MENA ECONOMIC OUTLOOK - Amazon S3€¦ · Middle East & North Africa Economics. MENA Economic Outlook Page 4 . Saudi Arabia . Consensus too optimistic on growth in 2018-19 • Saudi

Middle East & North Africa Economics | Q4 2017

Neil Shearing, Chief Emerging Markets Economist, +1 646 934 6162, [email protected]

William Jackson, Senior Emerging Markets Economist, +44 (0)20 7808 4054, [email protected]

Jason Tuvey, Middle East Economist, +44 (0)20 7808 4065, [email protected]

MENA Economic Outlook Page 1

MENA ECONOMIC OUTLOOK Turning the corner • Growth across the Middle East and North Africa has slowed further this year, but it should recover in 2018

and 2019. In the Gulf, the drag on GDP growth from this year’s oil production cuts will fade. Nonetheless,

the recovery will be slow-going. Fiscal austerity looks set to continue and dollar pegs mean that local

interest rates will need to rise in line with those in the US. Meanwhile, the diplomatic crisis between Qatar

and regional powers looks set to drag on. The early evidence suggests that Qatar’s economy has taken a

hit, but the worst of the impact may have already passed and economic spillovers into the rest of the region

are likely to be limited. Elsewhere, Egypt’s economy should strengthen as inflation and interest rates fall

back more quickly than most expect. For the MENA region as a whole, we expect growth to pick up from

an eight-year low of 1.3% in 2017 to 2.3-2.5% in 2018-19.

• Saudi Arabia’s economy is set to contract this year on the back of oil output cuts. A recovery is likely in

2018, but a resumption of austerity means it will be slow-going. Rumours that Crown Prince Mohammed

bin Salman will soon become king have raised hopes of fresh impetus to push through the Vision 2030

reforms. But the reforms face a number of hurdles and are likely to fall short of their lofty goals. (Page 4.)

• The UAE is likely to be the Gulf’s top-performing economy in 2018-19. The pace of fiscal consolidation

will be slower compared with the other Gulf economies, while activity will benefit from robust global

growth and a step-up in preparations for the 2020 World Expo. (Page 5.)

• Kuwait’s balance sheet is the strongest in the GCC, but it is still likely to be among the region’s weaker

performers in 2018-19. (Page 6.) The worst of the hit to Qatar’s economy caused by the diplomatic crisis

with regional powers appears to have passed but, with the crisis set to drag on, we are more pessimistic

than most on the outlook. (Page 7.) Weak balance sheets in Bahrain and Oman mean that fiscal

consolidation will be stepped up, keeping growth there subdued. (Page 8.)

• Egypt’s economy should strengthen as inflation and interest rates fall by more than most expect, the pace

of fiscal consolidation starts to slow and a weak pound supports robust export growth. (Page 9.)

• The ongoing problems in neighbouring Syria, as well as weak growth in the Gulf, mean that the economic

outlook for Lebanon and Jordan remains poor. (Page 10.) Fresh falls in the dinar, coupled with an ongoing

fiscal squeeze, mean that Algeria’s economy is likely to record sluggish growth. (Page 11.)

• Morocco is likely to be among the region’s best performing economies as the drag from policy tightening

fades and recent investments into the manufacturing sector bear fruit. (Page 12.) Tunisia’s economy should

strengthen, but growth is likely to remain in line with its average since the 2011 revolution. (Page 13.)

• In Financial Markets, we think equities will continue their recent underperformance. Dollar bond yields

are likely to rise and spreads will probably widen a touch. (Page 14.)

