GCC/ MENA macro outlook Khatija Haque, Head of MENA Research March 18 1
% y/y GCC: Is the worst behind us? Average GCC GDP growth 1 and 17 have been challenging on a number of fronts for the GCC. Lower oil prices forced fiscal reform across the region to varying degrees Oil production cuts pushed some countries into recession last year Non-oil sector growth slowed, businesses forced to become more efficient and productive Strong growth in output and new work largely due to selling price cuts, no employment or wage growth Households under strain from higher living costs as well,,, 3,, 1,,, 3, 3, 3, 3,3,,8, 1 13 1 1 1 17f 18f 19f Saudi PMI components UAE PMI components 3 Output Prices New Orders Employment 3 New Orders Employment Output Prices 7 7 1 1 8 8 Jan-1 Jun-1 Nov-1 Apr-17 Sep-17 Feb-18 Jan-1 Jun-1 Nov-1 Apr-17 Sep-17 Feb-18
(m b/d) Oil outlook: Risks balanced to the downside Brent futures will average around USD /b in 18 with Q1 representing the high. External factors (USD, correction in risk assets) pose a substantial nearterm risk. Fundamentals point to softness ahead. The US will add more than 1m b/d y/y each quarter in 18 and will capture all the incremental increase in demand. OPEC output will be higher in 18 than 17 thanks to increases from Libya and Nigeria, along with slipping compliance from MENA producers. A roughly balanced market will keep inventories from growing but they won t draw down much either. When measured against demand, stocks still at ample levels. Prices to drift lower from Q1 1 1 8 Jän.1 Jul.1 Jän.1 Jul.1 Jän.1 Jul.1 Jän.17 Jul.17 Jän.18 Jul.18 WTI (USD/b) Brent (USD/b) as supply response from US will be large and prevent inventories from declining 3,, 1,, -, -1, -, Jan-1 Jul-1 Jan-1 Jul-1 Jan-1 Jul-1 Jan-17 Jul-17 Jan-18 Jul-18 Non-OPEC supply OPEC supply Total supply growth 8 8 9 1 11 1 13 1 1 1 17 18 OECD commercial stocks: days of demand cover Source: EIKON, IEA, Emirates NBD Research. 3
USD bn % y/y % GDP Fiscal and external balances supported by higher oil prices in 18 Average GCC budget and external balances Higher oil prices allow governments to spend more to support the real economy But budgets to remain in deficit Significant fiscal stimulus announced in Saudi Arabia, but all GCC countries are likely to see higher government spending this year Public sector wages rise to compensate for subsidy cuts and VAT Infrastructure spending set to rise 3 1 1 - -1-1 current account budget balance 13 1 1 1 17e 18f Saudi Arabia budget spending (USD bn) Growth in GCC budget spending (18 over 17) 3 1 3 1 1 8 1 1 1 1 1 17e 18f KSA UAE Qatar Kuwait Oman Bahrain Total GCC budget spending
mn b/d Growth outlook is constructive Saudi Arabia oil production vs target GCC oil exporters have room to increase oil production this year while remaining compliant with OPEC targets. Oil sector growth will contribute positively to headline GDP growth this year, after being a drag in 17 Non-oil sector growth to accelerate as governments increase spending. Household demand is likely to be constrained by higher taxes and energy/ fuel subsidy cuts Key sectors to benefit: construction (infrastructure), tourism (UAE and KSA), oil & gas 1,8 1, 1, 1, 1, 9,8 Saudi Arabia oil output KSA production target 9, 9, Jän.1 Apr.1 Jul.1 Okt.1 Jän.17 Apr.17 Jul.17 Okt.17 Jän.18 Oil sector growth Non oil sector growth 3 - - 1 - KSA UAE Qatar* Kuwait Oman Bahrain KSA UAE Qatar Kuwait Oman Bahrain 1 17e 18f 1 17e 18f
USD bn % Risks 3m EIBOR spread over 3m USD LIBOR Geopolitics not just in MENA! Downside risk to oil prices fundamentals suggest oil prices should be lower than where they are. Increased financial market volatility Higher US rates will translate to higher borrowing costs in the region GCC budgets to remain in deficit, increased reliance on debt financing poses risks for the medium term. Higher US rates mean higher borrowing costs for GCC sovereigns and companies sharp rise in stock of public debt could be a cause for concern by,,,,3,,1, -,1 3m EIBOR spread over 3m LIBOR -, Jan-1 May-1 Sep-1 Jan-17 May-17 Sep-17 Jan-18 GCC CDS spreads Total new debt issued by the GCC 1 Abu Dhabi Qatar Saudi Arabia Bahrain (rhs) 1 1 8 Jan-17 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18 3 3 8 18 1 1 1 1 8 13 1 1 1 17 18 YTD Source: Haver Analytics, Emirates NBD Research Source : Haver Analytics, SAMA, Emirates NBD Research
Egypt: Improving macro fundamentals Egypt s PMI is improving steadily. The headline figure has remained predominately below the neutral. level, but is high above recent annual averages. Inflation will fall steadily over the next several months, in the sweet spot between the passthrough of November 1 s currency depreciation, and the implementation of further subsidy cuts in July. Diminishing inflationary pressures will enable the CBE to enact three further 1bps cuts over the remainder of 18. This will support growth in private domestic consumption, which has lagged to date. The CBE would be comfortable if reserves fall from current levels, and the USD11bn assets not reflected in the official reserves levels provide a further cushion from swings in hot money inflows. Inflation is easing PMI components 1 PMI Index New Export Orders Overall Input Prices 9 8 7 3 Jän.1 Apr.1 Jul.1 Okt.1 Jän.17 Apr.17 Jul.17 Okt.17 Jän.18 Source: IHS Markit, Emirates NBD Research FX reserves position is much stronger 3 CPI inflation, % y/y Core inflation, % y/y 3 EGP/USD 1 1 Jan-11 Jul-1 Jan-1 Jul-1 Jan-17 18 1 1 1 1 8 Reserves Foreigners' holdings of t-bills 3 3 1 1 Jan-11 Jul-1 Jan-1 Jul-1 Jan-17 Source : IHS Markit, Emirates NBD Research Source : IHS Markit, Emirates NBD Research 7
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