OPEC+ cut extension would drag on GDP - Capital Economics
Middle East & North Africa Economics

OPEC+ cut extension would drag on GDP

Middle East Chart Book
Written by William Jackson
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The latest OPEC oil production figures continue to show that several countries are overproducing, which is making Saudi Arabia – which has borne the brunt of production cuts – increasingly frustrated. For now, at least, countries are making compensatory cuts (although it’s not clear if some of the serial non-compliers like Nigeria and Angola will continue to do so). In the near term, we doubt that Saudi would revert to its previous policy of raising oil output to regain market share. Indeed, rumours suggest that the deal to cut output could even be extended beyond January (when quotas are set to ease). While that might support prices, it would prolong the drag exerted by oil sectors on overall GDP growth.

  • The latest OPEC oil production figures continue to show that several countries are overproducing, which is making Saudi Arabia – which has borne the brunt of production cuts – increasingly frustrated. For now, at least, countries are making compensatory cuts (although it’s not clear if some of the serial non-compliers like Nigeria and Angola will continue to do so). In the near term, we doubt that Saudi would revert to its previous policy of raising oil output to regain market share. Indeed, rumours suggest that the deal to cut output could even be extended beyond January (when quotas are set to ease). While that might support prices, it would prolong the drag exerted by oil sectors on overall GDP growth.
  • The COVID-19 outbreaks in Morocco, Tunisia, Jordan and Lebanon have continued to worsen, prompting authorities to tighten restrictions to slow the spread of the virus. With the composition of these economies being composed to a larger degree of sectors vulnerable to social distancing measures, the stricter measures will have a particularly damaging effect on economic recoveries.
  • Saudi Arabia’s economy contracted sharply in the second quarter of the year, which came as a result of the impact of OPEC+ production cuts and COVID-19 restrictions weighing on the economy. But, even as restrictions have been lifted, the economic recovery has stuttered.
  • The UAE’s largest construction firm, Arabtec, filed for liquidation this month and raised fresh concerns about the debts of Dubai (where Arabtec is listed) and it’s government-related entities. In Qatar, Q2 GDP figures showed that the economy shrunk by just over 6% y/y, but more timely figures have shown a strong recovery compared with the rest of the region.
  • Across the rest of the Gulf, Kuwaiti Emir Al-Sabah passed away this month and was succeed by Sheikh Nawaf, who needs to overcome an ineffective parliament to pass the long-awaited debt law. Oman’s government has taken swift action to address deteriorating public finances through a new debt issuance and bringing forward the introduction of VAT.
  • The Central Bank of Egypt (CBE) resumed its easing cycle this month in what may have been an anticipatory move ahead of September’s weak inflation reading. The headline rate came in below the 4% minimum threshold the IMF had set out in the recent Stand-By Arrangement and, as a result, triggered discussions with between the CBE and Fund’s Executive Board in which they are likely to encourage further loosening.
  • In the rest of North Africa, the imposition of new restrictions in Morocco and Tunisia will weigh on economic activity, which was already hit hard with double-digit contractions recorded in Q2. The Algerian dinar is continuing to come under greater pressure on the back of low oil prices. The authorities’ unsustainable depletion of FX reserves could reach a critical point sooner rather than later.
  • Lebanon’s political crisis was thrown into renewed turmoil as PM-designate Mustapha Adib resigned and was replaced with (twice) former prime minister, Saad Hariri. Jordan’s economic recovery will be dragged back by the decision to introduce national weekend lockdowns amid a surge in virus cases.
  • Financial markets have had a mixed month. Equity markets have struggled, particularly in Dubai and Egypt. Meanwhile sovereign dollar bond spreads have narrowed in almost all countries, though in Tunisia they have widened sharply as concerns over the government’s ability to finance the large budget deficit.

COVID-19

  • The divergence in COVID-19 outbreaks across the Middle East and North Africa has continued this month as North African economies, Lebanon and Jordan have quickly caught up to total case numbers in the Gulf (1). Despite the reimposition of partial lockdowns and national curfews in the likes of Morocco, Jordan, and Tunisia, new daily case numbers have continued to surge (2). And the total number of deaths in North Africa and Jordan has quickly surpassed that of some of the Gulf countries (3).
  • Virus outbreaks in the Gulf and Egypt been kept under control. New daily case numbers have generally trended downwards, and the number of tests per confirmed case in the Gulf has risen which suggests the spread of the virus has slowed (4). Part of the reason why the Gulf has been so successful in managing outbreaks and quelling second waves is an aggressive and widespread testing regime (5).
  • Containment measures in MENA have remained strict (6). In the coming months, they are likely to only get stricter in North Africa and Jordan due to the surge in cases.

