Dubai concerns start to mount - Capital Economics
Middle East & North Africa Economics

Dubai concerns start to mount

Middle East Chart Book
Written by William Jackson
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The past month has brought more bad news on Dubai’s economy. Markit’s Dubai PMI hit a four-year low in January and efforts to contain the coronavirus pose a threat to the Emirate’s transport and tourism sectors. And the real estate sector remains in the doldrums. The World Expo should provide a lift to the economy when it rolls into town later this year. But the boost will be temporary and potential overcapacity in the real estate and tourism sectors after the event is likely to weigh on the revenues of government-related entities, which were at the heart of the 2009 debt crisis. This month’s deal that saw DP World delisted from the stock exchange, which was partly an effort to secure funds for its parent’s debt repayments, may be a sign that debt servicing is already becoming a pressing issue.

  • The past month has brought more bad news on Dubai’s economy. Markit’s Dubai PMI hit a four-year low in January and efforts to contain the coronavirus pose a threat to the Emirate’s transport and tourism sectors. And the real estate sector remains in the doldrums. The World Expo should provide a lift to the economy when it rolls into town later this year. But the boost will be temporary and potential overcapacity in the real estate and tourism sectors after the event is likely to weigh on the revenues of government-related entities, which were at the heart of the 2009 debt crisis. This month’s deal that saw DP World delisted from the stock exchange, which was partly an effort to secure funds for its parent’s debt repayments, may be a sign that debt servicing is already becoming a pressing issue. 
  • Saudi Arabia’s economy appears to have contracted by around 2% y/y in Q4 but, as the drag from oil production cuts fades, this is likely to mark the trough. The economies of the UAE and Qatar continued to struggle at the end of last year. In the latter, the recent credit boom appears to have passed its peak.
  • Kuwait started trial output runs at its shared oil field with Saudi Arabia this month but, given the constraints of the OPEC+ deal, we doubt that this will translate into a marked increase in oil production. Elsewhere, this month’s drop in oil prices has reignited concerns over public finances in Bahrain and Oman. In response, Oman’s Sultain Haitham declared that the government will work to reduce the public debt.
  • The latest indicators suggest that Egypt’s economy lost momentum in the second half of last year. Inflation edged up in January and, while it remained below the mid-point of the central bank’s target range, interest rates were left unchanged for a second consecutive meeting.
  • It looks increasingly likely that Lebanon’s government will default on a Eurobond payment due in March. The authorities are in talks with the IMF but, with time quickly running out to secure external financing, the risk of a disorderly outcome is rising.
  • One year on since they started, protests in Algeria against the ruling regime show no sign of abating. Meanwhile, the economy continues to struggle and we think that the authorities will soon have to loosen their grip on the dinar. Morocco’s economy struggled over the second half of 2019, but rising car production should support a recovery over the course of this year.
  • Tunisia’s prime minister finally managed to form a government this month, thereby averting fresh elections. But the difficult task of restoring macroeconomic stability now begins. Fiscal policy will need to be tightened and the currency will weaken.
  • The region’s financial markets have fared poorly again this month amid the drop in oil prices and a bout of investor risk aversion. Equity markets have tumbled and dollar bond spreads have generally widened.

Saudi Arabia

  • The downturn in Saudi Arabia’s economy appears to have reached a trough in the final quarter of last year. Our GDP Tracker points to a contraction of around 2.0% y/y in November, compared with a decline in economic output of 0.5% y/y in Q3 (1). The weakness remained concentrated in the oil sector (2).
  • The drag from the oil sector looks set to fade this year. Saudi attempts to push through a deepening of the OPEC+ oil output cuts in response to fears about the impact from the coronavirus have, so far, failed to overcome resistance from Russia. In any case, the Kingdom fired a warning shot at other producers that it is no longer willing to shoulder the burden of output cuts by unexpectedly raising output in January (3).
  • The latest indicators suggest that the non-oil sector has continued to perform strongly. Figures on point of sale transactions and ATM withdrawals suggest that consumer spending has picked up (4). At the same time, looser monetary conditions have supported a rebound in private sector credit growth (5). Finally, headline inflation rose from 0.2% y/y in December to 0.4% y/y in January (6).

