Fresh virus outbreaks to hinder economic recoveries - Capital Economics
Middle East & North Africa Economics

Fresh virus outbreaks to hinder economic recoveries

Middle East Chart Book
Written by William Jackson
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The Gulf economies have been the epicentre of the coronavirus outbreak in the region but almost all countries have managed to put new daily cases on a downwards trend thanks to strict containment measures and aggressive testing. In contrast, new cases are rising in Algeria, Morocco, and Lebanon. Morocco risks being removed from the EU’s “safe travel” list, which would deal a fresh blow to its tourism sector. For now, high frequency data suggest that activity in the region is strengthening, but the threat of fresh lockdowns reinforces our expectations that the economic recovery will be weak.

  • The Gulf economies have been the epicentre of the coronavirus outbreak in the region but almost all countries have managed to put new daily cases on a downwards trend thanks to strict containment measures and aggressive testing. In contrast, new cases are rising in Algeria, Morocco, and Lebanon. Morocco risks being removed from the EU’s “safe travel” list, which would deal a fresh blow to its tourism sector. For now, high frequency data suggest that activity in the region is strengthening, but the threat of fresh lockdowns reinforces our expectations that the economic recovery will be weak.
  • The recovery in Saudi Arabia’s non-oil economy appears to have stalled in July. The tripling of the VAT rate this month, which will weigh on households’ finances, and OPEC+ oil production cuts will hold back the economy.
  • The UAE has continued to open up but the slump in the real estate sector has forced Nakheel, one of Dubai’s largest property developers, to seek a refinancing of its debts. In Qatar, economic activity has begun to plateau having previously recovered quite quickly from its nadir in May.
  • Across the rest of the Gulf, Kuwait’s parliament may finally pass a long-delayed debt law that would allow the government to access international capital markets and make it easier to finance the budget deficit this year. Meanwhile, the impact of lockdowns and weak domestic demand has led to a faster rate of deflation in Oman and Bahrain.
  • Egypt’s exclusion from the EU “safe travel” list is a blow to the economic recovery and, coupled with a slump in exports, will add to strains in the balance of payments. However, support from the IMF should help to contain this.
  • In the rest of North Africa, industrial sectors have taken a significant hit. In Algeria, the latest OPEC+ output cuts led to production falling to its lowest level since 2002. And in Morocco and Tunisia, industrial production has slumped amid lockdowns and weak external demand.
  • Lebanon’s negotiations with the IMF are on the brink of collapse. At the same time, the slump in the pound on the black market has led to a collapse in imports and surge in inflation, in turn resulting in wider social unrest and violent protests. Meanwhile, Jordan’s government has managed to get the virus under control, albeit at the expense of a slump in industry and tourism.
  • Financial markets have had a mixed month. Currencies have held relatively steady against the dollar over the past month and dollar bond spreads, for the most part, have narrowed. However, equity markets across the region have underperformed those in other parts of the emerging world.

Coronavirus

  • The number of coronavirus cases has continued to increase at a significant pace across the Middle East and North Africa (1) but, in positive news, new daily case numbers have been slowing for the region as a whole since the start of July (2). Most countries have seen an increase in the number of tests per confirmed case, which indicates that outbreaks are slowing (3).
  • Part of governments’ plans to get control of the virus has been an aggressive ramping up of testing. Over the past month or so, most countries in the region – particularly those in the Gulf – have almost doubled the amount of testing (4). Testing is most widespread in the UAE and Bahrain.
  • Even so, the Middle East and North Africa has been one of the worst affected regions for the spread of the outbreak and the Gulf states have some of the highest number of cases relative to their population size of any country (5). In aggregate, containment measures have maintained the same level of stringency over the past month (6). But in the likes of Saudi Arabia and Morocco, the authorities have been quick to reimpose restrictions when new outbreaks have occurred.