Chart 1: Confirmed COVID-19 Cases (Log-Scale)

Chart 2: New COVID-19 Cases (7D Rolling Avg.)

Chart 3: Confirmed COVID-19 Deaths (Log-Scale)

Chart 4: Tests per Confirmed COVID-19 Case

Chart 5: COVID-19 Tests (Per 100 Population)

Chart 6: Total Confirmed COVID-19 Cases in MENA & Oxford University Policy Stringency Index

Sources: CEIC, Refinitiv, Capital Economics


Saudi Arabia

  • Recently-released GDP figures showed that Saudi Arabia’s economy contracted by 4.9% q/q in Q2, deepening the year-on-year drop in output to 7.0% y/y (7). The weakness was concentrated in the non-oil sector after the authorities imposed a strict lockdown in order to contain COVID-19. And OPEC+ oil production cuts meant that the oil sector also continued to struggle (8).
  • There are signs that the recovery which began in June is losing steam. Point of sale transactions and ATM withdrawals – proxies for consumer spending – fell by 5.0% y/y in August (9). The growth in local deliveries of cement and clinker eased from 42.3% y/y in August to 23.2% y/y in September (10). On a more comforting note, the drag from oil production cuts has eased and Umrah pilgrimages, which are key the Kingdom’s tourism sector (11), resumed this month.
  • The government’s preliminary 2021 budget released this month suggests that the government has no intention to row back on recent austerity measures, including a VAT hike. Government spending is projected to fall in each of the next three years (12), with Vision 2030 programmes set to undergo “structural improvements”. Finally, headline inflation dropped from 6.2% y/y in August to 5.7% y/y in September as food inflation eased and schools slashed tuition fees.

Chart 7: GDP

Chart 8: GDP (% y/y)

Chart 9: Sum of ATM Cash Withdrawals and Point of Sale Transactions (% y/y)

Chart 10: Local Deliveries of Cement & Clinker

Chart 11: Tourism Expenditure by Type (% of Total)

Chart 12: Government Spending (SARbn)

Sources: CEIC, Refinitiv, Capital Economics


United Arab Emirates

  • The UAE’s economic recovery has continued at a modest pace over the past month. September’s whole economy PMI rose from 49.4 in August to 51.0 (13), largely on the back of stronger external demand. And, after plunging at the depth of the crisis, the employment component jumped to its highest level since February. The tourism sector has also been boosted by a higher volume of inbound flights (14). However, the faster pace of contraction of private credit growth will be a headwind to the recovery (15).
  • In Abu Dhabi, industrial production recovered from -21.7% y/y in Q1 to -13.0% in Q2, but any further recovery will be sluggish. After producing 0.2mn bpd of oil above its OPEC+ quota in August, the UAE made compensatory cuts in September. That translates to a fall of 17.8% y/y (16). UAE’s oil minister said he expected quotas to be eased from January but weaker output will continue to weigh on the oil sector.
  • Meanwhile, the news that Arabtec, the region’s largest construction firm has filed for liquidation highlights the pain inflicted by the crisis and has reinforces our fears about the debts of Dubai’s GREs. We estimate there is around $76.0bn of debt outstanding (77% of Dubai’s GDP) (17) and much of this is coming due by 2024. Problems could be exacerbated by the downturn in the real estate sector; residential property prices are 32% below their 2014 peak (18) and overcapacity will weigh on revenues accruing to the GREs.

Chart 13: Whole Economy PMI

Chart 14: UAE Inbound Flights

Chart 15: Private Sector Credit (% y/y)

Chart 16: Oil Production

Chart 17: Dubai GRE Debt Repayment Schedule ($bn)

Chart 18: REIDIN Dubai Residential Property Index

Sources: CEIC, Refinitiv, Capital Economics


Qatar

  • National account figures for Q2 showed that Qatar’s economy shrunk by 6.1% y/y, the weakest pace recorded since the quarterly series began in 2012 (19). The breakdown of the data revealed that the downturn was driven by those sectors worst affected by the COVID-19 crisis including wholesale & retail trade, transportation & storage, and manufacturing (20).
  • More timely figures show the recovery since then has been strong. Motor vehicle registrations strengthened in August (21). The whole economy PMI eased from 57.3 in August to 51.4 last month but it is consistent with non-hydrocarbon GDP growth of around 4% y/y in Q3 (22). At the same time, the decline in LNG exports eased in Q3 (23) – looking ahead, with more capacity coming on-line from the Barzan field, the hydrocarbon sector will provide a boost to the economic recovery.
  • That said, the recent credit boom – which had been pushed towards some of the worst performing sectors of the economy including travel, tourism, and real estate – has continued to unwind as private sector growth eased from 12.4% y/y in July to 11.1% y/y in August. Finally, the pace of deflation ease from 4.1% y/y in August to 2.9% y/y last month on the back of rising non-food and housing prices that more than offset weaker food inflation (24).

