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Middle East Focus – Q4 2016

Thursday 8th December 2016

The term MENA is an acronym referring to the Middle East and North Africa region. MENA covers an extensive region, extending from Morocco to Iran, including all Middle Eastern Mashriq (east of Egypt) and Maghreb (North of the Sahara and west of the Nile) countries. The population of the MENA region at its least extent is approximately 381 million people, about 6% of the total world population. The region is best known for its vast reserves of oil and natural gas that make it a vital source of global economic stability. According to the Oil and Gas Journal, the MENA region has 60% of the world’s oil reserves and 45% of the world’s natural gas reserves.

The MENA region has had a turbulent few years to say the least. Syria, Iraq, Libya and Yemen are in civil war, causing untold damage to human lives and physical infrastructure. Fifteen million people have fled their homes, many to fragile or economically strapped countries such as Jordan, Lebanon, Djibouti and Tunisia, giving rise to the biggest refugee crisis since World War II. The current turmoil in Yemen has set that country’s development back several years. Blockades and repeated cycles of violence have made Gaza’s unemployment rate the highest in the world and with Gross Domestic Product at only 40% of its potential. The relatively stable oil exporters, such as Algeria, Iran and the Gulf Cooperation Council countries (GCC), are grappling with low oil prices alongside chronic youth unemployment and undiversified economies. On a positive note, political developments in Tunisia, Morocco, and Jordan indicate that citizens are increasingly engaging in policymaking.

This year appears to be one of the toughest for the region as MENA governments face serious policy challenges. The biggest challenge for oil exporters is managing their finances and diversification strategies with oil prices below $45 a barrel. Fiscal consolidation in a difficult sociopolitical environment and spillovers from conflicts are creating challenges for oil importers as well. Persistently low oil prices, lower fiscal revenues and currency shortages have forced MENA governments to take austerity measures including cutting capital and current spending. For example, more than $20 billion of projects may be canceled in Saudi Arabia. This comes at a time when ongoing conflict and war in Syria, Iraq, Libya and Yemen are ravaging these economies and the refugee crisis is draining fiscal space in neighboring countries. Furthermore, private sector growth, a source of job creation, has slowed down making it difficult to absorb the large of number of unemployed. The latest labor market data show that the unemployment rate has remained stubbornly high in Egypt, Iran, Iraq, Jordan, Morocco and Tunisia in 2016.

Economic activity in the MENA region gained in Q3, helped by accommodative monetary policies in most countries, more stable financial and exchange rate markets, a slight increase in oil prices and stronger crude production. According to estimates, the region’s aggregate GDP expanded 2.5% year-on-year in Q3, up from Q2’s 2.1% growth. Nevertheless, the region appears to have entered Q4 on a weaker footing as an uncertain global outlook, doubts about the deal among the Organization of the Petroleum Exporting Countries to cut crude production and harsh fiscal adjustment processes are exerting downward pressure on growth. In this context, the PMI for the non-hydrocarbon sector in the majority of MENA countries deteriorated in October.

Attention remains focused on the possibility that some of the world’s key oil producing countries could agree on a production cut at OPEC’s ordinary meeting held at the end of November. While markets were mostly optimistic about the pact following a preliminary deal in September, tough negotiations in October and November reflected the level of mistrust among some countries and revealed the sizable obstacles to finding common ground for a successful agreement. Iran and Iraq are reluctant to reduce their output following years of supply restrictions, while Saudi Arabia asserted that any accord has to include lower quotas for all countries, but also claimed that the market would rebalance by itself even without an output cap deal. Libya and Nigeria have boosted production in recent months following serious supply disruptions, which is adding pressure to an already unsettling situation. Moreover, Russia, which is pumping crude at a record high of above 11 million barrels per day, stated that the country is only potentially considering a freeze in crude production. The outcome of the U.S. election has added more complexity to the situation due to Donald Trump’s campaign statements against the nuclear deal with Iran and about banning imports from Saudi Arabia.

The Egyptian Central Bank surprised market analysts and announced the free-floating of the Egyptian pound on November 3rd. This move prompted the IMF to approve a $12 billion loan to the country and is expected to alleviate Egypt’s financial needs. However, the sharp weakening of the pound is pushing up import costs, particularly for food and fuel, which has the potential to trigger social unrest. The implementation of austerity measures in order to reduce fiscal gaps is also affecting other countries in the region. In Kuwait, anti-austerity supporters made significant gains in the recent parliamentary election, while tensions resurfaced in Tunisia following the approval of the 2017 national budget. The removal of subsidies and the reduction of fiscal support is hurting economic activity across the region.

Growing tensions among OPEC countries are casting a dark shadow on OPEC’s deal to cut oil production. The pact is crucial in order to prop up oil prices and improve fiscal and financial positions in a number of countries in the region and, ultimately, to revamp growth. Among non-oil countries, protests have flared up in Tunisia, while Egypt could suffer short-term pain following the implementation of economic reforms. Moreover, security threats are still high due to the widespread activity of jihadist groups. Against this backdrop, several analysts have decided to cut MENA’s 2017 economic outlook by 0.1% to 2.7%. This nevertheless still represents an improvement from the 2.4% growth expected for this year.

Regional growth is expected to improve slightly to 3.2% and 3.6% over the next two years, as governments across the region are consolidating their fiscal stance, undertaking reforms and trying to diversify their economies away from oil.  The regional fiscal deficit is expected to stay at 9.1% of GDP in 2016, unchanged from last year. Nevertheless, all three sub-groups (GCC countries, developing oil exporters and oil importers) are expected to record significant deficits in 2016 and the next two years but with the prospects of reducing them going forward.

Iran, which is benefiting from its reintegration into the global economy and stronger oil exports, is expected to be the best performer in 2017. At the other end of the spectrum, Saudi Arabia and Lebanon, in that order, are expected to perform poorly, with expansion rates of around 1.5%. Of the rest of the major economies in the region, Egypt and Qatar will likely grow the fastest, with projected expansions of 3.5%.