Gulf tightening the purse strings - Capital Economics
Middle East & North Africa Economics

Gulf tightening the purse strings

Middle East Chart Book
Written by William Jackson
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Fiscal plans announced across the Gulf over the past month suggest that governments will keep policy tight, a key reason why we think that economic growth will disappoint this year. The Saudi 2020 budget outlined that expenditure would be cut by nearly 10% over the coming years. Similarly, in Qatar and Kuwait, 2020 budgets showed little increase in spending. Oman’s new Sultan Haitham has been quick to announce the imposition of a value-added tax from 2021 to repair the country’s weak balance sheets. The one exception to all of this is the UAE, where the authorities are set to implement fiscal stimulus in order to support the struggling economy.

  • Fiscal plans announced across the Gulf over the past month suggest that governments will keep policy tight, a key reason why we think that economic growth will disappoint this year. The Saudi 2020 budget outlined that expenditure would be cut by nearly 10% over the coming years. Similarly, in Qatar and Kuwait, 2020 budgets showed little increase in spending. Oman’s new Sultan Haitham has been quick to announce the imposition of a value-added tax from 2021 to repair the country’s weak balance sheets. The one exception to all of this is the UAE, where the authorities are set to implement fiscal stimulus in order to support the struggling economy.
  • Saudi Arabia’s Q3 GDP data confirmed that the economy contracted for the third quarter in a row, and it probably slowed further in Q4. Weak oil output figures seem to have outweighed a continued strong performance in the non-oil sector. Meanwhile, inflation finally returned to positive territory in December.
  • The UAE’s economy struggled in Q4 as activity in the oil and non-oil sectors weakened. Qatar’s gas exports declined at the end of last year but should recover in 2020 as the Barzan facility comes online. Credit growth continued to strengthen, but we think this is unlikely to be sustained.
  • Oman’s Sultan Qaboos passed away this month and was swiftly replaced by his cousin, Sultan Haitham. The new Sultan has been quick to address the country’s weak balance sheet by confirming a new VAT next year. Meanwhile, Q3 national accounts data for Kuwait and Bahrain showed that growth remained weak by past standards.
  • The Central Bank of Egypt kept its key policy rate on hold this month, despite inflation remaining below the mid-point of its target range. But we expect policymakers will resume their loosening cycle soon.
  • Lebanon’s prime minister finally formed a new government this month and policymakers are scrambling to secure external financing to avert default. Markets have almost entirely priced in a default and the currency is already trading well below the official rate on the black market. The authorities are warming to an IMF deal, but this is likely to involve a devaluation and debt restructuring
  • Protests in Algeria have continued to drag on and the unrest weighed heavily on growth in Q3. Morocco’s economy struggled over the second half of 2019.
  • Tunisia is still yet to form a government and, with the mid-February deadline edging closer, there is a growing chance that fresh parliamentary elections are called. This will extend the period of policy paralysis further and leave the country’s large twin deficits unchecked.
  • The region’s financial markets have fared poorly over the past month. The MSCI Arabian Markets Index declined and underperformed the broader MSCI Emerging Markets Index. Sovereign dollar bond spreads widened pretty much across the board, particularly in Lebanon.

Saudi Arabia

  • The downturn in Saudi Arabia’s economy deepened in the second half of last year. Recently-released national accounts data showed that the economy contracted in q/q terms for a third consecutive quarter, causing year-on-year growth to enter negative territory for the first time since 2017. Our GDP Tracker points to GDP declining by 2% in November, compared with a drop of 0.5% y/y over Q3 as a whole (1).
  • The weakness remained concentrated in the oil sector. While the disruption from the attacks on Aramco’s oil facilities in September ultimately proved short-lived, the drag from the OPEC+ oil production cuts intensified. In contrast, the non-oil sector continued to perform strongly (2). Figures on point of sale transactions and ATM withdrawals suggest that consumer spending has picked up (3). At the same time, looser monetary conditions have supported a pick-up in private sector credit growth (4).
  • Given that the 2020 Budget signalled a return to return to fiscal austerity (5), we doubt that the recent strengthen in the non-oil sector will be sustained. This underpins our view that, while GDP growth will recover this year, it is likely to disappoint. We have pencilled in GDP growth of 1.3% for 2020 as a whole. Finally, headline inflation rose from -0.1% y/y in November to +0.2% y/y in December (6).

