MENA Economic Outlook October 2017

Oil prices rally to two year high in late September amid rebalancing of supply and demand

MENA: Oil prices rally to two-year high in late September amid rebalancing of supply and demand

October 4, 2017

The economy of the Middle East and North Africa (MENA) region continued to expand at a moderate pace on diverging trends, with oil-producing countries feeling the effects of OPEC-dictated cuts and oil-importing economies benefiting from resilient domestic demand and improving global dynamics. A second estimate for the region shows that growth was 2.0% in the second quarter, slightly below the 2.2% year-on-year increase initially reported. The downward revision followed more complete data for the region’s individual economies, which saw Saudi Arabia falling further into contractionary territory and Qatar struggling to grow in annual terms.

Saudi Arabia, the region’s heavyweight, entered into recession in the second quarter as crude output cuts continued to weigh on the oil sector and authorities’ fiscal consolidation drive dragged on the non-oil private sector. The country is grappling with tight liquidity in the domestic market and a gaping fiscal deficit despite higher oil prices compared to a year ago, which has prompted authorities to resort to tapping into international bond markets. In late September, Saudi Arabia issued USD 12.5 billion in its third multi-billion dollar bond issue so far this year. Through a royal decree issued on 26 September, the Saudi government announced its intention to allow women to drive next year under certain conditions, a move that signals a renewed push for reform. The move is expected to greatly benefit several sectors in the Saudi economy and lead to higher participation of women in the workforce.

Similarly, the Qatari economy slowed down in the second quarter to its lowest rate since the height of the global financial crisis. The result, which included most of the first month of the economic blockade imposed by several Arab states led by Saudi Arabia, suggests that the trade embargo was not overly crippling for the economy, with growth largely being weighed down by the government’s commitment to OPEC cuts to oil production. In addition, recent trade figures show that the Qatari economy has successfully established alternative trade routes for goods previously sourced from Saudi Arabia and the UAE.

Meanwhile, oil prices were on a tear through most of September as strong global growth sustained demand and efforts to resume operations in the Gulf Coast following Hurricane Harvey added pressure on U.S. crude stockpiles. In addition, the political row that followed an independence referendum in late September in the Iraqi Kurdistan region has also added the potential for supply shocks in the market. Turkish President Recep Tayyip Erdogan threatened to block oil exports from the region, while Iraq called for all foreign countries to stop importing Kurdish crude. These moves threaten around 600,000 barrels per day in output.

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Economy set to recover mildly next year  


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The economic outlook for the Middle East and North Africa continues to be weighed down by geopolitical risks and structural imbalances across countries. The region is expected to grow 2.0% this year which would, if achieved, match the feeble expansion observed at the height of the financial crisis in 2009. However, GDP growth is expected to regain some of its footing next year as the adjustment in oil markets runs its course, with most oil-producing economies forecast to grow at quicker rates. Our panel projects regional growth of 3.1% in 2018, which is unchanged from last month’s forecast.

This month’s stable growth prospects for MENA reflect unchanged projections for 4 out of the 16 economies surveyed, including Iran. The estimates for a majority of countries, including heavyweights Saudi Arabia and UAE, were downgraded this month. Conversely, forecasts for Algeria, Egypt, Jordan and Oman were upgraded.

The Yemeni economy is expected to perform robustly in 2018 as panelists anticipate an end to the civil war. At the other end of the spectrum, Saudi Arabia is expected to be the region’s laggard as a result of the government’s austerity measures. Of the remaining major economies in the region, Egypt is expected to experience the fastest growth rate. 

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SAUDI ARABIA | Economy enters recession in Q2

The economy contracted for a second consecutive quarter in Q2 as the oil sector struggled with subdued crude prices and output, and the non-oil private sector faced reduced government support. Low oil prices, coupled with the country’s commitment to cutting crude output per last November’s OPEC deal, are weighing on investment and household consumption. In the third quarter, the economy is expected to have performed somewhat better, with PMI readings suggesting strong new orders and export demand growth. More importantly, oil prices hit a two-year high at the end of September. However, the economy is not yet out of the woods, as outstanding bank loans continued to fall in July and August, pointing to persistent weakness in the private sector. In addition, while the country’s fiscal performance in H1 was better than expected, foreign reserves in August fell to their lowest level since April 2011 due to the gaping fiscal deficit.

