Political troubles casting a shadow - Capital Economics
Middle East & North Africa Economics

Political troubles casting a shadow

Middle East Chart Book
Written by William Jackson
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Political developments across Algeria, Tunisia and Lebanon threaten to exacerbate already-poor balance of payments positions. Presidential elections that took place in Algeria last week don’t appear to have appeased protestors, who are no doubt disillusioned with the election of another insider from the current ruling regime. And Tunisia’s Prime Minister-designate, Habib Jemli, is no closer to forming a coalition government. In both countries, there are likely to be few efforts in the near-term to address large macroeconomic imbalances, setting the stage for a sharper adjustment further down the line. The situation is worst in Lebanon. Pressure is mounting on the dollar peg and there is a growing risk that the country starts the next decade amid messy currency, debt and banking crises.

  • Political developments across Algeria, Tunisia and Lebanon threaten to exacerbate already-poor balance of payments positions. Presidential elections that took place in Algeria last week don’t appear to have appeased protestors, who are no doubt disillusioned with the election of another insider from the current ruling regime. And Tunisia’s Prime Minister-designate, Habib Jemli, is no closer to forming a coalition government. In both countries, there are likely to be few efforts in the near-term to address large macroeconomic imbalances, setting the stage for a sharper adjustment further down the line. The situation is worst in Lebanon. Pressure is mounting on the dollar peg and there is a growing risk that the country starts the next decade amid messy currency, debt and banking crises.
  • The sale of a stake in Saudi state oil company, Aramco, concluded this month. The firm’s share price rallied in the first few days of trading, pushing the valuation above the authorities’ desired $2trn. Nonetheless, the government outlined an austere budget for 2020 and agreed with the rest of OPEC+ to deepen oil production cuts.
  • The UAE’s economy has continued to stutter. Economic growth in Dubai slowed a touch as weak, and its domestic real estate sector remains in the doldrums. Qatar’s economy has suffered too, dragged down by weakness in the construction sector.
  • The drag on Kuwait’s economy from oil production cuts should ease further over the coming months, but activity in the non-oil sector remains weak. Elsewhere, the latest activity figures show that the economies of Bahrain and Oman have continued to struggle.
  • Recently-released figures suggest that Egypt’s economy has slowed over the second half of this year. Meanwhile, inflation pressures remain weak and there is plenty of room for the central bank to loosen monetary policy further over the next twelve months or so.
  • Lebanon’s economy appears to have contracted sharply this year and the recent political turmoil has pushed the country to the brink of a messy economic crisis.
  • Algeria’s new president is unlikely to dramatically change the direction of economic policy, putting the economy on course for a sharp adjustment in the next couple of years. Morocco’s economy appears to be struggling on the back of weak export growth.
  • Tunisia’s political gridlock means that no efforts have been made to address the country’s large twin budget and current account deficits. The latest data show that GDP growth slowed to a three-year low in Q3.
  • The performance of financial markets has been mixed this month. The MSCI Arabian Markets Index rose, but still underperformed the broader MSCI Emerging Markets Index. Meanwhile, the Egyptian pound continued its rally against the dollar and is among the best performing EM currencies this year.

Saudi Arabia

  • The Saudi government has completed the sale of a stake in the state oil company, Aramco. In the world’s largest IPO, 1.5% of the shares of the firm were listed on the Tadawul, with the government set to secure a total of $29.4bn from the sale (1). Aramco shares are up by over 17% since they debuted (2), pushing the valuation of the firm above Crown Prince Mohammed bin Salman’s long-desired $2trn.
  • The 2020 budget released this month showed that the government is targeting a deficit of 6.4% of GDP (3). It looks like the underlying fiscal stance will be tightened through spending cuts (4). Reports suggest that the government is reviewing energy subsidies, increasing the chances of a fresh round of administered price hikes. This would push up inflation, which stood at -0.2% y/y in November (5).
  • Our GDP Tracker suggests that the Saudi economy contracted by 0.5% y/y over Q3 as a whole, with the downturn deepening in September (6). The weakness was concentrated in the oil sector, exacerbated by the hit to output from the recent attacks on Aramco’s oil facilities. In contrast, activity in the non-oil sector strengthened. Further ahead, this month’s OPEC+ deal to deepen oil output cuts, coupled with tighter fiscal policy, has prompted us to revise down our 2020 GDP growth forecast from 2.3% to 1.3%.

