Morocco & Tunisia To Outperform In Regional Recovery

BMI View : We expect Morocco and Tunisia to be the outperformers in North Africa as the region experiences an acceleration in real GDP growth over the period to 2018. Algeria and Libya will continue to be hamstrung by political paralysis and a dire security situation, respectively, while in Egypt, a degree of policy continuity as well as low base effects will herald a modest uptick in growth. Economic activity in Egypt, Tunisia and Morocco will be increasingly investment-led as government and private consumption growth lag.

We forecast an acceleration in economic growth across North Africa in the period to 2018 after three years of relative stagnation in the wake of the Arab Spring. We expect Morocco and Tunisia to be the outperformers, witnessing strong growth in fixed investment and exports, partly due to relative political stability compared with the rest of the region. We forecast average real GDP growth of 3.8% in 2014-2018 for the four North African countries excluding Libya. While this figure is below our forecast for the Gulf countries at 4.0%, it is a notable uptick from growth of 2.9% in 2010-2013.

Morocco will undergo the most broad-based and sustainable economic growth, with promise in the tourism and agriculture sectors. Trade links between Morocco and Francophone West Africa should also deepen over the rest of the decade, a trend that will boost Morocco's net exports (see 'Morocco - West Africa: Abundant Opportunities,' April 22). Overall, we forecast average Moroccan real GDP growth of 3.9% in 2014-2018, behind only Tunisia.

Pickup Across Region
North Africa - Real GDP Growth, %

BMI View : We expect Morocco and Tunisia to be the outperformers in North Africa as the region experiences an acceleration in real GDP growth over the period to 2018. Algeria and Libya will continue to be hamstrung by political paralysis and a dire security situation, respectively, while in Egypt, a degree of policy continuity as well as low base effects will herald a modest uptick in growth. Economic activity in Egypt, Tunisia and Morocco will be increasingly investment-led as government and private consumption growth lag.

We forecast an acceleration in economic growth across North Africa in the period to 2018 after three years of relative stagnation in the wake of the Arab Spring. We expect Morocco and Tunisia to be the outperformers, witnessing strong growth in fixed investment and exports, partly due to relative political stability compared with the rest of the region. We forecast average real GDP growth of 3.8% in 2014-2018 for the four North African countries excluding Libya. While this figure is below our forecast for the Gulf countries at 4.0%, it is a notable uptick from growth of 2.9% in 2010-2013.

Morocco will undergo the most broad-based and sustainable economic growth, with promise in the tourism and agriculture sectors. Trade links between Morocco and Francophone West Africa should also deepen over the rest of the decade, a trend that will boost Morocco's net exports (see 'Morocco - West Africa: Abundant Opportunities,' April 22). Overall, we forecast average Moroccan real GDP growth of 3.9% in 2014-2018, behind only Tunisia.

Pickup Across Region
North Africa - Real GDP Growth, %

An improving political situation in Tunisia will result in an acceleration in growth: from 2.6% in 2013, to 2.8% and 4.5% in 2014 and 2015 respectively. We expect an improving political situation to herald an uptick in tourist arrivals and increased consumer confidence. In addition, the recovery in Europe, Tunisia's main export partner, will help boost export growth to 4.0% and 5.5% in 2014 and 2015 respectively, from 3.0% in 2013.

Similarly, Egypt will see an uptick in real GDP growth over the coming quarters, on the back of the improved political situation in the country and greater investor confidence. Our baseline scenario sees the economy expanding by 2.3% in FY2013/14 and 3.1% in FY2014/15 (fiscal year running from July-June), up from 1.9% in FY2012/13. Growth will increase to almost 5% by 2018, a level which was consistently reached before the Arab Spring in 2011.

