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Middle East and North Africa
Area Note
GDP growth seen to accelerate in 2017 sustained by the recovery of oil
prices and by a stronger non-oil economy. Risks to growth stem from fiscal
adjustment in oil exporting countries and from political developments in
countries involved in conflicts.
7 November 2016
During the last two-year period the general economy of the MENA Area has suffered both from
the negative cycle of oil prices, which halfway through 2014 struck the net exporting Countries
of hydrocarbons (especially the Gulf Area) and the still ongoing conflicts – arisen after the
political upheavals that have affected the region since 2011.
Intesa Sanpaolo
In some Countries (Libya, Syria, Iraq, Yemen). The average annual growth rate of the gross
domestic product of the area in 2014-2015 amounted to 2.5%, down from the average of
3.5% during the five-year period 2009-2013.
International Research
Network
Estimates for the two-year period 2016-2017 expect a partial recovery to an average of 3.2%,
assuming that the inversion of the cycle of the price of hydrocarbons, from its lowest point of 30
dollars reached in December 2015, keeps steady during the next years. The price increase,
however, is still affected by several factors, both extra-economic and economic, particularly by
the possibility (and by the success) of an agreement between the main OPEC and non-OPEC
producers on the distribution of production shares among the different Countries, in compliance
to a fixed overall ceiling, and by the limit set to price increases by the gradual decrease of shale
oil production prices. In this context, IMF, IIF and the main observers expect a gradual recovery,
which should settle around 60 dollars.
Research Department
Gianluca Salsecci
Head
Giancarlo Frigoli
Economist
The dynamic of oil prices and political conflicts has an effect on economy growth and on the
dynamic of the markets of the area through several channels, both of real (direct production)
and financial nature (the financial flows that will originate from it). The latter have an impact, on
the one hand, with an opposite sign, on the public (via tax revenues) and private spending (via
disposable income) capability of producer and net consumer Countries of hydrocarbons and, on
the other hand, on the dynamic of the Official Reserves and Sovereign Funds accumulated by
the producer Countries with oil and gas incomes. The impact of the oil cycle on the producer
Countries is different according to the diversification level of the economy, therefore it’s more
limited in those Countries where the weight of the hydrocarbon sector on GDP, tax revenues and
export is lower (such as the United Arab Emirates) compared to the Countries where it’s higher
(such as Saudi Arabia).
In detail, on the public finances side, the decline of hydrocarbons price (from the over 100 dollar
per barrel on average of 2010-2014 to 30 dollar per barrel by the end of 2015), on one side,
and the resurgence of fights in the Countries with political conflicts, on the other, have caused a
rapid shift from the positive trade balance of 2009-2013, equal to 1% in comparison with the
annual average GDP of the whole area (with peaks, among the GCC, of 30.7% in Kuwait,
12.4% in Qatar and 5.4% in Saudi Arabia) to a negative one already in 2014 (-2.3%), rapidly
declining in 2015, with -9.3% (with peaks of about -16% in Algeria, Saudi Arabia and Oman,
without considering the -52.5% in Libya, where a civil war is currently undergoing). Should oil
prices reach 60 dollar per barrel, they would still be, in most cases, well behind the current breakeven prices of the public budgets (in the last years they exceeded 100 dollar in Algeria and over
90 dollar in Saudi Arabia, without considering, even in this case, the situation of Libya, where the
estimated break-even price has reached 200 dollar per barrel). Therefore, there had to be
implemented measures of fiscal consolidation (and the same goes for the foreseeable future)
– which slowed down growth – in order to bring the budgets back to a sustainable path in the
medium term and avoiding, at the same time, a sharp decrease of the activity of Sovereign Funds
(partly in the form of government deposits in the banking system) or, in parallel, the growth of a
stock of Public Debt securities to allocate on the market to cover the deficit.
For Saudi Arabia the measures involved, among the others, the cancellation of investment
projects deemed not of primary importance for about 20 billion dollars, the decrease of subsidies
This Note will be also published in the VI Annual Report by SRM on the Economic Relations between Italy and the Mediterranean Area
and presented in a Conference in Naples on 25 November 2014. For further information on this event see the website www.sr-m.it.
See the final page for important information.
Note
7 November 2016
and the increase of non-oil incomes (through the upcoming reform of indirect taxation and the
collocation of public companies’ shares on the market) for a value equal to about 3% of GDP, and
the reduction of the salaries of the public sector. Due to these measures, the IMF expects the
growth rate of economy to decrease anyway to 1.2% during this year, before increasing to 2%
in 2017. In the UAE, thanks to the greater diversification of the economy, which benefits from a
more intensive dynamic of non-oil sectors compared to the hydrocarbons sector, the expected
growth is 2.3% in 2016 and 2.5% in 2017. In the GCC as a whole, the expected growth profile
of the hydrocarbons component of the GDP is 1% in 2016 and 1.2% in 2017, versus
respectively 1.4% and 3.1% of the component not represented by gas and oil.
As for external accounts, the decline of hydrocarbons price and the civil war in the Countries
with political conflicts in the last two-year period have simultaneously caused a dramatic change
of the direction of net cash flows. In the MENA Area, the external current account balance went
from a surplus of an annual average of almost 280 billion dollar (9% of GDP) in the five-year
period 2009-2013 (with the related accumulation of foreign activities for about 1,400 billion
dollar) to a deficit of 124 billion dollar in 2015 (an average of -4.4% of GDP for the area, but
with peaks of -42% in Libya, -16% in Algeria and Oman and about -8% in Saudi Arabia, which
by itself accounts for over 40% of the total).
The negative balance in public and external accounts have been covered thanks to both Reserves
and Sovereign Funds, with a withdrawal of government deposits from the banking system (and
restriction of liquidity conditions in the system), and, increasingly throughout 2016, the
financing on the markets through the issuance of securities. In the case of Saudi Arabia, during
the first 8 months of this year the Authorities have utilized their deposits in the SAMA for 24
billion dollar (compared to the 84 billion dollar in the same timeframe of the previous year); at
the same time, they have issued securities for 25 billion dollar on the internal market and for
17.5 billion dollar on the international markets, also drawing from loans in foreign banks for 10
billion dollar.
Among the non-oil MENA Area Countries, the gain in terms of trade determined by the decline
of hydrocarbons prices (which has positive effects on the spending power of the public and
private sector and on the external financial position of the Countries), the investment plans
announced by the Authorities (in Morocco, Tunisia and especially In Egypt, to face the lack of
infrastructures) and the resuming of the reform process of the economy favoured by the
improvement of the internal political situation (in Egypt and Tunisia) are supporting the
economy’s recovery. The expected average growth rate of GDP for these countries is 3.9% in
the two-year period 2016-2017 compared to 4% in 2015 and the average of 3.1% in the fiveyear period 2010-2014. In these Countries, the growth dynamic is however still fragile due to
the deterioration of the security conditions of the region – which discourages the private flows
for FDI and tourism revenue – the lower remittances of emigrants in oil Countries, the excessive
dependency of some economies (Morocco, above all) toward climatic factors due to the weight of
the agricultural sector.
Outside of the MENA Area, in Turkey, in the two-year period 2016-2017 the expected average
growth is slightly lower than 3%, decreasing compared to the 4% of 2015, mainly supported by
the internal demand for consumption. The investments (along with the inbound capital flows),
instead, are expected to slow down due to geopolitical factors, especially the deterioration of
internal and external security conditions and the increased financing costs of external deficit (the
Country registers a current structural account deficit).
The economy of Israel is also expected to increase in 2016-2017 with an average of about 3%,
gaining momentum compared to the 2.5% of 2015. The economy is supported by the internal
demand, both for consumption – which is going to benefit from the improvement of purchasing
power of families (thanks to low inflation, wage increases and an unemployment rate that
decreased to 4.7% in July) – and investments, which are recovering significantly, after two
stagnant years, thanks to the announced corporate income tax cuts, the incentives toward
families on mortgages for purchasing homes, the development of high-tech sectors and the
possible resuming of the exploration of gas reserves in the Mediterranean.
Intesa Sanpaolo – Research Department
2
Note
7 November 2016
1.1 Structure and development of economy
The geographic region considered in this note (Widened MENA Area) includes the Countries of
North Africa and Middle East that the IMF classifies in the strict sense as MENA Area and,
additionally, Israel and Turkey. According to a largely shared criterion, from an economic
viewpoint the Countries of this region – that overall have a weight equal to 8.1% of global GDP
– are divided in two sub-groups. The first sub-group – of the net exporting Countries of
hydrocarbons- includes some Countries of North Africa (Algeria and Libya) and of the Persian
Gulf (Gulf Cooperation Council Countries – GCC, Iran and Iraq). The second sub-group – of net
importing Countries of hydrocarbons - includes some Countries of North Africa (Morocco,
Tunisia and Egypt) and Middle East (Jordan, Lebanon and Syria), other than Israel and Turkey.
However, Israel could soon turn into an exporter of hydrocarbons thanks to the exploitation of
gas reserves in the Mediterranean.
The GCC Countries have a very high average pro-capita income (usually more than 60,000
dollars). With the exception of Saudi Arabia, they are scarcely populated and immigrants account
for a high share of the population (50% on average, with peaks close to 90%). In the special
ranking of the United Nations, they have achieved a high human development level (each one of
them is considered to have a very high development).
The producer Countries of the GCC Group, well-aware of the risks related to the dependence
on hydrocarbons cycles, during the last decade have started, to varying degrees, a diversification
process of the economy, thanks to the growth of industrial sectors (typically the energy intensive
ones, such as petrochemical, metalworking and water treatment), of services (commercial,
tourism and real estate, financing) and the development of infrastructures. Some Countries, the
UAE in particular, became a crucial crossing point (for goods and passengers) between Asia,
Europe and Africa, hosting important service hubs.
Indicators of income, human development and competitiveness (2015 data)
Income
GDP
Total
Non-native
HDI*
per capita PPP USD USD Bn population
population
S. Arabia
53802
646
31.4
33
0.836
UAE
67217
370
9.6
88
0.827
Qatar
132870
167
2.4
85
0.851
Kuwait
70542
114
4.1
69
0.814
Oman
43707
64
3.8
44
0.783
Bahrain
49601
31
1.3
52
0.815
Algeria
14532
167
40.0
NA
0.717
Libya
14679
40
3.8
NA
0.784
Iran
17346
390
79.5
NA
0.749
Iraq
15186
165
35.2
NA
0.642
Egypt
11803
330
40.0
NA
0.682
Jordan
10902
38
7.6
NA
0.745
Lebanon
18277
51
4.6
NA
0.765
Morocco
8180
101
33.5
NA
0.617
Syria^
6375
60
21.4
Tunisia
11451
44
11.1
NA
0.721
Israel
34054
299
8.4
NA
0.888
Turkey
20420
718
78.2
NA
0.759
Emerging
10671
29039
Advanced
45924
44560
GCI**
4.84
5.26
5.23
4.53
4.28
4.47
3.98
Na
4.12
NA
3.67
4.29
3.84
4.20
Doing
business***
82
31
68
101
70
65
163
188
118
161
131
113
123
75
3.92
5.18
4.39
74
53
55
Human Development Index, human development ranging from 0 (minimum) to 1 (maximum).** Global competitiveness index,
ranging from 1 (minimum) to 7 (maximum).*** Doing Business 2015 ranking of the World Bank.^ The data for Syria refers to 2010.