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

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

Chart 3: Point of Sale Transactions & ATM Cash Withdrawals (% y/y, 3m avg.)

Chart 4: Private Sector Credit (% y/y)

Chart 5: Change in Non-Oil Budget Balance
(As % of Non-Oil GDP)

Chart 6: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Markit, Capital Economics


United Arab Emirates

  • The UAE’s economy appears to have deteriorated towards the end of last year. The downturn in the oil sector deepened and over Q4 as a whole output declined by 4.3% y/y (7). The non-oil sector struggled too. December’s whole economy PMI reading edged down to a fresh low since the survey began in mid-2009 (8). The decline in Dubai’s real estate sector deepened in December, and residential prices are nearly 30% below their 2014 peak (9). Private sector credit growth remained subdued in Q4 too (10).
  • One bright spot has been the tourism sector. Dubai tourist arrivals reached a record 16.7mn in 2019 and are set to receive a one-off boost as the World Expo rolls into town later this year (11). The economy will also be supported by looser fiscal policy – Dubai’s government outlined a 17% increase in budgeted expenditure for this year in its 2020 budget.
  • Finally, December consumer price figures for Dubai and Abu Dhabi were mixed (12). In the former, the pace of deflation eased to its weakest pace in a year, but in Abu Dhabi inflation fell further on the back of weaker food inflation.

Chart 7: UAE Oil Production

Chart 8: UAE Whole Economy PMI

Chart 9: Dubai REIDIN Real Estate Price Index

Chart 10: Private Sector Credit (% y/y)

Chart 11: Tourist Arrivals (mn)

Chart 12: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Qatar

  • Qatar’s economy looks to have slowed further over the second half of last year. LNG export growth rebounded from -11.1% y/y in October to +0.1% y/y in December. Although it still suggests that the hydrocarbon sector contracted over Q4 as a whole (13). The expansion of the Barzan gas field coming online this year should provide a fillip to the sector.
  • At face value, the non-hydrocarbon sector has fared better. Private sector credit growth increased from 20.6% y/y in October to 21.7% y/y in November (14). But this has been increasingly financed through wholesale borrowing, causing banks’ foreign liabilities to rise further (15). Meanwhile, Markit’s whole economy PMI picked up from 48.3 in November to 49.4 last month, but it remained below the 50-mark that, in theory, separates expansion from contraction (16).
  • Visitor arrivals growth jumped from 16.2% y/y in October to 31.6% y/y in November which we suspect was due to a one-off boost from the Arabian Gulf Football Cup. The bigger picture is that arrivals are still below pre-blockade levels (17). Finally, the pace of deflation eased from 0.7% y/y in November to 0.3% y/y last month (18) and the headline rate should return to positive territory in the coming months.

Chart 13: LNG Exports

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

Chart 15: Commercial Banks’ Foreign Liabilities
(% of Total Liabilities)

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

  • Recently-released figures showed that GDP growth in Kuwait slowed from 1.8% y/y in Q2 to 0.4% y/y in Q3, driven by a sharp decline in hydrocarbon output (19). More timely figures showed that the contraction in oil output deepened (20), suggesting that GDP fell further in Q4.
  • The non-hydrocarbons sector hasn’t fared much better. Private sector credit growth remains subdued (21), and the recently announced 2020 budget showed that spending was projected to be flat this year. Despite having the strongest balance sheets in the region, political infighting – highlighted this month by a (unsuccessful) no-confidence vote in the Minister of Social Affairs – will keep fiscal policy tight (22).
  • Elsewhere, Bahrain’s Q3 GDP figures showed that growth picked up from 0.3% y/y in Q2 to 1.6% y/y, due largely to an slower pace of contraction in the oil & gas sector and stronger manufacturing growth (23). Lastly, Oman’s Sultan Qaboos passed away this month after almost 50 years in power. His replacement, Sultan Haitham, has moved quickly to address the country’s weak balance sheets (24). The government confirmed this month that a new value-added tax will come into force at the start of next year.

