Fitch Solutions Middle East And North Africa Key Themes For 2022: Two Speed Recovery Gathers Pace

Fitch Solutions / Country Risk / Middle East / Fri 03 Dec, 2021

fs disclaimer

At Fitch Solutions, we see a brightening outlook for the Middle East and North Africa (MENA) in the year ahead, as the region begins to shake-off some of the worst effects of the Covid-19 pandemic and moves toward greater economic normalisation. Indeed, as oil production picks up, in line with a recovery in global demand, we anticipate stronger growth and narrowing fiscal deficits, while the more stable economic outlook allows for greater progress on reform. Nevertheless, long-standing macroeconomic imbalances and elevated political challenges suggest not all MENA countries will recover at the same pace, with many of the smaller countries in the Levant and North Africa likely to continue to grapple with lingering scars from the pandemic.

Below, we lay out our five key themes for 2022, outlining how we expect the region to emerge from the pandemic:

  • MENA Region Will Buck The Global Trend Of Slower Growth Next Year …
  • …But Many Smaller Economies Will Still Not Reach Pre-Crisis Output Levels
  • Business-Friendly Reforms Gaining Steam
  • Sharply Narrower Fiscal Deficit, As Governments Pare Back Spending
  • Easing Geopolitical Tensions, But Not Without Bumps

Theme 1: MENA Region Will Buck The Global Trend Of Slower Growth Next Year …

Economic activity in the MENA region will accelerate in 2022, making it the only region worldwide to see rising growth rates. We forecast MENA growth will accelerate from an estimated 3.2% in 2021 to 4.1% in 2022, as hydrocarbon output increases and a recovery in non-oil sector continues to gain ground.

MENA Growth Rising In 2022

Emerging Markets – Real GDP Growth, %

Source: Fitch Solutions Forecasts

Two factors will lead to higher hydrocarbon output in 2022, boosting growth. First, the easing of OPEC+ supply restrictions will allow MENA exporters to boost production of crude oil. Indeed, our Oil & Gas team forecasts aggregate crude, condensate & natural gas liquid production in the MENA region will rise 9.8% in 2022, the most significant year-on-year increase in more than 30 years, following an estimated 3.5% increase in 2021 and 9.3% contraction in 2020. Second, we anticipate gas production from MENA countries will increase next year as more production capacity comes online. This is particularly true for Israel, which will ramp up production and become a net gas exporter for the first time, and for Qatar through higher output from the Barzan Project in the North Field.

Many of the largest economies in the region will also see continued robust growth in the non-oil economy. Most notably, in the GCC we expect a further normalisation of activity as the impact of the global health crisis recedes. Coupled with a series of one-off country-specific factors, this will increase headline growth from an estimated 2.9% in 2021 to 4.9% in 2022 – the highest of any sub-region in MENA (see chart below). The Dubai Expo, which will end in March, the 2022 World Cup in Qatar which opens in November and high vaccination rates will drive visitor arrivals and support private consumption more broadly. Meanwhile, investment activity will benefit from an accelerating reform momentum, particularly as Saudi Arabia and the UAE push ahead with business-friendly reforms.

GCC Outperforming In 2022

MENA - Weighted Real GDP Growth, %

f = forecast. Source: National Sources, Fitch Solutions

Outside the GCC, several other major MENA economies are set to see robust growth as well. Economic activity in Egypt is set to accelerate to 5.0% in FY2021/22 (July 2021-June 2022) and 5.5% in FY2022/23 on the back of a rebound in investment, rising tourist arrivals and strong remittance inflows. Moreover, while we are expecting growth to decelerate in Morocco and Israel due to their strong recovery in 2021, both will see growth remain above their pre-Covid historical trend.

