Coronavirus measures and low oil prices take their toll - Capital Economics
Middle East & North Africa Economics

Coronavirus measures and low oil prices take their toll

Middle East Chart Book
Written by William Jackson
Cancel X

The early signs from the Middle East and North Africa are that efforts to contain the coronavirus and the collapse in oil prices are dealing a heavy economic blow. Whole economy PMIs plunged to record lows in March, flight cancellations are widespread and weak external demand is leading to a sharp drop off in exports. Strains in the balance of payments have forced several countries to turn to the IMF. And the Gulf economies are drawing down their FX savings in order to protect their dollar pegs, which we expect to remain intact. Some countries have started to lift restrictions in recent days but it will take some time for a return to anything resembling normality. What’s more, the limited policy support means that economic recoveries are likely to slow going compared with other parts of the world.

  • The early signs from the Middle East and North Africa are that efforts to contain the coronavirus and the collapse in oil prices are dealing a heavy economic blow. Whole economy PMIs plunged to record lows in March, flight cancellations are widespread and weak external demand is leading to a sharp drop off in exports. Strains in the balance of payments have forced several countries to turn to the IMF. And the Gulf economies are drawing down their FX savings in order to protect their dollar pegs, which we expect to remain intact. Some countries have started to lift restrictions in recent days but it will take some time for a return to anything resembling normality. What’s more, the limited policy support means that economic recoveries are likely to slow going compared with other parts of the world.
  • The coronavirus outbreak has continued to spread across the region with the number of new cases rising. All countries announced draconian measures to contain the virus and these have only been relaxed marginally as Ramadan commenced.
  • Saudi Arabia’s economy has suffered amid steps to contain the coronavirus and developments in the oil market will exacerbate the downturn. Oil production cuts mean the oil sector will act as a major drag on activity. The dollar peg has come under pressure but comments from officials support our view that they will rely on a period of fiscal consolidation to make the adjustment to cheap oil.
  • The UAE has among the highest case figures in the region, though, this has also come about due to a huge ramp up in testing. Lockdown measures have weighed on activity, with traffic congestion well below normal levels and almost all flights in and out of the country cancelled.
  • Across the rest of the Gulf, the impact from deeper OPEC+ oil output cuts will weigh heavily on the likes of Kuwait. The further plunge in oil prices will put severe strains on countries’ balance sheets.
  • Egypt’s economy is in the midst of a sharp downturn and strains in the balance of payments have prompted the government to return to the IMF for financial support. A key priority for the Fund is likely to be for the central bank to loosen its grip on the pound.
  • In the rest of North Africa, Morocco and Tunisia both turned to the IMF in the past month to help them through the current economic downturn.
  • Lebanon’s economic crisis has deepened and tensions between the central bank and government will make it difficult to push through a reported rescue plan. Jordan also headed to the IMF this month to agree to a new financing package to replace the deal that expired in March. The lockdown has hit the economy hard given its heavy reliance on tourism.
  • Financial markets recovered from the sell-off in March. Equity markets gained some of the lost ground but still underperformed. Sovereign dollar bond spreads narrowed pretty much across the board. The key exception was Oman amid growing concerns over the country’s weak balance sheet.

Coronavirus

  • The coronavirus outbreak has worsened in the region over the past month. Saudi Arabia, the UAE and Qatar lead the way in the number of cases and so far, there are little signs that they are approaching the peak (1). Increased testing in some of the worst affected countries has, admittedly, pushed up the case figures – for example, more than 10% of the UAE’s population has now been tested (2)
  • Relative to the size of the population, Qatar and Bahrain have been the most affected (3). There are early signs that measures that have been announced to control the outbreak may be having an effect, with the number of new cases starting to flatten off (4) In terms of deaths relative to the number of confirmed cases, Algeria has been the most affected so far (5).
  • Over the past couple of weeks, containment measures have been eased very slightly. For example, in the UAE, several flights were charted to allow foreigners to leave the country. Curfews have been relaxed (marginally) too coinciding with the start of Ramadan. However, the stringency of these policies is still extremely high and are likely to remain so for some time (6)

Chart 1: Confirmed Coronavirus Cases (Log-Scale)

