Regional slowdown worsens - Capital Economics
Middle East & North Africa Economics

Regional slowdown worsens

Middle East Chart Book
Written by William Jackson
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The focus on political risk and Lebanon’s growing debt problem have meant that the sharp slowdown in growth across large parts of the region has gone unnoticed. The latest figures suggest that the economies of Saudi Arabia, Qatar and Lebanon were all contracting in the middle of the year, and growth in the UAE, Morocco, Bahrain and Oman slowed. By our estimates, regional GDP growth fell from a peak of 3.5% y/y in Q4 2018 to 1.9% y/y in Q2 and 1.6% in Q3. The impact of oil output cuts and fiscal tightening could cause regional growth to slow to just 1% y/y in Q4, which would be one of the worst outturns this decade.

  • The focus on political risk and Lebanon’s growing debt problem have meant that the sharp slowdown in growth across large parts of the region has gone unnoticed. The latest figures suggest that the economies of Saudi Arabia, Qatar and Lebanon were all contracting in the middle of the year, and growth in the UAE, Morocco, Bahrain and Oman slowed. By our estimates, regional GDP growth fell from a peak of 3.5% y/y in Q4 2018 to 1.9% y/y in Q2 and 1.6% in Q3. The impact of oil output cuts and fiscal tightening could cause regional growth to slow to just 1% y/y in Q4, which would be one of the worst outturns this decade.
  • Besides the weakness of economic growth in Saudi Arabia, recent reports suggest that the Saudi authorities could get the ball rolling on the long-awaited IPO of state oil company, Aramco, at the start of November.
  • The UAE’s economy has continued to struggle. The whole economy PMI fell to its lowest level in nine years in September and Dubai’s real estate sector remains in a deep slump. Qatar’s economy suffered in Q2 as front-loaded projects for the football World Cup began to wind down.
  • Kuwait’s economy remains weak. Reports suggest that it and Saudi Arabia are close to a deal to re-start oil production in the shared neutral zone. But any rise in output would probably small so as not to breach OPEC+ quotas. Elsewhere, the latest activity figures point to weaker growth in Bahrain and Oman.
  • Egypt’s economy remains one of the region’s best performers. At the same time, inflation has plunged, which is likely to prompt further large interest rate cuts over the coming months.
  • Mass protests in Lebanon, which were initially sparked by new austerity measures, have morphed into more general anti-regime protests. This has highlighted the unpopularity of the fiscal consolidation needed to stabilise the debt ratio. Some form of debt restructuring looks inevitable.
  • Mass protests in Algeria have continued to weigh on economic activity. Growth in Morocco eased in the second quarter, but we expect it to strengthen as output at the Kenitra car plant increases.
  • Kais Saied was sworn in as Tunisia’s next president, having won the second-round vote comfortably. He faces the immediate challenge of working with a fragmented parliament. If a period of policy paralysis ensues, the country’s large economic imbalances would be left unchecked.
  • Financial markets have generally suffered across the region this month. Almost all equity markets have declined. Lebanese dollar bond spreads widened sharply as protests put the spotlight on the government’s unsustainable debt.

Saudi Arabia

  • GDP growth slowed to 0.5% y/y in Q2 and our Tracker suggests that output fell by 0.2% y/y in August (1). The slowdown was driven by the oil output cuts, a result of January’s OPEC+ agreement (2). This more than offset the strength of the non-oil sector. Private sector credit, point of sale transactions and ATM withdrawals have all held up well (3 & 4).
  • Economic growth is likely to weaken further over the course of this year. September’s attacks on the Abqaiq oil facility resulted in a drop in output of around 1.3mn bpd over the month as a whole – equivalent to an almost 19% y/y contraction (5). This would suggest the oil sector contracted by around 9% y/y in Q3. The oil sector is likely to remain a drag on growth in Q4 due to unfavourable base effects.
  • Meanwhile, deflation eased from 1.1% y/y in August to 0.7% in September (6). Finally, details of the long-awaited Aramco IPO could be announced at the beginning of November, with trading of the company’s shares reportedly likely to start in mid -December.

