Market Overview

Middle East/Africa: Regional Economic Review – Q1 2014


Israel Sees Growth; South Africa and Egypt Continue to Struggle

As the Middle East and Africa region stepped into the New Year, the three regional economies under our coverage did not see any material change in their political or economic situation. Labor problems remained the most immediate concern for South Africa while Egypt unveiled yet another stimulus program to mend an economy that has been struggling amid political uncertainty for three years now. Israel continued to see growth, especially supported by rising gas production at one of its newly discovered giant offshore wells, but on the flip side, the stubborn appreciation of the shekel took some of the shine off its growth story.

At a Glance

South Africa: South Africa continued to face headwinds during the first quarter. A miners’ strike over wage demands, which began on January 23 and continued through March, disrupted the production of platinum, a key export for the country. Various agencies lowered their forecasts for South Africa’s economic growth in 2014.

Israel: Israel’s economy expanded 3.2% in the fourth quarter and 3.3% in 2013 on the back of natural gas production. Exports, though, slipped 0.1% at the end of 2013 as the strengthening domestic currency continued to hurt the export sector.

Egypt: Interim government launched its second stimulus program in February. The stimulus, worth $4.87 billion, is slated to be used on development projects and social welfare programs. The new finance minister announced that GDP for the year ending 2014 might grow slower than previously expected and public debt might widen.


South Africa: GDP Growth Projections Lowered

South Africa is one of the so-called ‘Fragile Five’ emerging countries that are now believed to be posing the greatest risk to global stability due to their economic problems. The resource-rich nation has been struggling since 2009 not only because of the decline in the demand for its mineral exports but also a host of domestic problems, including extremely high unemployment, and infrastructure bottlenecks, especially an industry-crippling power-supply shortage, regulatory uncertainty, and protracted labor unrest. What’s worse, the country has an uncomfortable budget deficit — government expenses are higher than revenues — as well as a current account deficit — its imports are more than its exports. Against this backdrop, South Africa continued to face headwinds during the first quarter.

A miners’ strike over wage demands, which began on January 23 and continued through March, disrupted the production of platinum, a key export for the country, at Anglo American Platinum, Impala Platinum, and Lonmin — the world’s top three platinum producers — costing the firms several hundred million dollars in revenues. In another setback to the all-important mining industry, state-owned utility Eskom declared an emergency and asked several of its consumers, primarily mining firms, to cut back consumption 10%. Not surprisingly, therefore, both mining output and manufacturing production declined significantly during February.

Given these conditions, various authorities have lowered their forecasts for South Africa’s economic growth in 2014. The South African government has changed its growth projection from 3% to 2.7%. The World Bank (WB) too foresees a GDP growth of 2.7% this year, as opposed to an earlier forecast of 3.2%. In a report released in early February, the WB said that South Africa would have to accelerate its export expansion significantly in order to reach GDP growth of 5.5%, the target rate laid down in the country’s National Development Plan for the period until 2030. Similarly, the International Monetary Fund now believes that the South African economy will expand 2.3% in 2014. In January, the Fund had projected a growth of 2.8%.


On an encouraging note though, the government has declared that it was able to reduce its budget deficit from 4.2% of GDP to 4% of GDP for the financial year until March. The government is projected to bring down the deficit further to 2.8% of GDP by 2016-17, if it continues to control spending. What’s more, with the South African rand in a downtrend the past year, the country’s currency situation now has turned out to be positive for the export sector. The nation is slated to hold general elections on May 7.


Israel: Growth Steady but Rising Currency Remains a Concern for Export Sector

The economy expanded 3.2% in the fourth quarter and 3.3% in 2013, a rate substantially higher than the 1.2% average growth other developed (OECD) countries clocked during the year. GDP received a big boost from the production of large volumes of natural gas at one of the country’s two newly discovered, huge offshore wells. Exports, though, slipped 0.1% at the end of 2013. In fact, the multiple challenges Israeli exporters have been facing for a while now remained the primary concern of the broader economy during the first quarter.

