Saudi austerity, Arabtec liquidation, Lebanese politics - Capital Economics
Middle East & North Africa Economics

Saudi austerity, Arabtec liquidation, Lebanese politics

Middle East Economics Weekly
Written by James Swanston
Saudi’s preliminary 2021 budget showed that, with oil prices likely to stay low, fiscal austerity is here to stay and this will act as a key headwind to the economic recovery. Elsewhere, the collapse of the region’s largest construction firm, Arabtec, adds to signs of the economic pain that the coronavirus crisis has inflicted upon Dubai and reinforces our concerns over the ability of the Emirate’s government-related entities to service their debts. Meanwhile, Lebanon’s political crisis continues to drag on and a government looks no closer to being formed. This risks an even messier outcome to the current crisis.

Saudi budget plans suggest austerity is here to stay

Saudi Arabia’s preliminary 2021 budget that was released this week reinforces our view that, with oil prices likely to stay low, policymakers are not intending to row back on recent fiscal austerity.

The document revealed that the government expects the budget deficit to reach 12.0% of GDP this year, compared with a shortfall of 4.5% of GDP in 2019, driven by a slump in oil and non-oil revenues. Public debt is expected to jump from 22.8% of GDP last year to 34.4% of GDP by the end of this year.

The 2021 budget plans suggest that, despite policymakers recent assertion that they are looking at all options to boost the recovery (see here), there are no plans to reverse recent fiscal consolidation measures. Recall that the government suspended the Cost of Living Allowance in June and followed this up with a hike in the VAT rate, from 5% to 15%, in July. Capital spending is also being cut – it was down by more than 35% y/y in the first half of 2020.

Government spending is projected to fall in each of the next three years, by a total of close to 12%. Vision 2030 programmes will undergo “structural improvements” and the authorities will implement fiscal rules to “avoid pro-cyclical spending tied to oil market conditions” (although no details on these have been provided so far). Data released this week showed that the Saudi economy contracted by 7.0% y/y in Q2 (see here) and, while activity has rebounded as containment measures have been lifted, the backdrop of fiscal austerity will remain a major headwind to the recovery.

Arabtec liquidation highlights Dubai’s troubles

The collapse of the region’s largest construction firm, Arabtec, highlights the pain being inflicted by the coronavirus crisis and reinforces our fears over the debts of Dubai’s government-related entities (GREs).

According to a report by Reuters on Wednesday, shareholders in Arabtec voted to file for insolvency and enter into liquidation as “adverse market conditions” have made the company’s financial situation “untenable”. Arabtec had already reported a loss of AED794mn ($216mn) in H1. But with the decline in Dubai real estate showing no signs of easing, a quick turnaround seems to be out of reach.

The Arabtec saga follows problems at other real estate and construction firms in the Emirate; Nakheel is reportedly seeking debt refinancing, Limitless restructured its debts in March, and Drake & Scull is in a court battle with creditors. We warned in a Focus earlier this year that the crisis risked exacerbating problems of overcapacity in a number of Dubai’s key sectors and that this threatened fresh debt problems. There is, of course, a lack of transparency over the debts of Dubai’s GREs and we will be taking a fresh look at this in a future Update.

Lebanon back to square one in forming a government

Lebanon’s PM-designate Mustapha Adib resigned on Sunday after his technocratic cabinet was reportedly blocked by Hezbollah and Amal. The latest failure prompted France’s President Macron to point the finger at the two parties as being Lebanon’s problem. Hassan Nasrallah, the leader of Hezbollah, snapped back and insisted that the party should continue to play a crucial role in the government and keep control of the finance ministry. There is a growing risk that politicians go down the slippery slope of stoking sectarian tensions, leading to an even messier outcome to the current crisis.

Kuwait: new Emir faces tough challenges

Kuwaiti Emir Al-Sabah passed away on Tuesday and the country is now in a 40-day period of mourning. As we outlined in an Update, the new ruler Sheikh Nawaf al-Ahmad al-Sabah faces plenty of challenges in acceding to the throne.

The week ahead

September’s whole economy PMIs are likely to show that economic recoveries have lost steam.


Economic Diary & Forecasts

Upcoming Events and Data Releases

Date

Country

Release/Indicator/Event

Time (BST)

Previous*

Median*

CE Forecasts*

4th Oct

No Significant Data Released

5th Oct

Egy

Whole Economy PMI (Sep.)

49.4

Sau

Whole Economy PMI (Sep.)

48.8

UAE

Whole Economy PMI (Sep.)

49.4

Leb

Whole Economy PMI (Sep.)

40.1

6th Oct

No Significant Data Released

7th Oct

No Significant Data Released

8th Oct

Tun

Consumer Prices (Sep.)