Chart 2: COVID-19 Tests (per 000 Population)

Chart 3: Confirmed Coronavirus Cases
(per mn Population)

Chart 4: Daily New Coronavirus Confirmed Cases
in MENA

Chart 5: Deaths (per 1000 Confirmed Cases)

Chart 6: Total Confirmed Coronavirus Cases & Policy Stringency Index

Sources: CEIC, Refinitiv, Markit, Capital Economics


Saudi Arabia

  • Efforts to contain the coronavirus outbreak and developments in the oil market are hitting Saudi Arabia’s economy hard. March’s whole economy PMI dropped to a record-low of 42.4 (7). Meanwhile, ATM withdrawals and point of sale transactions, proxies for consumer spending, dropped by almost 10% y/y last month (8). April is likely to have been even worse.
  • The plunge in oil prices and a fresh round of oil output cuts will exacerbate the downturn. Brent crude has sunk and stands at just $25pb. The Kingdom reversed course on last month’s decision to ramp up oil production and agreed with OPEC and other oil producers to a fresh round of output cuts. As a result, the oil sector will act as a major drag on the economy over the coming months (9).
  • The Kingdom is now running large budget and current account deficits (10). The budget recorded a deficit of SAR34.1bn in Q1, compared with a surplus of SAR27.8bn in the same period of 2019. Pressure has mounted on the dollar peg (11) and FX reserves were drawn down by $27bn in March (12). But we expect the peg to remain intact and, instead, the authorities look set to rely on austerity to make the adjustment to cheap oil – cuts to budgeted spending of 5% have been announced.

Chart 7: Whole Economy PMI

Chart 8: Sum of ATM Cash With. & Point of Sale Trans.

Chart 9: Oil Production (% y/y)

Chart 10: Budget & Current Account Balances (% of GDP)

Chart 11: Saudi Riyal (vs. $, Inverted)

Chart 12: Foreign Exchange Reserves ($bn)

Sources: CEIC, Refinitiv, Capital Economics


United Arab Emirates

  • The spread of coronavirus in the UAE has yet to show any firm signs of slowing down, with the number of new cases continuing to rise (13).That said, this has coincided with a marked pick up in the rate of testing – more than 10% of the population has now been tested.
  • Social distancing and travel restriction measures have eased slightly since the start of Ramadan, but economic activity is still very weak. While some flights have resumed to allow foreigners to return home, cancellations remain high (14). Traffic congestion in Dubai and Abu Dhabi are still well below normal levels (15). And figures from Google on mobility in retail and recreation sectors show that closures have resulted in a sharp drop in activity (16).
  • All of this is adding to the headwinds facing the real estate sector – residential property prices declined by 6.8% y/y in March and are now 30% below their 2014 peak (17). Finally, consumer price figures for March showed the pace of deflation accelerated to 1.6% y/y last month. Weaker demand pulled down non-food inflation, which more than offset a rise in food inflation on the back of stockpiling (18).

Chart 13: UAE Confirmed COVID-19 Cases

Chart 14: Cancelled Departure Flights
(% of Total Scheduled Flights)

Chart 15: Traffic Congestion
(7-Day Rolling Average, %-pts, Deviation from 2019)

Chart 16: UAE Google Mobility Data on Retail & Recreation Sectors (%-pts Deviation from 2019)

Chart 17: REIDIN Dubai Residential Property Price

Chart 18: UAE Consumer Prices %(y/y)

Sources: CEIC, Refinitiv, Markit, Capital Economics


Rest of the Gulf

  • The other Gulf economies are also suffering due to the coronavirus and the slump in oil prices. Kuwait, where the oil sector makes up more than half of GDP, will be hit hard by OPEC+ output cuts that come into effect in May (19). Meanwhile, low oil prices will push budget and current accounts in all countries into deficit (20). Bahrain and Oman are most vulnerable. We expect financial support to be forthcoming for both countries, but governments have also responded by outlining deep spending cuts.
  • At the same time, measures put in place to contain the coronavirus outbreak have weighed on activity in non-oil sectors. Qatar’s whole economy PMI for March fell sharply too, though, it remains a touch above its nadir last summer (21). Tourism and hospitality sectors are suffering on the back of travel restrictions – only in Qatar are commercial flights still operating to some degree (22). And in Kuwait, traffic congestion is still well below normal levels (23)
  • Consumer price figures for March from across the Gulf showed that the pace of deflation accelerated (24). The key driver of the fall in prices was non-food inflation, most probably a reflection of weaker demand. This has more than offset rising food prices as households stockpiled ahead of lockdowns.