Source: EIU, WEF, World Bank, United Nations
In competitiveness conditions, the GCC Countries are in the higher part of the ranking by the
World Economic Forum (WEF) according to several indicators (infrastructures, innovation,
education, institutions, development of financial markets, efficiency of the labour market and
technological development level), while, with the exception of the UAE, their scores are not
Intesa Sanpaolo – Research Department
3
Note
7 November 2016
particularly high in the World Bank ranking on the ease of doing business (Doing Business Index).
In detail, these Countries are lacking in administration efficiency, legal system and business
protection (contracts, protection of minority shareholders, procedures concerning failures).
Additionally, many economic sectors, being de facto state-owned and highly concentrated, do
not favour the growth of private initiatives. The labour market is very segmented. Natives cover
more than 70% of jobs in the public sector, attracted by the generous remunerations, while
foreign workers contribute with over 80% to the employment of the private sector (almost 90%
for low-tier jobs).
Outside of the GCC Area, the other oil Countries have a much lower pro-capita income at PPP
(hovering around 15,000 dollars). They are relatively more populated, with a modest weight of
immigrants on the population, and their human development level is rated as average.
Moreover, competitiveness conditions and ease at doing business are less favourable in
comparison with the ones of the GCC. In this second group, however, Iran shows a relatively
diversified economy, with a qualified human capital. Algeria’s structure is still very focused on
the energy sector and shows an evident lack of infrastructures. In the past, some political and
administrative issues have hindered the use of the oil wealth accumulated for the diversification
of the economy. Libya, before the civil war and the current phase of political tensions, had an
economic structure and issues similar to the ones of Algeria.
The net importing Countries of hydrocarbons have an articulated economic structure. Israel is
technologically advanced and with a very open market economy. In the last decade, Turkey
reduced the technological level gap that still draws it apart from the advanced Countries. Other
Countries of this group, while still far from the level reached by advanced Countries, have
nonetheless achieved, thanks to the substantial foreign direct investment they benefitted from in
the past, a good development level for services, infrastructures and manufacturing sector (Egypt,
Morocco and Tunisia). Generally speaking, they are processing industries related to the primary
sector and with labour-intensive, low-medium technological level productions such as the
automobile. The economies of Jordan and Lebanon, instead, are mainly based on services, and
their manufacturing sector is relatively less developed.
With the exception of Turkey and Israel, the net importing Countries of hydrocarbons have a
relatively low average pro-capita income, together with a human development level rated as
average. Some Countries (specifically Egypt, Morocco) also have wide poverty and
underdevelopment areas. Lastly, some Countries of this group (not just Turkey, but also Morocco
and Tunisia) offer competitiveness and conducting business conditions of a level comparable to
the ones found in many GCC Countries.
Almost every MENA Country worsened its position compared to the previous year in the 2016
ranking of the World Bank for business conditions. The sole exception is Iran, which, while still in
the lower part of the ranking (118 place on a total of 189 Countries) gained many positions. The
same goes for the competitiveness conditions that the WEF has evaluated as less favourable in
2016 when compared to the ones of 2015 in every oil Country. Iran was the only Country in
which they improved.
Indicators of economic development (2015) (*)
Technological
Efficiency
Development
of markets
3.23
3.95
Egypt
4.05
4.62
Jordan
3.79
4.45
Lebanon
3.46
4.38
Morocco
NA
NA
Syria
3.32
3.93
Tunisia
5.76
4.71
Israel
5.16
4.47
Turkey
Financial market
Development
3.39
3.99
3.97
3.79
NA
3.21
4.88
3.82
Infrastructures
3.36
4.28
2.71
4.25
NA
3.74
5.3
4.42
*
The indicators are in a scale ranging from 1 (minimum development) to 7 (maximum development). 1 The indicator of technological
development considers several variables, including the usage and availability of internet, access to the most recent technologies,
investment in technological innovation. Source: WEF
Intesa Sanpaolo – Research Department
4
Note
7 November 2016
1.2 Economy performance in the recent past
In the past years, the MENA Area has been affected by political upheavals, by geopolitical
tensions that in some Countries resulted in civil wars and, more recently, by the negative
performance of the hydrocarbons market. These events, which are currently ongoing, had, and
keep on having, relevant effects on the economies of the Countries of the Region.
The political upheavals had a significant impact both among non-oil Countries (especially Egypt
and Tunisia), causing a substantial setback for this group’s growth in the five-year period 20102014 (+3.1%) compared to the five-year period 2004-08 (+6.3%), and among oil, non-GCC
Countries (especially Libya and Iraq), where the average growth went from 6.5% of the five-year
period 2004-08 to 2.9% of the 2010- 14 period. Many Countries of this second group have
been either directly affected by regional tensions (Libya and Iraq) or penalized by international
sanctions (Iran). GCC Countries, instead, after registering a temporary decline of economic
activities in 2009 (-1.2%) due to the effects of the global financial crisis, both in the hydrocarbons
and non- hydrocarbons part of the economy, in the following five-year period returned to grow
at a sustained pace (+5.2% of average in the 2010-2014 period), mainly driven by the nonhydrocarbons component (+6.1% of average), which benefitted from expansive fiscal policies,
aimed in many cases toward limiting or preventing possible changing phases of the institutionalpolitic framework.
In 2015, the Countries of the GCC group kept a pace similar to the one of 2014 (+3.4% vs.
3.3%), in spite of the slowdown of the non-hydrocarbons sector (+3.8% from +5.4%). The
latter, in fact, started to suffer from the measures (cuts in subsidies and investment expenses
deemed non-essential) aimed at compensating the fall of oil revenues caused by the decline of
hydrocarbons prices, in spite of the increase of mining activities (+3.2% from +1.1%) – a
consequence of the policy pursued by OPEC Countries aimed at defending the market position,
threatened by the entry of new producers (especially of shale oil in the USA).
Still in 2015, the GDP dynamic sped up in non-oil Countries (from 2.5% of 2014 to +4%),
supported by Egypt (where the economy benefitted from the subduing of political Tensions and
by the investment in public works) and by Morocco, which benefitted from a particularly rich
farming season.
In 2015 the non-GCC oil Countries have registered a GDP decrease (-0.4% compared to +2% of
2014), due to the dysfunctions caused by the conflicts that are still involving both Iraq and Libya
and the effects of the sanctions (most of them have been removed by now) on the economy in
Iran.
GCC: Oil and non-oil GDP dynamic (% var.)*
12
8
Terms of trade profit/loss (2015)*
5
1,7 1,8
0
2
-5
-10
4
-15
0
-12
-20
oil
-4
-30
-35
-8
2009
2011
2013
2015
-18
-25
non oil
2017E
*
For the years 2016 and 2017 IMF, IIF and Intesa Sanpaolo
Research Department. Source: National Statistical Offices
-22
-27 -27
-32
IRQ QAT ARS UAE ALG IRN EGY TRK TUN
*
Variations of available income determined by variation of raw
materials prices. Source: IMF, WEO, October 2016
Outside of the MENA Area in the strict sense, both Israel and Turkey kept on registering
relatively steady average expansion rates. In the 2004-2008 period, Israel (GDP +4.8% of
average) benefitted from the strong drive of the global trade of high- tech products, and in the
following one (GDP +4.1% in the five-year period 2010-2014) by the investments for the
exploitation of gas reserves and in real estate. The growth in Turkey was supported in both
Intesa Sanpaolo – Research Department
5
Note
7 November 2016
periods by reforms and the economy’s openness, but the position of the Country was relatively
more vulnerable compared to Israel, due to the persistent negative balances of trade and the
greater fragility of the industrial structure.
In 2015, the GDP growth in Israel, steady with the performances observed in the main advanced
economies, slowed down to 2.5% from the 3.2% of 2014, the more limited growth rate of the
economy since 2009. During the previous year, in Turkey, the GDP growth has instead
accelerated to 4% from the 3% of 2014. The economy benefitted from better climate conditions,
which have favoured the recovery of agricultural production and the profit of terms of trade
determined by the decrease of imported oil prices.
GDP dynamic
2004-08 2009 2010-14
S. Arabia
UAE
Qatar
Kuwait
Oman
Bahrain
GCC
GCC PIL. non-oil.
GCC PIL. oil.
Algeria
Iran
Iraq
Libya
Other oil producers
MENA oil producers
Egypt
Jordan
Lebanon
Morocco
Tunisia
MENA Non oil prod.
MENA Total
Israel
Turkey
Emerging
Avanced
M.I. Oil Price^
Weight%*
1.48
0.56
0.28
0.25
0.15
0.06
2.78
0.51
1.21
0.47
0.08
2.27
5.05
0.92
0.07
0.07
0.24
0.11
1.42
6.47
0.25
1.40
42.4
57.6
4.9
6.1
17.7
7.4
4.4
7.0
6.7
-2.1
-5.2
12.0
-7.1
6.1
2.5
-1.2
5.3
4.3
9.3
3.5
4.1
4.0
5.2
3.5
4.9
14.2
6.4
6.5
6.6
5.9
8.0
5.6
5.0
5.3
6.3
6.4
4.8
6.0
7.5
2.4
67
1.6
2.3
3.4
-0.8
2.3
0.4
4.7
5.5
10.3
4.2
3.1
5.2
1.3
1.4
-4.8
2.9
-3.4
63
3.3
1.2
7.0
2.0
2.9
4.2
2.7
2.7
3.2
3.8
1.9
3.1
3.9
4.1
5.5
5.7
1.8
97
2011 2012 2013 2014
Variation % in real terms
10.0 5.4
2.7
3.6
4.9 7.1
4.7
3.1
13.4 4.9
4.6
4.0
10.9 7.9
0.4
0.6
4.1 5.8
3.2
2.9
2.0 3.7
5.4
4.4
8.9 5.9 3.1
3.3
6.7 6.2 6.3
5.4
11.0 5.2 -0.1
0.9
2.8 3.3
2.8
3.8
3.8 -6.6 -1.9
4.3
7.5 13.9
7.6
-0.4
-62.1 104.5 -13.6 -24.0
2.0 3.8 0.7
2.0
5.8 5.0 2.0
2.8
1.8 2.2
2.1
2.2
2.6 2.7
2.8
3.1
0.9 2.8
2.5
2.0
5.2 3.0
4.5
2.6
-1.9 3.9
2.4
2.3
2.2 2.8 2.8
2.5
5 4.4 2.2
2.6
5.1 2.4
4.4
3.2
8.8 2.1
4.2
3.0
6.3 5.3 5.0
4.6
1.7 1.2 1.2
1.9
103 103 103
96
2015 2016E 2017E
3.5
4.0
3.7
1.1
3.3
2.9
3.4
3.8
3.1
3.9
0.4
-2.4
-6.4
-0.4
2.0
4.2
2.4
1.0
4.5
0.8
4.0
2.1
2.5
4.0
4.0
2.1
51
1.2
2.3
2.6
2.5
1.8
2.1
1.7
1.8
1.5
3.6
4.5
10.3
-3.3
5.0
3.3
4.3
2.8
1.0
1.8
1.5
3.7
3.2
2.8
3.0
4.2
1.6
43
2.0
2.5
3.4
2.6
2.6
1.8
2.3
3.1
1.4
2.9
4.1
0.5
13.7
3.7
3.0
4.0
3.3
2.0
4.8
2.8
4.2
3.2
3.0
2.8
4.6
1.8
51
Weight on PPP on world in 2015. ^ Brent-WTI average, USD per barrel. Source: IMF
1.3 Growth prospects in 2016 and 2017
In the MENA Area, the recent partial recovery of hydrocarbons prices had, so far, a limited
effect on the economies of oil Countries. They (especially Saudi Arabia, the Emirates and
Algeria) are suffering the full aftermath of both the restrictive fiscal measures undertaken in
the last two years to favour the consolidation of public accounts, and the reduced liquidity in the
system, caused by the withdrawal of funds deposited by the Governments in the banks,
necessary to fund (at least partially) the balance accounts, which in the meantime registered a
deficit. Other Countries (Iraq and Libya in particular) are still affected by internal tensions and
conflicts and/or by unsafe security conditions.