Exports account for as much as 40% of Israel’s economic activity. Unfortunately for this crucial sector, Israeli goods and services have been losing competitiveness in the global market due to rising costs at home, the economic weakness of Israel’s main trading partners, and, most importantly, the strength of the Israeli currency, the shekel, which has risen 15% against the U.S. dollar in the past 18 months. The shekel has climbed riding on three key factors — the relatively high interest rates in the country, which translate to higher returns on capital and tend to attract foreign investments, the comparative strength of the Israeli economy, as well as the start of production at the Tamar offshore well last year, which has drastically reduced Israel’s energy imports and hence importers’ demand for dollars.

Israel’s government and central bank have taken several steps to curb the value of the currency. For instance, in order to prop up major foreign currencies, primarily the dollar, against the shekel, the central bank purchased $2.5 billion of foreign exchange last year and another $2.1 billion in the first two months of 2014. Further, in February, the central bank reduced its benchmark rate of interest to 0.75% from 1.0%, the fourth such reduction since the beginning of 2013. Evidently, these measures have not been adequate, as the shekel remains in an uptrend.

With the rising shekel, Israeli manufacturers are feeling the heat from two sides — their wares have become pricier in the global market while imported goods are cheaper now and competing better with goods made in Israel. Consequently, several Israeli manufacturers have cut jobs at home and shifted production to countries with lower operational costs. According to a Reuters report with estimates by the Manufacturers’ Association in the country, 30% of Israel’s medium and larger manufacturers now have operations in foreign locations as opposed to 16% merely 10 years ago.

Worryingly, the outlook for the shekel does not appear to be bright over the next couple of years as Israel’s second newly discovered oil well, and the larger of the two, is slated to start production in 2016-2017. This is likely to not just contribute to the country’s growth but on the flip side add to the upward pressure on the currency. Nonetheless, the discovery of the two offshore oil wells appears to have had a positive impact on the political front. Trying to find new markets for its gas, Israel signed energy deals with Jordan and the Palestinian Authority during the first quarter. Reuters has reported that similar deals with Turkey and Egypt are on the horizon. Such agreements are expected to improve ties between Israel and its neighbors in the difficult Middle East region.


Egypt: Second Stimulus Program Launched; Growth Target Revised Lower

The first quarter saw the third anniversary of the popular uprising that overthrew the Mubarak regime. In these three years, the Egyptian economy has remained in turmoil — foreign investors and tourists have fled, economic growth has slowed down, foreign exchange reserves have dwindled, government debt

has ballooned, the unemployment rate has soared, inflation has stayed painfully high, and political instability has persisted.

However, the good news is that bolstered by billions of dollars in aid from friendly governments in the Middle East, Egypt has seen some of its problems easing since late 2013. The country’s inflation has fallen from two-digit levels, the Egyptian pound has stabilized, fuel shortages have reduced, and sovereign bond yields — a proxy for the government’s borrowing costs — have moderated.

Viewed against this backdrop, the first quarter turned out to be a mixed bag for Egypt. For instance, soon after taking office in February, the new finance minister announced that the budget deficit would likely widen more than the government’s own forecasts. He also pulled down the GDP growth target, saying that owing to “large events on the political, security and economic areas,” Egypt’s economy would likely expand only 2% to 2.5 % in the year ending June 2014, slower than the previous official forecast of 3% to 3.5%.

On a positive note, Egypt’s interim government launched its second stimulus program in February. The first, which amounted to $4.29 billion, was unveiled in August 2013. The latest is worth $4.87 billion and has been funded mostly by the United Arab Emirates. The government has said that 60% of the stimulus would be spent on development schemes and a large part of the remaining amount on funding social welfare programs. The focus on welfare programs likely reflects the keenness of Egypt’s current army-supported authorities to garner public support ahead of the presidential elections in late May.




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