MENA CHART BOOK. Region holds its breath. Middle East & North Africa Economics 30 th Nov. 2017

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1 th Nov. MENA CHART BOOK Region holds its breath The Middle East and North Africa has been gripped by political turmoil over the past few weeks. The most high-profile development was the launch of an anti-corruption crackdown in Saudi Arabia, led by Crown Prince Mohammed bin Salman (MbS), which has implicated more than ministers, princes and businessmen. While efforts to tackle corruption are clearly welcome, the speed and breadth of the crackdown threatens to deal a blow to the Saudi economy investment could be delayed and wealthy individuals may defer purchases of luxury items. There s also a risk of a backlash against MbS that ultimately derails his Vision reform plans. At the same time, MbS has ratcheted up tensions with Iran and Lebanon has been caught up in the crossfire the Saudis appear to have been behind Lebanese Prime Minister Saad Hariri s resignation (which Mr. Hariri has now postponed). Investors have been unnerved by these developments, although the impact has been more acute in financial markets in the rest of the region than it has been in Saudi Arabia itself. Our GDP Tracker suggests that the downturn in Saudi Arabia s economy gathered pace in Q. Weakness is concentrated in the oil sector on the back of OPEC-agreed production cuts. (Page.) Oil output cuts also appear to have caused the UAE s economy to slow further. Dubai s property sector appears to be experiencing a fresh period of weakness. (Page.) Qatar s diplomatic crisis dealt a sharp blow to the economy in the middle of this year, but the worst has now passed. That said, the recovery appears to be slow and uneven. (Page.) Activity in Kuwait remains sluggish and Bahrain s economy slowed in Q. On a more encouraging note, Oman s non-oil economy appears to be staging a recovery. (Page.) The monthly activity data suggest that Egypt s economy has lost a bit of momentum. The country s improved external position has allowed the central bank to dismantle the last of its FX restrictions. Headline inflation eased further in October that wasn t enough to prompt the central bank to cut interest rates this month, but we expect an easing cycle to get underway in December. (Page.) Recent political upheaval has caused jitters in Lebanon s financial markets. (Page.) Algeria s government recently announced plans to turn to the central bank to finance its budget deficit. Such a move risks stoking inflation and putting further downward pressure on the dinar. (Page.) Morocco s economy has strengthened this year, boosted by a rebound in the agricultural sector. (Page 9.) The Tunisian authorities have introduced a range of measures in an effort to exert more control over the supply of, and demand for, foreign currency. But these do little to tackle the fundamental reasons behind the weakness of the dinar over the past couple of years. (Page.) Neil Shearing, Chief Emerging Markets Economist, + 9, neil.shearing@capitaleconomics.com William Jackson, Senior Emerging Markets Economist, + (), william.jackson@capitaleconomics.com Jason Tuvey, Middle East Economist, + (), jason.tuvey@capitaleconomics.com MENA Chart Book Page

2 Saudi Arabia Saudi Crown Prince Mohammed bin Salman (MbS) launched an anti-corruption purge this month that has implicated more than princes, ministers and businessmen. The move, alongside rising tensions with Iran, seems to be an attempt by MbS to consolidate power ahead of a possible accession to the throne. Saudi financial markets have been resilient in the face of these events. Dollar bond yields initially jumped but have since fallen back (). Similarly, the equity market has recovered from an earlier slump (). The purge has raised hopes that MbS will be able to push through his Vision reforms. But we think there s a risk of a backlash that ultimately derails Vision. Meanwhile, the purge could prompt firms to delay investment and wealthy individuals to defer purchases of luxury items in the coming months. The latest data suggest that the non-oil sector has started to strengthen. The reversal of cuts to civil service benefits has finally started to seep through into a pick-up in consumer spending and, in the three months to September, non-oil imports declined at their slowest pace since late- ( & ). But this was more than offset by continued weakness in the oil sector on the back of OPEC-agreed output cuts (). Our GDP Tracker suggests that the economic downturn gathered pace in Q ().. Chart : Dollar Bond Yield (%)., Chart : Tadawul Equity Index,.. Anti-corruption purge launched..,,, MSCI puts Saudi Arabia on "watch" for inclusion into EM index,,,..,,... Jan- Mar- May- Jul- Sep- Nov-...,,9, Anti-corruption drive is launched, Jan- Mar- May- Jul- Sep- Nov-,,9,, Chart : ATM Withdrawals & Point of Sale Transactions (% y/y, m avg.) - Point of Sale Transactions ATM Cash Withdrawals Chart : Non-Oil Imports (% y/y, m avg.) Chart : Oil Production. % y/y (RHS). mn bpd (LHS) Chart : GDP & CE GDP Tracker (% y/y) *Quarterly GDP series starts in - CE GDP Tracker - GDP* - 9 Sources: CEIC, Thomson Reuters, Capital Economics MENA Chart Book Page

