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Economic outlook for MENA region remains subdued
October 7, 2017, 3:34 pm
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Growth in the Middle East and North Africa (MENA) region is expected to fall from 3.2 percent in 2016 to 2.1 percent in 2017 before making a slow climb to 3.1 percent in 2019, says the World Bank (WB) in its latest economic appraisal of the region.

Growth in the MENA region throughout 2017 has been held back by ongoing geopolitical tensions and conflicts, as well as fiscal consolidations and production cuts among many oil exporters. Modest improvements in growth among some oil importers were more than offset by the adverse effects of production cuts on the economies of oil exporters in the region, especially among the Gulf Cooperation Council (GCC) states struggling to implement key structural reforms.

The failure of oil prices to surge to anticipated levels, despite nine months of OPEC-mandated production cuts, has left many petroleum exporters with reduced revenues to transfer to their general budgets. This has tightened liquidity in the banking sector, which is significantly reliant on public sector deposits, and dampened non-oil activity.

Compliance to the OPEC production cut agreement of November 2016, which has been higher than expected, has left each of the five main oil exporters in the region — Iran, Iraq, Kuwait, Saudi Arabia and the UAE — with a production shortfall of over one million barrels per day in the first two quarters of 2017, compared to their respective production levels in October 2016.

On the other hand, the economies of oil importers in the region, which had gradually been gaining momentum since 2016, have now been impacted by the increase in price for petroleum imports.  Higher oil prices, along with an increase in food costs and currency depreciations, have led to rising inflation in many of these countries.

In contrast, though persistently subdued oil prices and currencies that are pegged to the US dollar have helped keep inflation below 3 percent in most GCC states, appreciation of the real exchange rate in Saudi Arabia and the UAE have hindered their adjustment to low oil prices.

Meanwhile, prompted by significant current account and fiscal deficits, many of the governments in the region have initiated fiscal consolidation programs that feature government expenditure cuts, subsidy reforms and new Value Added Tax (VAT) regimes. But these fiscal drives to prop up the economy have had an unintended consequence of negatively impacting household incomes.

The regional VAT of 5 percent, which is expected to be implemented across the GCC at the start of 2018, is expected to increase the cost of living by around 2.5 percent in 2018, and 0.5 percent in each year from 2019 – 2022. The recent decision by GCC countries to curtail or reduce subsidies for fuel and utilities such as water and electricity has increased the pressure on households. The impact of a weaker dollar on imports of countries pegged to the dollar is also expected to drive consumer price inflation to higher levels in the coming years.

With the fiscal break-even prices for most oil exporters in the region remaining above current and short-term projected oil prices, many countries are increasingly looking to overcome their fiscal deficits and support their fiscal consolidation measures by debt issuance.

Supported by benign global financing conditions, renewed investor risk appetite since the start of 2017, and driven by the need to finance fiscal deficits, international bond issuances in the region have been resilient, amounting to more than $45 billion in early 2017.

GCC economies have also embarked on efforts to promote equity investor confidence, including in the context of the impending initial public offering of Saudi Aramco, the state oil company, under what is expected to be the largest valuation on record. However, economic growth of the oil exporters in the region will mainly depend on whether OPEC decides to extend its production cuts beyond March 2018, when they are next up for review. If OPEC decides to maintain production cuts, which increasingly seem likely, then governments in the region will come under further pressure to find new revenue sources to stop public debt from accelerating.

The WB report concludes by noting that with more than four-fifths of the region’s economies projected to have fiscal deficits in 2017, several years of fiscal adjustment lie ahead for both oil exporters and importers in the region.

 

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