Chart 1: Largest Initial Public Offerings ($bn)

Chart 2: Aramco Share Price (SAR)

Chart 3: Budget Balance (% of GDP)

Chart 4: Change in Non-oil Budget Balance
(% of Non-oil GDP)

Chart 5: Consumer Prices (% y/y)

Chart 6: GDP & CE GDP Tracker (% y/y)

Sources: CEIC, Refinitiv, Markit, Capital Economics


United Arab Emirates

  • The UAE’s economic slowdown appears to have intensified. Recently-released national accounts figures for Dubai showed that growth eased from 2.2% y/y in Q1 to 2.1% in Q2 (7). This was driven by a contraction in the financial and insurance sector, which more than offset stronger growth in the non-financial and domestic households’ sectors.
  • More timely figures suggest that the economy has continued to struggle. The UAE’s whole economy PMI fell from 51.1 in October to 50.3 last month, which was the lowest reading since the survey began in mid-2009 (8). Dubai’s real estate sector remains in the doldrums (9). Private sector credit growth has slowed sharply too (10). And oil production contracted at its fastest annual pace since the end of 2017 (11).
  • Finally, consumer price figures for October showed that the pace of deflation eased from 2.2% y/y in September to 1.9% y/y in October. The breakdown showed that stronger non-food inflation more than offset a further decline in food prices (12).

Chart 7: Dubai GDP (% y/y)

Chart 8: UAE Whole Economy PMI

Chart 9: Dubai Real Estate Price Index

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

Chart 11: UAE Oil Production

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

Sources: CEIC, Refinitiv, Capital Economics


Qatar

  • Hopes are rising that an end to the blockade imposed on Qatar since mid-2017 is in sight, after the Qatari authorities announced that talks with Saud Arabia had commenced. The economy suffered a short, sharp hit from the blockade in 2017, which quickly unwound. The main casualty was the tourism sector as visitor arrivals collapsed (13). Accordingly, if the blockade is lifted, the tourism sector would benefit but we think that there would only be a limited boost to the economy as a whole.
  • The latest data suggest Qatar’s economy is struggling. Industrial production growth slowed from 1.1% y/y in August to -0.4% y/y in September. And while the whole economy PMI rose in November, it remained below the 50-mark, suggesting the non-oil economy continued to contract (14). The real estate price index declined by 7.7% y/y in September, leaving prices 27% below their peak in late-2015 (15).
  • Private sector credit growth softened a touch in October (16) and, given that the recent boom in credit has been driven by banks’ reliance on wholesale borrowing (17), we think that the pace of lending will ease further. Finally, consumer prices declined by 0.8% y/y in October (18), driven by a sharp drop in food, transport, and recreation and culture prices.

Chart 13: Tourist Arrivals (000s)

Chart 14: Whole Economy PMI

Chart 15: Real Estate Price Index

Chart 16: Commercial Banks’ Private Sector Credit
(% y/y)

Chart 17: Commercial Banks’ Loan-to-Deposit Ratio

Chart 18: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Markit, Capital Economics


Kuwait, Oman & Bahrain

  • Following weeks of consultations, Kuwait’s recently-appointed prime minister, Sabah Al-Khalid Al-Sabah, finally announced a new cabinet today. But this won’t spell an end to the political troubles that have dogged Kuwait for years. As a result, despite the country’s strong balance sheets, fiscal policy is unlikely to be loosened (19). And there will be few efforts to improve the poor business environment (20).
  • The OPEC+ deal to deepen oil production cuts doesn’t significantly alter the outlook for Kuwait’s economy. The drag from the oil sector will continue to fade over the coming months (21). In the non-oil sector, bank card transactions declined further in Q3. And while private sector credit growth picked up in October, it was still weaker than that recorded over the first half of the year (22). Consumer price figures for November showed that inflation slowed from 1.7% y/y in October to 1.5% y/y last month.
  • Elsewhere, the non-oil sectors of Bahrain and Oman continued to struggle. Credit growth has slowed further in both economies (23). Meanwhile, Oman’s headline inflation rate fell back into negative territory in October, whereas inflation in Bahrain rose to its highest rate this year (24).

