Lebanon: Economic Snapshot for MENA
OPEC oil production cuts begin to bite and political instability increases
Economic activity in the Middle East and North Africa remained subdued in the fourth quarter. According to an estimate by FocusEconomics, the MENA economy expanded an aggregate 1.9% annually in Q4, matching the result in Q3 and a notch above the 1.8% rise projected last month. Despite a fall in oil prices by the end of Q4, the oil sector benefited from increased oil supply. Economic dynamics among oil-importing countries were broadly stable due to a combination of solid domestic demand, healthy tourism inflows and policy reforms.
Looking forward, available data for 2019 signals that regional growth will likely experience a slowdown in the coming months. OPEC countries are quickly implementing the voluntary oil output cuts agreed upon in December and effective from the start of the new year: Data for January shows that OPEC has almost delivered its part of the deal, with a reduction of 797,000 barrels per day, just a tad below the aggregate voluntary adjustment of 812,000 barrels per day for the January–June period. Lower oil output volumes will translate into a sharp reduction in GDP growth among oil-exporting economies. On the upside, reduced global supply is expected to tighten global oil markets, pushing up oil prices. Higher oil prices should, in turn, increase oil revenue and support fiscal spending.
Further down the road, oil prices should be bolstered by Saudi Arabia’s plan to extend the oil production cuts beyond the June deadline and a potential trade deal between China and the United States, which is currently the main risk to the global economic outlook. Whether the U.S. will extend waivers to importers of Iranian oil, currently set to expire in May, is another key development to follow.
Political unrest is flaring in some countries in the region. In recent weeks, President Abdelaziz Bouteflika’s plan to extend his 20-year rule at the 19 April presidential elections sparked protests in Algeria. Meanwhile, another general strike was averted in Tunisia in early February when the government struck a deal with the country’s largest union to increase wages for 670,000 public employees. In Israel, the Blue and White alliance is leading the polls as incumbent Prime Minister Benjamin Netanyahu, who heads the Likud party, faces charges of bribery, fraud and a breach of trust. In more positive news for the region, the Lebanese parliament endorsed the new coalition government on 15 February, which could finally unlock much-needed economic reforms.
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Bleak prospects for oil-dependent economies continue to drag on MENA’s outlook for 2019
The sharp reduction in oil supply by some key regional members in compliance with the OPEC+ oil cut deal is expected to weigh heavily on growth prospects for the Middle East and North Africa this year. On the upside, the gradual increase in oil prices will replenish financial coffers among oil-export-driven economies, which, in turn, will translate into stronger fiscal support. Moreover, the U.S. Federal Reserve’s decision to pause its tightening cycle will allow central banks in the region to adopt or keep more accommodative monetary policies. Developments in the oil market, widespread geopolitical risks, especially tensions between Iran and the United States, and domestic political tensions in countries like Israel, Morocco and Tunisia are key downside risks to the region’s economic outlook.
FocusEconomics Consensus Forecast panelists expect the region to expand 1.9% in 2019, which is unchanged from last month’s estimate, and 2.8% in 2020.
The 2019 growth projections for Egypt, Iraq, Israel, Jordan, Morocco, Oman, Qatar, Saudi Arabia, Tunisia, the UAE and Yemen were all left changed compared to last month’s forecasts. Prospects were downgraded for Algeria, Bahrain, Kuwait and Lebanon, while estimates for Iran were revised upward amid hopes that the U.S. will extend sanctions waivers on the country’s oil sector.
Egypt is expected to be the region’s top performer in 2019, followed by Iraq. Iran, however, will contract again in fiscal year 2019 as U.S. sanctions continue to bite.
SAUDI ARABIA | Non-oil sector set to lead growth in 2019
In January, Saudi Arabia continued to lead the voluntary oil production cuts agreed upon with other OPEC and non-OPEC members, with output decreasing by 350,000 barrels per day in the month. While the deal is helping to tighten the global oil market, thereby pushing up oil prices, this is also hitting the performance of the all-important hydrocarbon sector. The non-oil sector, however, is gradually benefiting from the government’s more accommodative fiscal stance, as well from subdued inflation which is supporting private consumption. Meanwhile, in February, Crown Prince Mohammed bin Salman visited China, India and Pakistan, where he signed multibillion investment deals. This is reflective of the Kingdom’s attempts to strengthen ties with Asian nations—counterbalancing cooling relations with the West following the killing of journalist Jamal Khashoggi—as well of efforts to spur its economic transformation program.