+0.2%(+5.4%)

+1.1%(+6.4%)

Selected future data releases and events

9th Oct

Egy

Consumer Prices (Sep.)

(+3.4%)

Egy

Core Consumer Prices Sep.)

(+0.8%)

Bah

Private Sector Credit (Aug.)

(+3.2%)

Jor

Consumer Prices (Aug.)

+0.1%(-0.6%)

13th Oct

OPEC

OPEC Monthly Oil Market Report

UAE

Consumer Prices (Aug.)

-0.6%(-2.1%)

14th Oct

Oma

Private Sector Credit (Aug. )

(+5.8%)

18th Oct

Qat

Consumer Prices (Sep.)

+0.5%(-4.1%)

20th Oct

Sau

Consumer Prices (Sep.)

+5.9%(+6.1%)

21st Oct

Oma

Consumer Prices (Sep.)

+0.2%(-1.3%)

22nd Oct

Mor

Consumer Prices (Sep.)

+1.4%(+0.9%)

26th Oct

UAE

Private Sector Credit (Aug.)

(-1.1%)

28th Oct

Sau

Private Sector Credit (Sep.)

(+14.3%)

*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

1.3

3.5

2.4

0.3

-7.3

6.5

2.3

2.5

-2.1

3.5

4.0

2.5

Egypt

1.0

3.9

5.4

5.5

-3.5

8.8

5.8

14.4

8.6

5.5

6.5

6.0

UAE

0.5

2.8

1.7

3.0

-10.5

7.8

4.0

3.1

-1.9

-2.3

2.5

3.0

Algeria

0.5

2.8

1.5

0.8

-9.0

1.8

1.5

4.3

2.0

3.3

6.0

6.5

Qatar

0.3

7.4

1.4

-0.4

-2.3

4.5

5.5

0.3

-0.6

-0.5

1.5

2.5

Morocco

0.2

3.8

3.0

2.3

-6.8

7.0

3.8

1.8

0.7

0.8

1.8

2.0

Kuwait

0.2

1.1

1.2

0.4

-6.0

4.0

2.8

0.6

1.1

1.0

2.5

2.5

Oman

0.1

4.1

2.0

0.5

-7.3

4.5

2.0

0.9

0.1

-0.5

5.0

1.8

Tunisia

0.1

2.3

2.5

1.0

-7.0

5.0

3.0

7.3

6.7

6.0

5.0

5.0

Jordan

0.1

3.2

2.0

2.5

-6.8

8.8

3.3

4.5

0.8

0.3

3.3

4.0

Lebanon

0.1

3.4

0.2

-3.0

-30.0

-13.5

2.5

6.1

2.9

99.3

60.0

6.0

Bahrain

0.1

3.8

2.0

1.8

-4.5

3.3

1.3

2.1

1.0

-1.8

1.8

2.3

Middle East & North Africa

4.5

3.7

2.7

1.9

-6.9

6.1

3.5

5.1

1.4

3.9

5.1

3.8

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

Table 2: Central Bank Policy Rates

Policy Rate

Latest
(1st Oct.

Last Change

Next Change

Forecasts

End
2020

End
2021

Saudi Arabia

Reverse Repo Rate

0.50

Down 75bp (Mar. ’20)

None on the horizon

0.50

0.50

Egypt

Overnight Deposit Rate

8.75

Down 50bp (Sep. ’20)

Down 50bp (Q1 2021)

8.75

7.00

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
(1st Oct.

Forecasts

Stock Market

Latest
(1st Oct.

Forecasts

End
2020

End
2021

End

2020

End
2021

Saudi Arabia

SAR/USD

3.7507

3.7500

3.7500

TASI

8,332

8,200

9,450

Egypt

EGP/USD

15.71

17.00

18.00

EGX30

11,042

12,600

15,200

UAE

AED/USD

3.6728

3.6725

3.6725

DFMGI

2,263

2,325

2,800

Algeria

DZD/USD

128.9

145.0

160.0

Qatar

QAR/USD

3.6400

3.6400

3.6400

QSE

10,017

10,050

12,050

Kuwait

KWD/USD

0.3060

0.3040

0.3040

KWSE

5,445

7,900

8,950

Morocco

MAD/EUR

10.84

11.50

11.80

MADEX

8,122

11,250

12,750

Oman

OMR/USD

0.3849

0.3845

0.3845

MSM30

3,614

4,000

4,750

Tunisia

TND/EUR

3.24

3.60

3.80

TUNINDEX

6,690

8,100

9,200

Jordan

JOD/USD

0.71

0.71

0.71

ASE

1,585

2,000

2,050

Lebanon

LBP/USD

1505.7

7,500

7,500

BLOM

601

600

650

Bahrain

BHD/USD

0.3771

0.3761

0.3761

BHSE

1,432

1,550

1,850

Sources: Bloomberg, Capital Economics


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