Chart 19: Kuwait Budget Balance (% of GDP)

Chart 20: World Bank Ease of Doing Business Index (2018)

Chart 21: Kuwait Oil Production (% y/y)

Chart 22: Kuwait Private Sector Credit (% y/y)

Chart 23: Private Sector Credit (% y/y)

Chart 24: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Egypt

  • The latest data suggest that Egypt’s economy struggled in the second half of this year. Industrial production – which includes some services, such as tourism – contracted by 1.0% y/y in September, its worst performance in 10 months (25). Meanwhile, the whole economy PMI fell from 49.2 in October to 47.9 in November, a two-year low (26).
  • The Egyptian pound has continued to strengthen and is now up by 12% against the dollar since the start of this year (27). The appreciation has been underpinned by an improvement in Egypt’s balance of payments position – the current account deficit has narrowed from 6.6% of GDP prior to the 2016 devaluation to less than 3.0% of GDP (28).
  • Headline inflation increased from 3.1% y/y in October to 3.6% y/y in November, but this still left it well below the central bank’s target range of 9±3% for end-2020 (29). The central bank’s preferred measure of core inflation dropped to just 2.1% y/y and the price components of the whole economy PMI suggest that inflation pressures will stay subdued. Against this backdrop, we think that policymakers will press ahead with their easing cycle and forecast 275bp of interest rate cuts, to 9.50%, by the end of 2021 (30).

Chart 25: Industrial Production

Chart 26: Whole Economy PMI

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

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

Chart 29: Consumer Prices (% y/y)

Chart 30: Overnight Deposit Rate (%)

Sources: CEIC, Refinitiv, Capital Economics


Lebanon & Jordan

  • The political upheaval in Lebanon has continued to rumble on and the economy is teetering on the brink of a full-blown crisis. After two candidates for prime minister pulled out of the race, President Michel Aoun has turned back to former PM Saad Hariri – who resigned in October after the outbreak of the recent protests – to try to form a new government.
  • The protests have disrupted activity and almost certainly caused the recent economic downturn to deepen (31). Meanwhile, pressure on the dollar peg has continued to mount. Non-resident deposits fell by 5.2% y/y in October (32) and the central bank’s ability to offset capital flight is limited. The Lebanese pound is around 25% weaker against the dollar on the black market compared with the official exchange rate (33). The IMF has previously estimated that the currency is 50% overvalued.
  • A weaker currency would push up inflation, which stood at 1.3% y/y in October (34). It would also accelerate a potential sovereign default. The government managed to meet a $1.5bn foreign currency debt repayment this month, but large FX debts maturing early next year may prove more difficult to service (35). Investors have almost fully priced in a sovereign default within the next five years (36).

Chart 31: Lebanon GDP & Coincident Indicator
(% y/y)

Chart 32: Lebanon Non-resident Deposits (% y/y)

Chart 33: Lebanese Pound (vs. $, Inverted)

Chart 34: Lebanon Consumer Prices (% y/y)

Chart 35: Lebanon Government Foreign Currency Debt Repayments ($bn)

Chart 36: Lebanon Dollar Bond Spreads & Implied Probability of Default (bp)

Sources: CEIC, Refinitv, Capital Economics


Algeria

  • Former Prime Minister Abdelmadjid Tebboune was declared Algeria’s new president this month, after winning 59% of the votes in the presidential election. Mr. Tebboune’s close ties to the ruling regime are unlikely to appease protesters. From an economic perspective, Mr. Tebboune is unlikely to alter the current policy mix. Fiscal policy will be kept too loose and, despite dwindling FX reserves (37), the dinar will continue to be propped up (38). But this will merely worsen the country’s already-large twin deficits (39).
  • After recording growth of just 0.3% y/y in Q2 (40), the economy appears to have remained weak in the second half of the year. Oil production has continued to contract by around 3% y/y (41). Private sector credit growth picked up from 7.0% y/y in August to 8.1% y/y in September, but it remained weaker than its average over the first half of the year.
  • Finally, headline inflation slowed sharply from 2.9% y/y in September to 1.5% y/y in October. This was driven by weaker food inflation, although non-food inflation eased too (42).

