Mena economies to rebound next year as reforms take effect

Egypt and Iraq to lead a resurgence in economic growth, while Iran contracts

Economies of the Middle East and North Africa are set to expand at their fastest pace since 2016, while Iran’s economy will contract for the second time in that period and suffer its biggest slowdown in four years, according to a new report.

“Iran’s economy is expected to contract severely in the second half of 2019,” the report by research firm Focus Economics said. “Economic sanctions will batter oil exports, while the weaker rial in the parallel market will fuel inflation and erode consumers’ purchasing power.” Oil production in the country is low and the US scrapped sanction waivers on Iranian oil imports from May 1.

Continued fractious relations with the US, regional geopolitical tensions, a flagging banking sector and vulnerability to oil price swings are other downside risks to Iran’s outlook.

The report envisages the economy contracting 4.8 per cent in the second half of 2019 – down 0.7 percentage points from last month’s forecast – before growing 0.7 per cent in the second half of 2020. This represents a huge decline since 2016, when the economy surged 13.4 per cent.

The outlook for the whole Mena region is more positive, according to Focus Economics. Real gross domestic product growth for Mena is set to rise to 2.8 per cent in 2020, from 1.6 per cent in 2019 and 2018 and 1.4 per cent in 2017. However, that is more sluggish that the 4.5 per cent recorded in 2016, and the 2019 outlook is flat amid a slowing global economy and trade risks.

“Growth prospects for the Middle East and North Africa are deteriorating on the back of elevated geopolitical risks, weak global demand and severe oil production cuts,” the report said. “Moreover, escalating trade tensions between China and the US threaten to hit global economic growth, which could, in turn, reduce demand for the black gold [hydrocarbons].”

Egypt’s economy is growing at the fastest rate of all Mena economies, at a projected 5.5 per cent in 2020, up from a forecast of 5.3 per cent this year and last, and 4.2 per cent in 2017. After years of economic decline following the Arab Spring uprisings, the largest North African economy has turned a page and is ushering in a range of fiscal reforms under a $12 billion loan programme administered by the International Monetary Fund since late 2016.

Deep cuts to energy subsidies, the introduction of new taxes and currency devaluation are among the most significant reforms, together with new legislation intended to boost the private sector and encourage investment.

Iraq’s economy is set to expand at the second fastest rate in 2020, at 4.6 per cent, up from 3.7 per cent in 2019 and a contraction of 1 per cent in 2018. However, in line with an IMF outlook statement for Iraq in May, the report warns that post-war construction to date has been limited and elevated current spending could put pressure on public finances in the year ahead.

“The economy should strengthen this year due to some likely progress on reconstruction efforts, however, infrastructure investment will be restrained somewhat by the 2019 budget’s focus on current spending,” Focus Economics said.

“Domestic political instability, potential oil price swings and geopolitical tensions pose downside risks.”

Yemen’s GDP growth forecast is higher than Egypt and Iraq, according to the report, at 6.5 per cent, but this is based on hypothetical assumptions of peace and stability and pent-up demand.

Meanwhile, economies of the Gulf Cooperation Council are expected to accelerate next year by 2.6 per cent, up from 2 per cent this year and 1.9 per cent in 2018.

In the UAE, growth should ramp up to 3.1 per cent in 2020, from a projected 2.6 per cent this year, supported by large fiscal stimulus focused on infrastructure investment for Expo 2020, as well as the Dh50bn economic stimulus package for Abu Dhabi, and a raft of business-friendly reforms to attract foreign investment. The evolution of Opec+ output decisions will be key to the outlook, according to the report.

In Saudi Arabia, the biggest economy in the Arab world, growth is expected to moderate to 1.6 per cent in 2019 largely due to a cut in oil production, after accelerating to 2.2 per cent in 2018 following a contraction of 0.7 per cent the previous year.

However, from 2020 the economy should benefit from higher oil prices, while an expansionary fiscal policy is expected to support growth of the non-oil sector.