Market Overview

Middle East/Africa: Regional Economic Review – Q3 2014


Geopolitical Tensions, Industrial Unrest Hurt Outlook

With a geopolitical setback and a positive market development, the Middle East had a mixed second quarter. Amid the civil war in Syria, another conflict erupted in the region during the quarter as a militant group started systematically seizing territory from Iraqi security forces. By the end of June, the insurgency intensified into full-scale fighting between Iraqi forces and the militants, keeping the global financial community on edge over the conflict’s impact on international oil markets. The good news is although oil prices have risen since the start of the rebellion, Iraq’s oil output has not been affected significantly, as most Iraqi oil fields are located in the south of the country while the fighting has been confined to the north. But given that Iraq is the world’s seventh largest producer of crude oil, global energy markets remain vulnerable as long as the fighting continues.

Alongside this incursion, the Middle East witnessed an encouraging development in June when index compiler MSCI formally upgraded the status of two regional economies, Qatar and United Arab Emirates (UAE), from “frontier markets” to “emerging markets.” UAE and Qatar are members of OPEC (Organization of Petroleum Exporting Countries) and Qatar is also the biggest exporter of liquefied natural gas (LNG) in the world. To build two of the most vibrant economies in the Middle East, both countries have funneled their hydrocarbon wealth into mega infrastructure projects as well as crucial sectors like healthcare and education. And now, with their inclusion in the MSCI Emerging Markets Index, Qatar and U.A.E. are in the same category as China and India and are expected to attract capital from institutional investors that hold funds tracking the index.

Among the African economies under our coverage, Egypt got a respite from its inflation woes during the review period while South Africa continued to be hurt by labor problems.

At A Glance


South Africa: Standard & Poor’s downgraded the country’s credit rating while Fitch lowered its outlook from stable to negative. Both rating agencies cited poor prospects for the South African economy due to industrial strikes. The inflation rate remained above the central bank’s target rate but largely stable all through the second quarter.


Israel: The unemployment rate climbed to 5.9% in May from 5.7% in April. The Bank of Israel cut its 2014 growth forecast for the economy from 3.1% to 2.9%. Overseas sales remained in a downtrend, with the average monthly industrial exports in the April-May period standing 9% below the monthly average for the first quarter.


Egypt: Ex-Army chief Abdel Fatah al-Sisi was elected as Egypt’s next president. The annual inflation rate decelerated throughout the second quarter, falling from 8.87% in April and 8.24% in May to 8.2% in June, the lowest level in twelve months. GDP expanded 2.5% in the first quarter despite a 43% fall in tourism revenues.


Qatar: Backed by a double-digit surge in construction activity, GDP expanded 6.2% on an annual basis and 2.3% on a quarterly basis during the January-March period. Construction-sector activity soared 19.6% while the all-important energy sector declined.


U.A.E: The IMF forecasted GDP growth of 4.8% for the country this year. Dubai’s real estate sector continued to recover, while the banking sector was reported to have adequate liquidity and capital buffers.





In May, South Africa’s statistics agency announced that GDP shrunk 0.6% in the first quarter compared to the final quarter of 2013, when national output expanded 3.8%. This is the first time in five years the South African economy has suffered a quarterly contraction, but the decline was hardly a surprise because a long-drawn strike by platinum mine workers over wages was widely expected to take its toll on economic activity. Although South Africa has a background in labor problems, this strike lasted from January to June and turned out to be the longest in the country’s history. According to Reuters, the resource-rich nation’s mining production, which accounts for nearly a fifth of its GDP, plunged 25% in the first quarter due to the unrest.

Meanwhile, there were other bad news reports for South Africa during the second quarter. In mid-June, Standard & Poor’s downgraded the country’s credit rating while Fitch lowered its outlook from stable to negative. Both rating agencies cited poor prospects for the South African economy in view of the industrial strike. In the long run, the downgrade may potentially increase South Africa’s borrowing costs and weaken the country’s already shaky fiscal position. But the immediate impact, if any, of these rating-related changes is likely to be on South Africa’s ability to attract foreign capital, as downgrades typically diminish investor confidence in a country.

In fact, South Africa started the second quarter with a blow to its image on the global stage. It was reported in April that the country had lost the status of Africa’s largest economy to Nigeria, as Nigeria’s GDP last year was bigger than South Africa’s. Commentators believe this is much more than a symbolic setback for a country that is struggling to cope with the decline in the demand for its mineral exports as well as a host of problems, including high unemployment and inflation, infrastructure bottlenecks, an uncomfortable budget deficit, and persistent industrial unrest. Over the years, South Africa has capitalized on being the African continent’s largest economy and financial hub to attract multinational firms to its shores and to gain entry into powerful cliques like the Group of 20 industrialized and developing nations as well as BRICS.

Among other important developments, South Africa’s inflation rate, which has been consistently high in recent quarters due to a depreciating rand, remained above the central bank’s target rate but largely stable all through the second quarter. On the political front, the African National Congress won the general election held on May 7, paving the way for President Jacob Zuma’s second term in office.


Israel reported slightly subdued economic data between April and June. For instance, the Central Bureau of Statistics announced that in the first quarter, Israel’s GDP expanded at a slower rate compared to the final quarter of 2013. Further, the country’s unemployment rate climbed to 5.9% in May from 5.7% in April. On another discouraging note, the Bank of Israel (central bank) cut its 2014 growth forecast for the economy from the earlier 3.1% to 2.9%, citing a weaker-than-expected start to this year and “signs of moderation in the growth of private consumption.” However, the silver lining was that the central bank’s S Index, which tracks economic activity, inched up 0.2% in May after stagnating in March and April.