Middle East & North Africa Economics


Key Forecasts

Table 1: Real GDP and Inflation

Share of Share of World

GDP Inflation MENA 2016 2017 2018 2019 2016 2017 2018 2019

Saudi Arabia 31.1 1.5 1.7 -1.3 0.8 1.3 3.5 0.3 4.5 3.0 Egypt 20.1 0.9 3.8 3.8 4.3 5.0 13.8 29.0 15.0 10.0 UAE 11.9 0.6 3.0 2.0 3.0 3.3 1.6 2.3 3.3 2.5 Algeria 10.9 0.5 3.5 1.8 1.3 1.5 6.4 5.0 6.0 7.5 Qatar 5.9 0.3 2.2 0.8 1.8 2.0 2.8 0.5 2.0 2.0 Kuwait 5.4 0.3 3.5 0.0 1.5 1.5 3.2 2.0 2.3 3.5 Morocco 5.0 0.2 1.2 4.0 4.0 4.8 1.6 0.8 2.5 3.0 Oman 3.3 0.2 2.0 0.5 1.0 1.0 1.1 1.5 3.0 2.8 Tunisia 2.3 0.1 1.1 2.0 3.0 3.5 3.7 5.0 5.3 4.8 Jordan 1.6 0.1 2.1 2.3 2.5 2.8 -0.8 2.8 3.3 3.3 Lebanon 1.5 0.1 1.0 1.3 1.5 1.8 -0.8 3.3 1.5 1.5 Bahrain 1.2 0.1 3.0 2.5 2.0 2.0 2.7 1.5 3.5 3.0 MENA 4.7 2.6 1.3 2.3 2.5 5.3 7.3 6.3 4.8 Oil Producing Economies 3.3 2.5 0.3 1.5 1.8 3.5 1.5 4.0 3.5 Non-oil Producing Economies 1.4 3.0 3.5 4.0 4.5 9.5 20.0 11.0 7.8 US 15.3 1.5 2.2 2.5 1.7 1.3 2.0 2.1 2.6 Euro-zone 12.0 1.7 2.2 2.0 1.5 0.2 1.5 1.2 1.4 China Official 18.3 6.7 6.8 6.5 6.3 2.0 1.5 1.5 1.5 CAP 18.3 5.1 6.0 5.0 4.5 - - - - Sources: CEIC, Thomson Reuters, Capital Economics

Chart 1: GDP (% y/y)

Sources: CEIC, Thomson Reuters, Capital Economics

Chart 2: Consumer Prices (% y/y)


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Overview

The MENA region has slowed further this year, but a recovery should get underway in 2018-19.

But further fiscal tightening will be required to rein in budget and current account deficits…

The blockade on Qatar appears to have caused a sharp but short-lived hit to its economy. Even so, we remain pessimistic on the outlook.

The government has also made good progress with fiscal tightening and the drag from this should ease.

In the Gulf, the hit to growth from oil production cuts should fade next year.

…and dollar pegs mean that local interest rates will need to rise in line with those in the US.

We are a bit more upbeat on countries outside of the Gulf. In Egypt, inflation and interest rates are likely to fall sharply and by more than most anticipate.

For the region as a whole, growth is likely to be weaker than the consensus expects, at 2.0-2.5% in 2018-19.


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Middle East & North Africa GDP (% y/y)

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Egypt Consumer Prices & Interest Rates

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Capital Economics Consensus ForecastsMiddle East & North Africa GDP (% y/y)



Saudi Arabia Consensus too optimistic on growth in 2018-19

• Saudi Arabia’s economy is on course to contract this year and while a recovery should get underway in 2018-19, we think it will be weaker than most anticipate.

• The latest official GDP data showed that the downturn in the Saudi economy deepened in Q2. Output contracted by 1.0% y/y, compared with a drop of 0.5% y/y in Q1.

• OPEC-agreed oil production cuts have caused the oil sector to drag on growth this year. An extension to the OPEC deal looks likely, but officials are unlikely to sanction deeper cuts. As a result, the hit to growth from lower oil output should fade in 2018-19. (See Chart 1.)

• Even so, the recovery is likely to be weaker than most expect. Oil prices will be broadly stable in 2018-19 and, as a result, fresh fiscal austerity will be needed to rein in the budget and current account deficits. (See Chart 2.) A new value-added tax combined with fresh subsidy cuts will push up inflation, eroding real incomes and dampening consumer spending. Only the poorest households will be protected by a new “household allowance”.

• Tighter fiscal policy, coupled with the Kingdom’s strong balance sheet, means that the dollar peg should remain intact. The flip side to this, though, is that local interest rates will need to rise in line with those in the US, keeping credit growth subdued.

• We expect GDP to fall by 1.3% this year and to expand by less than 1.5% in 2018-19. Our forecasts are below consensus. (See Chart 3.)

• Meanwhile, rumours suggest Crown Prince Mohammed bin Salman may soon become king, raising hopes of a fresh impetus to push through the Vision 2030 reform plans. But the reforms still face a number of hurdles and are likely to fall short of their lofty goals.