Chart 19: Kuwait Oil Production

Chart 20: Breakeven Oil Price ($pb)

Chart 21: Qatar Whole Economy PMI

Chart 22: Cancelled Departure Flights
(% of Total Scheduled Flights)

Chart 23: Kuwait City Traffic Congestion
(%-pts Deviation from 2019)

Chart 24: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Egypt

  • Coronavirus cases in Egypt have continued to climb over the past month and the economic impact of containment measures is becoming clearer. The whole economy PMI dropped from 47.1 in February to 44.2 in March, its lowest since early 2017 (25). Meanwhile, traffic in the capital city, Cairo, is well down on normal levels. And almost all flights in the country have been cancelled (26).
  • A collapse in tourists, a downturn in external demand for Egypt’s exports and weaker Suez Canal revenues (27) are leading to strains in the balance of payments. The government has turned to the IMF for financing. A priority for the Fund is likely to be for the central bank to loosen its grip on the pound. The currency has been kept steady at 15.7/$ recently at the cost of a $5bn decline in FX reserves last month (28). With the Fund on board again, we expect the pound to weaken by 7.5% by year-end. (29)
  • A fall in the currency on that scale is unlikely to lead to significantly higher inflation. The headline rate stood at just 5.1% y/y in March and we expect it to stay below the mid-point of the central bank’s 9±3% target range over our forecast horizon (30). As the focus shifts away from supporting the pound and to stimulating the economy, the central bank is likely to resume its easing cycle.

Chart 25: Whole Economy PMI

Chart 26: Cairo International Airport Cancelled Flights
(% of Total Scheduled Flights)

Chart 27: Suez Canal Revenues ($, % y/y)

Chart 28: Foreign Exchange Reserves ($bn)

Chart 29: Egyptian Pound (vs. $, Inverted)

Chart 30: Consumer Prices & Overnight Deposit Rate

Sources: CEIC, Refinitiv, Capital Economics


Rest of North Africa

  • The economic impact from efforts to contain the coronavirus outbreak prompted governments in Morocco and Tunisia to go to the IMF this month. Both countries are among the most vulnerable in the region to containment measures due to their large tourism sectors (31). Morocco’s planning agency projected the economy will contract by 6.8% y/y in Q2, following estimated growth of 0.7% y/y in Q1 (32). Figures for March showed exports and imports collapsed as the country went into lockdown (33).
  • Against this backdrop, Morocco has drawn down its $3bn precautionary credit line from the Fund. And Tunisia, which is currently negotiating a new extended fund facility, has secured $700mn of emergency financing. This financing will help to contain the strains in the balance of payments, although we think that the Tunisian authorities will be pressured to let the dinar weaken (34).
  • In Algeria, the effects of the coronavirus outbreak and the collapse in oil prices are taking a heavy toll on the economy. OPEC+ cuts mean that oil output will contract sharply (35). The plunge in oil prices is exacerbating Algeria’s balance of payments problems. FX reserves were already set to be fully depleted within two years, but a crunch point will now arrive even sooner. The authorities have started to take some action – the dinar has weakened by 6% against its euro-dollar basket so far this year (36).

