Iran nuclear deal, Kuwaiti budget, Lebanon vaccine - Capital Economics
Middle East & North Africa Economics

Iran nuclear deal, Kuwaiti budget, Lebanon vaccine

Middle East Economics Weekly
Written by James Swanston
President Biden’s administration has taken the first steps to try and revive the Iran nuclear deal and, while there remain major hurdles, this could put downward pressure on oil prices. This would add to the reasons to expect fiscal policy in the Gulf to remain tight. In Kuwait, a draft law that would allow the government to lean on the sovereign wealth fund to finance the budget deficit may push parliament to pass a long-awaited debt law. Finally, Lebanon’s misuse of COVID-19 vaccines has worsened relations with multilateral institutions and could ultimately increase the pain being inflicted by the country’s crisis.

Efforts to revive Iran nuclear deal begin

The Biden administration has taken the first steps to try to revive the Iran nuclear deal and, while there remain major hurdles, this could put downward pressure on oil prices. This is unlikely to be a major problem for the Gulf countries but would add to the reasons to expect fiscal policy to remain tight.

In a statement last Thursday, a State Department spokesperson said that the US would accept an invitation to attend a meeting of the P5+1 and Iran to find a diplomatic solution to the nuclear deal, which President Trump pulled out of in 2018. Meanwhile, restrictions on Iranian diplomats posted at the United Nations have also been lifted.

Reviving the nuclear deal will be no mean feat, particularly given the increased influence of hardliners in Iranian politics in recent years. But if the deal (or a revised version) were to be sealed and US sanctions lifted, there are three main channels through which this could affect the rest of the Middle East and North Africa.

The first is via the impact on the oil market. Iran’s oil output has slumped by almost half since mid-2018. Bringing this supply back on stream would add to the reasons to think that the rally in oil prices will lose steam and actually drop back in 2022 – our current forecasts are for Brent to end this year at $70pb and to fall to $55pb by end-2022. (See our Energy Update.) We doubt this would create major problems for the Gulf economies, but it would reinforce our view that fiscal policy will stay tight.

The second channel is trade links. The lifting of US sanction would pave the way for a rebound in Iran’s economy, which has shrunk by 16% over the past three years. As it happens, though, trade ties between Iran and the rest of the region are limited. The UAE is a notable exception but, even there, exports to Iran have fallen sharply over the past decade and are now equal to just 0.7% of GDP.

The third channel is the effect on the region’s political dynamics. The Gulf states, alongside Israel, have long held concerns that bringing Iran in from the cold would encourage it to increase support for its for proxies across the region, namely in Yemen and Lebanon. Equally, though, in so far as a détente between Iran and the US reduces the threat of conflict and disruption to oil supplies through the Strait of Hormuz, this may help to lower the risk premium demanded by investors to hold financial assets in the region.

Kuwait’s budget workaround only a short-term fix

Kuwait’s government submitted a draft law to parliament earlier this week that would allow it to withdraw directly from the Future Generations Funds (FGF) to finance the budget deficit. We previously suggested some kind of workaround may be found to the current problems caused by the failure to pass the debt law. Drawing down from the FGF might be considered taboo, though, and parliament may opt instead to pass the long-awaited debt law. This would pave the way for Kuwait to return to international bond markets.

Lebanon’s vaccine corruption risks

The news that several Lebanese politicians jumped the vaccination queue has outraged both citizens and multilateral institutions, with the World Bank threatening to withdraw financing for COVID-19 vaccine purchases. Absent this financing, policymakers might need to rely on foreign exchange reserves at the BdL to buy vaccines. That may force the BdL to devalue the pound even sooner, pushing inflation higher and increasing the pain being inflicted by country’s crisis.

The week ahead

OPEC is likely to confirm its intention to ease production quotas from April at its meeting next week. February’s batch of whole economy PMIs are likely to show recoveries remained soft.


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (GMT)

Previous*

Median*

CE Forecasts*

28th Feb

Leb

Consumer Prices (Jan.)

+8.1%(+145.8%)

+12.9%(+171.8%)

1st Mar

Bah

Consumer Prices (Jan.)

+1.1%(-1.9%)

+0.6%(-1.0%)

2nd Mar

No Significant Data or Events

3rd Mar

Egy

Whole Economy PMI (Feb.)

48.7

Sau

Whole Economy PMI (Feb.)

57.1

UAE

Whole Economy PMI (Feb.)

51.2

4th Mar

OPEC

OPEC Meeting

Selected future data releases and events

5th Mar

Oma

Consumer Prices (Feb.)

0.0%(-1.6%)

+0.9%(-0.3%)

8th Mar

UAE

Consumer Prices (Jan.)

+0.1%(-2.1%)

+1.8%(-0.3%)

10th Mar

Egy

Consumer Prices (Feb.)

-0.5%(+4.3%)

+0.7%(+5.1%)

11th Mar

OPEC

OPEC Monthly Oil Market Report

17th Mar

Jor

Consumer Prices (Feb.)

+0.1%(-0.3%)

+0.3%(-0.1%)

18th Mar

Qat

Consumer Prices (Feb.)

+1.2%(-1.3%)

+0.7%(-0.7%)

Egy

Interest Rate Announcement

8.25%

25th Mar

Sau

Consumer Prices (Feb.)

+0.2%(+5.7%)

+0.3%(+5.7%)

*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

-4.3

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

-6.5

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

-8.0

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

-4.5

6.0

3.3

2.1

1.0

-2.3

1.0

1.8

Middle East & N. Africa2

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). 2) Regional inflation aggregate excludes Lebanon.

Table 2: Central Bank Policy Rates

Policy Rate

Latest
(25th Feb.)

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
(25th Feb.)

Forecasts

Stock Market

Latest
(25th Feb.)

Forecasts

End
2021

End
2022

End

2021

End
2022

Saudi Arabia

SAR/USD

3.7504

3.7500

3.7500

TASI

9,225

10,850

13,050

Egypt

EGP/USD

15.65

16.00

17.00

EGX30

11,556

13,800

16,400

UAE

AED/USD

3.6728

3.6725

3.6725

DFMGI

2,526

2,975

3,500

Algeria

DZD/USD

132.4

160.0

170.0

Qatar

QAR/USD

3.6400

3.6400

3.6400

QSE

10,152

12,650

14,800

Kuwait

KWD/USD

0.3020

0.3040

0.3040

KWSE

5,649

7,000

7,000

Morocco

MAD/EUR

10.85

11.25

11.50

MADEX

9,152

9,950

10,000

Oman

OMR/USD

0.3847

0.3845

0.3845

MSM30

3,601

4,500

5,200

Tunisia

TND/EUR

3.30

3.60

3.80

TUNINDEX

6,690

7,150

7,250

Jordan

JOD/USD

0.71

0.71

0.71

ASE

1,741

2,050

2,350

Lebanon

LBP/USD

1505.7

7,500

7,500

BLOM

682

675

700

Bahrain

BHD/USD

0.3770

0.3761

0.3761

BHSE

1,465

1,850

2,100

Sources: Bloomberg, Capital Economics


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