Chart 37: FX Reserves (US$bn)

Chart 38: Dinar vs. Euro-Dollar Basket

Chart 39: Current Account & Budget Balance
(% of GDP)

Chart 40: GDP (% y/y)

Chart 41: Oil Production (% y/y)

Chart 42: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Morocco

  • Morocco’s economy appears to have continued to struggle. The latest GDP data showed that growth eased from 2.8% y/y in Q1 to 2.5% in Q2 (43), driven by a slowdown in the non-agricultural sector. More timely figures point to economic activity remaining weak in the second half of the year. Industrial production figures showed that manufacturing output slowed from 2.3% y/y in Q2 to 1.6% y/y in Q3 (44).
  • Trade data showed that export growth slumped in October (45), reflecting continued weakness in the euro-zone. Car exports have struggled, but this should prove temporary as production from the recently-opened Peugeot plant in Kenitra comes on stream (46). Reports that German, Italian and Japanese auto manufacturers have declared their interest in setting up production facilities in Morocco bode well for the country’s long-term outlook. Meanwhile, private lending growth hit an eight-year high in October (47)
  • Finally, consumer price figures for October showed that the headline inflation rate ticked up from 0.2% y/y in September to 0.7%, driven by a strong rebound in food inflation (48). The central bank opted to keep its key policy rate on hold at 2.25% when it met this month.

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

Chart 44: Manufacturing Production (Excl. Oil, % y/y)

Chart 45: Exports & Imports (EUR Terms, % y/y)

Chart 46: Vehicle Production (000s Units)

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

Chart 48: Consumer Prices (% y/y)

Sources: CEIC, Refinitiv, Capital Economics


Tunisia

  • Hopes for a swift end to Tunisia’s political gridlock were dashed after Prime Minister-designate Habib Jemli announced that he will need more time to form a government. Negotiations over forming a coalition, which will need to include at least three parties, have proved difficult (49). If a government cannot be formed in the next two months, fresh parliamentary elections will be called. An extended period of policy paralysis will delay efforts to address the country’s large budget and current account deficits (50).
  • Recently-released national accounts figures confirmed that the economy continued to struggle in Q3. GDP growth slowed from 1.2% y/y in Q2 to 0.9% y/y last quarter – the weakest result since mid-2016 (51). The breakdown showed that the manufacturing and business services sectors drove the slowdown (52). The latest signs are that growth weakened further in Q4. Credit and industrial production growth remained weak and export growth slumped (53).
  • Consumer price figures for November showed that the headline inflation rate edged down from 6.5% y/y in October to a two-year low of 6.3% y/y (54). The fall in headline inflation was driven by both an easing of food and non-food price pressures.

Chart 49: Parliamentary Election Results
(No. of Seats Won)

Chart 50: Current Account and Budget balance
(% of GDP)

Chart 51: GDP (% y/y)

Chart 52: GDP by Sector (% 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 underperformed those in the rest of the emerging world this month. The MSCI Arabian Markets Index rose by 1.2% m/m (in local currency terms), compared with a 3.0% gain in the MSCI Emerging Markets Index (55). At a country level, performances were mixed (56). The Kuwaiti equity index surged over the past month and optimism surrounding the Aramco IPO boosted the Saudi Tadawul. At the other end of the spectrum, Egypt’s EGX30 fell by 7%.
  • Sovereign dollar bond spreads narrowed pretty much across the board over the past month (57). In Tunisia, spreads narrowed by nearly 40bp amid hopes that Prime Minister-designate Habib Jemli will eventually be able to form a new government. The one exception is Lebanon, where spreads have stabilised over the past month but are still consistent with investors pricing in a high chance of a sovereign default (58).
  • In the currency market, pressure also mounted on the Lebanese pound – the black market exchange rate is around 25% weaker than the official rate (59). Elsewhere, the Egyptian pound has continued to strengthen and is now up by close to 12% against the dollar this year. Despite the improved political backdrop, the Tunisian dinar fell by 0.8% over the past month (60).

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

Chart 56: Equity Indices (Local Currency, % m/m)

Chart 57: Change in EMBI Dollar Bond Spread over US Treasuries (bp, Change 16th Nov. – 16th Dec.)

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

Chart 59: Lebanese Pound (vs. $, Inverted)

Chart 60: Currencies vs. US Dollar (%)

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
Ruby Chamberlain, Research Assistant, +44 20 7808 4068, ruby.chamberlain@capitaleconomics.com