Chart 1: Confirmed Coronavirus Cases (Log-Scale)

Chart 2: Daily New Coronavirus Cases in MENA

Chart 3: Number of Tests per Confirmed Case
(Log-Scale)

Chart 4: Coronavirus Tests (Per 100 Population)

Chart 5: Confirmed Coronavirus Cases
(Per mn Population)

Chart 6: Total Confirmed Coronavirus Cases in MENA & Oxford University Policy Stringency Index

Sources: CEIC, World in Data, Refinitiv, Markit, Capital Economics


Saudi Arabia

  • The latest activity data suggest that Saudi Arabia’s non-oil economy has started to recover from the sharp downturn between March and May. Point of sale transactions and ATM withdrawals, which are proxies for consumer spending, bounced back in June following a plunge in April and May (7). Local deliveries of cement and clink also surged last month too (8).
  • However, our Covid Mobility Tracker points to activity being stuck at around 20% below pre-virus levels since the start of July (9). At the same time, the oil sector has dragged on the economy as fresh production cuts led to output being falling to just 7.6mn bpd in June, its lowest level since the early 2000s. In year-on-year terms, which is what matters for GDP, output declined by 23.1% y/y last month (10).
  • Figures released this month showed that low oil prices caused the budget deficit to widen to SAR109.2bn in Q2, equal to around 15% of GDP (11). Finally, consumer price figures for June showed that the headline inflation rate eased from 1.1% y/y in May to 0.5% y/y last month, its lowest level this year, as weak demand dampened underlying price pressures and fuel inflation dropped further. But the tripling of the VAT rate from 5% to 15% this month will cause the headline rate to jump to 5.5-6.0% y/y (12).

Chart 7: Sum of ATM Cash Withdrawals and Point of Sale Transactions

Chart 8: Local Deliveries of Cement and Clinker

Chart 9: CE Saudi Covid Mobility Tracker
(% Diff. from Jan-Feb. Median, 7D Moving Average)

Chart 10: Oil Production

Chart 11: Budget Balance (% of GDP)

Chart 12: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


United Arab Emirates

  • The UAE’s economy has continued to open up as the authorities appear to have got control of the virus, with new daily coronavirus cases continuing to fall and the number of tests per positive case rising (13). Against this backdrop, activity in the non-oil economy has started to recover – the whole economy PMI rose to 50.4 in June, the first time that it has been above the 50-mark this year.
  • More timely high frequency data tell a similar story. Traffic congestion in Dubai and Abu Dhabi has continued to increase (14) and the share of cancelled flights has continued to trend down (15). That said, our Covid-19 Mobility Tracker suggests that activity remains well below pre-virus levels (16). Meanwhile, the real estate sector downturn has deepened further (17) and Nakheel, one of the largest developers in Dubai, is reported to be seeking debt refinancing as it reels from the current crisis.
  • In the oil sector, the UAE has complied with the latest OPEC+ oil production cuts and reduced output to just 2.35mn bpd in June – the lowest level since the end of 2010. In year-on-year terms, which is what matters for GDP, output contracted by 23.5% y/y (18). Finally, consumer price figures for May showed the pace of deflation rose from 1.9% y/y in April to 2.7% y/y last month, the weakest pace on record.

Chart 13: Tests per Confirmed Covid-19 Case & Number of Daily New Confirmed Cases

Chart 14: Traffic Congestion
(%-pts Deviation from 2019 Level, 7D Rolling Avg.)

Chart 15: UAE Cancelled Departure Flights
(% of Total Scheduled Flights, All Airports)

Chart 16: CE UAE Covid-19 Mobility Tracker
(% Diff. from Jan-Feb. Median, 7D Moving Avg.)

Chart 17: REIDIN Dubai Residential Property Prices

Chart 18: Oil Production

Sources: CEIC, Google, Apple, REIDIN, Refinitiv, Markit, CE


Qatar

  • Qatar has the highest number of virus cases relative to its population and the authorities have taken a very gradual approach to easing the lockdown, which means that the economic recovery will be slow. The whole economy PMI rose from 36.6 in May to 42.0 in June and suggests that the contraction in the non-hydrocarbon sector eased from as 10% y/y in May to 4-5% y/y last month (19). High frequency data have shown that activity has recovered but it remains below pre-virus levels (20).
  • The latest figures on international arrivals showed that less than 300 people entered the country in May, a fresh record-low, although more timely figures on flight cancellations suggest that the travel sector is recovering (21). Meanwhile, the number of new vehicles registered were at their lowest on record in May (22). Private sector credit growth slowed from 17.3% y/y in May to 16.0% y/y in June (23) and is likely to ease further as the coronavirus crisis leads to a rise in bad loans that causes credit conditions to tighten.
  • Finally, consumer price figures for June showed that the pace of deflation picked up from 3.1% y/y in May to 3.5% y/y last month, a fresh decade low (24), on the back of weak domestic demand.