Chart 1: Contribution of Oil Sector to GDP Growth (%-pts)

Chart 2: Budget & Current Account Balances (% of GDP)


Key Forecasts (% y/y unless stated) 2015 2016 2017f 2018f 2019f

GDP 4.1 1.7 -1.3 0.8 1.3 Oil GDP 5.3 3.8 -4.0 0.5 0.5 Non-oil GDP 3.2 0.2 0.8 1.0 2.0 CPI Inflation 2.2 3.5 0.3 4.5 3.0 Gen’l Gov’t Bal(1) -14.8 -12.8 -5.5 -4.0 -3.5 Gen’l Gov’t Debt(1) 5.8 13.1 18.0 21.5 24.0 Current Account(1) -8.7 -3.9 1.5 2.0 2.5 Sources: CEIC, Thomson Reuters, Capital Economics. (1) % of GDP.

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Consensus

Forecasts



United Arab Emirates Top of the class in the Gulf

• The UAE’s economy should strengthen in the coming years and we expect it to be the Gulf’s top performer.

• The economy is likely to post slower growth this year than in 2016. However, this will entirely reflect weakness in the oil sector following OPEC-agreed output cuts.

• Growth should pick-up in 2018-19. If we are right in expecting policymakers to resist calls for more aggressive action by OPEC, the impact of oil production cuts will fade. (See Chart 1.) At the same time, the recovery in the non-oil economy should gather a bit of momentum. The UAE was ahead of the curve in tightening fiscal policy in response to lower oil prices and its balance sheet is among the strongest in the region.

• Accordingly, the pace of fiscal consolidation will be much slower compared with the other Gulf economies. The non-oil sector should also benefit from robust global growth, while a step-up in preparations for the 2020 World Expo will give a boost to construction activity.

• That said, there are a few factors which will hold back growth. Weakness in the rest of the GCC will weigh on the tourism sector. What’s more, the dollar peg means that local interest rates will need to rise in line with those in the US, keeping credit growth subdued. And the introduction of a new value-added tax at the start of 2018 will push up inflation and weigh on consumer-facing sectors. (See Chart 2.)

• Overall, we expect the UAE’s economy to grow by 2.0% in 2017, before picking up to 3.0-3.3% in 2018-19. (See Chart 3.) Our forecasts are broadly in line with consensus.

Chart 1: Oil Production




GDP 3.8 3.0 2.0 3.0 3.3 Oil GDP 5.4 3.8 -1.0 0.5 0.5 Non-oil GDP 3.2 2.7 3.5 4.0 4.5 CPI Inflation 4.1 1.6 2.3 3.3 2.5 Gen’l Gov’t Bal(1) -2.2 -4.2 -2.5 -1.5 -0.5 Current Account(1) 4.7 3.2 5.5 6.0 6.5 Sources: CEIC, Thomson Reuters, Capital Economics. (1) % of GDP.

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Kuwait Strong balance sheet, weak growth

• Kuwait’s balance sheet is the strongest in the GCC, but it is still likely to be among the region’s weaker performers in 2018-19.

• Last year, Kuwait posted twin budget and current account deficits for the first time since the early 1990s. (See Chart 1.) However, the shortfalls were relatively small. In any case, the country’s balance sheet is strong. At less than 20% of GDP, public debt is low and FX savings are equal to more than 500% of GDP.

• Nonetheless, we expect economic growth to be weak. Fiscal policy looks set to be tightened. Further subsidy cuts are likely, while a new corporate profit tax and a value-added tax are to be introduced. The public sector wage bill will also be kept in check.

• Tighter fiscal policy, coupled with higher oil prices, will cause budget and current account positions to return to surplus this year. (See Chart 1 again.) On the flip side, though, subsidy cuts and tax hikes will cause inflation to rise, dampening real incomes and weighing on growth in consumer-facing sectors.

• Meanwhile, a bloated bureaucracy and resistance from the National Assembly – the elected parliament – means that we think the government will struggle to push through its latest development plan. As a result, growth in the non-oil sector is likely to be subdued.

