Mixed Outlook for the Regional Economy in 2015
This year likely promises mixed prospects for the Middle East and Africa. Among the five economies under our coverage in this region, oil exporters U.A.E. and Qatar are expected to remain under pressure amid the oil price slump. On the other hand, oil-importing South Africa will probably benefit from the downtrend in oil prices as a potential rise in domestic consumption should help the beleaguered economy deal with its various problems. After being hurt by its 50-day conflict with militants in 2014, Israel is projected to record an improved growth rate this year while Egypt may consolidate its recovery further through ambitious structural reforms.
At a Glance
South Africa: Annual inflation fell to 5.3 percent in December, its lowest level since November 2013. While labor problems diminished, power shortages in the country worsened due to various labor and supply problems at power utility Eskom.
Israel: Economy expanded 2.5 percent-2.6 percent during 2014, clocking its slowest pace of growth in five years. Exports increased a minuscule 0.6 percent between 2013 and 2014. Consumer prices fell in each of the three months of the fourth quarter compared to their year-ago periods.
Egypt: According to the government, the economy likely grew at a rate of over 4 percent during the October-December period.
U.A.E.: The IMF cut its 2015 growth forecast for U.A.E. to 3.5 percent from its October projection of 4.5 percent.
Qatar: According to the IMF, Qatar will be among countries that will be hit hardest by the oil price slump. Still, the government has forecast a GDP growth rate of about 7 percent for 2015.
SOUTH AFRICA: POWER CRISIS POSES FRESH CHALLENGE FOR THE ECONOMY
After a difficult 2014, South Africa has stepped into the first quarter of 2015 with a mixed outlook. For several years now the mining powerhouse has been struggling to cope with the diminished demand for its metal and mineral exports alongside a host of domestic problems, including sky-high unemployment, infrastructure bottlenecks, and a large government budget deficit. But 2014 turned out to be a particularly bad year for South Africa due to a spurt in labor problems, especially a platinum mine-workers’ strike that lasted nearly six months and significantly hurt not just mining revenues but also national output.
Fortunately, the labor problems have abated, but the country’s recurring power shortage has worsened lately and is expected to exacerbate the problems of the all-important mining industry and South African businesses in general in the coming quarters. Utility Eskom Holdings SOC Ltd., which according to Bloomberg provides about 95 percent of South Arica’s power, has been regularly generating less than the daily demand of 32,000 megawatts due to various hurdles, including construction delays, labor unrest, accidents and, worse, a large cash crunch.
The power utility, which has already had at least two phases of fortnight-long rolling blackouts, has warned that soon daily rolling blackouts may become inevitable. Adding to the pessimism, a South African official has reportedly said that the power supply is unlikely to improve until some long-delayed power projects are completed, which could take as long as two years. Not surprisingly, the International Monetary Fund (IMF) has said that South Africa may not grow more than 2.5 percent a year until an adequate amount of new power capacity is added.
The silver lining though is that given the oil price slump, Eskom may find it easier to import diesel to make up for a portion of its output deficit. Not just that, South Africa being an oil importing country (oil imports account for around 23 percent of its total imports), low oil prices may help reduce the current account deficit, which in turn should support the domestic currency (rand). The rand is under pressure now due to the perceived risks of investing in South Africa. Low oil prices should also help keep inflation under check and provide a boost to consumer spending. In fact, South Africa’s annual inflation fell to 5.3 percent in December, its lowest level since November 2013. Incidentally, inflation is now within the central bank’s target range of 3 percent-6 percent.
ISRAEL: MODEST GROWTH IN 2014; OUTLOOK IMPROVES AS WEAKER SHEKEL MAY HELP EXPORTS
Israel’s Central Bureau of Statistics (CBS) and central bank have projected that the economy expanded 2.5 percent-2.6 percent during 2014, clocking its slowest pace of growth in five years. According to CBS, the growth rate would have been higher had it not been for Israel’s July-August conflict with militants in Gaza, which curtailed factory output, hurt consumer spending and kept tourists out of the country. Notably, the economy still managed to outgrow most other developed country peers, given that OECD members (group of 34 advanced countries) grew at an average rate of 1.8 percent in 2014.
Israel’s exports, which account for more than a third of the economy, increased a minuscule 0.6 percent between 2013 and 2014. In the second quarter of 2014, exports had plunged nearly 18 percent due to a strong domestic currency (shekel), which likely affected the export data for the whole year. In other developments, consumer prices fell in each month of the fourth quarter compared to their year-ago periods, which prompted the Bank of Israel to keep its benchmark interest rate at an all-time low of 0.25 percent in the fourth quarter as well as in January. The central bank has pegged the growth rate for this year at 3.2 percent as it believes a much weaker shekel will help exporters.
EGYPT: ECONOMIC TURNAROUND CONTINUES; REFORMS AGENDA ON TRACK
Egypt remains one of the brightest spots in the Middle East and North Africa (MENA) region. While the economy continues to recover from the turbulence it experienced following the 2011 revolution, the government appears to have embarked on a path to address structural problems and bring foreign investors back into the country. According to the latest quarterly data available, the Egyptian economy expanded 6.8 percent in the third quarter of 2014 compared to the year-ago period, and according to the government, it has likely grown at a rate of over 4 percent during the October-December period.
On the reforms front, the government has planned several initiatives. The finance minister has said that a costly energy subsidy will soon be phased out completely and the savings will be used to increase focus on social programs in the areas of health and education and on reducing the budget deficit. Following a 30 percent reduction in the subsidy in July 2014, the government reportedly saved $7 billion or about 2 percent of national GDP. Similarly, a value added tax will be introduced this year in an effort to expand the tax base.
To attract foreign investors, the government will host an international conference in March to showcase investment opportunities worth billions of dollars. Adding to the optimism, Saudi Arabia, U.A.E., and Kuwait are reportedly planning to invest in a multi-billion dollar combined sovereign fund to fund projects in Egypt. Notably, the North African economy has already received funds worth billions of dollars from several Gulf countries.
U.A.E.: IMF SLASHES 2015 GROWTH FORECAST AMID OIL PRICE SLUMP
Amid the current slump in oil prices, the U.A.E.’s ability to sustain its growth momentum is a key concern for the global financial community. The IMF believes that the country, which generates at least 30 percent of its GDP through oil revenues, is certainly going to be affected. Therefore, the world body recently cut its 2015 growth forecast for the country to 3.5 percent from its October projection of 4.5 percent. The U.A.E. government though believes that it will be able to achieve 4 percent-4.5 percent growth this year as most of the economy’s non-oil sectors, including tourism, are doing well. To U.A.E.’s credit, it has large financial reserves equivalent to about 400 percent of its GDP, which should help its government avoid spending cuts even as oil revenues diminish.
QATAR: HIGHER PUBLIC SPENDING LIKELY TO PROP UP ECONOMY AMID OIL PRICE SLUMP
The IMF believes that Qatar, along with Kuwait, Iraq, Oman, Libya and Saudi Arabia, will be hit hardest by the oil price slump. It has also predicted that Qatar and all other Gulf states except Kuwait will see their fiscal surpluses turn into deficits this year. But while other Gulf countries are projected to see slower growth in government spending, Qatar is likely to raise public spending faster than previous years as it feverishly prepares for the 2022 Soccer World Cup. What’s more, Qatar is experiencing stable inflation now and according to the Gulfnews.com, its current rate of unemployment is less than 1 percent. The Qatari government has forecast a GDP growth rate of about 7 percent for this year.
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