Chart 19: Whole Economy PMI & Non-Oil GDP

Chart 20: Google Mobility Data on Retail & Recreation Sectors (%-pts Deviation from 2019, 7D Rolling Avg.)

Chart 21: New Motor Vehicle Registrations

Chart 22: Private Sector Credit

Chart 23: Cancelled Departure Flights
(% of Total Scheduled Flights)

Chart 24: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Rest of the Gulf

  • Kuwait’s Emir Al-Sabah was hospitalised this month and reports suggested he was in a critical condition. If he were to pass, we don’t think that it would lead to a major shift in policymaking. Meanwhile, parliament may finally pass the long-delayed debt law, which would allow the government issue on international capital markets and make it easier to finance the widening budget deficit (25). But this is unlikely to prompt the government to row back on recently-imposed austerity.
  • Lockdowns in the Gulf have also been among the strictest in the world and the authorities have been reluctant to ease lockdowns. In the case of Oman, measures have been reintroduced to contain the rise in cases earlier in the month (26 & 27). As a result, having picked up in June and early July, activity in retail and recreation sectors has cooled off (28).
  • The latest OPEC+ oil production cuts have weighed on economies across the Gulf and Kuwait’s decline in output deepened from 18.9% y/y in May to 21.4% y/y last month (29). Finally, consumer price figures for June showed that the pace of deflation accelerated in Bahrain and Oman, while the headline inflation rate in Kuwait is also close to falling into negative territory (30).

Chart 25: Kuwait Budget Balance (% of GDP)

Chart 26: Oxford Containment Measures Index
(100 = Full Lockdown)

Chart 27: Daily New Coronavirus Cases
(7-Day Rolling Average)

Chart 28: Google Mobility Data on Retail & Recreation Sectors (%-pts Dev., from 2019. 7-Day Rolling Avg.)

Chart 29: Kuwait Oil Production

Chart 30: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Egypt

  • Egypt appears to have got on top of the virus with new daily case numbers continuing to come down, prompting the authorities to eased containment measures (31). During the lockdown, industry took a large hit and the decline in output deepened from 21.7% y/y in April to 22.6% y/y in May (32). But, against the backdrop of easing measures, economic activity has picked up. The whole economy PMI for June rose from 40.7 in May to 44.6 and our Mobility Tracker points to a further increase in activity (33)
  • On a more sobering note, Egypt was excluded from the EU’s “safe travel” list, which will be a blow to the tourism sector. Meanwhile, exports have slumped (34) and Suez Canal receipts fell by 13.4% y/y in June. Egypt secured close to $8bn in IMF financing, which will help to contain strains in the balance of payments.
  • Indeed, the pound has appreciated by 1.4% m/m against the dollar this month, although we are concerned that it is looking overvalued. (35). Consumer price figures for June showed the headline inflation rate rose from 4.7% y/y in May to 5.6% y/y (36), leaving it below the mid-point of the central bank’s (CBE) 9±3% target range. All told, the economic environment is now more conducive for the CBE to loosen monetary policy and we expect the overnight deposit rate to be reduced 9.25% now to 8.00% by year-end.

Chart 31: New Daily Confirmed Coronavirus Cases & Oxford Policy Stringency Index

Chart 32: Industrial Production

Chart 33: CE Egypt Covid-19 Mobility Tracker
(% Diff. from Jan-Feb. Median, 7D Rolling Avg.)

Chart 34: Exports (% y/y)

Chart 35: Egyptian Pound (vs. US$, Inverted)

Chart 36: Consumer Prices (% y/y)

Sources: CAPMAS, CEIC, Refinitiv, Capital Economics


Rest of North Africa

  • The number of new coronavirus cases has surged in Morocco and Algeria in the past month, prompting the former to re-impose lockdowns in major cities. In contrast, Tunisia has continued to control the virus (37). Morocco and Tunisia were included on the EU’s “safe travel” list, but lingering concerns about the virus are likely to mean both countries miss out on their peak summer seasons and mean that the slump in tourism receipts continues for longer (38).
  • The impact of the coronavirus crisis has also led to a sharp drop in exports in both Tunisia and Morocco (39) which, coupled with a loss of tourism receipts, has led to strains in the balance of payments. Both countries have turned to the IMF for financial support. Lockdowns have also taken their toll on industry in both countries (40) and, in Morocco, the renewed lockdown in Tangiers highlights the risk that Peugeot and Renault plants shut down production once again.
  • Algeria’s compliance with OPEC+ oil production cuts saw output fall to 0.81mn bpd in June – the lowest level since 2002 – and, in year-on-year terms, production declined by 19.5%, (41). Low oil prices have intensified strains in the balance of payments, with FX reserves continuing to be rapidly depleted (42).