Because of a weak oil sector and unfavorable dynamics in the non-oil private sector, the economy is expected to shrink 0.4% this year. Looking to 2018, the Saudi economy is seen growing again as infrastructure spending growth accelerates, oil prices continue to rise and private consumption proves resilient even with the implementation of VAT and an energy price reform. FocusEconomics Consensus Forecast panelists pencil in growth of 1.5% next year, which is down 0.1 percentage points from last month’s projection.

UAE | Economic dynamics strengthen on healthy non-oil sector

The economy continues to expand at a moderate pace, with the non-oil sector powering growth. In August, the PMI reached its highest level in over two years on the back of greater domestic and external demand, leading to further employment growth. A testament to the country’s economic strength came in September, when the economy was ranked the 17th most competitive in the world in the 2017 Global Competitiveness Report published by the World Economic Forum (WEF). In response to the strengthening economy, the Central Bank removed excess liquidity from the banking system for the second consecutive month in August. However, despite its multiple strengths and diversified economic base, the UAE is still running a budget deficit as a result of low oil prices. In order to strengthen the fiscal position, new excise taxes on tobacco, energy and fizzy drinks came into force on 1 October.

The economy should pick up speed next year thanks to higher oil prices, stronger external demand and greater fixed investment in preparation for the Dubai 2020 World Expo. FocusEconomics panelists expect GDP to rise 2.0% in 2017 and 3.1% in 2018, which is down 0.1 percentage points from last month’s forecast

EGYPT | Economy makes progress despite austerity measures  

The economy continues to firm up, thanks to the government’s bold reform agenda and improved international competitiveness due to a weaker pound. In August, the non-oil private sector PMI climbed closer to positive territory on the back of greater new export orders, and international reserves rose for the eleventh straight month to USD 36.5 billion in September, signaling renewed investor confidence. In September, the IMF praised the government’s progress on structural reforms, which have included new investment and licensing laws designed to attract more foreign investment. As a result, the country is likely to receive the third tranche of bailout funding following a second program review in November this year. However, inflation is painfully high, fanned by recent fuel and electricity subsidy cuts and a rise in VAT, which is hurting Egyptian consumers and dampening private consumption.

The economy should gather speed going forward. Recent laws designed to enhance the business environment are likely to boost investment, while consumer spending should recover as inflation declines and the depreciated pound boosts exports. FocusEconomics analysts expect GDP to expand 4.1% in FY 2018, up 0.1 percentage points from last month’s forecast, and 4.6% in FY 2019.

ISRAEL | Q2 economic growth fueled by robust domestic demand

Revised data confirmed that the Israeli economy grew at a much higher rate in Q2 compared to the previous quarter, despite a slight downward revision to the initial estimate. The expansion was driven by solid growth in private consumption and fixed investment; exports, however, contracted sharply. Indicators for the third quarter show that the economy is continuing its solid performance: Unemployment fell in July, which bodes well for private consumption, while in August business confidence remained high and the State of the Economy index rose again. In early September, Benjamin Netanyahu’s cabinet approved a five-year USD 32.4 billion infrastructure plan. The plan is aimed at increasing productivity and the growth potential of the economy.

Solid private consumption, supported by a tight labor market and accommodative monetary policy, and fixed investment are expected to drive growth this year and the next. A potential flare-up in the Israel-Palestine conflict and a tight housing market present risks to the downside. FocusEconomics panelists expect growth of 3.3% in 2017. For 2018, the panel projects GDP growth will be 3.4%, down 0.1 percentage points from last month.

INFLATION | Inflation steady in August

According to a regional aggregate produced by FocusEconomics, inflation again came in at an over one-year low of 4.0% in August, mirroring July’s reading. Softening price pressures were observed across several countries in the region, including Egypt, Iran, Kuwait, Qatar and the UAE. On the other hand, inflation accelerated in Algeria, Bahrain, Lebanon, Morocco, Oman and Tunisia. The annual drop in consumer prices was also more moderate in Israel and Saudi Arabia compared with the previous month.

Inflation is expected to rise in the months ahead as several GCC countries broaden their tax bases and oil prices continue to gradually increase. FocusEconomics panelists forecast regional inflation of 4.9% in 2017. Next year, inflation is expected to be largely stable at 5.2%, which is unchanged from last month’s estimate.

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