• As part of the OPEC deal, oil output has been cut which will act as a drag on GDP growth this year. An extension of the deal looks likely. But the year-on-year drop in output – which is what matters for GDP growth – should ease in 2018-19. (See Chart 2.)

• All told, we expect Kuwait to record GDP growth of 1.5% in 2018-19. (See Chart 3.)


Chart 2: Oil Production



GDP 0.6 3.5 0.0 1.5 1.5 Oil GDP -1.7 2.3 -3.0 0.0 0.5 Non-oil GDP 0.4 2.0 2.0 2.0 1.8 CPI Inflation 3.2 3.2 2.0 2.3 3.5 Gen’l Gov’t Bal(1) 1.2 -3.6 6.5 7.5 7.5 Current Account(1) 3.5 -4.5 2.5 4.0 4.0 Sources: CEIC, Thomson Reuters, Capital Economics. (1) % of GDP.

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Qatar Worst of blockade hit over, but growth to be sluggish

• The worst of the hit to Qatar’s economy caused by the diplomatic crisis with regional powers appears to have passed. However, the crisis is likely to drag on and we are more pessimistic than most on the outlook.

• The blockade imposed by Saudi Arabia and its allies did deal a blow to the economy – imports dropped by more than 30% y/y in June and July and this reportedly led to disruptions to activity. But the worst may now be over. Oil and gas shipments have continued to flow. And imports have been re-routed via Oman and the new Hamad Port recently opened for business – as a result, imports fell by a more modest 7.6% y/y in August. Financial conditions have loosened. (See Chart 1).

• In any case, Qatar is in a strong financial position to withstand the headwinds arising from the blockade. The current account position is likely to return to surplus this year. (See Chart 2.) And the country’s FX savings – equal to 235% of GDP – mean that it is well-placed to cope with a period of capital flight.

• While a sharp and sustained downturn may have been avoided, there are reasons to be downbeat on the outlook. With the crisis set to drag on, investment will be weak. In addition, a period of deleveraging, rising interest rates and a tougher external financing environment, mean that credit growth – a key driver of the economy in recent years – will stay subdued.

• On a more positive note, as the Barzan gas facility finally comes on stream, the hydrocarbon sector should rebound.

• Bringing all of this together, our forecasts for growth of 1.8-2.0% in 2018-19 lie firmly below the consensus. (See Chart 3.)

Chart 1: CE Qatar Financial Conditions Index




GDP 3.6 2.2 0.8 1.8 2.0 Oil GDP -0.5 -1.0 -1.5 1.5 1.5 Non-oil GDP 8.2 5.6 3.0 2.0 2.5 CPI Inflation 1.7 2.8 0.5 2.0 2.0 Gen’l Gov’t Bal(1) 5.6 -4.2 1.0 2.5 3.0 Current Account(1) 8.4 -5.5 1.0 1.5 2.0 Sources: CEIC, Thomson Reuters, Capital Economics. (1) % of GDP.

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Bahrain and Oman Sluggish growth as fiscal austerity is stepped up

• Balance sheets in Bahrain and Oman are the weakest in the GCC and, while currency devaluations are likely to be avoided, fiscal consolidation will be stepped up. As a result, growth is likely to be weaker than most expect.

• Both countries are running large twin budget and current account deficits. (See Chart 1.) Moreover, financial buffers are smaller than in the rest of the Gulf. Bahrain’s debt-to-GDP ratio is the highest in the region and Oman’s has risen sharply. (See Chart 2.) By our estimates, FX savings could fund external shortfalls for no more than five years.

• We expect oil prices to be broadly stable over the coming years – our end-2019 forecast is US$55pb. If we are right, Bahrain and Oman still need to make a large adjustment. The other Gulf countries would probably step in with support to prevent devaluations. After all, a devaluation in either country could ignite concerns about their own dollar pegs.

• That said, Bahrain and Oman are unlikely to receive a blank cheque and financing will be conditional on further austerity being applied. Subsidy reform, tax hikes and spending cuts are on the cards. Inflation looks set to rise which, coupled with public sector wage restraint, will weigh on consumer spending.

• All of this comes amid political uncertainty. In Bahrain, rumbling tensions between the Shia-majority population and Sunni leadership could deter investment. Meanwhile, the poor health of Oman’s Sultan Qaboos may result in a period of policy paralysis.