Chart 37: New Daily Coronavirus Cases
(7-Day Rolling Average)

Chart 38: Morocco Tourism Receipts
(MAD Terms, % y/y)

Chart 39: Exports (% y/y, 3m Avg.)

Chart 40: Industrial Production (% y/y))

Chart 41: Algeria Oil Production

Chart 42: Algerian FX Reserves (US$bn)

Sources: CEIC, Refinitiv, Capital Economics


Lebanon & Jordan

  • The crisis in Lebanon has continued to worsen over the past month. Alain Bifani, the director general of the Finance Ministry, resigned earlier in July, which follows several other high-profile resignations amid the government’s fumbled negotiations with the IMF. Indeed, we now expect that Lebanon will fail to secure a financing package from the Fund.
  • Against this backdrop, the Lebanese pound has remained extremely weak on the black market when compared with the official exchange rate – it trades at a discount of close to 80%. Combined with the restrictions on foreign currency, imports have plunged (43) and inflation has surged, driven by a sharp rise in food inflation (44). At the same time, the BdL’s coincident indicator suggests output contracted by as much as 25% y/y in May (45) and we expect that, over the year as a whole, GDP will decline by 30%.
  • Jordan has got on top of the coronavirus outbreak (46) and the economy is almost back to being fully re-opened, but the recovery will be slow-going. Tourist arrivals in March (the first month of restrictions) declined by 65% y/y (47), and international air travel has yet to resume meaning the sector will miss out on the key summer months. Meanwhile, industry has suffered –the fall in industrial production accelerated from 15.2% y/y in April to 17.5% y/y in May, the worst performance since 2003 (48).

Chart 43: Lebanese Imports (% y/y)

Chart 44: Lebanon Consumer Prices (% y/y)

Chart 45: BdL Coincident Indicator & GDP

Chart 46: Jordan Coronavirus Cases (Daily)

Chart 47: Jordan Tourist Arrivals (% y/y)

Chart 48: Jordan Industrial Production

Sources: CEIC, Refinitiv, Markit, Capital Economics


Financial Markets

  • Equity markets have underperformed. The MSCI Arabian Markets Index rose by 1.2% m/m, which was much weaker than the 7.5% m/m increase in the wider MSCI Emerging Markets Index (49). At the country level, stock markets were mixed. The Qatari QE 20 Index was the best performer, followed closely by the Saudi Tadawul, while the Kuwaiti all-share index fell the most (50).
  • Sovereign dollar bond spreads have had a mixed performance over the past month. Spreads narrowed across the Gulf but widened in most of the North African economies and Jordan (51). Spreads widened the most in Tunisia (52), amid increased concerns over the sustainability of the public debt position and fresh political turmoil.
  • Currencies have fared relatively well over the past month. The Algerian dinar and Tunisian dinar both weakened only slightly The Egyptian pound’s recent slide against the dollar came to an end as it strengthened by 1.2% m/m against the dollar (53). Meanwhile, the Lebanese pound stabilised on the black market, although it remains around 80% weaker than the official exchange rate (54).

Chart 49: MSCI Index (Local Ccy, 1st Jan. 2020= 100)

Chart 50: Equity Indices (Local Ccy., % Change)

Chart 51: EMBI Sovereign Dollar Bonds

Chart 52: Tunisia EMBI Sovereign Dollar Bond (bp)

Chart 53: Change in Currency (vs. US Dollar, %)

Chart 54: Lebanese Pound (vs. $, Inverted)

Sources: CEIC, Refinitiv, Markit, Capital Economics


Background Data

Chart 55: GDP ($bn, 2019, Market Exchange Rates)

Chart 56: Population (Millions, 2019)

Chart 57: GDP Per Capita
($000, 2019, Market Exchange Rates)

Chart 58: Share of World Output (%, 2019, PPP)

Chart 59: Real GDP (% y/y)

Chart 60: Consumer Prices (% y/y)

Chart 61: Budget Balance (% of GDP)

Chart 62: 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)

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)% 2019 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