In the GCC Area, these developments are affecting negatively mainly the non- hydrocarbons
component of the economy, expected to have a sensible setback in 2016 (+1.8%), which is
then going to grow at a rather limited pace compared to the recent past in the forthcoming
years (3.1% in 2017). As for the hydrocarbons component, the market conditions of surplus of
Intesa Sanpaolo – Research Department
6
Note
7 November 2016
mining capacity and the issuing of policies pursued by industrialized Countries lead to believe
this sector is going to contribute quite modestly to the GDP, even in the medium term (almost
completely dependent by processing related to hydrocarbons, such as petrochemical and gas
liquefaction). Short-term perspectives are actually expecting a cut in oil mining in the next year,
should the producer Countries reach an agreement on the policy of supporting the prices.
Overall, the hydrocarbon component is expected to grow by about 1.5% in the medium/long
term. The structural weakness of the hydrocarbons sector has a negative indirect impact on the
other sectors, through lower demand of services and more limited exploration investments.
Compared to the expected of the previous year, in 2016, the GCC Countries are going to be
affected by a greater slowdown of the non-hydrocarbons component of the economy, since
many Governments had to intervene more strictly to contain public deficit in order to limit the
use of resources set aside in Sovereign Funds; the dynamic of the hydrocarbons component,
instead, is proving to be more healthy than expected. However, overall, the GDP growth
expected for this year is still 1 point lower than the one expected previously.
As for the non-GCC oil Countries, in 2016, Iraq and Iran are benefitting from the recovery of the
mining activity. The non-hydrocarbon component, though, is particularly weak in Iraq, held back
by the precarious security conditions, while it keeps a sustained dynamic in Algeria, which has
delayed the deficit containment measures, financing it by drawing from the resources set aside
in the reserve fund and in the Sovereign Fund. Iran, instead, is cashing in the dividends of the
nuclear agreements, albeit slowly, also due to the internal constraints constituted by the lack of
infrastructures and services and the sluggishness of the reforms of the economic system. In
perspective, the minor contribution of the hydrocarbons sector is going to affect also these
Countries and, for Algeria, so will the measures undertaken recently for containing the budget
deficit. Libya, instead, is still characterized by the extreme volatility of forecasts, due to the
uncertainty surrounding the progress of the stabilization process of its internal political
framework. The non-GCC oil Countries are expected to grow, overall, by 3.7% in 2016 and
4.7% in 2017, in this case slightly more than what was previously expected thanks to the
greater contribution of the hydrocarbons component.
The resuming of the reform process of the economy favoured by the improvement of the internal
political climate (Egypt and Tunisia), the investment plans (Egypt, Morocco and Tunisia) and
reception services (Jordan and Lebanon) of the numerous refugees (mostly funded by aids
coming from friendly Countries and by loans of international organizations) and the profit in
terms of trade determined by the decrease of hydrocarbons prices, are supporting the GDP in the
net exporting Countries of hydrocarbons. However, in these Countries, the growth is still fragile
due to security conditions - which discourage the FDI private flows and tourism - internal social
tensions, lack of infrastructures and excessive dependency many economies have (Morocco,
above all) toward agriculture and the ensuing climate variables. In perspective, though, these
Countries are going to benefit from the gradual reduction of the restrictive effects of the recent
fiscal policies. For non-oil Countries, the expected growth is 3.7% in 2016 (weaker than what
initially expected due to the negative impact, in several cases, of the geopolitical tensions on
foreign financial flows and on tourism) and 4.7% in 2017.
In Israel, the economy is expected to speed up again to 2.8% in 2016 and 3% in 2017 (from
2.5% of 2015), supported both by consumption – which benefits from limited inflation, tax
cuts, wage increases and low unemployment (the unemployment rate went down to 4.7% in
July, the lowest level in many years) – and fixed investment. After two years of stagnation, the
latter are now expected to increase greatly, driven by the cuts announced on corporate income
tax, the development of high-tech sectors, the incentives on mortgages for purchasing real estate
and the possible resuming of the exploration of gas reserves in the Mediterranean through the
sale of new permits (for the first time since 2012).
Intesa Sanpaolo – Research Department
7
Note
7 November 2016
In Turkey, in the two-year period of 2016-2017, the expected average growth is slightly less than
3% (decreasing compared to 4% of 2015), mainly supported by the internal demand for
consumption. The investments (together with inbound capital flows), instead, are expected to
slow down due to geopolitical factors, in particular the deterioration of internal and external
security conditions, and the greater costs of funding of external deficit (the Country registers a
structural current account deficit).
Interbank rate 3M
2,5
Ara bia
2
1,5
MENA non-oil: GDP (% var. Y/y)
3,0
JO
Kuwait
US
1,2
MC
2,5
2H15
3,4
4,3
4,8
TK
0,5
2,3
2,4
IS
nov-14
nov-15
nov-16
Source: Thomson Reuters
1H16
4,6
1,1
EGY
1
0
nov-13
0,4
TU
UAE
0,0
2,0
3,9
4,0
6,0
Source: Thomson Reuters
2. Dependence on hydrocarbons
After the diversification efforts of the last ten years, especially by the GCC Countries, and the
recent negative economic situation of the market of fossil fuels, the weight of the hydrocarbons
sectors in the net exporting Countries of gas and oil decreased significantly, reaching, in 2015,
41% of real GDP and 30% of nominal one for GCC Countries, 10% of real GDP and 15% of
nominal one in Iran and 26% of real GDP and 19% of nominal one in Algeria. Nevertheless, the
sector is still of key importance for these Countries, since the biggest shares of tax revenues and
export revenues keep on coming from it, with percentages in 2015 ranging from, for tax
revenues, 90% of Bahrain and 36% of Iran and, for export, 96% of Algeria and 20% of the
Emirates (this percentage rises to 40% when excluding the re-export related to the hub
activities).
Almost all industrial activities – whether they be manufacturing, such as metal processing and
petrochemical, or public utility services, such as electric energy supply and water purification
(desalination) – are energy intensive. Furthermore, the mining activities involve several services
and the income flows coming from the sale of hydrocarbons supports the real estate
development.
% weight hydrocarbons on GDP
S. Arabia
UAE
Qatar
Kuwait
Oman
Bahrain
Algeria
Iran
Iraq
Libya *
Nominal
29
23
39
40
31
13
19
15
46
Na
Real
43
31
51
52
37
20
26
10
Na
49
*
Libya’s data refers to the year 2010.
source: National Statistical Offices
Intesa Sanpaolo – Research Department
Export and tax revenues from hydrocarbons
2015 (% share of the total)
Tax revenues Export revenues
S. Arabia
72
75
UAE
50
20
Qatar
66
64
Kuwait
70
91
Oman
78
51
Bahrain
90
69
Algeria
60
96
Iran
36
52
Iraq
94
99
96
98
Libya*
* Libya’s data refers to the year 2012.
Table 5 - source: IIF
8
Note
7 November 2016
2.1 Mining and consumption of hydrocarbons
According to the 2016 Report of the British Petroleum (BP) on the sources of energy in the world,
the oil wells located in the MENA Area provide 35.6% of the oil and over 20% of the gas mined
in the world. Additionally, the region houses over 50% of global reserves of oil and over 45% of
gas ones. Within the MENA, Saudi Arabia, Iran, Kuwait and United Arab Emirates and Iraq hold
the most relevant shares of the reserves and production of oil; Iran, Qatar, Saudi Arabia and
Algeria hold the gas ones.
The easy and cheap access to hydrocarbons led the producer Countries of the region to rely
almost exclusively on fossil fuels for the primary consumption of energy. The Gulf Countries are
confirmed to be the main consumers of hydrocarbons in the world in comparison to GDP: in the
last ten years, the relative consumption of oil and gas has increased considerably. Currently, the
MENA Countries use up 11.4% of oil and 16.6% of gas on a global scale. According to the data
of the Bookings Institutions, the energy intensity for GDP unit of Saudi Arabia, equal to 4.1, is
four times the one of England and Germany.
MENA: mining and reserves of hydrocarbons 2015
Oil
Production*
Reserves
MM barrel/d
Bn barrels
S. Arabia
12
267
UAE
3.9
97.8
Qatar
1.9
25.7
Kuwait
3.1
101.5
Oman
0.9
5.3
Bahrain
NA
NA
Algeria
1.6
12.2
Libya
0.4
48.4
Iran
3.9
157.8
Iraq
4.0
143.1
Egypt
0.7
3.5
Other MENA
0.2
MENA
32.6
862.3
Israel
World
91.7
1697.6
% MENA**
35.6
50.8
*
Gas
Production
Bn m3
106.4
55.8
181.4
15
34.9
15.5
83
12.8
192.5
1.0
45.6
752.3
8.4
3538.6
21.3
Reserves
Bn m3
8.300
6.100
24.500
1.800
700
200
4.500
1.500
34.000
3.700
1.800
87.300
200
186.900
46.7
Including crude oil from wells, sandy sediments and LNG (the liquid part of natural gas).** Calculated on the global total. Source: BP
Intesa Sanpaolo – Research Department
9
Note
7 November 2016
MENA: consumption of gas and oil
2015
S. Arabia
UAE
Qatar
Kuwait
Oman
Bahrain
Algeria
Libya
Iran
Iraq
Egypt
Other MENA
MENA
Israel
Turkey
World
% MENA
Oil (MM barrel/d)
3.9
0.9
0.3
0.5
NA
NA
0.4
NA
2.0
NA
0.8
1.7
10.8
0.2
0.8
95.0
11.4
2006
2.3
0.5
0.1
0.4
NA
NA
0.3
NA
1.9
NA
0.6
1.3
7.6
0.3
0.7
85.7
8.8
2015
Gas (Bn m3)
106.4
69.1
45.2
19.4
NA
NA
39.0
NA
191.2
NA
47.8
50.5
577.0
8.4
43.6
3468.6
16.6
2006
73.5
43.4
19.6
12.5
NA
NA
23.7
NA
112.0
NA
36.5
33.5
357.0
2.3
30.5
2857.7
12.5
Source: IIF
2.2 Oil and Sovereign Funds
In the 2005-2014 decade, thanks to the massive revenues coming from oil, the oil Countries of
the MENA have registered an estimated balance surplus of 1,600 billion dollar. Most of this sum
has been set aside in Sovereign Funds, which in September 2016 had an overall capitalization of
3,161 billion dollar (slightly more than 40% of the global total of the category). Starting from
the previous year, following the oil revenues decline, the budget balance of the same Countries
registered a deficit, which the IMF (World Economic Outlook of October 2016, WEO) estimated
to be equal to 148 billion dollar in 2015 and 152 billion in 2016.