Chart 19: GDP (% y/y)

Chart 20: Q2 GDP by Industry (%-pts Contribution)

Chart 21: Motor Vehicle Registrations (% y/y)

Chart 22: Whole Economy PMI &
Non-Hydrocarbon GDP

Chart 23: LNG Exports

Chart 24: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Rest of the Gulf

  • Oil prices fell a little further this month on the back of concerns about second waves of COVID-19 at the global level and oil production increasing faster-than-expected in other countries. These factors lies behind the sharp widening of budget deficits in Kuwait, Bahrain, and Oman this year (25). At the same time, oil sectors have been hit hard by OPEC+ output cuts (26).
  • In Oman, Sultan Haitham is tackling its deteriorating public finances through the recent $2bn dollar bond sale and bringing forward the introduction of a 5% VAT rate to April. However, this will push up inflation – which came in at -1.2% y/y in September – by around 3.5%-pts over the coming months (27). And in Kuwait, Sheikh Nawaf Al-Sabah acceded to the throne this month and will have to pass the debt law in order to help the finance the shortfall. However, this will prove difficult with an ineffective parliament, and the Emir’s attention may be diverted by the need to quell the recent rise in COVID-19 cases (28).
  • Non-oil sectors have struggled too. Bahrain’s non-oil GDP shrunk by 11.5% y/y in Q2. Private sector credit growth has slowed in both Bahrain and Oman in Q3, while in Kuwait while credit growth edged up from 4.6% y/y in July to 4.9% y/y in August (29). And non-oil exports collapsed in Kuwait in the second quarter of the year and in Oman, the pace of decline in eased from 25.6% y/y in July to 17.6% y/y in August (30).

Chart 25: Budget Balance (% of GDP)

Chart 26: Oil Production (% y/y)

Chart 27: Oman Consumer Prices (% y/y)

Chart 28: Daily New COVID-19 Cases (7-Day Avg.)

Chart 29: Private Sector Credit (% y/y)

Chart 30: Non-oil Exports (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Egypt

  • The 50bp policy rate cut by Egypt’s central bank (CBE) last month, to 8.75%, was probably in anticipation of the publication of September’s weak inflation reading – the headline rate came in at just 3.7% y/y (31). This figure falls outside the 9±3% inflation target range so triggers a consultation with the IMF’s Executive Board, in which the Fund is likely to give the green light for further easing. We think the CBE will lower rates by a further 150bp, to 7.25%, by end-2021, which is more easing than currently anticipated (32).
  • Looser monetary policy should help support the slowly recovering economy. The annual pace of contraction in industrial production eased from 13.2% y/y in July to 11.5% y/y in August (33), which has been weighed down by weak output from the hydrocarbon sector. And the whole economy PMI edged up from 49.4 in August to 50.4 in September, the first time it’s been above the 50-mark in over a year (34).
  • External pressures have continued to ease. Foreign capital inflows have returned, with ownership of domestic Egyptian Treasury bills rising to 14.3% of the total in August. However, there is still ground to make up to reach pre-virus levels (35). As a result, the pound has continued its rally, appreciating by 0.4% m/m against the dollar. At the same time, the authorities continued to build FX reserves (36). However, we are concerned the pound looks overvalued and expect it to depreciate by 10% to 17.5/$ by end-2021.