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

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

Chart 3: Sum of Point of Sale Transactions and
ATM Cash Withdrawals

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

Chart 5: Oil Production

Chart 6: Consumer Prices (% y/y)

 

Sources: CEIC, Refinitiv, Markit, Capital Economics


United Arab Emirates

  • The UAE’s economy has continued to struggle. Oil output growth has slowed since the turn of the year, when OPEC+ output cuts were imposed (7). The downturn will deepen before the year end. But, even if the cuts are extended, the drag will fade from early 2020.
  • Activity in the non-oil sector has softened too. Private sector credit growth eased to its weakest pace in over a year in August (8). And the whole economy PMI – which covers the entire non-oil private sector – fell further to 51.1 in September, its lowest reading in nine years (9). Dubai’s real estate slump continued as property prices and rents decline (10). This has fed through into inflation, which has been in negative territory for most of 2019. The headline rate rose from -2.2% y/y in July to -2.0% y/y in August (12).
  • One positive for Dubai is that the tourism sector has posted stronger growth this year than in 2018. As the World Expo rolls into town, the authorities are targeting 20mn arrivals in 2020, which would make Dubai the second most visited city in the world (11). But once the Expo is over, there’s a risk of overcapacity that weighs on corporate revenues and causes debt problems to re-emerge.

Chart 7: UAE Oil Production

Chart 8: UAE Private Sector Credit (% y/y)

Chart 9: UAE Whole Economy PMI

Chart 10: Dubai Real Estate Prices & Rents (% y/y)

Chart 11: Visitor Arrivals by City (Millions)

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

 

Sources: CEIC, Refinitiv, Capital Economics


Qatar

  • Recently-released national accounts data showed that, after posting growth of 0.8% in Q1, the economy contracted by 1.4% y/y in Q2 (13). The decline was driven by slumps in both the oil and non-oil sectors. The latter reflected sharp drops in output in the manufacturing and construction sectors. This was likely a result of front-loaded projects for the 2022 football World Cup that are starting to wind down (14).
  • We think that his weakness will continue. While the whole economy PMI picked up from 46.4 in August to 49.0 in September it is still low (15). The rapid pace of private sector credit growth looks unsustainable and is likely to cool (16). The downturn in the real estate market has deepened. Property prices are now contracting at over 7% y/y (17).
  • Finally, consumer price figures for August showed that the recent bout of deflation has come to an end. The headline rate rose from -0.6% y/y in July to 0.0% last month. This was driven by a pick-up in both food price inflation and a slower pace of decline in housing and utilities prices (18).

Chart 13: GDP (% y/y)

Chart 14: Number of Projects
(By Estimated Date of Completion)

Chart 15: Whole Economy PMI

Chart 16: Private Sector Credit

Chart 17: Real Estate Price Index

Chart 18: Consumer Prices (% y/y)

 

Sources: CEIC, Refinitiv, Markit, Capital Economics


Kuwait, Oman & Bahrain

  • Kuwait’s economy has weakened since the OPEC+ output cuts came into effect in January (19). Recent reports suggest that the country is close to an agreement with Saudi Arabia to restart production in the neutral zone. This could boost oil output by as much as 10%, but we suspect that production would be managed to ensure that both countries comply with the OPEC+ deal. Meanwhile, headline inflation rose from 1.2% y/y in August to a two-year high of 1.7% y/y in September (20).
  • Q2 GDP figures for Bahrain showed that growth slowed from 2.6% y/y in Q1 to just 0.8% y/y – its weakest pace in over a year. The slowdown was driven by the hydrocarbon sector (21). More recent figures suggest this slowdown worsened as oil production contracted in year-on-year terms in Q3 and private sector credit growth eased too (22). Finally, consumer headline inflation was stable in September at 1.2% y/y.
  • In Oman, the latest public finance figures show that the budget deficit has started to widen again (23). Meanwhile, import growth has remained weak suggesting that domestic demand has continued to struggle (24). Inflation eased from 0.5% y/y in August to 0.0% in September.

Chart 19: Kuwait Oil Production

Chart 20: Kuwait Consumer Prices (% y/y)

Chart 21: Bahrain GDP (% y/y)

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

Chart 23: Oman Budget Balance (12m Sum, OMR bn)

Chart 24: Oman Imports (% y/y, 3m Avg.)