The export sector, which accounts for nearly 40% of Israel’s $273 billion economy, continued to bear the brunt of a rising shekel. The Manufacturers Association of Israel has said that the average monthly industrial exports in the April-May period were as much as 9% lower than the monthly average for the first quarter. All except three export segments, including crucial ones like pharmaceuticals and high-tech, saw declines. The shekel has remained in an uptrend despite measures by the central bank largely because of the relatively high interest rates in the country, the comparative strength of the Israeli economy, and a decline in Israel’s energy imports since the start of production at the newly discovered Tamar offshore well. As a result, Israeli exporters have been losing competitiveness in the global market.

Unfortunately, Israel has stepped into the third quarter with additional headwinds for its economy. In the wake of the military offensive in the Gaza Strip, Israel is likely to suffer the economic cost of the conflict, which the International Monetary Fund estimates at 0.2% of GDP. More specifically, Israel’s tourism industry as well as its small- and medium-sized firms are expected to be hit if the fighting escalates.


Egypt ended the second quarter on an optimistic note. Its annual inflation rate decelerated throughout the period, falling from 8.87% in April and 8.24% in May to 8.2% in June, the lowest level in twelve months. The country has a history of struggling with high inflation, which was in fact one of the triggers for the popular uprising that overthrew the Mubarak regime three years ago. So, a slowing pace of inflation, especially in food prices, is a welcome trend for Egypt.

What’s more, Egyptians heard that their national output expanded as much as 2.5% in the first quarter compared to the same period a year ago. To put this rate in perspective, GDP grew 1.4% and 1.04% in the last two quarters of 2013. The first-quarter growth was driven by robust manufacturing and construction activity, although revenues in the tourism sector, which generates nearly a tenth of Egypt’s GDP and serves as a key source of foreign currency, plunged 43% due to rising insurgency in the country. The good news is that the manufacturing sector likely maintained its momentum in the second quarter as industrial production climbed 8.2% year-on-year in May.

May witnessed another important event — the election of ex-Army chief Abdel Fatah al-Sisi as Egypt’s next president. Sisi, who played a key role in ousting the previous president, Mohamed Morsi, from office last year, won not just with an overwhelming majority but also with the burden of hope that Egypt has returned to political stability after three years of turmoil. Nevertheless, from an economic standpoint, the new government has its task cut out, given Egypt’s myriad problems — shrinking tourism revenues, dwindling foreign exchange reserves, growing government debt, a high unemployment rate, an inefficient bureaucracy, poor education infrastructure, inadequate capital for investment, and the presence of large conglomerates in the private sector. To the new government’s credit, it appears to have put its best foot forward. In an effort to slash the subsidy bill, which accounts for a large portion of the government’s budget, the Sisi administration cut subsidy on fuel prices in early July.


Adding to the happy news of Qatar’s upgrade by MSCI, the Qatar Statistics Authority (QSA) announced in late June that the gas-rich economy had rebounded in the first quarter following a moderate slowdown in the final quarter of 2013. Backed by a double-digit surge in construction activity, Qatar’s GDP expanded 6.2% on an annual basis and 2.3% on a quarterly basis during the January-March period. Notably, GDP grew well despite a sharp decline in the energy sector, which accounts for more than 50% of the $202-billion economy and over 60% of total government revenues.

Qatar witnessed a spectacular phase of growth — averaging 17% a year — from 2006 to 2011 as its exports of liquefied natural gas (LNG) climbed rapidly. However, now that its gas production is running at full capacity, GDP expansion has slowed down to more modest levels — about 6.4% annually — over the past two years. So, it appears now that it is crucial for Qatar to grow its non-energy sectors and reduce its dependency on energy exports. Fortunately, the economy is doing well in that department. The government of Qatar has plans to spend as much as $210 billion on building roads, stadiums, and other infrastructure ahead of the 2022 soccer World Cup, which the country is slated to host. Much of this plan appears to have been set in motion already as construction sector activity soared 19.6% between January and March compared to the same period in 2013.


According to the International Monetary Fund (IMF), strong activity in the tourism and healthcare sectors as well as a fledgling rebound in the real estate sector continue to support U.A.E., which is a federation of seven states, including Abu Dhabi and Dubai. With the decrease in U.A.E.’s oil exports amid a general decline in global oil prices over the past few years, government-sponsored projects in Abu Dhabi and Dubai’s robust services sector have propped up the economy, the Fund said recently in a statement. Observing that the macroeconomic outlook for U.A.E. remains positive, the IMF has forecasted GDP growth of 4.8% for the country this year. Incidentally, based on preliminary data provided by the country’s National Bureau of Statistics (NBS), the U.A.E. economy likely grew 5.2% in 2013 (the NBS publishes only yearly GDP data).

Given that crude oil accounts for nearly two-thirds of U.A.E.’s total goods exports, all seven states in the U.A.E. federation have historically focused on adequately diversifying their economies. Dubai, which has much smaller oil reserves compared to other states in U.A.E, has been at the forefront of this strategy, evolving into a cosmopolitan financial hub by aggressively attracting foreign investments into ambitious construction projects. Not surprisingly, therefore, Dubai and its famed real estate sector were hit the hardest by the global financial crisis of 2009. The good news is that the property sector in Dubai appears to be steadily limping back to health. has reported that the majority of debt restructuring related to that crisis has been completed and the banking sector, which was saddled with a large volume of bad loans following the crisis, now appears to have adequate liquidity and capital buffers.


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