Key Themes Of 2014

BMI View : Growth in the Middle East and North Africa region will remain subject to downside political risks over 2014. We expect the major themes over the coming year to include; a slight convergence in growth as the GCC slows while economic activity in North Africa picks up; a lack of resolution in the Syrian conflict continuing to have negative knock-on implications on neighbouring countries; and further gains to be found in GCC equity markets.

Three years since the onset of the Arab Spring, we expect the Middle East and North Africa (MENA) region to continue feeling its effects. Political instability and social tensions will remain elevated throughout 2014, particularly in North Africa and the Levant, where political transitions have thus far been turbulent and incomplete. Although the six economies of the Gulf Cooperation Council (GCC) will continue to be the regional outperformers, we forecast a modest slowdown in growth on the back of limited gains in hydrocarbon output coupled with declining oil prices. Some of the key themes for the MENA region in 2014 include:

  • Convergence In Growth Rates: We expect GCC countries to record the highest growth rates in 2014 on the back of growing non-oil sectors and rising household incomes. However, the average real GDP growth rate differentials between the economies of the hydrocarbon-rich Gulf and the net-oil importers of North Africa are set to narrow. Base effects are a key aspect of this convergence, with the former group of states beginning to experience a cyclical downturn following two consecutive years of above-average economic expansion. We expect the non-oil sectors across the GCC to outperform the oil sectors - marking a significant break from recent economic history for much of the region.

  • Slowdown On The Horizon
    GCC - Real GDP Growth (%)

BMI View : Growth in the Middle East and North Africa region will remain subject to downside political risks over 2014. We expect the major themes over the coming year to include; a slight convergence in growth as the GCC slows while economic activity in North Africa picks up; a lack of resolution in the Syrian conflict continuing to have negative knock-on implications on neighbouring countries; and further gains to be found in GCC equity markets.

Three years since the onset of the Arab Spring, we expect the Middle East and North Africa (MENA) region to continue feeling its effects. Political instability and social tensions will remain elevated throughout 2014, particularly in North Africa and the Levant, where political transitions have thus far been turbulent and incomplete. Although the six economies of the Gulf Cooperation Council (GCC) will continue to be the regional outperformers, we forecast a modest slowdown in growth on the back of limited gains in hydrocarbon output coupled with declining oil prices. Some of the key themes for the MENA region in 2014 include:

  • Convergence In Growth Rates: We expect GCC countries to record the highest growth rates in 2014 on the back of growing non-oil sectors and rising household incomes. However, the average real GDP growth rate differentials between the economies of the hydrocarbon-rich Gulf and the net-oil importers of North Africa are set to narrow. Base effects are a key aspect of this convergence, with the former group of states beginning to experience a cyclical downturn following two consecutive years of above-average economic expansion. We expect the non-oil sectors across the GCC to outperform the oil sectors - marking a significant break from recent economic history for much of the region.

  • Mixed Outlook On 'Crisis States': We hold a cautiously optimistic view on negotiations with Iran. Whilst we do not expect a significant breakthrough and thus an accompanying boom in oil exports, we expect economic growth in the Islamic Republic to pick up significantly in 2014. In Syria, we believe that a resolution to the civil war will remain elusive in 2014.

  • Worst Is Over For Egypt: We expect a significant pickup in economic growth in Egypt over 2014, as we believe much of the economic crisis has passed. On the political front, we expect elections to take place in Q214, with el-Sisi winning the presidency if he decides to run. Even if the army does not put forward a candidate and elections are dominated by civilians, we maintain that the army will remain the key players in the political sphere throughout 2014.

  • Bullish GCC Equities: We retain our constructive outlook on Saudi, Omani, Qatari, and UAE equities, with a preference for Dubai's DFMGI over Abu Dhabi's ADX. Gains will come on the back of rising liquidity, elevated consumer and business confidence, fiscal stimuli, loose credit conditions, and healthy growth within the non-hydrocarbon private sectors of the GCC.

Slowdown On The Horizon
GCC - Real GDP Growth (%)

GCC To Remain Growth Leader

We retain a generally positive view of the GCC's prospects as we head into 2014, and expect the region to be the outperformer in the Middle East and North Africa. However, we expect headline growth to slow across the Gulf in 2014, on the back of smaller gains in oil production and a mild cyclical deceleration in the non-oil sector following three years of above-average economic expansion. We forecast overall real GDP growth for the GCC to fall to 3.7% - down from an estimated 4.1% in 2013 and 5.2% in 2012. Qatar will remain the fastest-growing country for the ninth year in a row (4.8%), followed by Saudi Arabia (4.3%), Oman (3.5%) and the UAE and Bahrain (3.4% each). Kuwait (2.9%) will be the laggard in the region due to the ongoing political impasse and only modest gains in oil production.

Our Oil & Gas research team expects the OPEC basket price to average US$105.0/bbl in 2013 and US$101.8/bbl in 2014, down from US$109.5/bbl in 2012. This slight decrease in oil prices reflects a relatively robust supply picture, a lacklustre demand story, and cautious optimism regarding international efforts over Syria and Iran. Although we project only a relatively soft decline in oil prices over the coming quarters, the subsequent impact on hydrocarbon revenues will complicate the outlook for the most fiscally vulnerable GCC states. We forecast the region's average budget surplus falling to 6.1% of GDP in 2014, from an estimated 7.8% in 2013 and 10.3% in 2012. Bahrain is likely to record a fiscal deficit for the sixth year in a row, while the outlook for Oman is becoming more uncertain. Both countries are reliant on a small and slowly declining oil production base to cover their budgets, although they can also count for now on development aid from the rest of the GCC as well as access to international markets and (if need be) foreign assets.

