South Africa Avoids Recession, Israel Records a Slight Revival
The three months from July to October turned out to be a reasonably good period for the five economies we cover in the Middle East and Africa region. Although the largest among these economies, South Africa, remained beleaguered by a range of external and domestic problems, there were signs that the country coped well with its difficulties. Israel recorded robust growth after staying depressed for much of the first half of this year while Egypt took further steps to reform its economy. The two energy-exporting countries, Qatar and the United Arab Emirates (UAE), continued to rely on the non-energy components of their economies for growth amid the slide in their energy exports.
At a Glance
South Africa: According to preliminary data, South Africa dodged recession in the third quarter. Annual inflation in the country inched up to 4.7 percent in October from 4.6 percent in September.
Israel: The Israeli economy showed signs of a significant revival between July and October, growing as much as 2.5 percent on an annualized basis. Israel’s annual inflation fell to -0.9 percent in October from -0.5 percent in September, clocking its 14th consecutive month in negative territory.
Egypt: The government of President Abdel Fatah al-Sisi committed to further structural reforms in the economy. The unemployment rate declined to 12.8 percent in the third quarter from 13.1 percent in the same period a year ago.
Qatar: The International Monetary Fund (IMF) recently forecast that Qatar will record 4.5 percent GDP growth this year, up from last year’s 4 percent growth, on the back of continued government spending on infrastructure.
U.A.E.: The IMF has projected that amid the slowdown in the global energy sector, the UAE, which has the seventh largest oil reserves in the world, will grow around 3 percent this year, down from the 4.6 percent growth it clocked last year.
SOUTH AFRICA: DODGES RECESSION BUT INFLATION REMAINS IN AN UPTREND
Africa’s most industrialized economy has been under stress for several years now, having been beset with high unemployment and inflation as well as labor problems and an acute power scarcity at a time when the demand for its metal and mineral exports has fallen significantly amid a severe slowdown in the global commodities market. Nevertheless, recent data suggest that between July and October, South Africa did well in this adverse climate and even succeeded in dodging recession.
After shrinking 1.3 percent between the first quarter and the second — on a seasonally adjusted and annualized basis — the South African economy stepped into the third quarter with the risk of slipping into recession if GDP declined again at the end of September (technically, recession is described as two consecutive quarters of contraction). However, according to a preliminary estimate by Statistics South Africa, the South African economy not only avoided a contraction in the third quarter but also expanded as much as 0.7 percent.
On another positive note, Eskom, a state-owned utility that supplies 95 percent of the electricity South Africa consumes, managed to increase its electricity output in the third quarter after overhauling two of its generating units. The utility has also announced that it will spend $16 billion over the next decade to strengthen its transmission grid. This is a significant development because South Africa is facing a severe power crisis now due to consistently inadequate capital investment at Eskom. Almost daily power outages since the beginning of this year have hurt South African businesses by pushing up their operating costs and curtailing their output.
In other developments, South Africa’s annual inflation inched up to 4.7 percent in October from 4.6 percent in September. Rising inflation is a key concern for South Africa because of its potential impact on consumer spending, a key driver of growth now for the beleaguered country. It is noteworthy that although the current pace of price rise remains within its target range of 3 percent to 6 percent, the South African central bank has expressed its apprehensions about the continuing upward pressure on inflation from a depreciating rand. The currency, like other emerging market currencies, has weakened significantly this year due to a fall in South Africa’s export revenues and a strengthening U.S. Dollar.
ISRAEL: ECONOMY BOUNCES BACK AFTER A LACKLUSTER FIRST HALF
After a rather lackluster performance during the first half of this year, the Israeli economy showed signs of a slight revival between July and October. Initial data reported by the country’s Central Bureau of Statistics (CBS) show that during the third quarter, national output grew as much as 2.5 percent on an annualized basis. In comparison, merely 0.2 percent growth was recorded in the second quarter. According to the CBS data, a surge in exports and investment fueled the third-quarter expansion.
Exports, which account for 35 percent-40 percent of the Israeli economy, jumped 4.4 percent from July to September while investment in fixed assets edged up 0.7 percent. A 1.6 percent increase in government spending also spurred the economy. All these components of the economy — exports, investment and government spending — had declined in the first two quarters of this year. Similarly, private spending, which had risen just 1.5 percent during the second quarter, climbed 2.4 percent in the third quarter. It is noteworthy that over the past couple of years, private spending has turned out to be Israel’s primary engine of growth as the country’s traditional growth driver, exports, has faltered amidst a global slowdown.