In order to cover the deficit the Governments have initially used their own funds deposited in the
banks, and later they have issued bonds on the internal and international market, also
considering to sell minority shares of strategic companies on the market, such as, in the case of
Saudi Arabia, the oil company Aramco. Qatar and Oman gathered respectively 9 billion and 2.5
billion with a bond in dollars on the international markets. Moreover, Qatar issued 2.5 billion
dollar of securities in local currency and recently authorized a new issuing in dollars for 5 billion.
Bahrain (despite being the first Gulf Country to lose, last February, the “investment grade” title
of S&P) issued in turn 1.6 billion of conventional securities in dollars and one billion dollar in
sukuk securities. Lastly, Saudi Arabia has recently allocated 17.5 billion dollar of sovereign bonds
and Kuwait is considering a massive issuing of securities.
When considering that - according to the recent forecasts of the IMF (WEO of October 2016) the oil Countries should register an overall cumulative budget deficit of over 500 billion dollar in
the next five-year period, the mere collection on the market could not be enough, in perspective,
to fund the imbalance: the Countries shall probably resort to Sovereign Funds to face the
balance needs. The Sovereign Funds of the GCC Countries are probably facing a new
consolidation phase, where growth is going to have to rely more on profitability of the portfolio
rather than the contribution of new capital. Furthermore, a reduction process of wealth accrued
is not out of the picture, with ensuing disinvestment on international equity and bond markets.
The near totality of Sovereign Funds in the GCC Countries does not provide precise statistics of
the composition of their portfolio: indications on the investment policy they pursue can only be
obtained by studies carried out by specialized companies. From these studies (for example:
Intesa Sanpaolo – Research Department
10
Note
7 November 2016
“Mobilizing the potential of GCC SWF for Mediterranean Partner Countries” of the Boston
Consulting Group) one can observe that the Sovereign Funds have favoured, for foreign
investment, mature Countries and very few emerging markets, for a greater stability of the cashflow and less risks of political and regulatory nature (uncertainty related to the legal validity of
potentially owned property rights). The Governments of the GCC Countries have often
encouraged, however, the Sovereign Funds intervention also in friendly Arab Countries
(especially Egypt, Morocco and Tunisia). More recently, the Sovereign Funds have expanded their
intervention in the origin Countries themselves, both by participating in local companies and
contributing to the funding of infrastructure development plans. Saudi Arabia, Abu Dhabi and
Dubai have established Funds with this specific purpose.
MENA oil: capitalization Sovereign Funds,
billion USD
Fund (Country)
sept-16 sept-15
SAMA (S. Arabia)
598
672
Public I. (S. Arabia)
160
5
ADIA (UAE)
792
773
Abu Dhabi I. C. (UAE)
110
110
I.C. Dubai (UAE)
196
183
I.P.C. (UAE)
66
66
Mubadala (UAE)
66
66
Emirates I. A. (UAE)
15
15
RAK (UAE)
1,2
1,5
KIA (Kuwait)
592
592
QIA (Qatar)
335
256
General reserve fund (Oman)
34
13
Investment Fund (Oman)
6
6
Mumtalakat (Bahrain)
11
11
National Development Fund (Iran)
62
62
Revenue regulation (Algeria)
50
50
LIA (Libya)
66
66
Development Fund (Iraq)
1
18
GCC Total
2.982,2 2.769,5
World Total
7.396,0 7.273,0
MENA oil: budget balances, billion USD
400
300
200
100
0
-100
-200
2005 2008 2011 2014 2017E 2020E
Source: IMF, WEO October2016
Source: SWF Institute
2.3 Oil and fiscal and external status
The decrease of oil revenues caused a worsening of the fiscal and external status of oil Countries.
In recent years, the same Countries, in fact, went through a significant increase of the oil price
necessary to guarantee the balance of public budget and current account of the balance of
payments. The price increase of the fiscal and external breakeven prices mirrors, on the one hand,
the increase of public spending of some Countries aimed at handling the consensus of a phase
of political turbulence started by the end of 2010; on the other hand, the increased import
determined by the rise of internal demand both of durable and semi-durable consumer goods
and capital goods, supported by the income increases and the strengthening plans for
infrastructures and economy diversification. Due to the limited offer of domestic productions,
this demand oriented itself toward import, with a negative impact on the current account
balance.
Intesa Sanpaolo – Research Department
11
Note
7 November 2016
Fiscal breakeven oil price (USD/brl)
(USD/brl)
2010
2015
S. Arabia
68
93
UAE
87
60
Qatar
24
58
Kuwait
46
48
Oman
67
99
Bahrain
103
106
Algeria
82
112
Iran
76
60
Iraq
90
65
Libya
58
197
Brent/WTI Average
103
51
Public spending/GDP
2016E
80
59
62
48
77
94
91
55
58
217
43
Source: IMF, WEO October 2016
Iran
Bahrain
Lebanon
Jordan
Tunisia
UAE
Egypt
Qatar
S. Arabia
Oman
Algeria
Kuwait
Iraq
0
20
40
60
80
100
Source: IMF, WEO October 2016
The exporting Countries reacted to the decrease of oil revenues with modest current
expenditure cuts, especially related to subsidies, and non-essential investments. Every oil Country
of the Gulf either reduced subsidies or increased fuel and public utility services prices (water and
electricity). Moreover, some limited increases of taxes and duties and expenditure interventions
on the wages of the public sector have been implemented (Saudi Arabia froze the bonuses for
public employees). In general, the answer, on the public finances side, has been quite timid so
far, and in 2016 and 2017 every exporting Country of hydrocarbons is expected to register, in
various degrees, severe budget deficits. These deficits are going to translate in an acceleration of
the growth process of the public debt/GDP ratio started in 2014 and in an increase of foreign
debt, considering in perspective the lower funding ability on the internal market.
However, in relation to some budget items, the low hydrocarbons prices support fiscal
consolidation policies pursued by the near totality of import Countries. The decline of oil price, in
fact, is having a positive impact on the expenditure for energy subsidies, which constitutes a
significant item of the public budgets of these Countries. Jordan, Morocco, Tunisia and Egypt –
as part of the reparatory measures requested by the IMF in return of financial support, in order
to contain a too high public deficit in comparison with the GDP – have initiated some policies in
cuts of subsidies, starting from 2014. The decline of energy prices allowed to limit the inflation
impact and the slowdown on internal demand of this manoeuvre, also containing the risk of
social tensions that the decrease of subsidies traditionally involves in low-income Countries.
Public debt/GDP (USD/brl)
2013 2014 2015 2016E 2017E
S. Arabia
2.2
1.6
5.0
14.1
19.9
UAE
15.8
15.6
18.1
19.0
18.8
Qatar
32.6
31.7
39.8
54.9
66.2
Kuwait
6.5
7.5
11.2
18.3
22.4
Oman
5.1
4.9
14.9
21.8
24.5
Bahrain
43.9
44.4
61.9
75.2
82.3
Algeria
7.7
8.0
9.1
13.0
17.1
Iran
15.4
15.6
15.9
14.9
15.0
Iraq
31.2
33.5
61.4
75.8
73.4
Libya
3.7
36.4
73.8 101.8 100.2
Egypt
84.8
86.3
89.0
94.6
93.4
Jordan
86.7
89.0
93.4
94.4
94.0
Lebanon
133.4 133.4 138.4 143.9 149.2
Morocco
61.7
63.5
64.1
64.4
63.8
Tunisia
46.8
51.6
55.7
59.0
58.9
Israel
67.0
66.0
64.1
65.8
67.6
Turkey
36.1
33.5
32.9
31.7
30.8
State balance/GDP (USD/brl)
2013 2014 2015 2016E 2017E
S. Arabia
5.8
-3.4 -15.9 -13.0
-9.5
UAE
10.4
5.0
-2.1
-3.9
-1.9
Qatar
22.2
15.0
5.4
-7.6 -10.1
Kuwait
34.3
28.1
1.7
-3.5
3.2
Oman
4.7
-1.1 -16.5 -13.5 -10.3
Bahrain
-5.4
-5.8 -15.1 -14.7 -11.7
Algeria
-0.4
-7.3 -16.2 -12.9
-9.3
Iran
-0.9
-1.2
-1.7
-1.1
-1.0
Iraq
-5.8
-5.6 -13.7 -14.1
-5.1
Libya
-4.0 -40.3 -52.5 -56.6 -43.8
Egypt
-13.4 -12.9 -11.5 -12.0
-9.7
Jordan
-11.5 -10.0
-4.1
-3.8
-4.0
Lebanon
-8.7
-6.0
-7.4
-8.1
-9.5
Morocco
-5.2
-4.9
-4.4
-3.5
-3.0
Tunisia
-7.4
-3.4
-4.4
-4.5
-3.6
Israel
-4.2
-3.4
-3.1
-3.4
-3.9
Turkey
-1.3
-0.9
-1.0
-1.9
-1.6
Source: IMF, WEO October 2016
Source: IMF, WEO October 2016
Intesa Sanpaolo – Research Department
12
Note
7 November 2016
As for external accounts, the decrease of the value of exported hydrocarbons (only partially
balanced by the slowdown of import determined by the halt of internal demand) caused, in 2015,
a significant worsening of the current balance of payments of the oil Countries. Only the
Countries with a relatively limited share of hydrocarbons export (UAE and Iran) or a low current
breakeven price (Kuwait and Qatar) closed with a surplus. At the same time, the lower cost of
imported hydrocarbons had positive effects on the external balance and the spending power of
families and enterprises of the importing Countries of hydrocarbons.
Current breakeven oil price (USD/brl)
2010
2015
S. Arabia
53
69
UAE
69
42
Qatar
44
41
Kuwait
30
46
Oman
74
86
Bahrain
66
66
Algeria
59
85
Iran
71
36
Iraq
80
56
Libya
n.d.
