Abu Dhabi, UAEMonday 20 May 2019

GCC economic growth to drive Mena expansion despite Iran contraction

Deepening Iranian recession will cause drag on regional expansion, says Fitch Solutions

Abu Dhabi rose up the living cost ranks but remains far cheaper than major global capitals. Silvia Razgova / The National
Abu Dhabi rose up the living cost ranks but remains far cheaper than major global capitals. Silvia Razgova / The National

The UAE, Saudi Arabia and Egypt will drive economic expansion in the Middle East and North Africa in 2019, even as recession in Iran weighs on the region’s overall growth, Fitch Solutions said in a report yesterday.

In the year ahead, a forecast of 4.1 per cent economic contraction in Iran, compared to 0.5 per cent in 2018, will act as the biggest drag on Mena growth, according to the unit of Fitch Group.

“We believe the Iranian economy entered into recession in 2018 as the reimposition of US sanctions spurred investment outflows, oil export reductions, rial weakness and soaring inflation,” the report said.

“This recession looks set to deepen in 2019 as sanctions remain in place and likely tighten further.”

Last year, prior to reimposing sanctions, the US also withdrew from a nuclear deal struck between the US, UK, France, China, Russia, Germany and Iran in 2015.

Mena average GDP growth will decelerate to 1.9 per cent in 2019 from 2.1 per cent in 2018 due to the recession in Iran, the report said.

The report assumes Iran’s net hydrocarbons exports will reduce by about 30 per cent as a result of the reimposition of sanctions. An accompanying fall in hard currency inflows will weigh on the rial further this year and increase import costs, constraining business activity and reducing the government’s ability to subsidise basic goods.

Iranian plans to restructure its squeezed banking system will likely be postponed too, Fitch said, meaning the private sector will find it hard to access credit and inflation could rise. Private investment and consumption will in turn likely contract.


Read more:

Iran to face recession as US sanctions bite

UAE economy will see robust growth in year ahead

Iranian inflation set to rise sharply as US sanctions deadline approaches


Overall, another drag on Mena growth could be a sharper than expected slowdown in global economic growth, which could reduce oil demand and discourage investment. Mena oil producers’ export gains are being capped over the quarters ahead – at least until mid-2019. Global financial tightening and trade tensions are other downside risks, Fitch said.

However, economic growth in the GCC will rise slightly to 2.6 per cent in 2019, up from 2.5 per cent in 2018, driven by Saudi Arabia and the UAE, whose expansionary fiscal policies are helping boost non-oil investment and consumption.

Growth in Saudi Arabia is forecast to be 2.4 per cent this year from an estimated 2.3 per cent in 2018, while the UAE economy is set to accelerate to 3 per cent in 2019, from 2.8 per cent, as the Abu Dhabi Government scales up investment and Dubai prepares for the Expo 2020.

Meanwhile, Egypt is expected to continue to outperform in the region, with forecast growth averaging above 5 per cent over 2019-2020. The North African country has implemented a package of economic and structural reforms over the past three years to improve fiscal stability and encourage investment.

Updated: January 21, 2019 06:26 PM