• The upshot is that growth is likely to be weak for the foreseeable future. We have pencilled in growth of 2.0% in Bahrain and 1.0% in Oman in 2018-19. (See Chart 3.)


Chart 2: General Government Debt (% of GDP)



Bahrain GDP 2.9 3.0 2.5 2.0 2.0 CPI Inflation 1.9 2.7 1.5 3.5 3.0 Gen’l Gov’t Bal(1) -13.5 -14.2 -12.0 -10.0 -8.0 Oman GDP 5.7 2.0 0.5 1.0 1.0 CPI Inflation 0.1 1.1 1.5 3.0 2.8 Gen’l Gov’t Bal(1) -15.1 -19.0 -12.5 -10.0 -8.0 Sources: CEIC, Thomson Reuters, Capital Economics. (1) % of GDP.

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Egypt Growth to strengthen, inflation and interest rates to fall sharply

• Egypt’s economy should strengthen in 2018-19 as inflation falls back, interest rates are cut and the pace of fiscal consolidation slows.

• Despite the sharp rise in inflation this year, the Egyptian economy has held up better than expected. The latest data show that GDP grew by 4.3% y/y in Q1, up from 3.8% y/y in Q4 of last year.

• The economy should strengthen in 2018-19. Having fallen by 50% against the dollar over the past year, the big adjustment in the pound has probably now happened. Recent reforms, including to the business environment, should attract foreign investors back to the country. The upshot is that we expect only a modest further depreciation of the pound.

• As a result, inflation looks set to fall sharply, in turn supporting growth in households’ real incomes. Lower inflation will allow the central bank to cut interest rates (see Chart 1) and by more than most expect.

• The government has made good progress reining in the budget shortfall and the public debt-to-GDP ratio has started to fall back. Further subsidy reforms are likely, but the overall drag from fiscal consolidation is likely to ease. As a result, domestic demand should start to strengthen.

• A weak currency has boosted Egypt’s external competitiveness, which should translate into stronger exports. This, combined with a recovery in the tourism sector and the start of operations at the “supergiant” Zohr gas field, will help to rein in the current account shortfall. (See Chart 2.)

• All told, we expect the Egyptian economy to accelerate in 2018-19 (see Chart 3) and our forecasts are a touch above the consensus.

Chart 1: Consumer Prices & Interest Rates

Chart 2: Current Account Balance (% of GDP)



GDP 3.9 3.8 3.8 4.3 5.0 CPI Inflation 10.4 13.8 29.0 15.0 10.0 Unemp. Rate (%) 12.8 12.4 12.5 12.0 11.5 Gen’l Gov’t Bal(1, 2) -11.4 -12.5 -10.5 -8.0 -6.5 Gen’l Gov’t Debt(1, 2) 88.4 97.0 89.0 78.0 73.0 Current Account(1) -5.2 -6.0 -5.5 -5.0 -4.0 Interest Rate %(3) 9.25 14.75 16.25 12.75 10.50 EGP/USD(3) 7.83 18.13 18.00 19.00 20.00 Sources: CEIC, Thomson Reuters, Capital Economics. (1) % of GDP. (2) Fiscal Year. (3) End period.

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Lebanon and Jordan Syrian conflict, Gulf weakness to keep growth subdued

• The ongoing problems in neighbouring Syria, as well as weak growth in the Gulf, mean that the economic outlook for Lebanon and Jordan remains poor.

• Growth in Lebanon and Jordan has been subdued for a number of years as the conflict in neighbouring Syria has weighed on exports, deterred investment and heightened security concerns. Tourism sectors have suffered particularly badly. (See Chart 1.)

• This picture is unlikely to improve any time soon. The militant group, Islamic State, has lost large swathes of territory over the past year, but a resolution to the Syrian conflict remains remote. Both Lebanon and Jordan are also exposed to weakness in the Gulf via trade ties and a reliance on these countries for official financing, capital inflows and remittances.

• The upshot is that current account shortfalls are likely to remain wide. (See Chart 2.) For now, Jordan’s IMF deal and Lebanon’s large FX reserves provide substantial buffers. In return for IMF support, though, Jordan will be required to tighten fiscal policy. Fiscal policy will be kept tight in Lebanon too, although the government is unlikely to make significant strides in dealing with the dire public finances.

