A MENA review
Risks to the region’s economic outlook this year remain balanced.
The beginning of 2017 started off with robust economic activity in the non-oil sector. FocusEconomics has estimated that the region’s aggregate GDP growth was at 2.6 per cent year-on-year in Q1, below the 3.3 per cent in Q4 and a notch above the 2.5 per cent its panel of analysts had initially projected.
The first half of the year witnessed several key events that could potentially shape the region’s performance for the rest of the year. In May, OPEC and other oil producers such as Russia agreed to extend the duration of the oil cuts to Q1 2018 in order to continue reducing the massive oil glut and supporting prices. Oil prices, however, retreated following the 25 May deal as investors demonstrate concern that further downward adjustments are needed to stabilise the global oil market. The nine-month extension is also said to have triggered fears that some countries could deviate from their oil-pumping quota and increase supply again.
Egypt is gradually recovering from the IMF-induced economic slump that followed the introduction of severe reforms in November in order to receive financial aid. FocusEconomics highlighted that growth accelerated timidly in Q1, despite stubbornly-high inflation, rising social unrest and budget austerity. A more stable economic environment has boosted capital inflows, which have likely translated into increased investment.
A main concern in the region is the political unrest following Bahrain, Saudi Arabia and the UAE’s decision to sever diplomatic ties with fellow GCC member, Qatar. Egypt, Libya, the Maldives and Yemen also cut off relations with the country. These countries also ended all land, sea and air contacts with Qatar amid claims that the country is sponsoring terrorism in the region. Regional carriers have suspended flights to and from Qatar and the market is yet to see the economic impact of these consequences.
In June, growth prospects for MENA were left stable as risks to the economic outlook appear to be broadly balanced, suggested the research and analysis firm. FocusEconomics suggests that the limited rise in oil prices is having a positive effect in the region. Even if it is not yet enough to allow most oil-export-driven countries to plug their massive fiscal imbalances and improve their current account balances, the mild price increase assists in alleviating liquidity stress in the domestic financial markets and enabling the economies affected to post better-than-expected budget figures.
Similarly, the weaker-than-expected rise in oil prices is shoring up private consumption among oil-importing economies and reducing pressure on their external sectors. Nevertheless, despite some improvements, security risks remain high in the region, hurting investor sentiment. Additionally, macroeconomic imbalances and delays in implementing structural reforms are dampening the potential for a sustained economic recovery in the mid- to long-term.
FocusEconomic’s analysts project MENA’s 2017 GDP growth outlook to be at 2.4 per cent, which would represent the weakest expansion since the height of the financial crisis in 2009. Reforms in a number of countries in the region is expected to start gaining traction going forward, while security risks are expected to ease. This, coupled with stronger crude production and rising oil prices, will prompt growth in the region to accelerate to 3.3 per cent in 2018.
The firm’s stable outlook for MENA reflects unchanged growth estimates for four of the 16 economies surveyed, including Egypt and Israel. Projections for Algeria, Iran, Iraq, Jordan, Kuwait, Lebanon, Qatar, UAE and Yemen were revised downwards, while the outlooks for Bahrain, Oman and Saudi Arabia were upgraded.
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, which are responsible for the lion’s share of the oil reduction under the OPEC agreement, are expected to perform poorly.
Of the rest of the major economies in the region, Israel, Egypt and Qatar will likely grow the fastest in that order. Yemen, which has been immersed in a prolonged civil war since 2015, will return to growth this year due to increased oil production and expectations that peace talks could finally materialise in the coming months.