On a discouraging note, though, Israel’s annual inflation fell to -0.9 percent in October from -0.5 percent in September, clocking its 14th consecutive month in negative territory. The global financial community has been worried about this deflationary trend in the Israeli economy, attributing it to extremely weak consumer demand. However, the Bank of Israel (central bank), which has kept its benchmark interest rate steady at 0.1 percent since February, has been reluctant to cut rates further or take other monetary measures on the grounds that the decline in consumer prices is a reflection of lower commodity costs rather than weak demand.
EGYPT: GOVERNMENT COMMITS TO MORE REFORMS
Egypt, which has been struggling to restore social, political and economic order following its 2011 uprising, reported a mixed bag of news during the July-October period. On the positive side, the government of President Abdel Fatah al-Sisi committed to further structural reforms in the economy. After having phased out several subsidies and broadened the tax base over the past two years, the al-Sisi administration recently approved budget proposals that include ways of bringing the government’s fiscal deficit below 10 percent of GDP this year.
What’s more, the unemployment rate declined to 12.8 percent in the third quarter from 13.1 percent in the same period a year ago. Nearly 218,000 workers were added to the labor force between the second quarter and the third. Youth unemployment though crept up to 27.4 percent in the third quarter from 26 percent in the second quarter. Nevertheless, the worst setback that the Egyptian economy experienced during the July-October period was triggered by a plane crash at the country’s main Red Sea resort of Sharm el-Sheikh, which killed all the 224 passengers on board.
Following intense speculation that the Russian plane was downed by a bomb, Russia, which typically sends more tourists to Egypt than any other country (around 3 million a year), suspended all flights to Egypt. The U.K., which accounts for the second largest group of tourists in Egypt after Russia, suspended all flights to Sharm el-Sheikh. Moving forward, these events are expected to severely hurt Egypt’s all-important tourism sector, which garners 17 percent of the country’s foreign currency earnings, apart from driving nearly a tenth of the economic activity in the North African nation. It is noteworthy that at this juncture of its revival, Egypt is particularly vulnerable to even a small decline in the number of inbound tourists since its foreign exchange reserves have depleted considerably.
OTHER ECONOMIES:
QATAR PROJECTED TO GROW FASTER THAN LAST YEAR BUT UAE MAY SLOW DOWN
QATAR: Apart from being a large crude oil exporter, Qatar accounts for a third of the world’s liquefied natural gas (LNG) shipments. So, given that LNG spot prices in Asia have fallen more than crude oil prices this year, the Qatari economy is likely under a fair bit of strain. Nonetheless, Qatar’s long-standing efforts to diversify its hydrocarbon-based economy appear to be paying off. The International Monetary Fund (IMF) recently forecast that Qatar will record 4.5 percent GDP growth this year, up from last year’s 4 percent growth, on the back of continued government spending on infrastructure. Qatar now generates only 38 percent of its GDP from the hydrocarbon sector, having reduced its dependence on oil and gas exports by focusing on an enormous public infrastructure investment program.
THE UAE: The IMF has projected that amid the slowdown in the global energy sector, the UAE, which has the seventh largest oil reserves in the world, will grow around 3 percent this year, down from the 4.6 percent growth it clocked last year. Apart from the oil price slump, planned government spending cuts are believed to be taking a toll on the UAE economy. It is noteworthy that like Qatar, the UAE has a diversification strategy in place to reduce the contribution of oil revenues to national income. However, this strategy, which focuses on the UAE’s industrial sector and promotes small and medium-sized Enterprises, has only been able to reduce the proportion of oil revenues in GDP from 90 percent to 70 percent.
This article is for informational purposes only. This article is not intended to provide tax, legal, insurance or other investment advice. Unless otherwise specified, you are solely responsible for determining whether any investment, security or other product or service is appropriate for you based on your personal investment objectives and financial situation. You should consult an attorney or tax professional regarding your specific legal or tax situation. The information contained in this article does not, in any way, constitute investment advice and should not be considered a recommendation to buy or sell any security discussed herein. It should not be assumed that any investment will be profitable or will equal the performance of any security mentioned herein. Thomas White International, Ltd, may, from time to time, have a position or interest in, or may buy, sell or otherwise transact in, or with respect to, a particular security, issuer or market on our own behalf or on behalf of a client account.
FORWARD LOOKING STATEMENTS
Certain statements made in this article may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.