180
Brent/WTI Average
103
51
2016E
57
41
46
40
78
65
77
31
47
208
43
Source: IMF, WEO October 2016
Current balance/GDP
2013 2014
S. Arabia
18.2
9.8
UAE
19.1
10.0
Qatar
29.9
23.5
Kuwait
39.9
33.3
Oman
6.7
5.7
Bahrain
7.4
4.6
Algeria
0.4
-4.4
Iran
7.0
3.8
Iraq
1.4
-0.8
Libya
13.5 -27.8
Egypt
-2.2
-0.8
Jordan
-10.3
-6.8
Lebanon
-26.7 -28.1
Morocco
-7.6
-5.7
Tunisia
-8.4
-9.1
Israel
3.6
4.0
Turkey
-7.7
-5.5
2015 2016E 2017E
-8.3
-6.6
-2.6
3.3
1.1
3.2
8.2
-1.8
0.0
5.2
3.6
8.4
-17.5 -21.3 -17.6
-3.1
-4.7
-3.8
-16.5 -15.1 -13.7
2.1
4.2
3.3
-7.2 -10.8
-3.6
-42.1 -47.4 -36.9
-3.7
-5.8
-5.2
-9.0
-9.0
-8.9
-21.0 -20.4 -20.6
-1.9
-1.2
-1.4
-8.8
-8.0
-6.9
4.6
3.1
2.9
-4.5
-4.4
-5.6
Source: IMF, WEO October 2016
In perspective, the additional frailty of internal demand and, therefore, of import, is going to
support the current position of oil Countries, although it will do so in a scenario with still low
hydrocarbons prices in a historic comparison. In the importing Countries of hydrocarbons, the
increase of the energy bill due to the expected rise of hydrocarbons price (although in this case
the price framework is more limited than in the past) and a more sustained internal demand are
expected to determine a new expansion of trade deficits, only partially compensated by other
items of the balance, such as transferrals (donations of friendly Countries and remittances by73
Emigrated workers) and services (tourism incomes, which are even decreasing in some
Countries due to regional tensions), with an ensuing worsening of the current balance.
Tourism and remittances (billion USD)
Tourism
Remittances
2015
2014
2015
2014
Egypt
3.7
7.4
16.8
19.2
Jordan
4.4
4.1
3.4
3.4
Lebanon
2.1
1.5
3.6
2.8
Morocco
6.0
5.9
7.7
7.5
Tunisia
1.2
1.9
1.9
2.0
Trade balances (billion USD)
2013
2014
2015
Egypt
-29.5
-39.2
-38.1
Jordan
-11.6
-12.0
-10.2
Lebanon
-15.2
-15.1
-13.2
Morocco -21.6
-20.7
-14.3
Tunisia
-5.8
-6.6
-4.9
Turkey
-79.9
-63.6
-48.1
Israel
-7.1
-6.7
-3.4
Source: National central banks
Source: FMI
Intesa Sanpaolo – Research Department
2016E
-35.4
-10.6
-14.8
-14.8
-4.7
-48.4
5.9
2017E
-36.0
-11.0
-16.1
-15.9
-5.0
-55.0
-6.6
13
Note
7 November 2016
3. Evaluations of rating agencies
In 2015-2016, the perspective of an unstable growth, regional and internal political tensions and
the worsening of budget and external balances have caused new rating cuts of sovereign debt
in the MENA Area, which have affected both the importing and exporting Countries of
hydrocarbons.
Rating
S. Arabia
UAE
Qatar
Kuwait
Oman
Bahrain
Algeria
Iran
Iraq
Libya
Egypt
Jordan
Lebanon
Morocco
Tunisia
S&P Moody's
S&P action 2016
A-/S
A1/S
Cut to A+(Feb )
AA/S Aa2/N
Confirmed
AA/S Aa2/N
Confirmed
AA/S Aa2/N
Confirmed
BBB-/S Baa1/S
Cut to BBB+(Feb )
BB/S
Ba2/N
Cut to BBB (Feb )
NA
NA
B-/S
NA
Confirmed (Aug)
NA
NA
B-/N
B3/S Outlook cut (Mar)
BB-/N
B1/S
Outlook cut (Apr)
B-/S
B2/N Outlook raised (Sept)
BBB-/S
Ba1/S
Confirmed (Oct)
BB-/N
Ba3/S
Confirmed
BB/N
Ba1/S
Cut to BB+ (Jul)
Stock market MENA Countries
2016 (*)
Egypt
20.4
Morocco
15.2
MSCI EM
9.1
Turkey
8.1
Tunisia
7.5
Dubai
4.8
Qatar
1.1
Lebanon
-0.5
Kuwait
-5.4
Bahrain
-6.2
Jordan
-6.4
Israel
-10.8
S. Arabia
-18.5
2015
-21.5
-7.2
-3.1
-16.3
-0.9
-16.5
-22.7
-0.1
-14.1
-14.8
-0.2
6.8
-17.1
* January – Mid October
Source: Thomson Reuters
Source: Thomson Reuters
In the region, only Lebanon, this year, was subject of a more positive rating due to the hold of
capital flows from abroad (especially non-resident deposits, the near entirety of the Lebanese
diaspora), in spite of the persistent internal political issues (it is only by the end of October that
the Lebanese Parliament, after 41 ballots in two years, was able to elect the new President of the
Republic, the General Michel Aoun) and of the conflicts in the nearby Countries. Equity investors,
instead, have rewarded the markets of the importing Countries of hydrocarbons which, after the
difficulties of the recent past, are now showing better economy recovery outlooks, progresses
on the fiscal consolidation process and stabilisation of the institutional political framework, as in
the case of Egypt and Tunisia.
Intesa Sanpaolo – Research Department
14
Note
7 November 2016
4. Exchange-rate regimes and exchange rates
The GCC Countries have a fixed exchange-rate regime with the dollar, with the exception of
Kuwait that abandoned it in May 2007 for a controlled fluctuation regime with a reference
basket where the dollar still has a relevant weight. The Libyan dinar has a fixed rate with special
drawing rights (SDR), while the Iraqi dinar has a fixed rate with the dollar.
Among the oil producer Countries, Algeria’s currency follows a controlled fluctuation regime with
the dollar in a market where there is a rigid control of capital movements. The restrictions of
currency purchases, moreover, favour the existence of a parallel market, where the dollar is
exchanged with a considerable bonus. Iran has a dual regime, one with a fixed rate with the
dollar (which was still lowered several times during the last years) for the purchase of basic
necessities and a parallel one for other transactions. Even in this case, the dollar is exchanged
with a bonus on the parallel market, which was however significantly reduced after the removal
of the sanctions.
Among the importing Countries of hydrocarbons, the currencies of Jordan and Lebanon have a
fixed rate with the dollar, while the Moroccan dirham is pegged to a basket where the euro
weighs by 80% and the dollar by 20%. Egypt, in the last years, after following a regime the IFM
defined “of stabilisation”, characterised by a limited currency offer through auctions, restrictions
toward capital movements, and periodic reviews (depreciation) of the exchange rate with the
dollar, announced on the 3rd of November the liberalisation of currency transactions. The need
to defend the competitiveness of exported goods (the main market, by far, is the Euro area) and
to contain the inflation drives from imported goods have caused the Tunisian dirham to follow a
controlled fluctuation with the euro. Outside of the MENA Area, the currencies of Israel and
Turkey follow a free-floating regime.
The strengthening of the US dollar in the last years caused a significant appreciation of the
effective exchange rate of the MENA Countries with pegged currencies, bringing them toward
an overvaluation status. The recent decrease of hydrocarbons price determined a decrease of
terms of trade for exporting Countries, increasing the pressure on the external position, while it
improved the terms of trade of the importing Countries.
The important stabilisation function of the relatively less-developed internal financial markets by
the fixed exchange rate regime and the strong unbalance of export toward the hydrocarbons
(quoted in dollars), which implies limited advantages from the competitiveness gain deriving
from depreciation, lead us to believe that the oil Countries shall keep on defending the fixed parity
with the USA currency, despite the exchange rate pressures by the dollar appreciation and the
change in the American monetary policy.
There are risks coming from a prolonged phase of low prices for hydrocarbons, which could make
the fiscal position unsustainable and lead to reviews of the parity with the dollar aimed at
increasing the revenues in local currency.
As for the currencies of net importing Countries of hydrocarbons with a controlled fluctuation
exchange rate regime, the competitiveness gain from the depreciation of the nominal exchange
rate has been often more than countered by the high inflation. In almost each one of the
Countries, the real effective exchange rate is, as such, currently overvalued, according to IMF
standards.
The controls on currency movements and the limits on currency purchases have, so far, fuelled,
in some Countries like Egypt, an unofficial market where the dollar is exchanged with a
significant bonus.
Intesa Sanpaolo – Research Department
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Note
7 November 2016
Real effective exchange rate
Last Average 10a
S. Arabia (fixed)
123
103
UAE (fixed)
109
99
Qatar (fixed)
113
102
Kuwait (basket)
116
103
Oman (fixed)
116
104
Bahrain (fixed)
115
102
Algeria
97
100
Iran
105
101
Iraq
140
109
118
98
Egypt^
Jordan
NA
NA
Lebanon
166
117
Morocco
100
99
Tunisia
91
99
Israel
105
99
Turkey
83
91
Art IV*
Above 9/15
Above 9/15
Above 4/15
Above12/15
Above 6/16
Above 4/16
Above 5/16
Above12/15
Above12/15
Above 2/15
NA
Above 7/15
Above 2/16
In line 9/15
Above 9/15
Above 4/16
*
Rating based on the gap of real effective exchange rate with its
equilibrium value estimated by IMF. Above
= Overvalued. The date concerns the date of publication of the
Art IV Report.
^
Real effective exchangerdrate estimated in a previous date from
the depreciation of the 3 of November
Together with the transition of the Egyptian pound to a flexible
exchange rate.
source: IMF, EIU
Intesa Sanpaolo – Research Department
Exchange rate vs. USD and Inflation
Country (currency
03/11/16 % chg* Inflation **
regime)
S. Arabia (fixed)
3.75
3.3
UAE (fixed)
0.27
0.6
Qatar (fixed)
3.64
2.6
Kuwait (basket)
0.30
0.3
2.9
Oman (fixed)
0.38
1.4
Bahrain (fixed)
2.66
2.6
Algeria (fluctuating)
109.6
2.9
5.4
Libya (fixed DSP)
1.40
1.3
27.4
Iran (dual)
31750
6.0
9.5
Iraq (fixed)
1.166
2.6
Egypt (fluctuating)
13.0
61.9
14.0
Jordan (fixed)
0.71
-0.8
Lebanon (fixed)
1.51
1.0
Morocco (basket)
9.79
-0.3
2.3
Tunisia (fluctuating)
2.23
11.8
4.3
Israel (fluctuating)
3.80
-1.6
-0.4
Turkey (fluctuating)
3.11
10.5
7.3
* Depreciation vs USD in the last year.
** Last trend rate.
Source: Thomson Reuters
16
Note
7 November 2016
Appendix: the outlooks of some countries of the area
United Arab Emirates: diversification limits the effects on the economy of
the conjuncture of the hydrocarbons market
Growth and Inflation
GDP % Oil GDP
chg. % chg.