Effects Of Arab Spring Still Felt
North Africa (ex Libya) - Average Real GDP Growth, % y-o-y

Algeria & Libya: Little Cause For Optimism

While the outlook for three North African states is relatively promising, the same cannot be said for Libya and Algeria, which will remain hamstrung by political issues. We forecast that Libya's economy will contract by 12.0% in real terms in 2014, following an estimated fall of 7.1% in 2013. Despite agreements between the central government and local militias that are likely to lead to a partial resumption of oil production, exports will remain volatile. Declining government revenue and persistent security risks will disrupt public spending and private investment, ensuring that the economic crisis worsens this year. The economy will return to growth in 2015 on the back of a rebound in oil exports, but risks remain firmly to the downside given the precarious security situation.

The political situation is less extreme in Algeria. However, lack of political reform will hinder growth. President Abdelaziz Bouteflika's re-election in April implies a continuation of the status quo, and we see little prospect of reform to help diversification of the economy or to bolster growth in the hydrocarbon sector ( see 'Bouteflika's Victory Bodes Poorly For Structural Reform,' April 22). On the back of this we expect hydrocarbon exports to stay broadly flat in 2014, and thus real net exports will weigh on headline growth for the first time in decades. Given the size of the state's role in the economy, the slowdown in government spending will weigh on private consumption growth.

Investment To Drive Growth
Egypt - GDP By Expenditure

GFCF To Outpace Private Consumption

As well as an acceleration in GDP growth across the region, we expect the shape of growth to change noticeably from 2014. In the aftermath of the Arab Spring, North African governments used subsidies and direct transfers to placate discontent. This bolstered private consumption and mitigated the growth impact of the drastic collapse in fixed capital formation due to the political turmoil. We believe we now are nearing a turning point across the region whereby governments withdraw transfers and reduce subsidies due to fiscal pressures, while investment picks up strongly on the back of low base effects and a reduction in political risks.

Egypt is a case in point. We expect infrastructure spending to be a key driver of GDP growth in the coming quarters on the back of relative political stability and low base effects. Investment in the oil and gas sector has stagnated for the last 18 months due to a lack of policy continuity. Given the election of President Abdel Fattah al-Sisi and the formation of a new cabinet in June 2014, our Oil & Gas research team expects significant foreign direct investment (FDI) into Egypt as companies look to tap into the lucrative gas sector. Meanwhile, we expect the government to reduce fuel subsidies on the general population in early 2015 and forecast mild depreciation in the Egyptian pound against the US dollar, both of which will depress consumer spending significantly given inelastic demand for imports (see 'Subsidy Reform: Economics To Outweigh The Politics,' February 3). We forecast average household consumption growth of only 3.2% over the period 2014-2018, compared with 6.4% for fixed capital formation.

GFCF Bouncing Back
Tunisia (LHS) & Morocco (RHS) - GDP By Expenditure, Real Growth %

In Tunisia we expect tight fiscal and monetary policies to slow growth in private consumption in H214 and 2015. The government will have little leeway to prop up consumer spending, given elevated fiscal deficits and the policy anchor offered by a USD1.7bn 24-month Stand-By Arrangement signed in April 2013 with the IMF. The administration approved an austerity budget in December 2013 and thus we expect only a modest expansion of public sector employment and salaries. The inflationary environment will also be unfavourable to an expansion in consumer demand. Fixed investment will benefit from a more bullish outlook, with our Infrastructure research team expecting the major private-led infrastructure projects in the country to be approved after elections in H214.

Declining Political Risks To Bolster Investment In Tunisia & Egypt
MENA - Political Risk Scores

Finally, Morocco will see growth in household consumption slightly weighed down in 2014 by the normalisation of agricultural production after a record harvest last year (leading to a fall in rural incomes) and the adverse impact of ongoing cuts to government fuel subsidies. Morocco's headline GDP growth will be driven by the aforementioned expansion of exports and gross fixed capital formation. For the latter we forecast growth of 4.5% by 2015 - compared to an average of just 1.2% between 2009 and 2013. Morocco will also benefit from increasing investment from the Gulf States, with Qatar, Saudi Arabia, Kuwait and the UAE pledged USD5bn in aid to build up its infrastructure and foster tourism.

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This article is tagged to:
Sector: Country Risk
Geography: Middle East, Algeria, Egypt, Libya, Morocco, Tunisia
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