was above the 4.8% recorded in February. Overall, inflation is mounting on the back of higher food prices. Among oil-importing countries, higher oil prices compared to last year are fueling inflationary pressures. In Egypt, inflation continues to climb as a result of the IMF-backed measures approved at the end of last year in order to restore economic stability. However, in most oil-exporting economies, the strength of their currencies are shielding their economies against a sharp rise in inflation.
Inflation is expected to remain near current level for the rest of this year. FocusEconomics panelists foresee inflation for the region to be to 5.0%, which is unchanged from last month’s estimate. This month’s stable inflation outlook for 2017 reflects unchanged projections for 6 of the 16 economies surveyed, including Israel, Saudi Arabia and the United Arab Emirates. The panel sees inflation broadly stable at 5.1% in 2018.
Written by: Ricard Torné, Head of Economic Research