2010
2011
2012
2013
2014
2015
2016E
2017E
1.6
4.9
7.1
4.7
3.1
4.0
2.3
2.5
3.8
6.6
7.4
3.0
0.8
4.6
1.5
1.5
Inflation
Non-Oil
GDP % average %
chg.
0.7
0.9
4.5
0.9
6.4
0.7
5.6
1.1
4.1
2.3
3.7
4.1
2.4
3.6
2.7
3.1
Source: EIU, Central Bank, ISP studies
PMI (non-oil private sector)
65
60
55
50
45
Sep-13
Sep-14
Sep-15
Sep-16
Source: Thomson Reuters
Growth prospects
The economy of the Emirates has entered a more limited growth phase compared to the one of
the last five years (4.7% of average). The non-hydrocarbons component of the economy is
expected to register, in the next two-year period, expansion rates well below the 5% of average
of the five-year period 2011-2015. The economy of the Emirates is the most diversified of the
GCC group. The diversification process favoured the financial, real estate and tourism sectors, as
well as trading hubs. The volumes of transiting goods (especially toward Asian Countries such as
China, Japan and India, and Middle Eastern Countries, like Iran) reached 45% of the overall
export of the UAE. About one fifth of these goods is related to the trade with Iran.
The passenger movement of the Dubai Airport reached 79 million in 2015, turning it into the
busiest airport in the globe. The economy of the Emirates is expected to suffer, therefore, by the
lower demand of services coming from persons and companies located in other Countries,
especially Gulf ones, and it is going to be only partially countered by a more sustained demand
from Iran.
The internal demand is going to be affected by the restrictive effects both of fiscal measures
(reduction of subsidies, tariff increases, cuts of non-essential investment) aimed at limiting the
deficit in relation to GDP to 3.9% of GDP in 2016 and to 1.9% in 2017, and monetary
conditions. The surveys on the expectations of consumers and entrepreneurs highlight a further
slowdown of the non-hydrocarbons component of the economy during the first half of 2016.
The central Bank publishes a composite indicator of economic activity with which it estimated,
for the 1st semester of 2016, a 2.45% growth of the non-hydrocarbons sector. The SME
indicator calculated by HSBC, which measures the trend and the outlooks of the manufacturing
and service sector on the basis of interviews with over 400 private companies, while still
highlighting an expansion, amounted to an average of 54 for the first nine months of 2016,
versus the 56 of 2015. In this context the non-hydrocarbons component of the economy is
expected to slow down to 2.4% in 2016, from the 3.7% of 2015.
In the medium term, the slow average growth rate of the non-hydrocarbons sectors is expected
to speed up until reaching 4% in the M/L, supported by: 1) the positive impact on trust, financial
conditions and flows from nearby Countries of the expected rise of hydrocarbons prices; 2) the
trade with Iran after the removal of sanctions; 3) the investments in Dubai related to Expo 2020
(especially transport infrastructures, such as the Metro line expansion toward the exhibition area)
and to Abu Dhabi included in the multi-annual plan with a 85 billion dollar worth, which
privileges transport infrastructures, generation and treatment of water and development of areas
for industrial and residential settlements. Moreover, the oil company of Abu Dhabi (the Emirate
that controls 94% of the hydrocarbons reserves of the Country) has scheduled investments for
offshore exploration for a total of 25 billion in the next five years. The hydrocarbons component
Intesa Sanpaolo – Research Department
17
Note
7 November 2016
is expected to have a limited growth (around 1.5% of average in the next two-year period),
fuelled by the gas and refining part, while oil extraction is going to be held back by market
conditions of over production.
The growth of GDP of the whole economy is expected to reach its lowest at 2.3% in 2016,
before gradually accelerating in the forthcoming years, until reaching 3.5% in 2020.
The financial and currency framework
Due to the fixed exchange rate regime with the dollar (3.6725 dirham : 1 USD), the central Bank
has raised the reference rate, last December, to 25bp (to 0.75%) in the wake of Fed USA. The
three-month EIBOR rate recently increased by an additional 25bp (reaching 1.25%), taking a hit
from the new rising USA rates.
In the last two years the appreciation of nominal rate (for the fixed rate with the dollar) and the
temporary acceleration of inflation (due to the increases of electric tariffs and fuels that brought
the trend rate to reach the 4.9% peak in August 2015, before Reaching 0.6% of August
2016) have determined an appreciation of the real effective exchange rate, while the equilibrium
rate is depreciated because of the worsening of the terms of trade. These movements have
caused the market exchange rate to reach an overvaluation status compared to the fundamental
ones. Among the Gulf Countries, the Emirates are the ones that would benefit the most from
abandoning the peg to the dollar, due to the relevant share the non-hydrocarbons component
has in exports and in services (such as tourism) within the economy. Other than possible gains,
though, there are risks related to inflation and the financial stability currently guaranteed by the
peg to the dollar. The balance of factors steers away from the possibility of a change of the
exchange rate regime.
The availability of the Sovereign Funds greatly exceeds the external debt of the whole Federation
(which the IMF has estimated to be slightly more than 200 billion dollar, 60% of GDP by the end
of 2015), and, together with foreign reserves, they represent a considerable financial resource
the Authorities can draw from to face the decline of oil revenues and possible difficulties on the
financial and real estate markets, just like it happened in 2008-09. In 2009, in order to avoid
disruptive effects on the banking system of the whole Federation, Abu Dhabi loaned 10 billion
dollar to the Government of Dubai and granted financial support to Dubai World, one of the
large conglomerates of Dubai, which was in trouble for the decline of the quotations of their
movable and real estate investments. Although at the time Abu Dhabi clarified that its support
to Dubai World had to be considered selective and not to be intended as taking responsibility for
the conglomerate debts, it’s a shared opinion that the Government of Abu Dhabi, the Emirate
that owns the majority of the wealth of Sovereign Funds, could intervene again to face some
possible difficulties that might arise and that could jeopardize the financial soundness of the
whole Federation.
Real effective exchange rate (*)
115
Public and external debt on GDP
80
Public
Foreign
110
105
44
60
56
48
40
100
95
20
90
85
Sep-12
60
60
16
16
18
19
19
2013
2014
2015
2016E
2017E
0
Sep-13
Sep-14
Sep-15
Sep-16
* The continuous line indicates the long term average. Source:
Thomson Reuters
Intesa Sanpaolo – Research Department
Source: Thomson Reuters
18
Note
7 November 2016
Qatar: the non-hydrocarbons component keeps on growing at a sustained
pace thanks to the considerable investments in infrastructures
Growth and Inflation*
GDP % Oil GDP
chg.
% chg.
2010
2011
2012
2013
2014
2015
2016E
2017E
16.7
13.4
4.9
4.6
4.0
3.7
2.6
3.4
28.9
15.6
1.3
0.2
-1.5
-0.2
-0.8
0.9
Non-Oil
GDP %
chg.
8.6
8.4
9.7
11
10.6
7.8
6.1
5.7
Inflation
average
%
-2.4
1.9
1.9
3.1
3.4
1.8
3.0
3.0
*
GDP data starting from 2011 has been reviewed with base
2013. This review has determined a significant rise of
hydrocarbons’ weight and a consequent substantial downward
review of growth. Source: IMF
Credit to the private sector (% var y/y)
30
25
20
15
10
5
0
Sep-14
Mar-15
Sep-15
Mar-16
Sep-16
Source: Central Bank
Growth prospects
In the last decade Qatar has been one of the Countries with the highest economic growth rate
in the world (12.4% of average). The drivers were both the hydrocarbons sector and the rest of
the economy. Currently, the hydrocarbons sector is going through a consolidation phase both
due to the exploitation blockade of new wells introduced since some years by the Authorities in
order to preserve the deposits and the negative conjuncture of the market. The Country has
invested in facilities for gas liquefaction (LNG), which allow its transport via ship as an alternative
to the pipelines. These facilities provide about one third of the liquefied gas produced in the
world, mainly purchased by Asian Countries (especially Japan, South Korea, India and China),
which absorb over two thirds of the exports of the Country. The drive to the non-hydrocarbons
component of the economy came mainly from public expenditure in infrastructures and
buildings which, due to the lack of internal workforce, gave life to considerable migratory flows
(85% of the population is non-native). In parallel, the immigrant demand favoured the
development of other sectors, such as real estate, trade and financial and personal services.
Manufacturing, which has an incidence on the GDP of about 9%, focuses on high energyintensive productions (petrochemical and metal processing).
In 2015, the GDP growth slowed down to 3.7% from 4% of 2014. In 2015, the further slight
decrease of the hydrocarbons component (-0.2% compared to -1.5% of 2014), which includes
mining and refining activities (propane, butane, liquid petroleum gas) has been widely countered
by the sustained growth, even though it was lower than the one of 2014, of the rest of the
economy (+7.8% from +10.6%). The drive to the non-oil part of the economy mainly came from
building (+17.9%) and services, especially the financial- real estate ones (+10.3%). Buildings
have been supported by works scheduled for real estate development projects (Lusail city), for
the transport network (Doha Metro), for the public utility services (water generation and
treatment facility of Mesaieed), other than the works scheduled for the football World Cup of
2022 (stadiums, reception, transport). Financial and real estate services have benefitted both
from the further growth of the Financial Centre of Qatar, located in the capital of Doha, which
provides a series of support services to companies that choose to operate in the Country, and
the transferral by foreign companies in Qatar of operations from less politically stable Countries.
These trends have been confirmed on the 1st semester of 2016, when the GDP increased by 1.7%
y/y, with the hydrocarbons component decreasing by 2%, while the rest of the economy
registered a 5.8% increase. In perspective, the non-hydrocarbons component is going to keep
on receiving support by the building sector, thanks to the investment listed in the Multi-annual
Plan 2014-21, which has scheduled interventions for a total of 210 billion dollar, three quarters
of which are directly funded by the State, while the rest is funded by private companies. The
interventions favour the enhancement of transport, communication and reception infrastructures
Intesa Sanpaolo – Research Department
19
Note
7 November 2016
(Barwa workers city and Hilton Panorama) and of sport facilities in view of the football World
Cup of 2022, in addition to the housing development and public utility and social services.
Investments in exploration and petrochemical, instead, have been frozen, and the ones for
services deemed not of primary importance have been cut (media and the opening of new
museums). Moreover, the reduction of subsidies, in particular toward non-residents, the
increases of fuel and services of public utility, fiscal cuts, the increase of interest rates and the
slowdown of the credit dynamic determined by the uncertainties on the perspectives of the
economy are affecting negatively the internal demand. The deceleration of the nonhydrocarbons component (the expected growth for 2016 and 2017 is respectively +6.1% and
5.7%) is expected to cause, according to the IMF, an increase of real GDP of 2.6% in 2016 and of
3.4% in 2017, well below the average rate of the last ten years.
The financial and currency framework
The increase of fuel prices, of electrical and water tariffs and of some services (like education
and entertainment) have determined an acceleration of the inflation rate starting from last
December. The trend rate rose to 3.8% in April 2016, decreasing to 2.6% in September 2016.