• The bigger risk for Lebanon is a fresh deterioration in relations with the Gulf. Saudi Arabia and its allies have taken a harsher line with countries perceived to have close ties with Iran – parts of the Lebanese government are backed by Tehran. In a worst-case scenario, Lebanon could face financial restrictions that may undermine the dollar peg.

• Overall, we expect GDP growth of 1.5-1.8% in Lebanon and 2.5-2.8% in Jordan in 2018-19. (See Chart 3.)

Chart 1: Jordan Tourist Arrivals (12m Sum, mn)

Chart 2: Current Account Balances (% of GDP)



Lebanon GDP 1.0 1.0 1.3 1.5 1.8 CPI Inflation -3.7 -0.8 3.3 1.5 1.5 Gen’l Gov’t Bal(1) -7.4 -8.1 -8.0 -7.5 -7.0 Jordan GDP 2.4 2.1 2.3 2.5 2.8 CPI Inflation -0.9 -0.8 2.8 3.3 3.3 Gen’l Gov’t Bal(1) -4.1 -3.4 -3.0 -2.5 -2.0 Sources: CEIC, Thomson Reuters, Capital Economics. (1) % of GDP.

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Lebanon Jordan CEForecasts



Algeria Currency fall and austerity to weigh on growth

• Algeria’s economy has weathered low oil prices well so far. But fresh falls in the dinar, coupled with an ongoing fiscal squeeze, mean that the economy is likely to record sluggish growth over the coming years.

• The latest data suggest that the Algerian economy has continued to hold up relatively well. GDP expanded by 3.7% y/y in Q1, a touch stronger than growth of 3.4% y/y recorded over 2016 as a whole.

• However, we doubt that this robust performance will be sustained. For one thing, growth in the hydrocarbon sector looks set to weaken as the boost from the In Amenas gas plant’s return to full capacity fades.

• Growth outside of the hydrocarbon sector also look set to weaken. In order to finance the large current account deficit, the authorities have burned through half of the country’s FX reserves over the past few years. More recently, the dinar has been allowed to depreciate against its euro-dollar basket and we think the currency will fall by a further 25% by end-2018. (See Chart 1.)

• A weaker dinar will raise the local currency value of the government’s oil revenues and thus help to narrow the budget deficit. Even so, the government looks set to pursue further fiscal austerity. Fresh subsidy cuts and a range of tax hikes, coupled with currency weakness, will push up inflation (see Chart 2) and weigh on growth in consumer-facing sectors.

• All told, we think GDP growth will remain below 2% over the coming years. Our forecasts are weaker than consensus expectations. (See Chart 3.)

Chart 1: Algerian Dinar (vs. Euro-Dollar Basket, Index, 1st Jan. 2014 = 100)




GDP 3.8 3.5 1.8 1.3 1.5 Unemp. Rate % 11.0 11.2 11.0 11.5 11.5 CPI Inflation 4.8 6.4 5.0 6.0 7.5 Gen’l Gov’t Bal(1) -15.4 -11.3 -7.5 -3.5 -2.0 Gen’l Gov’t Debt(1) 8.8 20.4 26.0 26.5 25.0 Current Account(1) -14.9 -15.3 -10.0 -9.0 -8.0 Sources: CEIC, Thomson Reuters, Capital Economics. (1) % of GDP.

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*Basket consists of approximately 65% US dollar and 35% euro

Dinar weaker CE Forecast

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Capital Economics Consensus Forecasts



Morocco Stronger exports to support robust growth

• Morocco is likely to be among the region’s best performing economies in 2018-19 as the drag from policy tightening fades and recent investments into the country’s manufacturing sector bear fruit.

• Morocco’s economy expanded by 4.0% y/y in the first half of 2017, up from 1.2% over 2016 as a whole. Growth in the agricultural sector – which accounts for around 20% of GDP and has driven this year’s rebound – is likely to ease in 2018. But there are good reasons to think that other sectors will perform well.

• The government has made good progress in reining in the budget shortfall. (See Chart 1.) Accordingly, further fiscal consolidation is likely to be much less aggressive compared with the past five years.

• Meanwhile, there has been significant investment geared towards raising capacity in the manufacturing sector over the past year. (See Chart 2.) This, coupled with robust growth in the euro-zone – Morocco’s largest trading partner – should support a pick-up in exports and a narrowing in the current account deficit.