Stronger government spending and increased public support will propel activity in the non-hydrocarbon sector this year. However, overall growth will decelerate due to the implementation of the planned oil supply cuts. Spillovers from the Saudization policy, persistent geopolitical risks and a potential increase in domestic political unrest are the main risks to the economic outlook. FocusEconomics panelists expect growth of 1.9% in 2019, which is unchanged from last month’s projection, and 2.2% in 2020.
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ISRAEL | Uncertainty mounts ahead of 9 April elections
Preliminary data showed that the economy shifted into a higher gear in Q4 2018 owing to stronger private consumption growth and a rebound in fixed investment. Early data for Q1 of this year sent mixed signals, however. Sentiment increased among businesses and households in January, although the latter remained firmly entrenched in pessimistic territory. A pick-up in the economic activity index of the Central Bank further suggests positive spillovers from Q4. However, the manufacturing sector had a rocky start to the year as the PMI fell into negative territory for the first time in nearly three years, while net exports continued to drag on the economy in January. Meanwhile, Israel’s attorney general intends to press corruption charges against Prime Minister Benjamin Netanyahu, who could face a tough battle in the general election on 9 April with his Likud party trailing in the polls.
Domestic demand is expected to continue supporting economic growth this year. Private consumption will benefit from a lower tax burden and still-favorable financial conditions, while new gas- and oil-related projects should prop up fixed investment growth. However, regional tensions remain a key downside risk and cloud the outlook. FocusEconomics analysts expect growth of 3.2% in 2019, which is unchanged from last month’s forecast, and 3.2% again in 2020.
UAE | Non-oil dynamics improve in January
The non-oil economy appears to have started 2019 on a solid footing. The PMI rebounded to a seven-month high in January after a lull at the end of 2018, signaling solid prospects in the non-oil sector thanks primarily to strong domestic demand. Employment growth, however, remains low due to ongoing pressure on firms’ margins. Meanwhile, though OPEC+ cuts weighed on oil production so far in Q1, crude oil prices consequently rebounded, which should buttress the government’s coffers going forward. Furthermore, the public sector will likely be a key driver of growth in Q1 and throughout the year, as the large fiscal stimulus approved both at the federal and emirate level should have begun lifting economic activity in the quarter.
A strong fiscal stimulus focused on infrastructure investment in preparation for Expo 2020 should power growth this year. A recent landmark investment law and other business-friendly reforms also appear poised to attract qualified foreign workers and to boost FDI inflows. Nevertheless, slower global growth, trade protectionism and financial volatility constitute important downside risks. FocusEconomics panelists expect GDP to increase 3.0% in 2019, which is down 0.1 percentage points from last month’s forecast, and 3.3% in 2020.
EGYPT | Economy enters Q3 FY 2019 with some uncertainties
The economy grew at an accelerated pace in the second quarter of fiscal year 2019—which covered October to December 2018—compared to the first quarter. Although a comprehensive breakdown of GDP components is still pending, private consumption should have supported the strong outturn given that the unemployment rate fell to the lowest level in nine years in the quarter. This comes after the current account deficit remained broadly unchanged in Q1 FY 2019, with rising tourism revenues compensating for a larger merchandise trade deficit. More recently, the economy had a shaky start to Q3 FY 2019: The private-sector PMI fell in January to the lowest level since December 2017 and therefore remained in contractionary territory for the fifth month running. This downturn was due to markedly lower output and a substantial drop in forward-looking business sentiment.
This fiscal year, economic growth should be strong thanks to higher government investment spending, rising natural gas production and an improving regulatory environment. However, despite moderating in recent years, fiscal imbalances continue to weigh on economic prospects. FocusEconomics panelists expect GDP to expand 5.3% in FY 2019, which is unchanged from last month’s forecast, and 5.4% in FY 2020.
INFLATION | Regional inflation declines sharply at the start of the year
Inflation in the Middle East and North Africa region continued to decline in January, falling from 8.1% in December to 7.0%, according to an aggregate produced by FocusEconomics. The four-month low reflected still-low oil prices, the complete absorption of the VAT implemented in January 2018 in Saudi Arabia and the UAE, as well as subdued rent and food prices in some economies within the Gulf Cooperation Council.
FocusEconomics panelists forecast that regional inflation will fluctuate at current levels in the coming months and to average 7.0% in 2019, which is down 0.2 percentage points from last month’s estimate. In 2020, regional inflation is expected to decline to 5.5%.
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Ricard Torné
Lead Economist