Chart 31: Tourism (% of GDP)

Chart 32: Morocco GDP (% y/y)

Chart 33: Morocco Exports & Imports (EUR, % y/y)

Chart 34: Tunisian Dinar (vs. €, Inverted)

Chart 35: Algeria Oil Production

Chart 36: Algerian Dinar (vs. €-$basket, Inverted)

Sources: CEIC, Refinitiv, Capital Economics


Lebanon & Jordan

  • Lebanon’s crisis deepened even further over the past month and the government and central bank came to loggerheads. Prime Minister Hassan Diab has criticised central bank (BdL) governor Riad Salameh for the collapse of the pound, which is trading at more than a 60% discount on the black market (37).
  • Efforts to contain the virus have exacerbated the country’s recent economic turmoil. The whole economy PMI for March slumped to a record low (38). The spat between BdL and the government will make it difficult to implement the government’s reported economic rescue plan, which includes seeking assistance from the IMF. As a result, the chances of a more disorderly outcome are rising and the risks to our forecast for the economy to contract by 12% this year lie firmly to the downside (39).
  • Jordan’s government formally secured a new four-year $1.3bn deal with the IMF as the economy is hit hard by a loss of tourism, which contributes around a fifth of economic output and employment (40 & 41). The hit to the tourism sector (and wider economy) will intensify if travel restrictions remain in place into the peak season around July and August (42). The IMF deal will help to limit strains in the balance of payments, ensuring the dollar peg remains intact. But the scope for fiscal support is limited.

Chart 37: Lebanese Pound (vs. US$, Inverted)

Chart 38: Lebanon Whole Economy PMI

Chart 39: Lebanon GDP (% y/y)

Chart 40: Tourism (% of GDP)

Chart 41: Tourism Employment (% of Total)

Chart 42: Tourist Arrivals
(Avg., 2011-19, Peak Month of Arrivals = 100)

Sources: CEIC, Refinitiv, Capital Economics


Financial Markets

  • The further plunge in oil prices over the past month has led to strains on Saudi Arabia’s dollar peg. On the spot market, the riyal has weakened against the dollar and briefly traded at its lowest level since the global financial crisis in 2009 (43) Elsewhere in the region, lower oil prices have prompted the Algerian authorities to loosen their grip on the dinar. The Egyptian pound has continued to hold up well albeit at the expense of a sharp draw down of FX reserves. The central bank is likely to come under pressure from the IMF to loosen its grip on the currency (44).
  • After surging in March amid the early stages of the coronavirus outbreak and initial fall in oil prices, sovereign dollar bond spreads across much of the region have narrowed in the past month (45). Oman is the key exception (46). The country is the most vulnerable in the Gulf to the collapse in oil prices and there are growing fears that the authorities will be forced to devalue the rial. For now, we maintain our view that the other Gulf countries will provide financing in order to stave off a devaluation.
  • Following large declines in March, equities recovered a little in April. While the MSCI Arabian Markets Index rose by 6.9% m/m, it underperformed the wider MSCI Emerging Markets Index (47). Most indices across the region did strengthen, led by the UAE and Saudi Arabia, but those in North Africa fell (48).

Chart 43: Saudi Arabian Riyal (vs. $, Inverted)

Chart 44: Change in Currency (vs. $, %)

Chart 45: EMBI Sovereign Dollar Bonds

Chart 46: Oman EMBI Sovereign Dollar Bonds (bp)

Chart 47: MSCI Index (Local Ccy, 1st Jan. 2020= 100)

Chart 48: Equity Indices
(Local Ccy., % Change, 30th Mar. – 30th Apr.)

Sources: CEIC, Refinitiv, Markit, Capital Economics

Background Data

Chart 49: GDP ($bn, 2019, Market Exchange Rates)

Chart 50: Population (Millions, 2019)

Chart 51: GDP Per Capita
($000, 2019, Market Exchange Rates)

Chart 52: Share of World Output (%, 2019, PPP)

Chart 53: Real GDP (% y/y)

Chart 54: Consumer Prices (% y/y)

Chart 55: Budget Balance (% of GDP)

Chart 56: Current Account Balance (% of GDP)

Sources: CEIC, Refinitiv, Capital Economics

Key Historic Data

Table 1: Real GDP & Inflation

Share of World1

GDP (% y/y)

Inflation (% y/y)