Base Effects Coming Into Play
North Africa - Real GDP Growth (%)

Mixed Outlook On North Africa

Elevated political risks and the lack of willingness for structural economic reform will keep economic expansion in North Africa below potential in 2014. Fiscal and current account deficits in several countries in the region will also remain elevated. However, we believe that all North African governments will manage to avoid financing problems in 2014, either through inflows of foreign aid, continued access to international debt markets, or IMF agreement. Aid from the GCC has provided Cairo with enough room for manoeuvre to avoid refinancing problems, while the Tunisian and Moroccan governments both benefit from IMF loans and foreign aid inflows. Elevated foreign currency reserves and the disposal of additional resources from national wealth funds will ensure that the Libyan and Algerian governments will be able to finance spending in 2014. That said, given persistent fiscal deficits in all the countries in the region, with the exclusion of Libya, financing risks will increase over the medium term.

Libya will see the fastest growth rates in the entire MENA region in 2014. We forecast real GDP growth of 13.0%, primarily on the back of low base effects. That said, there are substantial downside risks to this view, given the presence of hundreds of militias in the country and the central government's inability to exert control over the periphery. Indeed, the potential for unexpected disruptions to growth in oil output remains high.

Turning Positive On Egypt

We believe the worst of the political and economic crisis in Egypt has passed and expect to see a significant rebound in growth over 2014. On the political front, we expect the constitution to be passed in January by referendum and anticipate presidential and parliamentary elections occurring in Q214. The order of parliamentary and presidential elections has not been decided, but we expect presidential elections to be held first in order to provide greater stability as the elected parliament is likely to be highly fragmented.

Worst Is Over
Egypt - Real GDP Growth (%)

We see an increasing likelihood that General Abdel Fattah el-Sisi will run in presidential elections in 2014. If so, we expect el-Sisi to comfortably win the election given the large groundswell of support he possesses on a popular level, but also crucially within the political elite and army. Even if el-Sisi does not run as a presidential candidate, we expect little reduction in his, and the army's power in government. In this scenario, we would expect a candidate from outside the army to win the election, but become a figurehead, as much of the real executive power remains with the army. On the back of the more promising political outlook, we expect significant improvements in the country's economy, particularly in the vital tourism and construction industries, which will result in a noticeable pickup in GDP growth in 2014.

Elevated Political Risks In North Africa
MENA - Political Risk Ratings

Cautious Optimism On Iran, Less So For Syria

We are cautiously optimistic on negotiations on Iran's nuclear programme. As a result of an agreement reached on November 24 by Tehran and the West, the Islamic Republic will curb some of its nuclear activities in return for an immediate gain of approximately US$7bn in sanctions relief. Such development will likely result in further improvements in investors' sentiment in Iran, reinforcing our view that real GDP growth will return to positive territory in 2014.

Back To Positive Territory
Iran - Components of GDP (IRRtr) & Real GDP Growth

That said, we also flag the risk that the November 24 agreement could turn out to be the apex of negotiations, with the next phase of talks - aimed at reaching a long-term deal on Iran's nuclear programme - likely to face significant opposition by hardline policymakers from all sides. Given that Iran's macroeconomic outlook is highly dependent on progresses on the political front, a setback in talks would have a detrimental impact on real GDP growth over the coming quarters.

Lebanon And Jordan The Worst Affected
MENA - Syrian Refugees

Syria remains on the precipice, and we hold little hope that a resolution will be found in the near term. Despite the planned 'Geneva II' conference, a series of talks which aim to broker an end to the Syrian civil war, we believe that a political solution to the conflict will remain elusive. On the military front, the war appears in a deadlock for the foreseeable future. As long as the regime remains in control of the centre of the capital Damascus and the coastal strip, chances of a collapse of the regime are in our view low, and the conflict is thus likely to continue throughout 2014. This will have significant ramifications for countries such as Lebanon and Jordan, where economic, political and social stability have been undermined as a result of the spike in sectarian tensions, decreased trade flows and weaker tourist arrivals, and large inflows of Syrian refugees. One positive for the coming year is that attempts to dismantle Syria's chemical weapons arsenal are proceeding relatively smoothly. Although the chemical weapons agreement (according to which the country's chemical stockpiles must be disposed of by mid-2014) will continue to face challenges over the coming months, a Western armed intervention remains off the cards for the moment, in our view.

Constructive On GCC Equities

We retain our constructive outlook on Saudi, Omani, Qatari, and UAE equities into 2014, with a preference for Dubai's DFMGI over Abu Dhabi's ADX. Our core view has long been that a combination of rising liquidity, elevated consumer and business confidence, fiscal stimuli, loose credit conditions, and healthy growth within the non-hydrocarbon private sectors of the GCC are set to underpin continued advances in equities across the region. That said, we note that gains are likely to be harder to come by over 2014 after the heavy advances seen in several markets in 2013, with valuations now back to multi-year highs.

Read the full article

×

Enter your details to read the full article

By submitting this form you are acknowledging that you have read and understood our Privacy Policy.