The inflationary pressures are expected to be limited in scope, thanks to the abundant subsidies
and the absence, due to currency stability, of drives from the prices of imported goods. The IMF
estimates that the average rate is going to be equal to 3% both in 2016 and in 2017.
The decrease of hydrocarbons revenues has determined a sharp fall of the liquidity conditions in
the system and the three-month interbank rate in October increased to 1.6%, well above the
one of the bank deposits in the central Bank, amounting to 0.75%. The funding demand from
the private sector, mainly fuelled by real estate and consumer loans, went down to 7.8% in
August 2016 from 25% of one year ago.
Interest and inflation rate
5
inflation yr/yr
QIBOR 3M
4
Public and external debt on GDP
150
Public
131
80
79
55
2
135
106
100
3
Foreign
50
33
32
2013
2014
66
40
1
0
Sep-14
0
Mar-15 Sep-15
Mar-16 Sep-16
Source: Thomson Reuters
2015
2016E
2017E
Source: FMI
The Qatari rial is pegged to the dollar with a parity of QR 3.64:USD 1. The fixed exchange rate
regime gave financial stability, low inflation and foreign investors’ trust to Qatar and the other
Gulf Countries. The limited exchange rate elasticity of export (given the modest share of nonhydrocarbons exports) and the considerable currency reserves and in Sovereign Funds (equal to
200% of GDP) support the upkeep of the regime. Moreover, the Country has a high external
debt (equal to 106% of GDP in 2015 and expected to further rise in the two-year period 20162017, also due to the considerable issuance of sovereign debt already carried out and scheduled
to happen in the future – see paragraph “Oil and Sovereign Funds”), although widely covered
by the currency reserves and the activities of Sovereign Funds, which would grow in the event of
devaluation. Over one third of this debt has been contracted by State-owned non- financial
companies to fund investments in mining activities, infrastructures, services (air transport,
telecommunications) and real estate development. The Government does not offer any specific
guarantee on the debt of the subsidiaries.
Intesa Sanpaolo – Research Department
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7 November 2016
Iran: the economy benefits from the dividend from the removal of
sanctions
Growth and Inflation*
GDP % Oil GDP
chg. % chg.
2010
2011
2012
2013
2014
2015
2016E
2017E
6.6
3.8
-6.6
-1.9
4.3
0.4
4.5
4.1
4.2
-1.0
-37.4
-8.9
4.8
4.9
21.0
3.8
Inflation
Non-Oil
GDP % average %
chg.
7.0
12.4
5.4
21.2
-0.9
30.8
-1.1
34.7
4.1
15.6
-0.1
11.9
2.5
7.4
4.1
7.2
The Iranian year ends on the month of March of the year
following the one indicated.
Source: IMF, central Bank
Oil extraction (thousands of barrels per day)
4500
4000
3500
3000
2500
Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16
Source: central Bank
Growth prospects
Iran, with a GDP of 390 billion dollar (1.2% of global GDP) in 2015, is the second economy of
the MENA group after Saudi Arabia. Its population (79.5 million) is the second in the Middle East
after the one of Egypt and has a relatively high education level. The per-capita income (17,300
dollars at PPP), while significantly lower than the one of the oil Countries of the Gulf, is
noticeably higher than the average data of the emerging Countries. The economy, while being
one of the most diversified of the region, is however dependant from hydrocarbons. The gas and
oil industry has a weight on GDP of 15% in nominal terms and 10% in real terms, but the
activities related to hydrocarbons provide slightly more than 50% of export revenues (the data
before sanctions was 80%) and over one third of tax revenues. Iran possesses one of the most
vast gas reserves in the world (18.2% of the total worldwide) and are fourth for reserves of oil
(9.3% of the total worldwide). Agriculture (sugar cane and sugar beet, cereals and fruits)
contributes with 6.5% to real GDP and employs one third of the workforce. The manufacturing
industry weighs by 16% on real GDP. The main productions are energy intensive ones, such as
petrochemical and metal processing. Other important industries are automotive, household and
telecommunication appliances, foodstuffs and textiles. The most developed sectors in the service
field, which weighs by almost 60% on real GDP, are the ones of real estate and professional,
transport, communication and trade. The State, directly or indirectly, controls a considerable
share of the economy.
Starting from 2011, the tightening of sanctions had a negative impact on the productive activity.
Therefore, in the five-year period 2011-15, the average GDP dynamic of Iran (0.1%) has been
noticeably inferior to the one of the other oil Countries of the region. In this period, the activity
of hydrocarbons mining registered an average decline of 7.5%, while the non-hydrocarbons
component kept on growing, albeit at a modest pace (+1.5%), mainly supported by agriculture
and services.
In 2015 (the Iranian year ended on 19.03.2016) the GDP almost stopped (+0.4% in real terms),
in spite of the sustained growth of the hydrocarbons component (+4.9%). The decline of the
building sector (-6.2%) and manufacturing production (-2.8%) led to a 0.1% reduction of the
non-hydrocarbons component. Last year, non-hydrocarbons exports have decreased by 5% in
volume, penalised by an overvalued exchange rate, while the tax consolidation measures,
especially subsidies cuts on fuels, have held back consumption.
GDP growth is expected to accelerate over 4% this year and the next. A strong drive is expected
for the hydrocarbons component, since it will strive toward getting back the OPEC share of
mined oil that the Country had before the introduction of sanctions (12.4% of the total, down
Intesa Sanpaolo – Research Department
21
Note
7 November 2016
to 9.9% in 2014). During the first seven months of 2016, the mining of oil rose by 13%
compared to the same period in 2015, reaching 4.12 million of barrels per day last July.
Moreover, Iran has scheduled important investment to exploit its gas reserves, specifically the
expansion of the pipeline network, involving both local and foreign companies. The contribution
of the non-hydrocarbons component in the next two-year period is expected to be more limited
in scope (+2.5% in 2016 and +4.1% in 2017). In perspective, however, the non-hydrocarbons
component is expected to benefit from the recovery of internal demand, thanks to a more
favourable economic climate and the inflation decline (the trend rate went down to 9.5% of
September 2016 from the 11.8% of last year).
The effects of the removal on sanctions, however, are late, since there are still restrictions to the
banking activity – both for the lack of local regulations (for example, specific anti-money
laundering laws) and the caution of the international financial groups, which in the past have
been severely fined for bypassing the sanctions – and the relations with companies controlled by
the Revolutionary Guard, which have an important weight in the economy of the Country. As
for investments, they are expected to be driven by the implementation of some contracts already
signed by the Iranian Government with foreign companies in the following sectors: refining
(with Saipem, 3 billion dollar for modernising two oil refineries), plant design (with Danieli, 4.3
billion dollar for supplies), automotive (Peugeot, 350 million dollar for modernising a new
facility), pharmaceutics (with Novo Nordisk, 70 million dollar for an insulin facility), and also
several Turkish companies (7 billion for electrical generation facilities).
The financial and currency framework
Iran has a dual exchange rate regime, an official one controlled by the central Bank that provides
the currency to purchase basic necessity products and a parallel informal one called street rate,
where exchange offices and other operators manage their activity with the public. The nonofficial exchange rate is currently higher than 35,000 rial for one dollar versus the 31,700 rial of
the official one, with a difference of about slightly more than 10% (in the past the difference
reached 50%). The Authorities declared their intention of unifying the two exchange rates by the
end of the current Iranian year (March 2017). It is probable that this will happen with
devaluations of the official exchange rate in the next months, in order to direct it toward the
same current value of the exchange rate on the second market.
Exchange rate toward the dollar
35000
30000
25000
Inflation yearly rate
50
40
20000
30
15000
20
10000
5000
0
Oct-06 Oct-08 Oct-10 Oct-12 Oct-14 Oct-16
Source: Thomson Reuters
10
0
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Source: Thomson Reuters
The previous surplus of current account (5.8% of GDP is the average data of the last ten years)
allowed Iran to accumulate exchange reserves the Ministry of Industry set at around 120 billion
by the end of July, including the investments in external activities of the Sovereign Fund. Due to
these activities, last July Iran had an external debt of just 7.5 billion (1.6% of GDP). Even the
public debt is limited, equal to 15.9% of GDP.
Intesa Sanpaolo – Research Department
22
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7 November 2016
Egypt: an additional drive to medium term growth comes from reforms,
fiscal stabilisation measures and currency liberalisation
Growth, inflation and budgetary and current
balances*
State
Current
GDP Inflation
% average % balance/GDP balance/GDP
chg.
2010
2011
2012
2013
2014
2015
2016E
2017E
5.1
1.8
2.2
2.1
2.2
4.2
4.3
4.0
11.1
10.1
7.2
9.5
10.1
10.4
14.2
23.0
-7.9
-9.3
-10.0
-13.4
-12.9
-11.5
-12.1
-9.7
-1.9
-2.5
-3.7
-2.2
-0.8
-3.7
-5.8
-5.2
*
The data of GDP, current balance and State balance is related
to the fiscal year.
Source: EIU, central Bank, ISP studies
PMI non-oil private sector
54
52
50
48
46
44
42
40
Oct-14
Apr-15
Oct-15
Apr-16
Oct-16
Source: Central Bank
Growth prospects
The stabilisation of the political framework favoured a significant recovery of Egyptian economy.
In the fiscal year 2016, which ended last June, the GDP increased by 4.3% in real terms, after
increasing by 4.2% in the fiscal year of 2015. The data on the first nine months’ highlight that
the drive came especially from building (+11%), public utility services (electricity generation
+6.8%) and transport and communication (+6.2%). Tourism contribution, instead, has been
negative (-22.7%) and the one of the Suez Canal has been lower than expected (+1.9%), in spite
of the doubling of this waterway, and the same goes for manufacturing (+0.6% thanks to
refining, which increased by 2.9%, while the other productions have been declining). Building is
benefitting from the progress of the ambitious investment program of the Government, mainly
funded with capital of the Gulf Countries, which privileges the enhancement of transport and
generation infrastructures, the exploitation of hydrocarbons reserves, and the development of
tourism facilities. The traffic of the Canal suffered from the decrease of trade between Europe
and Asia and of oil tankers movement. Tourism was strongly penalized by the fear of terrorist
attacks and regional tensions. Currency scarcity and import restrictions, with the ensuing supply
problems of imported products (finished, semi-finished and raw materials) are holding back
manufacturing activities and support services to vehicles and facilities, often forced to stop due
to the lack of materials or spare parts.
The issues in these sectors persisted in the last trimester of the fiscal year 2016 (April – June
2016), when tourism collapsed by 66% compared to the previous year, the Suez Canal suffered
from a traffic decrease of 6.7% and the manufacturing production increased by a measly 0.9%,
still supported by refining (+9.2%). These negative factors have an impact on the expectations
of the non-hydrocarbons private sector, and the related SME has been under the critical level of
50 for more than a year.
