MENA Quarterly Q4 2019

Highlights

Oil markets will go through an enormous transformation from January 1, 2020 as new regulations covering the sulphur content of marine fuels take effect. For a region that produces a relatively sour barrel the Middle East could face changes in the demand profile for its crude exports post 2020.

Several GCC countries have now released GDP growth data for Q2 2019, allowing us to assess the performance in the first half of this year against our expectations.  While there have been some bright spots (notably non-oil sector growth in Saudi Arabia), the decline in oil production in H1 2019 has weighed on headline growth numbers.  With the OPEC curb on production expected to remain in place through Q1 2020, and taking into account H1 GDP data where it is available, we have downgraded real GDP growth forecasts for 2019 in four out of the six GCC countries.

The biggest change is in our forecast for Saudi Arabia, despite a strong rebound in non-oil sector growth in the first half of this year.  Although output has recovered after the damage to Aramco’s facilities in September, average crude output this year is likely to be significantly less than we had expected.  As a result we now expect a -4.5% contraction in the oil sector, bringing headline GDP growth down to -0.4% this year compared with our previous forecast of 2.0%.

Lower oil production is also the main reason for downgrades to Kuwait, Oman and Qatar, although in Oman and Qatar’s case, we have revised our expectations for non-oil growth lower as well. 

For the UAE and Bahrain, we retain our 2019 growth forecasts at 2.0% respectively.  The UAE has increased oil production 2.8% this year relative to 2018, while still meeting its OPEC-agreed production target.  On a GDP weighted basis, average GDP growth in the region this year is likely to slow to 0.5% from 1.9% in 2018.  While the headline number is soft, this is largely due to lower oil production than had been expected earlier this year.

A combination of international and domestic factors have enabled the Central Bank of Egypt to begin rate-cutting in earnest, in a move which should provide a boost to the Egyptian economy. The 100bps cut enacted by the bank’s MPC in late September took the total rate cuts to 550bps so far this year, and the overnight deposit rate to 13.25% - the lowest since November 2016 when the country embarked on its IMF-sponsored reform programme.

Protests in Iraq, and in particular Lebanon, have highlighted ongoing political risk in ex-GCC MENA countries. The Lebanese protests have elicited concessions from the government, but the fiscal consolidation targets announced have little chance of being realised.

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