Chart 19: Kuwait GDP (% y/y)

Chart 20: Kuwait Oil Production

Chart 21: Kuwait Private Sector Credit

Chart 22: Kuwait Budget Balance (% of GDP)

Chart 23: Bahrain GDP (% y/y)

Chart 24: Oman Budget & Current Account Balance
(% of GDP)

Sources: CEIC, Refinitiv, Capital Economics


Egypt

  • Recently-released national accounts data confirmed that Egypt’s economy maintained a solid pace of growth in the second half of last year. GDP expanded by 5.6% y/y in Q3, a touch weaker than growth of 5.7% y/y in Q2 (25). The breakdown showed that domestic demand picked up on the back of stronger investment. But the previous support from net trade has started to fade.
  • More timely activity data suggest that the economy regained some momentum in the final months of last year. Industrial production growth rose from 0.1% y/y in October to 1.1% y/y in November (26). A full breakdown has yet to be released, but the latest sales data suggest that construction activity strengthened (27). And there was a pick-up in the amount of freight traversing the Suez Canal (28). Meanwhile, the whole economy PMI rose from a two-year low of 47.9 in November to 48.2 in December.
  • The Egyptian pound continued to strengthen at the start of 2020 (29) and, in real trade-weighted terms, the currency is now approaching its levels before the 2016 devaluation. Headline inflation jumped from 3.6% y/y in November to 7.0% y/y in December (30). Whilst inflation remained below the central bank’s target of 9±3% and core price pressures are still weak, the MPC decided to keep interest rates on hold at this month’s meeting. We still expect further monetary easing later this year.

Chart 25: GDP (% y/y)

Chart 26: Industrial Production

Chart 27: Sales of Reinforced Steel & Construction Output (% y/y, 3m avg.)

Chart 28: Suez Canal Average Daily Freight

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

Chart 30: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Lebanon & Jordan

  • Three months after protests kicked off in Lebanon, Prime Minister Hassan Diab finally formed a government this month. Policymakers are scrambling to secure external financing in order to meet a Eurobond repayment due in March and seem to be coming around to the idea of an IMF deal. But, as we’ve warned before, the Fund would almost certainly insist on a debt restructuring and devaluation.
  • A default is now almost fully priced into financial markets (31). And the pound is already around 30% weaker against the dollar on the black market compared with the official rate (32). We think the official exchange rate will be devalued by 50%. This is likely to cause inflation, which hit 7% y/y in December (33), to spike to more than 30%. The economy already seems to be in recession (34) and things are only likely to get worse in the coming months.
  • Jordan’s economy remains weak. Recently published data showed that GDP growth edged up from 1.8% y/y in Q2 to 1.9% y/y in Q3, keeping it close to a decade low (35). Meanwhile, consumer price figures for December showed that the headline rate jumped from -0.4% y/y in November to 0.6% last month, on the back of higher food inflation (36).

Chart 31: Lebanon CDS Implied Probability of Default & EMBI Spread over US Treasuries

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 GDP (% y/y)

Chart 36: Jordan Consumer Prices (% y/y)

Sources: CEIC, Refinitv, Capital Economics


Algeria

  • Unrest will continue to weigh on the economy as President Abdelmadjid Tebboune has struggled to appease protestors, who are no doubt disillusioned with another insider from the current ruling regime. Admittedly, recently released GDP data showed that growth picked up from 0.3% y/y in Q2 to 1.2% y/y in Q3, on the back of a rebound in the hydrocarbon sector (37). But growth in the non-hydrocarbon sector slowed further. Mr. Tebboune faces a tough task to turn the economy around.
  • More timely evidence shows that oil production contracted further in Q4 (38). Meanwhile, private sector credit growth slowed to its weakest pace since 2012 (39). The trade balance rose to its largest surplus since 2013 (40), however, this has been 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 think a sharp adjustment lies in store. Finally, headline inflation rose from 1.4% y/y in November to 2.4% y/y last month on the back of easing food price deflation (42).