The outbreak of the Omicron variant and potential for further Covid-19 mutations presents the biggest downside risk to our view. For example, if new variants slow global growth and weigh on oil prices, this could see OPEC+ bring production back online more slowly. We also cannot rule out the imposition of some mobility and travel restrictions in such a scenario. However, thus far, OPEC+ has signalled that it is unlikely to alter its timeline for returning barrels of oil to the market, while increased vaccine production capacity suggests that governments are unlikely to enact lockdowns as stringent as those seen in March 2020.

Theme 2: …But Many Smaller Economies Will Still Not Reach Pre-Crisis Output Levels

Even though MENA’s regional real GDP growth is set to accelerate in 2022, structurally, many of the region’s smaller countries will not fully recover from the impacts of Covid-19. Even by the end of 2022, only around half of the region’s economies will have reached their pre-Covid-19 levels of real output. Long-standing structural weaknesses heading into the pandemic such as weak fiscal and external positions alongside elevated political instability exacerbated the economic impact of the pandemic for countries like Tunisia, Algeria and Lebanon. Along with low vaccination rates in many of these countries, this led to a weak recovery in 2021, and will continue to dampen the pace of economic activity in 2022.   

Most Countries Will Not Surpass Pre-Crisis High

MENA - 2022 Real GDP % 2019 Real GDP

Source: Fitch Solutions Forecast

For instance, our forecasts imply Kuwait and Tunisia will only reach their pre-crisis level of output by 2023. While Kuwait’s large hydrocarbon sector will see a strong recovery in 2022, the non-oil sector will remain structurally weak, with growth tempered by ongoing political gridlock that has prevented much-needed reform to diversify the economy or the passage of a new debt law to allow the government to tap into international capital markets. Similarly, the decision by Tunisian President Kais Saied to freeze parliament indefinitely in 2021 will continue to spur caution amongst foreign investors, limiting investment, while a deal with the IMF over a new funding programme, which will likely force fiscal consolidation, will weigh on private consumption.

Elevated Political Risk Will Delay Recovery In Output Beyond 2023

MENA - Short-Term Political Risk Index

Note: Scores out of 100; higher score = lower risk. Countries in red will see their real GDP recover to pre-Covid levels by end-2022. Source: Fitch Solutions

The remaining eight MENA countries, which will not see growth return to pre-crisis highs even by end-2023, will struggle with elevated political risk (see chart above), which in addition to country-specific factors, will prevent a stronger recovery in output. For instance, Lebanon is set for another difficult year, amid a lack of policy action to address the prevailing economic crises. The sustained weakening of the Lebanese pounds on the parallel market and cuts to subsidies will keep inflation in triple digits and further erode purchasing power. Additionally, ongoing conflicts in Syria and Yemen, along with international sanctions against the Syrian government, will deter foreign investment and maintain depreciatory pressure on their respective currencies, suppressing consumption. Similarly, sanctions on Iran, which will remain in place for most of 2022, along with political gridlock and elevated security risks in Iraq, will continue to prevent strong economic growth next year in these countries.

Theme 3:  Business-Friendly Reforms Gaining Steam

In 2022, we believe reforms efforts will accelerate across large parts of the MENA region, as the easing of the health crisis will allow authorities to refocus their attention on improving business environments and attracting foreign direct investment. Indeed, in our latest Global Reform Tracker, MENA average score rose - the only region to post a higher score (see chart below).

MENA Region Reform Momentum Accelerating

Reform Tracker Regional Averages, Score Out of 0

Note: Scores out of 10; higher score = stronger reform progress. Source: Fitch Solutions

The GCC countries will spearhead progress in advancing reforms in 2022, pushing ahead with diversification efforts. We anticipate that competition between UAE and Saudi Arabia, which has become increasingly apparent in recent quarters, will continue to intensify, with positive knock-on effects on each country’s business environment. Throughout 2021, both countries have implemented a series of policies aimed at attracting foreign investments, raising the contribution of the private sector in the economy, and liberalising labour and residency laws. In November 2021, the UAE revamped its legal system to make it more business friendly. We expect the strong reform momentum will continue in 2022. Indeed, we anticipate the oil price volatility seen during the pandemic and the increasingly rapid global push towards a green energy transition in the aftermath will only increase the impetus for GCC governments to reduce their dependency on oil quickly.