Chart 1: GDP & CE GDP Tracker (% y/y)

Chart 2: CE GDP Trackers (% y/y)

Chart 3: Oil Production

Chart 4: Sum of Point of Sale Transactions and ATM Cash Withdrawals

Chart 5: Private Sector Credit (% y/y)

Chart 6: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Markit, Capital Economics


United Arab Emirates

  • The latest indicators suggest that the UAE’s economy has continued to struggle. Markit’s whole economy PMI dropped from 50.2 in December to 49.3 in January, the first time it has been below the 50-mark – which, in theory, separates expansion from contraction – since the survey began in 2009 (7). Real estate prices declined by 6.0% y/y in December and prices are now 28% below their peak in late-2014 (8). Meanwhile, private sector credit growth slowed to its weakest pace since mid-2017 in December (9).
  • Meanwhile, the drag from oil production cuts has continued to weigh on growth in the hydrocarbon sector. The tourism sector has been a relative bright spot. Dubai attracted a record 16.7mn tourists in 2019 (10). But, as a signal of the overcapacity in the sector, the occupancy rate fell further (11).
  • Finally, Dubai’s consumer price figures for January showed a sharp easing in deflation. The headline inflation rate rose from -2.0% y/y to -1.3% y/y last month on the back of a pick-up in food inflation (12). This, coupled with a rise in the price components of the whole economy PMI in January, supports our view that inflation in the UAE as a whole will rise over the course of this year.

Chart 7: UAE Whole Economy PMI

Chart 8: Dubai Real Estate Price Index

Chart 9: UAE Private Sector Credit (% y/y)

Chart 10: Dubai Tourist Arrivals

Chart 11: Dubai Hotel Occupancy Rate (%)

Chart 12: Dubai Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics



Qatar

  • Qatar’s economy has remained in the doldrums. Admittedly, LNG exports jumped by around 1mn bcm between December and January, pushing year-on-year growth up to more than 4% (13). This strength is set to continue as the Barzan gas expansion comes on stream.
  • But activity in the non-hydrocarbon sector remains weak. The recent credit boom has passed its peak (14). Activity in the real estate sector is sluggish. The number of properties sold in December fell by 17% y/y and real estate prices declined by more than 8% y/y – prices are over 25% below their 2015 peak (15). And the Markit PMI fell back from 49.4 in December to 48.7 last month (16). On a positive note, tourist arrivals jumped in December close to levels last seen before the blockade was imposed in mid-2017 (17).
  • Finally, the headline inflation rate rose from -0.7% y/y in November to -0.3% y/y in December (18) on the back of higher food inflation. We think that the headline rate returned to positive territory in January.

Chart 13: LNG Exports

Chart 14: Private Sector Credit (% y/y)

Chart 15: Real Estate Prices

Chart 16: Whole Economy PMI

Chart 17: Visitor Arrivals (000s)

Chart 18: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Markit, Capital Economics


Kuwait, Oman & Bahrain

  • Kuwait started trial runs of oil production at its shared field with Saudi Arabia this month but, given the current OPEC+ quotas, this is unlikely to translate into a rapid rise in output (19). Oil output cuts weighed on GDP growth at the end of last year and will continue to do so in Q1. The non-oil sector has struggled too as private sector credit growth remains weak (20). Headline inflation rose to 1.7% y/y in January (21).
  • Meanwhile, the fall in oil prices this month on the back of the coronavirus outbreak has put the spotlight back on to poor fiscal positions in Oman and Bahrain (22). Investors’ concerns were captured in a widening of sovereign dollar bond spreads over the past month (23). In a sign that he will take a more serious approach to the country’s public finances than his predecessor, Oman’s Sultan Haitham said that the government will work to reduce the public debt.
  • Private sector credit growth slowed in both countries at the end of 2019 (24). Meanwhile, the latest consumer price figures show that the headline inflation rate fell from 1.7% y/y in November to 1.2% y/y in December in Bahrain. In Oman, the headline rate returned to positive territory, at 0.4% y/y in January.

Chart 19: Kuwait Oil Production (% y/y)

Chart 20: Kuwait Private Sector Credit (% y/y)

Chart 21: Kuwait Consumer Prices (% y/y)

Chart 22: Budget Balances (% of GDP)

Chart 23: JP Morgan EMBI Sovereign Dollar Bond Spreads over US Treasuries (bp)

Chart 24: Private Sector Credit (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Egypt

