Thomas White Global Investing
Middle East / Africa: January 2018

Middle East / Africa

Economy Trends Update January 2018

 

AT A GLANCE

 

South Africa: Citing the growing adverse impact of political uncertainties on business confidence and investment, the IMF cut its 2018 growth projection for South Africa from 1.1% to 0.9%.

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Israel: GDP expanded at an annualized rate of 3.6% between October and December, beating estimates but slowing down slightly from the third quarter. For the year 2017, the economy clocked 3.3% growth.

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Egypt: Egypt’s GDP grew at an annualized rate of 5.3% between October and December, its second quarter of the current financial year (July 2017 to June 2018). The same period a year ago had recorded 3.8% growth.

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Positive developments across the region

The Middle East and Africa region reported an encouraging set of news for the period between November and January. The largest economy under our coverage in the region, South Africa, saw a leadership change that is expected to usher in greater political stability. Israel’s all-important export sector remained robust, despite currency pressures, and the outlook for the Egyptian economy improved on the back of foreign currency and foreign investment inflows as well as a major gas discovery. Qatar stayed resilient amid geopolitical complications while the UAE’s non-oil sector continued to see robust activity.

 

South Africa: Leadership change promises greater political stability

South Africa releases its GDP data rather late, but recent developments indicate that after recording a comparatively strong third quarter, Africa’s most industrialized economy likely lost a bit of its momentum in the November-January review period.

Indeed, the three months until October 2017 witnessed several improvements in the country – the mining, manufacturing and financial services sectors registered faster growth while the drought-hit farm sector experienced a strong revival. However, according to the International Monetary Fund’s (IMF) latest “World Economic Outlook,” these advances may not be adequate to ensure a sustained recovery for South Africa in the quarters ahead. Citing the growing adverse impact of political uncertainties on business confidence and investment, the IMF has cut its 2018 and 2019 growth projections for the country (from 1.1% to 0.9% in 2018 and from 1.6% to 0.9% in 2019).

Given the widespread allegations of corruption and influence-peddling in the previous Jacob Zuma administration, the IMF’s pessimism does not appear to be misplaced. Nonetheless, the good news is that the recent resignation of Mr. Zuma and subsequent election of Cyril Ramaphosa as the new president promises greater political stability for South Africa in the near future. Reuters reported that Mr. Ramaphosa, who won the race to succeed President Jacob Zuma as ANC leader in December, has promised to attack corruption and kick-start growth, and the stock market rally following his election signals improved investor sentiment around South Africa.

In other developments, a looming water crisis amid the persistent drought in the Western Cape region of the country is threatening to hurt the entire South African economy. Commentators have predicted that in the event of taps running completely dry in the region, including the popular tourist destination Cape Town, South Africa may witness disruptive mass exoduses, diminished tourist inflows and even credit downgrades.

 

 

Israel: Export sector still robust despite currency pressures

The Israeli economy ended 2017 with its strong momentum intact. According to the country’s Central Bureau of Statistics, GDP expanded at an annualized rate of 3.6% between October and December, beating estimates but slowing down slightly from the third quarter. For the year 2017, the economy clocked 3.3% growth, which was faster than the forecast of 3%. Israel’s central bank has said that 2017 saw more broad-based growth compared to previous years as both exports and consumer spending contributed to the economic expansion.

In fact, the most significant news of the fourth quarter came from the export sector, which accounts for 30% of economic activity in Israel. The sector expanded 7.7% between October and December, signaling its ability to shrug off the impact of a strong domestic currency on a sustained basis. After plunging 8.8% in the second quarter owing to an appreciating shekel, exports did bounce back in the third quarter, but their recovery was largely due to the sales of startups. Against this backdrop, fourth-quarter export data was widely expected to provide cues to the general health of the export sector amid currency pressures.

In other developments, government spending jumped 9.7% in the fourth quarter, while private spending edged up 1.3% and investment in fixed assets actually diminished 5.5%. News from the labor market was also mixed. Between the third quarter and the fourth, Israel’s unemployment rate rose from 4.1% to 4.2%. However, for the year 2017, the unemployment rate slipped to 4.2% from 4.8% in 2016.

 

 

Egypt: Foreign currency and investments rise following major oil find

Egypt’s GDP grew at an annualized rate of 5.3% between October and December, its second quarter of the current financial year (July 2017 to June 2018). The same period a year ago had recorded 3.8% growth, which shows that the economy has been improving steadily since the beginning of its reforms program in November 2016. As a part of its agreement with the IMF, Cairo is overhauling the economy in exchange for a $12 billion loan. The reforms, which comprise a range of measures, seek to attract more foreign currency and foreign direct investments, besides curbing the budget deficit.

Speaking of foreign currency and foreign direct investments, Egypt reported a series of positive developments in recent months. Encouraged by reforms since the end of 2016, a devalued currency and, most importantly, a recent major gas find off the Egyptian coast, investors appear to be increasingly optimistic about Egypt’s prospects in the medium to long term. In November, Italian oil and gas company Eni reported the discovery of what is believed to be the largest ever offshore natural gas field in the Mediterranean. Given that the Zohr gas field lies in the Egyptian sector of the Mediterranean Sea, Egypt is likely to not just stop importing liquefied natural gas but also become a net exporter of gas by next year.

Soon after this discovery, foreign holdings of treasury bills reached a record high in December and the same month saw the Egyptian central bank’s foreign reserves soar to $37 billion from $24 billion a year ago. The foreign fund inflows are expected to help the country deal with its chronic balance of payments and trade deficit problems.

 

 

Qatar: Rating affirmation shows economy coping well with sanctions

During the latest review period, Qatar showed several signs of coping well with the economic sanctions imposed by some Middle-Eastern countries, including Saudi Arabia. The boycott of Qatar was announced in June 2017 on allegations that the country supported terrorism and destabilized the Middle East. The sanctions have taken a toll on the Qatari economy and, according to a Moody’s estimate, Qatar spent as much as 38.5 billion USD, or 23% of its GDP, to prop up its economy in the first two months of the sanctions alone.

However, S&P’s recent affirmation of Qatar’s long- and short-term ratings indicates that the country has been managing the economy well over the past few months. On its part, Fitch has announced that it expects Qatar’s fiscal deficit will narrow despite the economic blockade. Both S&P and Fitch have expressed optimism about the Qatari government’s infrastructure building program and strong finances.

 

 

The U.A.E.: Recovering oil prices, robust non-oil sector activity improve outlook

Thanks to recovering oil prices and the strength of the UAE’s non-oil sector, this year is expected to be better for the UAE economy. According to the UAE Ministry of Economy, GDP growth is likely to accelerate to 3.9% in 2018 while the IMF has pegged the 2018 GDP growth rate at 3.4%. To put these forecasts into perspective, the IMF projected just 1.3% growth in 2017. The most recent IHS Markit-produced Emirates NBD survey, which tracks activity in the UAE’s non-oil sector, shows that the IMF’s optimism is not misplaced. The survey indicated continued gains in output, new orders and employment in non-oil companies. The Emirates NBD report also noted a “marked improvement” in business confidence in January.

 

 

 


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