Qatar may also look to make additional reforms in 2022 to further modernise its existing legislation. is This especially true as we expect authorities will want to use the FIFA World Cup, scheduled for November 2022, as a catalyst to increase foreign participation in the local business environment. Moreover, Oman will likely increase efforts at privatisation, which the pandemic had brought to an abrupt halt.

Lower Oil Prices Will Drive Efforts To Diversify Revenue Streams

GCC – Real GDP Growth Rate, % (LHS) & Brent Prices, USD/bbl (LHS)

Source: National sources, Fitch Solutions

Outside the GCC, large MENA economies will make progress on their structural reform agenda. For instance, after pandemic-related delays in recent quarters, we expect Egypt will continue advancing the second phase of its economic reform programme (launched in April 2021). The programme aims to incentivise investment, liberalise trade and promote greater flexibility in the labour market. It will focus on the agriculture, telecommunications and information technology sectors. In October 2021, Egyptian authorities also signed a three-year programme with the OECD to receive support for the implementation of key structural reforms to improve the business environment and attract foreign investments.

Finally, Israel, under the new government, will also engage in a wide set of reforms, as outlined in its 2022 Budget. The main ones include the liberalisation of the kosher certification industry and domestic transportation; the opening up of the agricultural sector to foreign competition through the removal of subsidies; streamlining regulations for small and medium enterprises; and allowing non-banks, including fintech companies, to compete with banks.

Theme 4: Sharply Narrower Fiscal Deficit, As Governments Pare Back Spending

In 2022, we expect the MENA region’s fiscal deficit will narrow from an anticipated 3.1% of GDP in 2021 to 1.4% of GDP - the smallest deficit in nearly a decade. We anticipate elevated energy prices and growth in hydrocarbon output will boost revenues among the region’s oil producers, while most governments look to reduce spending growth through a paring back of pandemic-related expenses and, in some cases, cuts to long-standing subsidy spending. Indeed, we forecast smaller deficits in 18 of the 19 countries we cover in the MENA region. We believe that even with an anticipated rise in hydrocarbon revenues in 2022, governments in Saudi Arabia, the UAE and Qatar look poised to maintain low spending, especially current spending.

Fiscal Deficit Will Narrow In 2022

MENA – Government Balance, % of GDP

Source: National sources, Fitch Solutions

Meanwhile, many of the countries that have long struggled with weaker fiscal dynamics and high debt loads look poised to accelerate efforts to address these vulnerabilities in the wake of the pandemic. Indeed, the Covid-19 shock deepened fiscal imbalances in these countries, with surging fiscal deficits which saw the average regional debt rise from 39.0% of GDP in 2019 to an estimated 46.0% in 2021.

Among GCC countries, Oman will continue to prioritise the improvement of its weak fiscal position and keep spending growth subdued to boost credibility, especially in light of the country’s elevated refinancing needs. Similarly, we expect Bahrain will also look to keep spending contained; in November 2021, Manama updated its economic and fiscal program with a statement of its intention to double the value-added tax to 10% in 2022, as dwindling oil reserves provide impetus for authorities to increase non-oil revenues. As such, after we have already seen a rapid narrowing of these countries’ fiscal shortfalls in 2021, to an estimated 3.1% of GDP for Oman and 5.0% for Bahrain. We expect they will narrow further in 2022, forecasting deficits of 0.5% and 2.6% respectively – the smallest deficits for both countries since at least 2014.

Turning to North Africa, Tunisia will also seek to keep expenditure in check, as it aims to secure an IMF deal over the coming quarters to stabilise its public finances. The Fund has previously stated that a new deal can only be agreed if policymakers in Tunis trim the large public sector wage bill, which accounted for nearly 47.0% of the total budget in 2020, reform loss-making state-owned enterprises and cut back on energy subsidies. Given the high political risk in Tunisia, authorities will proceed with addressing these structural rigidities in spending over several years, similar to what Egypt did under its own program with the IMF. Similarly, Algeria will seek to reduce its fiscal deficit, which we estimate will come in at 8.4% of GDP in 2022, from 9.8% in 2021, by slashing long-standing subsidies on food, fuel and electricity.