3 United Arab Emirates The UAE s economy has slowed this year. The latest quarterly GDP data showed that Abu Dhabi s economy the largest of the seven emirates that make up the UAE contracted by.9% y/y in Q, compared with growth of.% y/y in Q (). The downturn was entirely driven by the oil sector, where output declined by.9% y/y. That said, growth in the non-oil sector remained extremely weak at just.% y/y. More timely data suggest that growth in the UAE as a whole has since slowed further. In year-on-year terms which is what matters for GDP growth oil production dropped by.% in October, its steepest decline since 9 (). Meanwhile, there are signs that the property sector is experiencing a fresh downturn (). On a more encouraging note, growth in passenger and cargo traffic at Dubai International Airport remains robust (). And the whole economy PMI (which covers the non-oil private sector) rose in October (). Finally, headline inflation edged up from.% y/y in August to.% y/y in September (). The rise was fairly broad-based with food, housing and transport inflation all picking up. Chart : Abu Dhabi GDP (% y/y) Chart : UAE Oil Production Q Q GDP Oil Non-Oil % y/y (RHS)..9 mn bpd (LHS) Chart : Property Prices (% y/y) Chart : Dubai International Airport Traffic (% y/y, m avg.) - Apartment Villa Passenger Traffic - Cargo Handled Chart : UAE Whole Economy PMI Chart : Consumer Prices (% y/y) *Only covers non-oil private sector. Number above indicates expansion - Headline - Food & Non-Alcoholic Bev. - Housing & Utilities 9 Sources: CEIC, Thomson Reuters, OPEC, Capital Economics MENA Chart Book Page

4 Qatar Qatar s diplomatic crisis dealt a sharp blow to the economy in the middle of this year, but the worst has now passed. Oil exports have been steady and the Dolphin pipeline which sends gas to the UAE has remained open. More importantly, the decline in imports has eased significantly imports fell by.% y/y in September, in line with their performance in the - months prior to the blockade being imposed (). That said, there s no sign that any pent-up demand that may have built up in June and July is now being met. In levels terms, imports have yet to return to their level prior to the blockade (). And certain sectors of the economy are still struggling. There has been a sharp decline in tourist arrivals and flights into Qatar are down by % y/y (). The uncertainty created by the blockade has also prolonged the downturn in the real estate sector (). Strains in the banking sector have eased. Banks foreign liabilities fell further in October, but the decline was small compared with June and July (). Meanwhile, private sector deposits have picked up which has eased pressure on the government to provide support to banks public sector deposits fell last month (). Chart : Imports (QAR Terms, % y/y) Chart : Imports (QAR bn, Seasonally Adjusted) Blockade imposed Blockade imposed Chart : Number of Flights (% y/y) Blockade in place - Chart : Real Estate Prices Index (Jan. 9=, LHS) % y/y (RHS) Flights into Qatar Flights operated by Qatar Airways Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep Blockade in place Chart : Change in Commercial Banks Foreign Liabilities (m/m, QAR bn) Blockade in place Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct Chart : Commercial Banks Deposits (QAR bn) Public Sector Private Sector Blockade in place Sources: CEIC, Thomson Reuters, Capital Economics MENA Chart Book Page

5 Kuwait, Oman & Bahrain Kuwait s economy appears to have slowed this year. The fall in oil output deepened to.9% y/y in October, meaning that the oil sector acted as a bigger drag on economic growth (). Meanwhile, private sector credit growth has weakened in recent months (). On a more encouraging note, bank card transactions picked up in Q and expanded at their fastest pace since early (). Meanwhile, the latest GDP data showed that Bahrain s economy slowed in Q. GDP expanded by.% y/y, down from.% y/y in Q (). The hydrocarbon sector contracted at a slower pace but this was more than offset by weaker growth in the non-hydrocarbon sector. In Oman, the available data suggests that the worst of the economic slowdown has now passed. Imports a proxy for domestic demand jumped by close to % y/y in the three months to August (). Headline inflation in Bahrain picked up to a -month high of.% y/y in October, from.% y/y in the previous month. Inflation also rose in Kuwait, from.% y/y to.% y/y. In contrast, inflation edged down in Oman, from.% y/y in September to.% y/y in October ()..9 Chart : Kuwait Oil Production Chart : Kuwait Private Sector Credit (% y/y) % y/y (RHS). mn bpd (LHS) Chart : Kuwait Bank Card Transactions (% y/y) Chart : Bahrain GDP (% y/y) - Hydrocarbon (LHS) - GDP (RHS) Non-Hydrocarbon (RHS) Chart : Oman Imports % y/y % y/y, m avg. Chart : Consumer Prices (% y/y) Bahrain Oman Kuwait - Sources: CEIC, Thomson Reuters, OPEC, Capital Economics - - MENA Chart Book Page

