The 13th Annual One on One Conference


of MENA & Frontier Markets

Atlantis, The Palm - Dubai, UAE, 6 - 8 March 2017

Regional Outlook

2017 will be a challenging year for emerging and frontier markets. Brexit and the election of Donald Trump mean that protectionism is a rising risk to EM growth. Rising growth expectations in the US have driven bond yields and the dollar higher, and capital is likely to flow out of emerging markets after strong inflows in 2016. However, we believe several factors will support selected emerging markets. The first is internal; reforming economies, particularly smaller ones, will be able to win a bigger piece of EM-dedicated investment and, potentially, trade. The second is external; investment-heavy fiscal expansion in the US can potentially drive greater demand for industrial commodities, supporting export growth in certain emerging markets.


The float of the Egyptian Pound was a step in the right direction for Egypt. Despite short-term inflationary pressures and higher interest rates, the free float will unleash the full potential of the Egyptian market and economy. We believe the float will lead to strong Foreign Portfolio Flows (FPIs) and Foreign Direct Investments (FDIs) which will improve FX currency in circulation and help the Egyptian economy and Egyptian companies grow at a much faster rate than seen since 2011.


A stronger economic outlook than GCC peers is likely to continue as the country enjoys a diversified economy and capital inflows. Low pressure on fiscal balances will allow Abu Dhabi to reverse its fiscal retrenchment in 2017, leading to accelerated economic growth. In parallel, Dubai is continuing with an expansionary fiscal budget as it continues to boost investments ahead of the Dubai Expo in 2020.


Government is expected to continue spending on infrastructure projects, especially those linked to World Cup 2022 and Qatar vision 2030. Qatar benefits from a low budget breakeven oil price, but further pressure on gas prices is a risk, especially as global LNG supply picks up.


The Sultanate is expected to see slow GDP growth continuing in 2017, on the back of ongoing austerity measures. Low oil prices indicate that the budget deficit will continue at high levels in the near future, given the high budget breakeven for Oman (2nd highest in the GCC after Bahrain).


2017 may see some recovery in growth after a difficult 2016 for the Kingdom, but fiscal retrenchment remains an important theme given the limited recovery in oil prices in 2016. MSCI EM status will be an important driver of investor interest in KSA.


Bahrain's economic growth is expected to slow to 2% in 2016 and 1.7% in 2017 on the back of continued austerity measures that will further hit consumption. Domestic political unrest and escalating regional risks are a drag on growth and investor confidence, though the former has eased since 2011. Bahrain's ease of doing business ratings are the highest of the GCC countries.


Having the lowest break-even oil price amongst the GCC countries, Kuwait's macro stability is supported by low deficits and very high levels of foreign assets. Economic activity is picking up as the government's investment program is finally gaining pace from a low base. Parliamentary elections planned for late 2016 are a key development for the continuation of political stability.


The Moroccan economy remains vulnerable to shifts in agriculture, though activity could pick up slightly in 2017. Non-agricultural activity is expected to remain at 3%. Morocco is expected to move towards a flexible FX regime in 2017.


Iraq is subject to critical challenges: oil production has increased while oil prices remain relatively low. The government is recovering territory from ISIS, but the campaign is increasing tensions between major political groups. Macroeconomic stability remains in question, in light of the recent shrinking of non-oil revenues.


Economic growth is likely to remain at around the 3%-mark as regional political instability continues to weigh on economic activity. The government recently renewed its Stand-By Agreement with the IMF, providing a cushion against external shock. In addition, foreign reserves remain at a comfortable level. Fiscal deficits have been reduced to low single digits as share of GDP, but the country remains dependent on foreign grants to fund its deficit.


The macro-economic outlook has improved in the light of the recent resolution of the political deadlock. This has started to boost investor confidence, though things are still at an early stage. A lasting recovery in sentiment and boost to GDP growth in Lebanon is still dependent on Syria's conflict resolution.