Fiscal Fortunes To Improve Across Board, Yet Only Few Countries Will Post Surpluses

MENA - Government Balance, % of GDP

Source: Fitch Solutions Forecasts

Meanwhile, in the Levant, Jordan will intensify its austerity measures next year, as agreed under its Extended Fund Facility agreement with the IMF. We believe these measures will include a mix of closing loopholes in the tax system and the reduction of household electricity subsidies, bringing the fiscal deficit down to 4.0% of GDP in 2022 from an estimated 5.3% in 2021. Iraq is also likely to contain spending, in line with the authorities’ efforts to follow the fiscal reforms suggested by the IMF White Paper, presented to parliament in 2020. We forecast a fiscal surplus of 3.5% of GDP in 2022, up from 0.7% in 2021.

Theme 5: Easing Geopolitical Tensions, But Not Without Bumps

Finally, we believe that geopolitical tensions between key players in the MENA region will ease in 2022, as de-escalation and reconciliation efforts advance. In 2021, there has been a series of reconciliation efforts between MENA regional powers. The most notable example has been the reconciliation between Qatar and the Quartet States (Saudi Arabia, Egypt, Bahrain, UAE) in January 2021. In addition, Turkey sought to repair its ties with Egypt, Saudi Arabia and more recently with the UAE; while a rapprochement between Arab states and Syria has been ongoing since August 2021. Further, talks between Iran and Saudi Arabia led  to the resumption of trade relations between the two countries, while Iran and the UAE recently vowed to revamp ties.

Regional Tensions Set To Ease

Map Of Middle East

Source: Fitch Solutions

We see these ties further developing and strengthening in 2022, as we expect regional powers will prioritise reaping economic gains. We believe many governments remain concerned over the economic hangover from the pandemic. This reality, amid the broader trend of accelerating reform (see theme 3), will serve to disincentivise aggressive international posturing in the near term. As such, the UAE will continue with its economic-driven diplomacy, which will lead to deepening ties with Israel, Qatar, Turkey and Iran next year. Israel will likely look to further strengthen its ties with Morocco and Bahrain, especially in terms of security cooperation under the Abraham Accords. Meanwhile, we believe President Recep Tayyip Erdoğan’s domestic economic challenges and falling popularity will push him to look for political wins abroad, with the aim that improving ties will bring in foreign investments and increase trade ties. This could help to underpin further improvements in Turkey’s relations with Egypt, Saudi Arabia and Israel in coming quarters. 

Perhaps most impactfully, our core view remains for a return to the nuclear deal by the US and Iran in the next year. While a return to the deal will involve politically painful compromises, we continue to believe that both Iran and the US see a return to the nuclear deal as in their best economic and geopolitical interests, respectively. Namely, Iran would benefit from the removal of economic sanctions, while the new regional equilibrium created by the deal would allow the US to shift its focus away from MENA towards the Indo-Pacific region, a strategic geopolitical priority. While we cannot rule out sporadic flares of violence in the run-up to the US-Iran deal, especially in proxy battle-grounds across the region, such as Lebanon, Iraq and Yemen, we believe that an eventual agreement would help to cool these tensions toward end-2022.

This report from Fitch Solutions Country Risk & Industry Research is a product of Fitch Solutions Group Ltd, UK Company registration number 08789939 ('FSG'). FSG is an affiliate of Fitch Ratings Inc. ('Fitch Ratings'). FSG is solely responsible for the content of this report, without any input from Fitch Ratings. Copyright © 2021 Fitch Solutions Group Limited. © Fitch Solutions Group Limited All rights reserved. 30 North Colonnade, London E14 5GN, UK.

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