• Against this backdrop, we think the upcoming shift towards a more flexible exchange rate regime will result in the dirham appreciating against the euro – we have pencilled in a rise to 10/€ by the end of next year, from just over 11/€ at present. This will help to keep a lid on inflation, supporting households’ real incomes and consumer spending.

• Bringing all of this together, we expect Morocco to record GDP growth of 4.0-5.0% in 2018-19. (See Chart 3.) Our forecasts are a touch above the consensus and the IMF.


Chart 2: Moroccan Imports from Romania (12m Sum, US$mn)



GDP 4.5 1.2 4.0 4.0 4.8 Unemp. Rate % 9.7 9.4 9.3 9.0 8.5 CPI Inflation 1.5 1.6 0.8 2.5 3.0 Gen’l Gov’t Bal(1) -4.2 -4.1 -3.5 -3.0 -3.0 Gen’l Gov’t Debt(1) 64.1 64.5 65.5 64.0 62.0 Current Account(1) -2.1 -4.4 -3.0 -2.5 -2.0 Sources: CEIC, Thomson Reuters, Capital Economics. (1) % of GDP.

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Jump in imports due to relocation of car production

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Capital Economics

Consensus

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Tunisia Slow recovery to continue

• Tunisia’s economy should strengthen in 2018-19, but growth is likely to remain relatively sluggish by past standards at 3.0-3.5%.

• GDP grew by 1.9% y/y in the first half of this year, up from 1.1% over 2016 as a whole. The agricultural sector rebounded from last year’s drought, while the tourism sector continued to recover from the 2015 terrorist attacks.

• We expect the economy to strengthen further over the coming quarters. The improvement in the security situation should continue to support the tourism sector, a key source of foreign currency earnings. In addition, robust growth in the euro-zone should boost exports, remittances and investment.

• Even so, the current account deficit is likely to remain wide. (See Chart 1.) An IMF deal and support from bilateral partners will keep strains in the balance of payments contained.

• However, the Fund has ramped up pressure on the authorities to push ahead with reforms. A fresh round of fiscal consolidation – equal to around 1.5% of GDP in 2018 – is on the cards, including tax hikes and subsidy cuts. Recent public sector wage hikes mean the IMF is likely to insist on measures to limit the wage bill, which is among the highest in the emerging world as a share of GDP.

• The authorities have loosened their grip on the dinar and we expect it to fall by a further 10% against the euro by end-2018. (See Chart 2.) Inflation looks set to rise, eroding real incomes and dampening consumer spending.

• All told, while we expect GDP growth to pick up in 2018-19, it is likely to remain in line with the rates recorded since the revolution in 2011. (See Chart 3.)


Chart 2: Tunisian Dinar (vs. €, Inverted)



GDP 1.3 1.1 2.0 3.0 3.5 Unemp. Rate % 15.5 15.5 15.0 14.5 14.5 CPI Inflation 4.7 3.7 5.0 5.3 4.8 Gen’l Gov’t Bal(1) -5.0 -5.5 -5.5 -4.5 -4.0 Gen’l Gov’t Debt(1) 57.0 60.5 62.0 62.0 61.0 Current Account(1) -9.0 -9.0 -8.5 -7.5 -6.0 Sources: CEIC, Thomson Reuters, Capital Economics. (1) as % of GDP.

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Dinar weakeragainst the euro

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Financial Markets Equities to underperform, dollar bond yields to rise

• Equity markets across the MENA region have continued to underperform and we think they will struggle to make much headway over the next twelve months. Meanwhile, interest rates and dollar bond yields are likely to rise in much of the region.

• The MSCI Arabian Markets equity index has risen 1.1% year-to-date, a poor performance compared with stocks elsewhere in the emerging world. (See Chart 1.)

• Equities in the Gulf have struggled recently despite the rise in oil prices. Investors may be coming round to the view that, while the near-term outlook has improved, long-term growth is likely to be subdued. Geopolitical tensions have also weighed on sentiment. These issues are unlikely to fade soon which, with oil prices likely to tread water, means that Gulf equities will rise only modestly. (See Chart 2.)