15-19

2015

2016

2017

2018

2019

15-19

2015

2016

2017

2018

2019

Saudi Arabia

1.3

1.6

4.1

1.7

-0.7

2.4

0.3

0.7

1.3

2.0

-0.9

2.5

-1.2

Egypt

1.0

4.7

3.9

3.9

5.0

5.4

5.5

15.7

10.6

14.4

30.6

14.0

8.6

United Arab Emirates

0.5

2.4

5.1

3.1

0.5

1.7

1.5

1.8

4.1

1.6

2.0

3.1

-1.9

Algeria

0.5

2.3

3.7

3.4

1.6

1.5

1.5

4.6

4.8

6.4

5.6

4.3

2.0

Qatar

0.3

1.6

3.6

2.2

1.7

1.4

-0.8

0.9

1.7

2.8

0.4

0.3

-0.6

Morocco

0.2

3.0

4.5

1.1

4.2

3.0

2.2

1.3

1.5

1.6

0.8

1.8

0.7

Kuwait

0.2

0.2

0.6

2.9

-3.5

1.2

-0.5

2.1

3.7

3.5

1.5

0.6

1.1

Oman

0.1

2.2

4.7

5.0

-0.9

2.0

0.5

0.8

0.3

1.0

1.4

0.9

0.1

Tunisia

0.1

1.6

1.2

1.3

1.8

2.5

1.0

5.6

4.7

3.7

5.3

7.3

6.7

Jordan

0.1

2.1

2.4

2.0

2.1

2.0

1.8

1.6

-0.9

-0.8

3.3

4.5

2.0

Lebanon

0.1

0.0

0.4

1.6

0.6

0.2

-3.0

1.8

-3.7

-0.8

4.5

6.1

2.9

Bahrain

0.1

2.8

2.9

3.5

3.8

2.5

1.5

1.8

1.9

2.7

1.4

2.1

1.0

Middle East & North Africa

4.5

2.4

3.8

2.6

1.3

2.7

1.7

4.6

3.9

4.9

7.1

5.1

1.8

1)% 2018 in PPP terms

Table 2: Current Account & Budget Balance

Current Account (% of GDP)

Budget Balance (% of GDP)

15-19

2015

2016

2017

2018

2019

15-19

2015

2016

2017

2018

2019

Saudi Arabia

0.9

-8.7

-3.7

1.5

9.0

6.3

-9.6

-15.8

-12.9

-9.0

-6.0

-4.5

Egypt

-4.2

-5.2

-6.2

-3.3

-3.1

-3.4

-10.5

-11.4

-12.5

-10.9

-9.7

-8.1

United Arab Emirates

6.8

4.9

3.7

7.3

9.1

9.0

-1.1

-3.4

-2.0

-1.7

0.6

1.2

Algeria

-12.3

-14.8

-15.8

-13.0

-7.0

-11.0

-10.4

-15.3

-13.0

-6.5

-5.0

-12.0

Qatar

4.2

8.4

-5.5

3.9

8.7

5.5

0.7

4.4

-5.4

-2.9

5.3

2.0

Morocco

-4.0

-2.1

-4.4

-3.6

-5.5

-4.4

-4.1

-4.2

-4.5

-3.5

-3.7

-4.5

Kuwait

6.0

3.5

-4.2

8.0

14.4

8.0

6.6

5.6

0.3

6.6

11.3

9.0

Oman

-12.8

-15.9

-18.7

-15.2

-5.5

-8.8

-13.7

-16.1

-21.3

-14.0

-7.9

-9.4

Tunisia

-10.2

-9.0

-9.0

-10.5

-11.0

-11.5

-5.5

-6.0

-5.8

-5.8

-5.0

-5.0

Jordan

-8.7

-9.0

-9.4

-10.6

-7.4

-7.0

-4.9

-8.5

-3.7

-3.7

-4.8

-4.0

Lebanon

-23.3

-19.3

-23.1

-25.7

-27.0

-21.5

-10.0

-9.1

-9.4

-8.5

-11.5

-11.5

Bahrain

-5.1

-2.4

-4.6

-4.5

-5.9

-8.0

-9.7

-13.5

-14.1

-9.7

-5.5

-5.5

Source: Refinitiv


William Jackson, Chief Emerging Markets Economist, william.jackson@capitaleconomics.com
Jason Tuvey, Senior Emerging Markets Economist, jason.tuvey@capitaleconomics.com
James Swanston, MENA Economist, james.swanston@capitaleconomics.com