On the positive side, the Egyptian Government resumed the economy reform process, aimed at
attracting foreign capital, which was interrupted in 2011 after the political upheavals. New laws
have been approved in the last two-year period favouring competitiveness, micro-financing,
mining and new investments. In particular, this last law has drastically cut down the number of
authorizations required to start up a new company, has accelerated the procedures to obtain
the specific authorizations, has sped up the solution of possible controversies and has increased
the protection of investors’ rights. Moreover, the investment in the medium and long term are
expected to be driven by the exploitation of the gas and oil reserves recently discovered in the
Mediterranean and the Western Desert. Due to the positive outlook for investments, the high
inflation and the fiscal stabilisation measures (indirect taxation reform with the introduction of
VAT and subsidies cuts) are holding back consumption, at least in the short term, while export is
expected to benefit from the weakness of the exchange rate and Europe’s demand. While
Intesa Sanpaolo – Research Department
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Note
7 November 2016
several of its components are subject to contrasting dynamics, the increase of GDP is expected to
keep a sustained pace during the current fiscal year (+4.6%), accelerating toward 5% in the
medium-long term.
The financial and currency framework
The price increase of food products and of some services (education, reception) have
determined, throughout 2016, a significant acceleration of inflation, with the trend reaching
15.5% in August, the highest level since 2008, slightly decreasing in September (14.1%) thanks
to a favourable base effect. New inflationary pressures are expected due to the recent VAT
introduction and the strong depreciation of the exchange rate.
The policy of defending the parity toward the dollar pursued during the last months by the
Authorities (in spite of the strong appreciation of the real exchange rate), after it was devalued
by 13.5% during the last March (to EGP 8.88 : 1 USD) led to a condition of currency scarcity on
the market, fuelling the unofficial market, where the pound was exchanged with a wide
discount on the dollar (15 EGP : 1 USD). The unsustainability of this situation and the IMF push
toward a more flexible management of the exchange rate led the Authorities to announce, on
the 3rd of November, the liberalisation of currency transactions and a new reference exchange
rate of 13 EGP : 1 USD. In order to support the currency, the central Bank has then raised the
reference exchange rates by 300bp (maximum rate at 15.75%). In the first days of free
bargaining the exchange rate fluctuated between 16.5-17.5. A marked volatility is expected for
the short term, with a probable wide overshooting, before the EGP/USD can stabilize itself. The
equilibrium value - currently estimated in the 13-14 range - is also likely to increase due to the
persistent inflation differential expected between Egypt and trade partners. In 2017, we expect
an average value slightly below 15 EGP : 1 USD.
Rates and inflation
20
18
Public debt/GDP
100
ove rnight rate
Inflation yr/yr
80
16
60
14
40
12
20
10
8
nov-13
0
nov-14
nov-15
nov-16
Source: Thomson Reuters
20102011201220132014201520162017
Source: FMI
The deterioration of the fiscal position (in the last five years the public deficit has been constantly
above 10% of GDP and the public debt increased by 20pp, reaching 90% of GDP in 2015) forced
the Authorities to take measures in order to control expenditure, such as subsidies cuts, and to
increase revenues (specifically with the VAT introduction and changes on the taxation of
incomes). These measures should bring the deficit back under 10% by the end of the current
fiscal year, from the previous 12.1%.
During the last years, Egypt went through a relevant drainage of currency reserves, down from
the 32 billion of 2010 to about 15 billion by the end of September 2016, despite the generous
donations and deposit flows from friendly Countries (especially oil Gulf Countries). The decrease
of the reserves mirrors the weakness of its trade position (in the fiscal year 2016 the trade deficit
amounted to 37.6 billion dollar, i.e. 11% of GDP, in spite of the decrease of oil expenditure),
foreign portfolio disinvestments of the private sector and the contraction of FDI. Egypt, recently,
has reached a preliminary agreement with the IMF for the concession of a three-year credit line
(EFF) of 12 billion dollar. The funding is subject to additional fiscal stabilisation measures and
economy reforms to support growth and employment. The support of the Fund should
encourage the flow of foreign capital, even of private nature, which is essential in supporting
the ambitious investment plan of the Country.
Intesa Sanpaolo – Research Department
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Note
7 November 2016
Israel: GDP supported by domestic demand waiting for the recovery of
export
Growth, inflation and budget and current
balances
State
Current
GDP Inflation
% average balance/GDP balance/GDP
%
chg.
2010
5.7
2.7
-4.1
3.6
2011
5.1
3.5
-3.4
2.3
2012
2.4
1.7
-5.0
0.5
2013
4.4
1.5
-4.2
3.6
2014
3.2
0.5
-3.4
4.0
2015
2.5
-0.6
-3.1
4.6
2016E 2.8
-0.6
-3.4
3.1
2017E 3.0
0.8
-3.9
2.9
Source: EIU, IMF
State of the economy index (GDP proxy)
4,0
3,5
3,0
2,5
2,0
1,5
1,0
0,5
0,0
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Source: central Bank
Growth prospects
In 2015, GDP growth went down to 2.5% from 3.2% of 2014, the lowest expansion rate of the
economy of Israel since 2009. From the demand side, the external trade has severely affected
the GDP (1.3pp). Since Israel is a small, very open and technologically advanced economy, which
achieved success as a high-tech hub (over 300 large companies of the globe have R&D centres in
the Country) the GDP performance of the Country is significantly affected by the dynamic of
global trade of goods and services. The temporary freezing of expenditure levels determined by
the delayed approval of the balance due to the formation of the new Government has affected
the contribution of public consumption. Investments, who have suffered again from the
conclusion of the cycle of investments aimed at the partial exploitation of gas reserves and the
completion of important projects in the transport and public utility services sectors, have
registered a growth rate of zero.
During the first half of 2016, GDP growth has amounted to 2.3%, the same pace of the 2nd
semester 2015, thanks both to family consumption (+6.3%) and, especially, investment
(+9.1%). A large share of the increase of the latter component of demand was due to the
building of a new microprocessor facility by Intel. The recovery of the investments acted as a
driver for machinery and facilities demand, favouring a leap in import (+7.7%), while export
decreased by 0.9% from January to June, registering in the 2d trimester the seventh consecutive
decrease, penalized by the strength of the currency and the weakness of the conjuncture in
Europe and United States, its main trade partners.
In perspective, family consumption is expected to still be the main actor of growth. It is going to
benefit from low inflation, the already implemented tax cuts (VAT from 18% to 17%) or the ones
listed (tax on household incomes) in the 2017-2018 balance (which is being discussed at
Knesset), the wage increases and the low unemployment (the unemployment rate reached
4.7% in July, the lowest level in many years). GDP support is also expected to come from
investment, which in 2016 started from a low base after two years of stagnation and that,
moreover, is expected to be driven by the announced tax cuts on corporate income and the
mortgages incentives for buying houses. Lastly, last June, the Israel Government has approved a
new agreement that should allow the resuming of the exploitation of gas reserves in the
Mediterranean through the sale of new licences for the first time since 2012. Furthermore, the
building of a new gas liquefaction facility in Ashdod is expected to be carried out in 2017. The
sustained internal demand is expected to support imports, while exports are expected to have a
small and gradual recovery, thanks to the electronic products of the aforementioned Intel facility.
The IMF, in the WEO of October, expects a GDP growth with a gradual acceleration, reaching
2.8% in 2016 and 3% in 2017.
Intesa Sanpaolo – Research Department
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Note
7 November 2016
The financial and currency framework
With a negative inflation (trend rate -0.4% in September 2016), well below the inferior limit of the
target range (1-3%) and a relatively weak growth rate of the economy, the policy rate is
expected to not budge from the current 0.1% level throughout the whole 2016 and most of
2017. However, considering that the current conjuncture is mainly influenced by the decrease of
export, while domestic demand is expected to speed up, the central Bank might choose to adopt
a restrictive behaviour in the final months of 2017, bringing the rate to 0.25%, if the estimates
of an acceleration of GDP dynamic will be confirmed.
Since 2013, the central Bank carried out many operations of open market of currency sale to limit
appreciation spikes of the exchange rate caused by the initiation of gas mining. This policy has
been firstly aided (in 2014) by the strength of the dollar and, in the last year and half, by the
negative conjuncture of the hydrocarbons market. Therefore, by the end of October 2016 the
ILS/USD exchange rate amounted to 3.8, a limited depreciation (4%) compared to its quotation
of two years ago. In the same period the real effective exchange rate didn’t go through any
modifications (the impact it suffered by the undergoing deflation process in the Country has
been countered by the increased weakening toward the dollar of the currencies of the main
trade partner Countries, such as the Euro area), keeping its overvaluation status, highlighted by
the IMF in its last Art IV Report on the Country, released in September 2015. In perspective, the
path of the shekel seems to be oriented toward appreciation, thanks to the support coming
from the wide current surplus, the sustained growth of economy - if we compare it to the one
of the advanced Countries - and the expected direct investment in the gas sector. In order to
hold back these drives the central Bank has announced its intention of maintaining in 2016 its
currency purchase program for an amount of 1.8 billion dollar.
Interest rates and inflation
4,0
3,5
3,0
2,5
2,0
1,5
1,0
0,5
0,0
-0,5
-1,0
Sep-12 Sep-13 Sep-14
policy rate
inflation y/y
ISL/USD
4,2
4
3,8
3,6
3,4
Sep-15
Sep-16
Source: Thomson Reuters
3,2
Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16
Source: Thomson Reuters
The current account balance of Israel registers a large surplus (3.2% of GDP in the last ten years)
due to the surplus of the service component (mainly coming from high- tech companies and
tourism) and transferrals (about half of it of public nature and related to aid from friendly
Countries), higher than the deficit of the trade balance and income account (remuneration of
foreign capital invested in the Country). In 2015 the surplus of current account rose to 13.7
billion dollar (4.6% of GDP), from 11.9 billion (3.1% of GDP) of 2014, due to the decrease of
trade deficit (determined by the decrease of imported values, especially energy products). By the
end of 2015 the currency reserves amounted to 88.9 billion dollar, which later rose to 96.4
billion in July 2016. The reserves data is compared to a foreign financial requirement 2016 that
EIU estimates to be 18.2 billion, for a reserve cover ratio equal to 4.9. In the medium-long term,
Israel could become a hydrocarbons exporter (gas). To limit the probable currency appreciation
spikes and to distribute over time the benefits of the mining activity, a share of the incomes
from the gas sale is going to be allocated in a Sovereign Fund, which is going to invest abroad.
Intesa Sanpaolo – Research Department
26
Note
7 November 2016
Intesa Sanpaolo Research Department – Head of Department Gregorio De Felice
Tel 02 8021 + (3) Tel 02 879 + (6)
International Research Network - Head
Gianluca Salsecci
35608
[email protected]
Macro Economist – Latin America, CSI and MENA
Giancarlo Frigoli
32287
[email protected]
Macro Economist – Emerging Asia
Silvia Guizzo
62109
[email protected]
Macro Economist – CEE and SEE
Antonio Pesce
62137
[email protected]
Macro Economist – Trade and industry
Wilma Vergi
62039
[email protected]
Macro Economist – Banks and markets
Davidia Zucchelli
32290
[email protected]
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