• Meanwhile, Egyptian stocks should be supported by improved investor sentiment towards the country, although stretched valuations are likely to limit any gains. (See overleaf for our full market forecasts.)

• Dollar pegs in the Gulf mean that interbank interest rates will follow those in the US up (see Chart 3), while higher US Treasury yields will cause dollar bond yields to rise and we think that spreads will probably widen a touch. If Egyptian inflation and interest rates fall sharply, as we anticipate, local currency bond yields are likely to drop back.

• Elsewhere, we expect the Egyptian pound to experience only a modest further depreciation. (See Chart 4.) The Moroccan dirham is likely to strengthen against the euro when the authorities eventually shift to a more flexible exchange rate. In contrast, the Tunisian and Algerian dinars have further to fall.

Chart 1: MSCI Arabian Markets & Emerging Markets Indices (1st Jan. 2017 = 100)

Chart 2: MSCI GCC Index & Oil Prices

Chart 3: Gulf & US Interest Rates (%)

Chart 4: Egyptian Pound (vs. US$, Inverted)

Sources: Bloomberg, Thomson Reuters, Capital Economics

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Egyptian pound weakens against the dollar

CE Forecast

CBE floats the pound



Market Forecasts

Table 1: FX Rates

Currency Latest (4th Oct.) End 2017 End 2018 End 2019 Saudi Arabia/$ SAR 3.75 3.75 3.75 3.75 Egypt/$ EGP 17.63 18.00 19.00 20.00 UAE/$ AED 3.67 3.67 3.67 3.67 Qatar/$ QAR 3.64 3.64 3.64 3.64 Kuwait/$ KWD 0.30 0.30 0.30 0.30 Morocco/€ MAD 11.11 11.00 10.00 9.80 Tunisia/€ TND 2.90 3.00 3.20 3.20 Euro-zone/$ EUR 1.18 1.20 1.15 1.20 US USD - - - - Japan JPY 112 110 115 115 Source: Bloomberg, Thomson Reuters, Capital Economics

Table 2: Equity Markets

Equity Market Latest (4th Oct.) End 2017 End 2018 End 2019 Saudi Arabia TASI 7,285 7,500 7,750 7,500 Egypt EGX30 13,881 14,500 16,000 12,500 Abu Dhabi ADI 4,433 4,500 4,500 4,250 Dubai DFMGI 3,598 3,600 3,600 3,400 Qatar QSE 8,152 8,500 9,000 8,500 Kuwait KWSE 6,692 6,750 7,000 6,750 Morocco MADEX 10,144 10,250 11,000 10,500 Tunisia TUNINDEX 6,147 6,250 6,500 6,250 Germany DAX 30 12,940 12,750 13,500 12,500 US S&P 500 2,534 2,500 2,500 2,150 Japan Nikkei 225 20,626 20,000 20,750 19,000 Source:

Table 3: Government Bond Yields (%)

Latest (4th Oct.) End 2017 End 2018 End 2019 Saudi Arabia 2028 Dollar 3.65 3.75 4.50 4.00 Egypt 10yr Local Currency 15.32 15.00 14.00 12.00 EMBI 6.56 6.50 7.00 6.50 UAE (Abu Dhabi) 2026 Dollar 2.96 3.00 3.75 3.25 Qatar 2026 Dollar 3.41 3.50 4.25 3.50 Kuwait 2027 Dollar 3.17 3.25 4.00 3.50 Morocco 2022 Dollar 3.06 3.50 4.25 3.75 Tunisia 2025 Dollar 6.32 6.25 7.00 6.50 Germany 10yr Local Currency 0.45 0.50 1.25 1.75 US 10yr Local Currency 2.33 2.25 3.00 2.50 Japan 10yr Local Currency 0.06 0.00 0.00 0.00 Source:



Background Charts

Chart 1: GDP ($bn, 2016, Market Exchange Rates)

Chart 3: GDP Per Capita ($000, 2016, Market Exchange Rates)

Chart 5: Real GDP (% y/y)

Chart 7: Budget Balance (% of GDP)

Chart 2: Population (Millions, 2016)

Chart 4: Share of World Output (%, 2016, PPP)


Chart 8: Current Account Balance (% of GDP)

Sources: CEIC, Thomson Reuters

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Email [email protected] Visit www.capitaleconomics.com

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