  • Egypt’s economy lost a bit of momentum in the second half of last year. The latest national accounts account data showed that GDP growth eased from 5.7% y/y in Q2 to 5.6% y/y in Q3. In the three months to December, industrial production expanded by a sluggish 0.7% y/y (25). And the whole economy PMI dropped from 56.9 in December to 54.9 in January, its lowest reading since late-2018 (26).
  • The pound is now up by around 3% against the dollar since the start of this year (27). But there are growing signs that a stronger currency is weighing on Egypt’s external competitiveness. The real effective exchange rate is now back in line with its long-run average. While higher gas exports mean that Egypt can sustain a higher real exchange rate, the underlying current account position has deteriorated (28). It’s also worth noting that the new export orders component of the PMI fell to a three-year low last month.
  • Headline inflation edged up from 7.1% y/y in December to 7.2 % y/y in January, leaving it below the mid-point of the central bank’s target of 9±3% for end-2020 (29). Even so, the central bank kept interest rates on hold at 12.25% for a second consecutive meeting this month. The accompanying statement left the door open to further easing, but we suspect that this will now take place in the second half of 2020 (30).

Chart 25: Industrial Production

Chart 26: Whole Economy PMI

Chart 27: Egyptian Pound (vs. $, Inverted)

Chart 28: Current Account (4Q Sum, % of GDP)

Chart 29: Consumer Prices (% y/y)

Chart 30: Overnight Deposit Rate (%)

Sources: CEIC, Refinitiv, Capital Economics


Lebanon & Jordan

  • It is looking increasingly likely that the Lebanese government will default on a $1.2bn Eurobond repayment due in March. The bond is trading at less than 55 cents on the dollar. Even if the authorities do make the payment, it will merely delay the inevitable given that another $1.3bn of Eurobond redemption payments are due by the end of June. The government is in talks with the IMF, but time is running out to secure financing and avert a disorderly outcome.
  • In return for financial support, the Fund would almost certainly insist on a debt restructuring and devaluation. The former is likely to involve haircuts of up to 70% (31). And the pound is already trading at a discount of nearly 40% compared with the official exchange rate (32) – we think that a devaluation of 50% lies in store in the coming months. Inflation, which jumped to 10% y/y in January likely to rise further (33). This will erode households’ real income and cause the recession to deepen (34).
  • Jordan’s industrial sector has slumped in recent months, with output contracting by 14% y/y in December – the worst performance since 2003 (35). However, data from the tourism sector has been more positive. Visitor arrivals are now at their highest since 2012 (36).

Chart 31: Investor Losses in Restructurings & Gov’t Debt-to-GDP Ratios

Chart 32: Lebanese Pound (vs. US$, Inverted)

Chart 33: Lebanon Consumer Prices (% y/y)

Chart 34: Lebanon Official GDP & BdL Coincident Indicator

Chart 35: Jordan Industrial Production

Chart 36: Jordan Tourist Arrivals

Sources: CEIC, Refinitv, Capital Economics


Algeria

  • This month marked a one year since the mass protests in Algeria began and, with recently-elected President Abdelmajid Tebboune struggling to appease protestors, the unrest looks set to continue. The protests will remain a key headwind facing the economy. The latest national accounts data show that GDP expanded by just 0.3% y/y in Q3 of last year, up from 1.2% y/y in Q2 but still one of the worst performances over the past decade (37).
  • More timely data show that the hydrocarbon sector remained a drag on the economy at the end of last year (38). The non-hydrocarbon sector also struggled. Private sector credit growth slowed to its weakest pace since 2012 in the last quarter of 2019 (39). And while the trade balance recorded to its largest surplus since 2013 (40), this was driven by a collapse in imports – a sign of weak domestic demand.
  • The authorities have maintained a tight grip of the dinar (41) but this has come at the expense of a further drawdown of FX reserves. This cannot be sustained much longer and we expect the currency to weaken by 20% against the dollar by the end of this year. Finally, inflation rose from 1.4% y/y in November to 2.4% y/y in December as food inflation picked up (42).

Chart 37: GDP (% y/y)

Chart 38: Oil Production (% y/y)

Chart 39: Private Sector Credit

Chart 40: Trade Balance (12m Sum)

Chart 41: Algerian Dinar
(vs. Euro-Dollar Basket*, Inverted)

Chart 42: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Morocco

  • The latest national accounts figures show that GDP growth in Morocco eased from 2.2% y/y in Q2 to 2.1% y/y in Q3. A jump in export volumes was more than offset by weaker investment and household spending growth (43). More timely data suggest that growth remained weak at the end of last year. Consumer confidence picked up but stayed below its long-run average (44).
  • Meanwhile, exports contracted by 5.1% y/y in value terms in December (45). But we expect the burgeoning auto sector to drive a recovery in investment and export growth in 2020. Peugeot’s Kenitra plant should boost total car production by around 40% this year (46), and Hands’ new aluminium wheel factory, which opened in January, will provide a further fillip. This should help narrow the current account balance, which currently stands at 4.8% of GDP (47).
  • Finally, consumer price figures for January showed that the headline inflation rate ticked up from 1.2% y/y in December to a 14-month high of 1.3% y/y in January on the back of a rise in non-food inflation (48). We expect inflation to continue to rise over the course of this year.

