Iran nuclear deal, Egypt in the GBI-EM, vaccine worries - Capital Economics
Middle East & North Africa Economics

Iran nuclear deal, Egypt in the GBI-EM, vaccine worries

Middle East Economics Weekly
Written by James Swanston
Hopes of a positive start to talks on reviving the Iran nuclear deal were dampened after Iran announced plans to increase uranium enrichment, highlighting that negotiations have a long way to go. If the deal is restored, it would probably be a factor weighing on oil prices, but regional tensions probably wouldn’t ease much. Elsewhere, Egypt looks set to re-join JP Morgan’s GBI-EM later this year which could boost the local bond market but also result in further pound overvaluation. Finally, recent concerns about vaccines could slow rollout in the region, delaying economic recoveries.

Iran nuclear deal talks off to a bumpy start

Hopes of a positive start to talks on reviving the Iran nuclear deal were dampened after Iran announced plans to increase uranium enrichment, highlighting that negotiations have a long way to go. If the deal is restored, it would be factor weighing on oil prices, but regional tensions probably wouldn’t ease much.

Iran joined discussions in Vienna last week with the other signatories of the 2015 deal, although it did not directly speak with US representatives. However, the apparent cyber-attack on the Natanz nuclear facility on Sunday, which prompted Iranian authorities to announce that they would increase uranium enrichment, may have undone the good work so far. And a failure to reach a new deal soon could put talks at the mercy of Iranian hardliners if they come to power in June’s presidential election – President Rouhani, who played a crucial role in the original deal, will step down at the end of his second term.

If a deal were to be revived or a new version put in place, it should pave the way for US sanctions to be lifted and allow Iran to ramp up its oil output. This would put downwards pressure on oil prices (see here) and likely prompt governments in the Gulf to keep a tighter grip on fiscal policy. However, unlike in 2015, hopes of a diplomatic shift in the region are less likely to materialise. The hostility of regional leaders – Crown Prince Mohammed bin Salman (Saudi), Crown Prince Mohammed bin Zayed (UAE), as well as Israel – towards Iran has increased. At the very least, though, a détente between the US and Iran should improve sentiment towards the region. That could help to lower risk premia demanded to hold financial assets in the region.

Egypt’s on the path to GBI-EM inclusion

The possibility that Egypt could be included in JP Morgan’s GBI EM index has provided hopes of a boost to the local currency bond market. But, significant inflows could put upwards pressure on the pound and cause overvaluation.

JP Morgan announced that it has put Egypt under a six month review to be included in its GBI-EM index (it was removed following the 2011 revolution). Were Egypt to be brought back into the fold, estimates suggest that Egypt would have a 2% weighting in the index and could attract as much as $5bn of inflows into the local currency bond market.

This development is a welcome one and the combination of inclusion in the index, the government’s tight grip on public finances and the central bank (CBE) keeping inflation under control, presents an environment in which yields on Egyptian bonds should stay low (by past standards).

However, policymakers may be concerned that the resulting capital inflows could lead to further overvaluation of the pound. Even before the COVID-19 crisis, the IMF warned of signs of overvaluation. And since the start of 2020 the currency has appreciated by 3% against the dollar. The Fund has continued to call for greater exchange rate flexibility. To prevent further appreciation, the CBE could engineer some weakness through interest rate cuts. Policymakers certainly have scope to do so given the high level of real interest rates (around 4%).

Vaccine concerns risk delaying recoveries

COVID-19 vaccine developments in recent weeks have raised concerns about the possibility of blood clots (AstraZeneca and Johnson & Johnson) and efficacy (SinoVac), which could lead to greater vaccine hesitancy or, as has been the case in some other countries, vaccines being suspended.

Data on the procurement in the region is patchy but all countries have purchased at least one of these vaccines. Kuwait, Morocco and Egypt are the most reliant on AstraZeneca and Johnson & Johnson vaccines. So far. no country in the region has suspended vaccinations. But it could slow down rollouts and mean restrictions stay in place for longer, delaying economic recoveries.


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (BST)

Previous*

Median*

CE Forecasts*

16th Apr

Qat

Consumer Prices (Mar.)

-0.1%(-1.4%)

-0.1%(-0.6%)

19th Apr

UAE

Private Sector Credit (Feb.)

(+2.4%)

20th Apr

Jor

Consumer Prices (Mar.)

+0.7%(+0.4%)

+0.1%(0.0%)

22nd Apr

Mor

Consumer Prices (Mar.)

+0.1%(+0.3%)

-0.1%(-0.2%)

Selected future data releases and events

24th Apr

Jor

GDP (Q4, q/q(y/y))

(-2.2%)

28th Apr

OPEC

OPEC Meeting

Sau

Private Sector Credit (Mar.)

(+14.7%)

29th Apr

Egy

Interest Rate Announcement

8.25%

Jor

Industrial Production (Feb.)

(-10.2%)

Qat

Private Sector Credit (Mar.)

(+8.1%)

3rd May

Bah

Consumer Prices (Mar.)

-0.1%(-3.0%)

4th May

Sau

Whole Economy PMI (Apr.)

53.3

UAE

Whole Economy PMI (Apr.)

52.6

Kuw

Consumer Prices (Mar.)

+0.2%(+3.0%)

Kuw

Private Sector Credit (Mar.)

5th May

Leb

Whole Economy PMI (Apr.)

46.4

6th May

Tun

Consumer Prices (Apr.)

+0.7%(+4.8%)

Egy

Whole Economy PMI (Apr.)

48.0

7th May

Egy

Foreign Exchange Reserves (Apr.)

10th May

Egy

Consumer Prices (Apr.)

+0.6%(+4.5%)

UAE

Consumer Prices (Mar.)

+0.1%(-1.9%)

Bah

Private Sector Credit (Mar.)