6 Egypt Egypt s economy appears to have lost a bit of momentum in recent months. Industrial production (which includes a number of services) expanded by.% y/y in September, down from.% y/y August (). A breakdown of the data is not yet available, although we suspect that activity in the manufacturing sector remained strong. Meanwhile, the whole economy PMI edged up from. in September to. in October, but it remained below the -mark which, in theory, separates expansion from contraction (). Egypt s external position has improved since the pound s % fall against the dollar last year (). Admittedly, the current account deficit has narrowed only modestly. But there has been a surge in capital inflows (), which has allowed the central bank to rebuild its foreign exchange reserves () and to dismantle its last remaining FX restrictions. Finally, headline inflation eased further in October, to.% y/y from.% y/y in the previous month (). The central bank kept its benchmark overnight deposit unchanged at.% at its meeting earlier this month. But inflation should fall more sharply in the final few months of this year, which we think will prompt policymakers to embark on an easing cycle. Chart : Industrial Production Chart : Whole Economy PMI Expansion - % y/y - % y/y, m avg Second" revolution Contraction Headline PMI Constitutional Output crisis New Orders Chart : Egyptian Pound (vs. $, Inverted) Egyptian pound weaker against the dollar CBE floats the pound Chart : Net Capital Flows (Q Sum, % of GDP) FDI Portfolio Other Net inflows Net outflows Chart : Foreign Exchange Reserves ($bn) 9 Chart : Consumer Prices (% y/y) Food Headline Non-Food 9 Sources: CEIC, Thomson Reuters, Capital Economics MENA Chart Book Page

7 Lebanon & Jordan Political uncertainty has gripped Lebanon after Prime Minister Saad Hariri announced his resignation after fleeing to Riyadh, before postponing the decision upon his return to Beirut. Events are still in a state of flux, but there are concerns that Lebanon is about to become the centre ground of a new proxy war between Saudi Arabia and Iran. The upheaval has caused jitters in Lebanon s financial markets. Dollar bond spreads have widened by bp since the start of this month and the equity market has dropped by % ( & ). Investors concerns are likely to be centred on the country s dire balance sheet. The government debt-to- GDP ratio, at around %, is among the highest in the world (). Meanwhile, the current account deficit stands at close to % of GDP (). Lebanon is heavily reliant on flighty portfolio inflows as well as deposits into local banks from the diaspora, the bulk of which originate in the Gulf, to fund this shortfall. Even if conflict is avoided, any restrictions imposed by the Gulf countries on Lebanon or Lebanese nationals could force the central bank to burn through its FX reserves (). A more severe outcome, including a military confrontation, would have dire humanitarian consequences. In addition, a period of capital flight would quickly erode FX reserves and force the authorities to devalue the pound. This could create problems for the government in servicing its large foreign currency debts () and raise the prospect of an outright default. 9 Chart : JP Morgan Lebanon EMBI Index 9 Chart : BLOM Equity Index Yield 'Stripped' spread over US Treasuries Saad Hariri announces resignation from Riyadh Chart : General Government Debt (% of GDP) Chart : Lebanon Current Account Balance (% of GDP) Chart : Lebanon Foreign Exchange Reserves ($bn) 9 Chart : Government Foreign Currency Debt (% of GDP) Leb. Arg. Ven. Hun. Egy. Mex. Pol. Idn. Tur. Php. Per. Sau. S. Af. Cze. Brz. Chl. Rus. Ind. Chn. Mly. Tha. Sources: CEIC, Thomson Reuters, BLOM/Markit, Capital Economics MENA Chart Book Page

8 Algeria Recently-released GDP data show that Algeria s economy grew by.% y/y in Q, down from.% y/y in Q. This was the weakest pace since 9 (). The slowdown was largely attributable to the hydrocarbon sector. Growth had been boosted earlier this year by the return to full capacity at the In Amenas gas facility, but this has now faded. Growth in the non-hydrocarbon sector also weakened and, at.% y/y, remained sluggish by past standards (). More timely data show that the year-on-year decline in oil production gathered pace over the course of Q (). The rise in oil prices over the past few months should have supported an increase in hydrocarbon export revenues. Even so, the country s budget and current account deficits remain large and the central bank s FX reserves have continued to decline at a rapid pace (). Worryingly, the government recently announced plans to turn to the central bank to finance its budget deficit. Such a move risks stoking inflation, which rose to a five-month high of.% y/y in September (). Higher inflation will put further downward pressure on the dinar. The authorities have loosened their grip on the currency again in recent months and it has fallen by.% against its euro-dollar basket (). Chart : GDP (% y/y) 9 Chart : GDP by Sector (% y/y) Hydrocarbon Non-Hydrocarbon Chart : Oil Production % y/y (RHS) mn bpd (LHS) Chart : Foreign Exchange Reserves (US$bn) Chart : Consumer Prices (% y/y) 9 Chart : Algerian Dinar (vs. Euro-Dollar Basket, st Jan. = ) Dinar weaker *Basket consists of approximately % US dollar and % euro 9 Sources: CEIC, Thomson Reuters, OPEC, Capital Economics MENA Chart Book Page