Chart 43: GDP by Expenditure (% y/y)

Chart 44: Consumer Confidence

Chart 45: Exports (EUR Terms)

Chart 46: Vehicle Production (000s Units)

Chart 47: Current Account Balance

(4Q Sum, % of GDP)

Chart 48: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Tunisia

  • Tunisia’s Prime Minister-designate Elyes Fakhfakh finally unveiled a new cabinet this month which seems to have wide-ranging support. Markets have taken the news positively – dollar bond spreads are now at their lowest since August 2018 (49). However, the tough task of restoring macroeconomic stability now begins. The country’s large twin budget and current account deficits (50) have been left unchecked since October’s elections. Fiscal policy will need to be tightened and the dinar is likely to weaken.
  • Against this backdrop, the economy’s struggles will continue. GDP growth hit a three-year low of 0.9% y/y in Q3 of last year and more timely data suggest that growth slowed further in Q4. Industrial production contracted by over 3% y/y in the three months to November (51). Credit growth slowed to its weakest pace since 2003 in November (52). Meanwhile, export and import growth has weakened sharply (53).
  • Consumer price figures for January showed that the headline inflation rate edged down from 6.1% y/y in December to a fresh two-year low of 5.9% y/y. The fall in headline inflation was driven by a steep decline in food inflation, which more than offset a slight rise in non-food inflation (54).

Chart 49: JP Morgan EMBI Dollar Bond Spread Over US Treasuries (bp)

Chart 50: Current Account & Budget Balance (% of GDP)

Chart 51: Industrial Production

Chart 52: Total Credit to Economy (% y/y)

Chart 53: Exports & Imports
(TND Terms, % y/y, 3m avg.)

Chart 54: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Financial Markets

  • Stock markets in the region have had a poor month and underperformed those in the rest of the emerging world. The MSCI Arabian Markets Index has fallen by nearly 7% m/m (in local currency terms), compared with a 3.2% decline in the MSCI EM index (55). Only in Tunisia, Oman, and Bahrain did indices strengthen. At the other end of the spectrum, the collapse in Lebanese BLOM index has been stark but, sell offs across the Gulf have been the main drivers of the fall in the MSCI Arabian Markets index (56).
  • Sovereign dollar bonds have fared better, with yields falling across the board over the past month (57). However, spreads have generally widened. Dollar bond spreads widened the most in Bahrain and Oman on the back of the fall in oil prices. In Lebanon, spreads have climbed to fresh record highs and credit default swap premia imply that a default is now almost fully priced in (58).
  • Most currencies have held up well over the past month. The rally in the Egyptian pound has continued, with the currency rising by 1.4% m/m against the dollar. (59). However, pressure has continued to mount on the Lebanese pound. The black market exchange rate weakened by nearly 14% m/m against the dollar and is now trading at close to a 40% discount compared with the official exchange rate (60).

Chart 55: MSCI Indices (Local Ccy, Jan. 2019 = 100)

Chart 56: Equity Indices (Local Currency, YTD)

Chart 57: Change in EMBI Dollar Bond Spread over US Treasuries (bp, Change 24th Jan. – 24th Feb.)

Chart 58: Implied Probability of Default
(Based on CDS Premia, %)

Chart 59: Currencies vs. $ (%)

Chart 60: Lebanese Pound (vs. $, Inverted)

Sources: CEIC, Refinitiv, Capital Economics

Background Data

Chart 61: GDP ($bn, 2019, Market Exchange Rates)

Chart 62: Population (Millions, 2019)

Chart 63: GDP Per Capita
($000, 2019, Market Exchange Rates)

Chart 64: Share of World Output (%, 2019, PPP)

Chart 65: Real GDP (% y/y)

Chart 66: Consumer Prices (% y/y)

Chart 67: Budget Balance (% of GDP)

Chart 68: Current Account Balance (% of GDP)

Sources: CEIC, Refinitiv, Capital Economics

Key Historic Data

Table 1: Real GDP & Inflation

Share of World(1)

GDP (% y/y)

Inflation (% y/y)

