MENA Quarterly Q3 2019

OPEC+ has agreed to extend its production cuts into Q1 2020 in an attempt to keep market balances low and support prices. Cutting production has been effective in the past at drawing down inventories but is a heavy-handed tool that has a sharply negative impact on producer economies. As non-OPEC supplies continue to grow and demand remains a major risk for the rest of the year, cutting production is losing its effectiveness as a tool to influence markets.

Non-oil sector growth in the two largest GCC economies appears to have gained momentum in H1 2019, albeit off a low 2018 base.  In Saudi Arabia, Q1 GDP showed faster non-oil sector expansion, while PMI survey data in the UAE and Saudi Arabia suggest that GDP growth accelerated further in Q2.  However, the expansion is on the back of further price discounting and there is very little evidence of job growth in both countries, despite the apparent recovery in the volume of activity.  We now expect the UAE’s economy to grow 2.0% in 2019, lower than our previous estimate of 3.1%. 

Kuwait’s non-oil sector grew at the fastest rate in more than a year in Q1 2019, although we do not expect this pace to be maintained through the rest of this year. In contrast, the latest data for Qatar suggests that non-oil sector growth has slowed so far this year.  The PMI remained in contraction territory in H1 and the preliminary estimate of Q1 GDP showed the first y/y contraction in the building and construction sector since at least 2012.

Declining housing costs across the GCC are the main drivers of deflation in the region this year.  Measures to reduce expat workers in Saudi Arabia and Kuwait have led to an exodus of foreigners, while the lack of private sector job growth in the UAE and Qatar have had a similar consequence.  In the UAE, increased supply of residential real estate has contributed to the drop on housing costs.

The focus in Bahrain and Oman remains on the fiscal situation.  Despite some slippage in budget deficit targets for 2019 and 2020, Bahrain has received another tranche of GCC funding.  In Oman, the IMF has called for deeper fiscal reforms and highlighted external vulnerabilities on the back of rising debt and debt service costs. 

Egypt’s declared intent to maintain relations with the IMF through forging a new non-monetary deal will reassure investors who have poured back into Egypt in recent months that ongoing reform efforts will continue. That being said, while most indicators continue to improve, the private sector continues to underperform.

Political risk remains to the fore in a large number of ex-GCC MENA countries, with heightened uncertainty in Iran, Libya, Algeria and Tunisia, with the potential to spillover into neighbouring countries. 

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