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The Middle East and North Africa: a region divided by oil

What are the forecasts for the MENA region?

Current developments in the oil market and a pick up in non-oil economic activity have exempted most Gulf countries from a forecast downgrade. On the contrary, the October WEO has upgraded 2018 growth numbers for countries like Kuwait, Saudi Arabia and the UAE which have respectively gained 1, 0.5 and 0.9 percentage points to reach growth levels of 2.3%, 2.2% and 2.9%. Betting on higher government spending to push the agenda of economic diversification forward, such countries are set to continue growing in 2019 as the IMF expects economic growth to reach 4.1% for Kuwait, 2.4% for Saudi Arabia, 3.7% for the UAE and 2.8% for Qatar.

However, this rosy picture is not indicative of the whole region’s economy. Indeed, the region’s forecasts have been significantly downgraded since the April WEO issue. Whilst the IMF expected growth to reach 3.3% in 2018 and 3.5% in the MENA region, the October issue has revised such numbers to only 2% in 2018 and 2.5% in 2019. The most striking example of this downgrade is Iran, which is bearing the brunt of American sanctions and lowered oil proceeds. Back in April, which was one month prior to the announcement of sanctions by President Trump, the IMF projected Iran’s economy to grow by 4% in 2018 and 2019. Now, Iranians are due to see their economy contract by 1.5% in 2018 and 3.6% in 2019, thus being with Sudan the only country facing a contraction in the region as defined by the WEO.

Reflecting the recent increase in oil prices, oil-importing countries in the region such as Jordan, Lebanon and Morocco have seen a slight forecast downgrade from April. Lebanon lost 0.5 percentage point in growth forecasts for 2018 and 0.4 point for 2019; Jordan 0.2 point for both years and Morocco 0.8 point for 2019. Benefitting from resilient private consumption and a significant increase in public investments, Egypt is staying on course with the region’s highest forecasted growth rates amounting to 5.3% in 2018 and 5.5% in 2019.

Are higher growth prospects tenable for the Gulf?

In spite of having their growth prospects revised upwards, oil-exporting countries still lag far behind the average global growth rate of 3.7%. Overall, oil-exporters’ growth rate is of 1.4% this year and around 2% next year, far behind the 4.5% and 4% rates of oil-importing countries. Although this is partly caused by Iran’s slump, it shows that the economies of Gulf countries are still too reliant on oil-exports and that the current uncertainty in oil markets could well again hit them hard should there be a sudden crisis in the global economy.

The risk of such a crisis is increasingly likely: from a potential trade war between America and China, which would exacerbate the Asian giant’s economic slowdown, to the fears surrounding a new Euro-crisis abetted by Italy, risks are omnipresent in the global economy. Yet, it is America that has lately raised investors’ concerns. Last week, modellers at J.P.Morgan found that the U.S. economy has 60% chance of falling into a recession by 2020 and 80% chance by 2021. Auguring the end of America’s longest expansion in history, such warnings are to be taken seriously considering the pro-cyclicality of the American government’s fiscal, regulatory and monetary policies. Since global growth has been increasingly unbalanced and since America has taken a greater role in it, a recession from the U.S. would greatly endanger the economic recovery of Gulf countries, by lowering global economic activity and leading to lower oil prices.

Despite the objective of Gulf countries to become less reliant on oil, they still are pursuing pro-cyclical policies, especially Saudi Arabia and the UAE which have increased public spending in the last months as oil prices have increased. Saudi Arabia now runs the largest budgets in its history and hopes to balance the books by 2023, reaching 1.7% of budget deficit in 2019, from around 7% this year. Should oil prices turn back to preceding levels, which caused a fiscal crisis in the region, it is highly likely that budget deficits would not be balanced and economic plans would be blurred around the region.

Our publications do not offer investment advice and nothing in them should be construed as investment advice. Our publications provide information and education for investors who can make their investment decisions without advice.

Sources:

Bloomberg, Brendan Murray, 18 October 2018, U.S. Recession Changes in Next Two Years Top 60%, JPMorgan Says.

International Monetary Fund, October 2018, World Economic Outlook

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