14-18

2014

2015

2016

2017

2018

14-18

2014

2015

2016

2017

2018

Saudi Arabia

1.37

2.2

3.7

4.1

1.7

-0.7

2.2

1.4

2.2

1.3

2.0

-0.9

2.5

Egypt

0.96

4.2

2.9

4.4

4.3

4.2

5.3

15.6

10.1

10.4

13.8

29.5

14.4

Algeria

0.49

2.8

3.8

3.7

3.2

1.4

2.1

4.8

2.9

4.8

6.4

5.6

4.3

United Arab Emirates

0.54

3.0

4.4

5.1

3.0

0.8

1.7

2.6

2.3

4.1

1.6

2.0

3.1

Qatar

0.26

2.7

4.0

3.7

2.1

1.6

2.2

1.7

3.4

1.8

2.7

0.4

0.2

Morocco

0.23

3.1

2.7

4.6

1.1

4.1

3.1

1.2

0.4

1.6

1.6

0.7

1.9

Kuwait

0.23

0.5

0.5

0.6

2.9

-3.5

1.7

2.3

2.9

3.3

3.1

1.4

0.6

Tunisia

0.11

1.9

3.0

1.2

1.1

2.0

2.5

5.2

4.9

4.8

3.6

5.3

7.3

Oman

0.15

2.4

1.4

4.7

5.0

-0.9

2.1

0.9

1.0

0.1

1.1

1.7

0.8

Lebanon

0.07

0.9

1.9

0.4

1.6

0.6

0.3

1.6

1.8

-3.7

-0.8

4.5

6.1

Jordan

0.07

2.3

3.1

2.4

2.0

2.1

2.0

1.8

2.9

-0.9

-0.8

3.3

4.5

Bahrain

0.06

3.3

4.4

2.9

3.5

3.8

1.8

2.2

2.6

1.9

2.7

1.4

2.1

Middle East & North Africa

4.5

2.8

3.7

3.7

2.6

1.3

2.8

5.1

3.9

3.9

4.8

7.2

5.5

(1)% 2018 in PPP terms

Table 2: Current Account & Budget Balance

Current Account (% of GDP)

Budget Balance (% of GDP)

14-18

2014

2015

2016

2017

2018

14-18

2014

2015

2016

2017

2018

Saudi Arabia

1.4

9.8

-8.7

-3.7

1.4

8.3

-10.1

-3.5

-15.8

-17.2

-9.2

-4.6

Egypt

-3.8

-0.9

-3.7

-6.0

-6.1

-2.4

-10.9

-11.3

-10.9

-12.5

-10.4

-9.5

Algeria

-11.9

-4.4

-16.4

-16.5

-13.2

-9.1

-9.5

-7.3

-15.3

-13.0

-6.6

-5.2

United Arab Emirates

7.1

13.5

4.9

3.7

6.9

6.6

-1.4

1.9

-3.4

-2.0

-1.6

-1.8

Qatar

8.0

24.0

8.5

-5.5

3.8

9.3

3.2

14.3

4.5

-5.4

-2.9

5.3

Morocco

-4.1

-5.9

-2.1

-4.2

-3.6

-4.5

-4.1

-4.8

-4.2

-4.5

-3.5

-3.7

Kuwait

10.2

33.4

3.5

-4.6

5.9

12.7

9.2

22.4

5.6

0.3

6.6

11.4

Tunisia

-10.1

-9.8

-9.7

-9.3

-10.2

-11.2

-5.2

-3.9

-5.3

-6.2

-5.9

-4.6

Oman

-10.1

5.2

-15.9

-18.7

-15.2

-5.9

-11.8

-1.1

-15.9

-21.2

-12.9

-7.7

Lebanon

-24.7

-28.2

-19.3

-23.1

-25.7

-27.0

-8.9

-6.2

-9.1

-9.4

-8.6

-11.0

Jordan

-8.7

-7.2

-9.0

-9.4

-10.6

-7.4

-5.9

-8.6

-8.5

-3.7

-3.7

-4.8

Bahrain

-2.6

4.6

-2.4

-4.6

-4.5

-5.8

-12.7

-1.6

-18.4

-17.6

-14.2

-11.7

Source: Refinitiv


William Jackson, Chief Emerging Markets Economist, +44 20 7808 4054, william.jackson@capitaleconomics.com
Jason Tuvey, Senior Emerging Markets Economist, +44 20 7808 4065, jason.tuvey@capitaleconomics.com
James Swanston, MENA Economist, +44 20 7808 4991, james.swanston@capitaleconomics.com
Olivia Cross, Research Assistant, +44 20 7808 4089, olivia.cross@capitaleconomics.com