Chart 37: GDP (% y/y)

Chart 38: Oil Production

Chart 39: Private Sector Credit (% y/y)

Chart 40: Trade Balance (12m Sum)

Chart 41: Dinar vs. Euro-Dollar Basket

Chart 42: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Morocco

  • Recently-released national accounts figures showed that GDP growth edged down from 2.2% y/y in Q2 to 2.1% y/y in Q3 – the weakest pace of growth since the end of 2016 (43). This was due to the slowdown in the non-agricultural sector (44).
  • Data for Q4 have shown little sign of improvements. Weak external demand has taken its toll on export growth, which slowed over the course of Q4 (45). The consumer confidence survey picked up in December, but it remained below its long-run average (46). which suggests that domestic demand remains weak. On positive point to note is that private sector credit growth has picked up and is running at its strongest pace since early 2013 (47).
  • Consumer price figures for December showed that the headline inflation rate rose from 0.4% y/y in November to a 13-month high of 1.2% y/y. This was driven by stronger food and transport inflation (48). The headline rate is likely to remain weak over the course of 2020. And with the ECB set to loosen policy further, we think that the central bank will cut its key policy rate by 25bp, taking the rate to 2.00%, in the second half of the year.

Chart 43: GDP (% y/y)

Chart 44: GDP by Sector (% y/y)

Chart 45: Exports (EUR Terms)

Chart 46: Consumer Confidence

Chart 47: Private Sector Credit (% y/y)

Chart 48: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Tunisia

  • President Kais Saied sacked his prime minister-designate, Habib Jemli, in January after three months of unsuccessful attempts to form a government. New PM Elyes Fakhfakh now has less than a month to complete the job or Mr. Saied will be forced to call new parliamentary elections. In the meantime, the state of policy paralysis has left the country’s large twin deficits unchecked. While the current account deficit narrowed from more than 11% of GDP in Q2 last year to 9.6% in Q3, it remains large (49).
  • Economic activity continued to deteriorate at the end of last year. GDP growth slowed to a three-year low of 0.9% y/y in Q3 (50). More timely figures show that industrial production continued to contract in year-on-year terms in October (51), bank lending growth has weakened further (52) and both export and import growth slowed sharply in November (53).
  • Consumer price figures for December showed that the headline inflation rate edged down from 6.3% y/y in November to a fresh two-year low of 6.1% y/y (54). The fall in headline inflation was driven largely by easing food price pressures.

Chart 49: Current Account Balance
(4Q Sum, % of GDP)

Chart 50: GDP (% y/y)

Chart 51: Industrial Production

Chart 52: Bank Loans (% y/y)

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

Chart 54: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Financial Markets

  • Stock markets in the region have struggled since the turn of the year and have underperformed those in the rest of the emerging world. The MSCI Arabian Markets Index has fallen by over 2% (in local currency terms) so far this year, compared with a 0.3% decline in the MSCI EM index (55). Indices in Morocco, Bahrain, Jordan and Oman have started the year on a strong footing, but this has been overshadowed by large falls in Egypt’s EGX30, the Saudi Tadawul and the Lebanese BLOM index (56).
  • Sovereign dollar bond spreads widened pretty much across the board over the past month (57). Only in Egypt have spreads narrowed. Tunisian spreads widened further amid continued delays to the formation of a new government. In Lebanon, sovereign dollar bond spreads have widened further and a default is now almost entirely priced in (58).
  • In the currency market, most currencies have held up well over the past month, but pressure continued to mount on the Lebanese pound (59). The black market exchange rate weakened by nearly 4% m/m against the dollar and is now trading more than 30% below the official rate. At the other end of the spectrum, the rally in the Egyptian pound has continued into this year (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 29th Dec. – 29th Jan.)

Chart 58: JP Morgan Lebanon EMBI Stripped Spread over US Treasuries & Yield (bp)

Chart 59: Currencies vs. US Dollar (%)

Chart 60: Egyptian Pound (vs. US$, Inverted)

Sources: CEIC, Refinitiv, Capital Economics


Background Data

Chart 61: GDP ($bn, 2018, Market Exchange Rates)

Chart 62: Population (Millions, 2018)

Chart 63: GDP Per Capita
($000, 2018, Market Exchange Rates)

Chart 64: Share of World Output (%, 2018, 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, Middle East and North Africa Economist, +44 20 7808 4991, james.swanston@capitaleconomics.com