Chart 31: Consumer Prices (% y/y)

Chart 32: Overnight Deposit Rate (%)

Chart 33: Industrial Production

Chart 34: Whole economy PMI

Chart 35: Foreign Ownership of Treasury Bills
(% of Total)

Chart 36: FX Reserves ($bn)

Sources: CEIC, Refinitiv, Capital Economics


Rest of North Africa

  • COVID-19 outbreaks in Morocco and Tunisia have worsened (37) which has prompted authorities to tighten restrictions. Officials in Morocco extended localised lockdowns in major cities until at least the end of October. And in Tunisia, despite the government previously wanting to avoid reimposing containment measures, the severity of the virus has forced their hand by banning all public gatherings.
  • Tunisia’s government announced a $1.5bn bailout of state-owned companies most affected by the crisis, which widened the budget deficit. With sovereign dollar bond yields now above 9%, a threshold that has typically caused EMs to shy away from external borrowing in the past (38), officials asked the central bank to buy government bonds and turned back towards the IMF for more support (39). However, unless fiscal policy is tightened sufficiently soon, there is a risk that debt continues on an unsustainable trajectory (40).
  • Algeria’s economic recovery has been very sluggish against the backdrop of OPEC+ production cuts. Oil output growth fell from -15.7% y/y in August to -16.3% y/y in September. Even as quotas ease, the drag on the economy will linger for some time (41). Meanwhile, pressure on the dinar has continued to increase – it weakened by 0.3% m/m against its euro-dollar basket. And with FX reserves being rapidly depleted (42), this can only go on for so long until there is a much sharper adjustment.

Chart 37: New Daily COVID-19 Cases (7D Avg.)

Chart 38: EM Eurobond Issuances by Yield
(No. Since 2010)

Chart 39: Tunisia Budget Balance (% of GDP)

Chart 40: Tunisia General Government (% of GDP)

Chart 41: Algeria Oil Production

Chart 42: Algeria FX Reserves ($bn)

Sources: CEIC, Refinitiv, Capital Economics


Lebanon & Jordan

  • Saad Hariri has returned (for the third time) as Lebanon’s prime minister-designate, following the resignation of Mustapha Adib earlier this month. Mr Hariri will now face the unenviable task of forming a government. With IMF talks already on the verge of collapse and economic rescue plan being dead in the water, he faces a nearly impossible task of turning the country around.
  • Without political reforms, the government will be unable to unlock financial assistance to cushion the economic collapse. Even before the Beirut blast, output was falling by 25-30% y/y (43) and the September PMI suggests that the economy is contracting, albeit at a slower pace (44). Headline inflation rose further in August, from 112.4% y/y in July to 120.0% y/y, as food prices continued to surge (45).
  • Recently-released Q2 GDP figures showed that Jordan’s economy shrunk by a modest 3.5% y/y (46), largely due to downturns in industry and tourism-related sectors. The decline in industry has eased since then as output growth picked up from -5.2% y/y in July to -0.7% y/y in August (47). However, the recovery will remain slow-going as containment measures have been tightened amid a sharp rise in new infections, including national lockdowns at the weekend. Finally, August consumer price figures showed that the pace of deflation has stabilised at 0.6% y/y (48).

Chart 43: Lebanon BdL Coincident Indicator & GDP

Chart 44: Lebanon Whole Economy PMI

Chart 45: Lebanon Consumer Prices (% y/y)

Chart 46: Jordan GDP

Chart 47: Jordan Industrial Production

Chart 48: Jordan Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Financial Markets

  • Equity markets have had a poor month. The MSCI Arabian Markets Index had strengthened earlier in October, but it has since given back all of these gains. It underperformed relative to the wider MSCI Emerging Markets Index, which rose by 6.1% over the same period (49). At a country level, Dubai’s equity index was the worst performer, declining by 3.8% m/m. It was weighed down by the news that Arabtec, one of the largest real estate firms in the Gulf, filed for liquidation (50).
  • Sovereign dollar bond spreads narrowed across most of the region over the past month. Only in Morocco and Tunisia did they widen (51). Spreads widened the most in Tunisia and the yield rose to 8% (52), a level where EMs generally find it too costly to borrow externally. Indeed, Tunisian authorities appear to be aware of this by turning to the central bank to possibly buy government bonds to finance the fiscal deficit, however, this caused spreads to widen further amid concerns about financial repression.
  • Currencies have mostly strengthened this month. The Moroccan dirham rose by 0.5% m/m against its euro-dollar basket, while the Algerian dinar was the only currency to depreciate this month (53). The rally in the Egyptian pound has continued and is at its strongest level against the US dollar since March (54).

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

Chart 50: Equity Indices (LCU, % Change)

Chart 51: EMBI Sovereign Dollar Bonds

Chart 52: Tunisia EMBI Sovereign Dollar Bond (bp)

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

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

Sources: CEIC, Refinitiv, 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

1.2

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

0.9

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

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

Qatar

0.2

1.6

3.6

2.2

1.7

1.4

-0.8

0.9

1.7

2.8

0.4

0.3

-0.6

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

4.0

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

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

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

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