9 Morocco Morocco s economy has strengthened so far this year. The latest GDP data showed that the economy expanded by.% y/y in Q, up from.% y/y in Q and.% over as a whole (). Stronger growth was supported in large part by the agricultural sector, which has rebounded from last year s drought-related slump (). Growth in the non-agricultural sector was stable at.% y/y as a jump in mining output offset a slowdown in the manufacturing sector. More timely data suggest that the economy continued to grow at a robust pace in the third quarter. In the three months to September, tourist arrivals were around % higher than a year earlier (). Meanwhile, recent investments into the country s manufacturing sector are supporting a period of strong export growth (). Imports are rising at a slower pace than exports and this should help to narrow the current account deficit, which stood at.% of GDP in the four quarters to Q. The central bank has been intervening in the foreign exchange market to offset upward pressure on the dirham, as shown by the recent rise in FX reserves (). Finally, inflation rose from.% y/y in August to.% y/y in September. A drop in food inflation was more than offset by a jump in non-food inflation (). Chart : GDP (% y/y) Chart : GDP by Sector (% y/y) - Agriculture (LHS) - GDP (RHS) Non-Agriculture (RHS) Chart : Tourist Arrivals (% y/y, m avg.) Chart : Merchandise Trade (EUR Terms, % y/y, m avg.) Exports Imports Chart : Foreign Exchange Reserves (US$bn) Chart : Consumer Prices (% y/y) CPI - Food Non-Food Sources: CEIC, Thomson Reuters, Capital Economics MENA Chart Book Page 9

10 Tunisia Tunisia s economy slowed in the second quarter of this year. Recently-released GDP data showed that output expanded by.% y/y, compared with growth of.% y/y in Q (). Activity strengthened in the services and manufacturing sectors but this was more than offset by weaker growth in the agricultural sector and a slump in non-manufacturing industries (). More timely data suggest that activity picked up in Q. In the three months to September, industrial production expanded by.% y/y compared with a contraction of.% y/y in Q (). This was supported by strong growth in the mining sector, as well as an acceleration in manufacturing output (). The dinar depreciated by % against the euro between April and August, but the authorities have kept the currency steady at.9/ in recent months (). Moreover, the government has introduced a range of new measures in an effort to exert more control over the supply of, and demand for, foreign currency. But these measures do little to tackle the fundamental reasons such as excessively loose fiscal policy that have caused the current account deficit to remain wide, at close to % of GDP (). Chart : GDP (% y/y) Chart : GDP by Sector (% y/y) GDP Services Agricult. Non-Bus. Act. Q Manuf. Q Non-Man. Indust Chart : Industrial Production % y/y % y/y, m avg. Chart : Manufacturing Production % y/y % y/y, m avg Chart : Tunisian Dinar (vs., Inverted). Chart : Current Account Balance (Q Sum, % of GDP) Dinar weaker against the euro Jan- Apr- Jul- Oct- Jan- Apr- Jul- Oct Sources: CEIC, Thomson Reuters, Capital Economics - MENA Chart Book Page

11 Background Data Chart : GDP ($bn,, Market Exchange Rates) Chart : Population (Millions, ) 9 9 Chart : GDP Per Capita ($,, Market Exchange Rates) Chart : Share of World Output (%,, PPP) Chart : Real GDP (% y/y) - Chart : Consumer Prices (% y/y). - Latest Observation - - Chart : Budget Balance (% of GDP) Chart : Current Account Balance (% of GDP) Sources: CEIC, Thomson Reuters MENA Chart Book Page

12 Key Historic Data Table : Real GDP & Inflation Share of World GDP (% y/y) Inflation (% y/y) - - Saudi Arabia Egypt Algeria United Arab Emirates Qatar Morocco Kuwait Tunisia Oman Lebanon Jordan Bahrain Middle East & North Africa () % in PPP terms. Table : Current Account & Budget Balance Current Account (% of GDP) Budget Balance (% of GDP) - - Saudi Arabia Egypt Algeria United Arab Emirates Qatar Morocco Kuwait Tunisia Oman Lebanon Jordan Bahrain Source: Thomson Reuters MENA Chart Book Page

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