Pakistan's economy should continue to grow at a rate above 5% in 2017 as the country benefits from improvements in security, rising FDI (notably the China-Pakistan Economic Corridor) and relatively low oil prices. Low inflation and the lead-up to elections in 1H2018 will also be favorable for growth, while the pending MSCI EM upgrade (set for May 2017) should have a positive impact on stock market performance.


The outlook for Zimbabwe's economy is poor. The agricultural economy shrank last year and a financial crisis, caused by ongoing arrear payments to state-owned enterprises, continues. The economy requires a strong reduction in the public wage bill (which accounts for 70% of total expenditures) in order to avoid further accumulation of public debt.


The IMF trimmed growth expectations for Uganda to 5% in FY16/17 and the central bank has gradually cut interest rates by 400 basis points in 2016 to support economic growth momentum.


GDP growth in 1H2016 came in at 6.2% from 5.6% last year, according to the IMF. The Kenyan economy has benefited from low oil prices, a general improvement in all sectors, namely agriculture, and an uptick in tourism on the back of improved security. The recent government decision to cap interest rates at 4% above the Central Bank of Kenya increased risk on overall growth through its effect on private sector credit.


Growth should continue at roughly 6% in 2017. Large external funding for infrastructure projects in Bangladesh has been received from China, along with commitment from the Asian Development Bank and the World Bank to increase funding. Bangladesh's exports remain strong in the textile sector; however, the economy will continue to face increased pressures from falling remittances from the Gulf states (which account for half of total remittances) and a high public wage bill.

Sri Lanka

Sri Lanka has received approval for an IMF facility worth USD 1.5 billion over 36 months, which should allow the economy to grow at a rate above 5%. However, Sri Lanka needs to improve export competitiveness, widen the tax base, and work towards effective public management restructuring to ensure healthy medium-term growth.


Growth in Ghana should recover in 2017 and 2018 as problems in the oil sector are resolved. Relatively stable currency and tight monetary policy have helped contain inflation, which – along with favorable external balance and FDI inflows - should support growth going forward and help contain a prevailing high domestic financing cost. Problems in the oil sector, weak commodity prices, and fiscal challenges are all concerns ahead of December elections.


The economy in Mauritius is estimated to grow at above 3.5% in 2016, driven by a modest recovery in investment especially in the industrial sector. Inflation is to remain contained given limited imported price shocks. Growth is expected to slow down in 2017 and 2018 as more interventionist policies adopted by the government are set to be implemented, expected to weigh negatively on economic activity and place further pressure inequality.


GDP growth in Rwanda is expected to remain robust, driven by foreign and public investment, services, exports, and political stability. Private investment, which is largely informal, will continue to face major constraints, including poor infrastructure and lack of access to electricity. The government's ability to implement its investment plans as part of Vision 2020 will be limited by weak domestic revenue collection and uncertain foreign aid inflows (30-40% of the budget).


Diamond-rich Botswana's economy is expected to rebound to 3.5% in 2016 and 4.1% in 2017, mostly driven by growth in the mining sector (assuming stable demand from advanced economies). State revenue will remain low as it relies on two volatile sources - minerals (40%) and Southern African Customs Union (SACU) inflows (25%, likely to remain soft on weaker South African growth), but spending will continue to grow as part of as part of the Economic Stimulus Program.


Zambia's GDP growth is expected remain at around 3% in 2016 and below 4% in 2017, down from 4.9% in 2014, with China's economic slowdown and falling FDI dragging on growth. Further subsidy cuts, high inflation, persistent power shortages, and poor harvests are downside risks to growth.


Foreign exchange shortages are likely to weigh further on economic activity following this year's contraction - the first in over ten years. The widening gap between the parallel and official rates hints to no near-term resolution to FX shortages. Inflation, running at double-digits and reaching multi-year highs, is eroding real incomes, further depressing economic activity. On a positive note, restored security is allowing the government to increase oil production, which might help ease shortages.


Expansionary fiscal policy is likely to support strong economic activity in the medium-term as the government focuses on infrastructure development. Growth is therefore likely to remain above 5%. Risks to the outlook include lower donor support and widening twin deficits on the back of the strong fiscal expansion.