 

Sources: CEIC, Refinitiv, Capital Economics


Egypt

  • The protests that rocked Egypt in September have abated after a crackdown by the country’s security services. The macroeconomic fallout from the protests is likely to have been limited. And local financial markets have rebounded – the stock market has recovered a large chunk of its losses (25) and dollar bond spreads have narrowed.
  • Meanwhile, the latest data suggest that Egypt’s economy has strengthened. Industrial production – which includes some services, such as tourism – expanded by 4.0% y/y in the three months to May (26). Private sector credit growth remains strong (27). The whole economy PMI, while still below 50, is higher than it was in late 2018 (28).
  • Headline inflation dropped again from 7.5% y/y in August to 4.8% y/y in September, its lowest level since late-2012 and well below the mid-point of the central bank’s target range of 9±3% for end-2020 (29). The MPC is likely to press ahead with its easing cycle over the coming months. We expect the overnight deposit rate to be cut by 100bp, to 12.25%, at November’s meeting and lowered to 10.00% by the end-2020 (30).

Chart 25: EGX30 Index

Chart 26: Industrial Production

Chart 27: Domestic Credit to Non-government
(Local Currency, Deflated by CPI, % y/y)

Chart 28: Whole Economy PMI

Chart 29: Consumer Prices (% y/y)

Chart 30: Overnight Deposit Rate (%)

 

Sources: CEIC, Refinitiv, Capital Economics


Lebanon & Jordan

  • The recent protests in Lebanon, which were sparked by a plan to impose austerity measures, have morphed into broader antipathy towards the ruling regime. Since the protests began almost two weeks ago, sovereign dollar bond spreads have widened by nearly 250bp (31). The BdL’s coincident indicator points to a contraction in GDP of 1.5% y/y in Q3, and output could fall further if protests disrupt activity (32).
  • The protests highlight the challenge of stabilising the public finances. A budget deficit of 11.4% was recorded in 2018, the largest shortfall in 15 years (33). And the debt-to-GDP ratio is among the highest in the world (34). Given the confines of the dollar peg and weak growth, a debt restructuring looks inevitable. The widespread holdings of government FX debt by local banks (35), mean that a messy default could trigger a banking crisis
  • Elsewhere, Q2 GDP figures for Jordan showed growth slowed from 2.0% y/y in Q1 to 1.8% y/y (36). Meanwhile, headline inflation fell from 0.1% y/y in August to -0.3% y/y in September, the first time it has fallen into negative territory since 2016.

Chart 31: JP Morgan Lebanon EMBI Index (bp)

Chart 32: BdL Coincident Indicator & GDP

Chart 33: Lebanon Budget Balance (% of GDP)

Chart 34: General Gov’t Debt (2018, % of GDP)

Chart 35: Lebanon Gov’t Debt by Creditor
(% of Total)

Chart 36: Jordan GDP (% y/y)

 

Sources: CEIC, Refinitv, Capital Economics


Algeria

  • The Algerian electoral commission announced that 22 candidates will run in December’s presidential election, though with many members of President Bouteflika’s regime in positions of power the election will do little to quell the protests. Q2 national accounts data are yet to be published, but more timely activity data have shown that the protests have continued to weigh on economic growth.
  • Private sector credit growth has softened (38). That may partly be a result of rising deposit withdrawals (39). Import growth has contracted toopointing to weak domestic demand (40). Meanwhile, oil production output has slowed sharply over the past couple of quarters (37).
  • The authorities’ firm grip on the dinar (41) has forced them to draw down FX reserves. Since the start of 2018, reserves have fallen $31.2bn, and now cover just five months of imports. This is unsustainable and could result in a sharp adjustment in the dinar down the line. In the event, this would push up inflation, which rose from 1.9% y/y in August to a six-month high of 2.9% y/y in September (42).