Oma

Private Sector Credit (Mar.)

11th May

OPEC

OPEC Monthly Oil Market Report

12th May

Oma

Consumer Prices (Apr.)

0.0%(-0.4%)

*m/m(y/y) unless otherwise stated

Sources: Bloomberg, Refinitiv, Capital Economics


Main Economic & Market Forecasts

Table 1: GDP & Consumer Prices (% y/y)

Share of

World 1

2008-18

Ave.

GDP

Consumer Prices

2018

2019

2020

2021

2022

2018

2019

2020

2021

2022

Saudi Arabia

1.2

3.5

2.4

0.3

-4.1

2.3

6.3

2.5

-2.1

3.4

3.8

1.8

Egypt

0.9

3.9

5.4

5.5

1.0

6.0

6.3

14.4

8.6

5.2

5.8

4.5

UAE

0.5

2.8

1.7

3.0

-9.0

9.8

6.8

3.1

-1.9

-2.1

2.5

3.0

Algeria

0.4

2.8

1.5

0.8

-9.3

4.5

4.0

4.3

2.0

2.4

5.0

6.5

Morocco

0.2

3.8

3.0

2.3

-7.1

9.5

4.3

1.8

0.2

0.7

1.0

1.3

Qatar

0.2

7.4

1.4

-0.4

-2.8

4.5

4.3

0.3

-0.6

-2.6

1.3

2.5

Kuwait

0.2

1.1

1.2

0.4

-7.8

4.0

5.3

0.6

1.1

2.1

3.3

2.5

Oman

0.1

4.1

2.0

0.5

-7.3

7.0

2.8

0.9

0.1

-0.8

2.8

1.3

Tunisia

0.1

2.3

2.5

1.0

-8.6

8.0

3.5

7.3

6.7

5.6

5.3

5.8

Jordan

0.1

3.2

2.0

2.5

-1.5

2.8

2.3

4.5

0.8

-0.3

2.0

3.8

Lebanon

0.1

3.4

0.2

-3.0

-40.0

-10.0

6.8

6.1

2.9

84.9

59.0

9.5

Bahrain

0.1

3.8

2.0

1.8

-5.8

6.0

3.3

2.1

1.0

-2.3

1.0

1.8

Middle East & North Africa

4.0

3.7

2.7

2.0

-5.2

4.9

5.6

5.3

1.5

4.1

4.9

3.3

Sources: Refinitiv, Capital Economics. 1) % of GDP, 2019, PPP terms (IMF estimates).

Table 2: Central Bank Policy Rates

Policy Rate

Latest
(15th Apr.)

Last Change

Next Change

Forecasts

End
2021

End
2022

Saudi Arabia

Reverse Repo Rate

0.50

Down 75bp (Mar. ’20)

None on the horizon

0.50

0.50

Egypt

Overnight Deposit Rate

8.25

Down 50bp (Nov. ’20)

Down 50bp (Q4 2021)

7.75

6.75

UAE

Repo Rate

0.75

Down 75bp (Mar. ’20)

None on the horizon

0.75

0.75

Algeria

Discount Rate

3.25

Down 50bp (Mar. ’20)

None on the horizon

3.25

3.25

Qatar

Deposit Rate

1.00

Down 50bp (Mar. ‘20)

None on the horizon

1.00

1.00

Kuwait

Discount Rate

1.50

Down 100bp (Mar. ’20)

None on the horizon

1.50

1.50

Morocco

Key Rate

1.50

Down 50bp (Jun. ’20)

None on the horizon

1.50

1.50

Oman

Overnight Repo rate

0.50

Down 100bp (Mar. ’20)

None on the horizon

0.50

0.50

Tunisia

BCT Key Rate

6.25

Down 50bp (Sep. ’20)

None on the horizon

6.25

6.25

Jordan

Overnight Deposit Rate

1.75

Down 100bp (Mar. ’20)

None on the horizon

1.75

1.75

Lebanon

Repo Rate

10.00

Down 200bp (Dec ‘09)

None on the horizon

10.00

10.00

Bahrain

1-week deposit facility

1.00

Down 75bp (Mar. ’20)

None on the horizon

1.00

1.00

Sources: Bloomberg, Capital Economics

Table 3: Currencies and Stock Markets

Currency

Latest
(15th Apr.)

Forecasts

Stock Market

Latest
(15th Apr.)

Forecasts

End
2021

End
2022

End

2021

End
2022

Saudi Arabia

SAR/USD

3.7503

3.7500

3.7500

TASI

9,925

10,850

13,050

Egypt

EGP/USD

15.62

16.00

17.00

EGX30

10,165

13,800

16,400

UAE

AED/USD

3.6728

3.6725

3.6725

DFMGI

2,602

2,975

3,500

Algeria

DZD/USD

132.0

160.0

170.0

Qatar

QAR/USD

3.6400

3.6400

3.6400

QSE

10,165

12,650

14,800

Kuwait

KWD/USD

0.3013

0.3040

0.3040

KWSE

6,056

7,000

7,000

Morocco

MAD/EUR

10.69

11.25

11.50

MADEX

9,444

9,950

10,000

Oman

OMR/USD

0.3840

0.3845

0.3845

MSX30

3,706

4,500

5,200

Tunisia

TND/EUR

3.31

3.60

3.80

TUNINDEX

7,108

7,150

7,250

Jordan

JOD/USD

0.71

0.71

0.71

ASE

1,766

2,050

2,350

Lebanon

LBP/USD

1505.7

7,500

7,500

BLOM

889

875

875

Bahrain

BHD/USD

0.3769

0.3761

0.3761

BHSE

1,472

1,850

2,100

Sources: Bloomberg, Capital Economics


James Swanston, MENA Economist, james.swanston@capitaleconomics.com