Chart 37: Oil Production

Chart 38: Private Sector Credit (% y/y)

Chart 39: Local Commercial bank Deposits

Chart 40: Imports

Chart 41: Algerian Dinar vs. Euro-Dollar Basket
(1st Jan 2014 = 100))

Chart 42: Consumer Prices (% y/y)

 

Sources: CEIC, Refinitiv, Capital Economics


Morocco

  • Morocco’s economic slowdown looks to have bottomed out in Q2. Recently-released national accounts data showed that GDP growth eased from 2.8% y/y in Q1 to 2.5% in Q2 – the weakest pace of growth recorded since Q4 2016 (43). This was driven by a slowdown in the non-agricultural sector; the pace of contraction in the agricultural sector eased (44)
  • Looking ahead, increased output from auto sector should drive the non-agricultural sectors’ recovery. Production at Peugeot’s new plant in Kenitra began last month, and once at full capacity it will add an additional 200,000 vehicles per year (45). This will provide a fillip to exports and support a narrowing of the current account deficit, which currently stands at around 5.5% of GDP (46).
  • Meanwhile, private sector credit growth has continued its gradual recovery (47). Finally, headline inflation continued its very weak trend in September. Consumer price figures showed that inflation slowed from 0.8% y/y in August to 0.2% y/y last month (48).

Chart 43: GDP (% y/y)

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

Chart 45: Vehicle Production (000s Units)

Chart 46: Current Account Balance (4Q Sum, % of GDP)

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

Chart 48: Consumer Prices (% y/y)

 

Sources: CEIC, Refinitiv, Capital Economics


Tunisia

  • Kais Saied was confirmed as the president of Tunisia earlier this month after winning the second-round run-off comfortably, with almost 75% of votes. He faces the immediate challenge of working with a fragmented parliament. Ennahda, who won the most seats in parliamentary elections in early October (49) and supported Mr. Saied, need to co-operate with at least three other parties to gain a majority.
  • Despite this, international investors have taken Mr. Saied’s victory positively. Sovereign dollar bond spreads have narrowed by nearly 150bp from their pre-election highs (50). But this may be too optimistic. Coalition talks are likely to drag out and, with no government in place, it will leave the country’s large economic imbalances – twin budget and current account deficits – unchecked (51 & 52).
  • Once a government is formed, the IMF will likely apply more pressure on the authorities. Fiscal tightening will be front and centre, but they will probably demand that the tight grip on the dinar is loosened – we expect to fall to 4.00/€ by the end of next year (53). The fall in inflation would push up inflation, which has remained stable between August and September at 6.7% y/y (54).

Chart 49: Parliamentary Election Results (Seats Won)

Chart 50: JPM EMBI Spread Over US Treasuries (bp)

Chart 51: Curr. Account Balance (4Q Sum, % of GDP)

Chart 52: Budget Balance (% of GDP)

Chart 53: Tunisian Dinar vs. US$ (Inverted)

Chart 54: Consumer Prices (% y/y)

 

Sources: CEIC, Refinitiv, Capital Economics


Financial Markets

  • Equity indices across the region have performed poorly over the past month. The MSCI Arabian Markets Index fell by around 1% m/m (in local currency terms), while the MSCI EM Index rose by over 2% in the same period (55). Almost all equity indices across the region declined over the month, but the falls in the Saudi Tadawul and the Lebanese BLOM Index were the biggest contributors to the underperformance (56).
  • In bond markets, the moves in dollar bonds were muted in most countries (57). Lebanese spreads have surged as mass protests turned the spotlight onto the country’s debt burden. If the case of Argentina is anything to go by, spreads could jump to well over 2000bp in the event of a restructuring (58). By contrast, in Tunisia, spreads have come down from the highs reached prior to this month’s presidential election.
  • In currency markets, the Egyptian pound resumed its rally this year, strengthening around 1% against the dollar, and is now up by 11% this year-to-date (59). Meanwhile, the Moroccan dirham’s rally since the middle of year has come to an end (60).

Chart 55: MSCI Indices
(Local Currency, 1st Jan. 2019 = 100)

Chart 56: Benchmark Equity Indices (Local Currency, %)

Chart 57: Change in EMBI Dollar Bond Spread over US Treasuries (bp, Change 29th Sep. – 29th Oct.)

Chart 58: EMBI Dollar Bond Spread over US Treasuries (bp)

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

Chart 60: Moroccan Dirham (vs. €-$ Basket, 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 World1)

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