The 7th Annual London Conference MENA & Frontier Markets
The Playing Field

6 - 9 November 2017Emirates Arsenal Stadium
London, UK

Regional Outlook

While low oil prices have dominated the region in previous years, new market dynamics are now acting as the key catalysts for the region's growth in 2017. The US Federal Reserve's increase in policy rates, economic reforms undertaken by regional governments, and index-related changes will see investors increasingly seeking opportunities in countries poised to received a bigger share of emerging markets bound capital flows in 2017. With a currency devaluation bringing Egypt back onto the emerging markets radar; reforms and an outflow in frontier market liquidity from Pakistan being a key driver for the Kuwaiti market; and news on KSA's FTSE & MSCI EM index upgrades, the region today offers compelling opportunities beyond the traditional oil-driven returns.


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 show the full potential of the Egyptian market and economy. Reforms have revived Foreign Portfolio Flows (FPIs) and will result in an improvement in Foreign Direct Investments (FDIs) as FX currency has been availed. We forecast 3.8% growth in FY16/17 to increase to 4.4% in FY17/18.


A stronger economic outlook than its 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.


The government is expected to continue spending on infrastructure projects, especially those linked to the 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. Some weakness on the government's efforts to rationalize spending post decline in oil prices may negatively impact consumption.


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 remain at high levels for the near future, given the high budget breakeven for Oman (2nd highest in the GCC after Bahrain). We forecast overall fiscal deficit to narrow to 11.2% of GDP in 2017, and to 7.9% in 2018, with the government needing to deliver strongly on reforms this year.


2017 may see some recovery in growth after a difficult 2016 for the Kingdom, but fiscal retrenchment remains an important factor given the limited recovery in oil prices in 2016. MSCI EM status will be an important driver of investor interest in KSA. We expect real GDP to contract by 0.4% in 2017, largely due to oil production cuts, before it rebounds to 1.9% growth in 2018.


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. Net foreign assets have reached a critical level, requiring intervention by GCC allies or further external debt issuances. Domestic political unrest and escalating regional risks are a drag on growth and investor confidence, though the former has eased since 2011.


The economy is likely to enjoy a strong year with agricultural production recovering strongly and non-agriculture growth maintaining its relatively modest performance. Morocco is expected to start gradual liberalisation of the Dirham by June 2017 as part of its efforts to liberalise its economy. The country is also planning to issue its first domestic Sukuk issuance in 2H17 following the adoption of Islamic banking legislation last year.


Economic growth is likely to remain at the 3% mark in 2017, as regional political instability continues to weigh on economic activity. The extended Stand-By Agreement with the IMF provides a cushion against external shocks. 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 initial 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.


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 remains decent as implementation of the government's investment program remains on track especially with recent legislative changes allowing spending not to be interrupted by parliament. Equity market reforms, with the establishment of Boursa Kuwait, are an interesting development which may improve investors' access to the stock market.


The Iraqi economy is going through tough economic conditions, having to deal with two simultaneous shocks of lower oil prices and a war against the Islamic State to regain territory in the west. The non-oil economy has contracted by 8% in 2016, according to the IMF, representing the third contraction in a row and following a 19% contraction in 2015. To deal with such challenges, the government signed a three-year USD 5.34 bn Stand-By Agreement with the IMF coming after a USD 1.2 bn loan in mid-2015. The economic outlook is set to improve slightly in 2017 with the recovery in oil prices providing a relief to fiscal and external balances and a slight boost to private consumption. Fiscal balances will remain in the red though with Iraq in need of oil prices closer to the USD 60 level to balance its budget.


Bangladesh is a growth economy, which the IMF expects to grow around 6.5%-7% in the next few years. There are a few clouds on the horizon – the ripple effect from Trump's presidency has dampened enthusiasm somewhat in Bangladesh, as it is yet unknown what effect US trade protectionism will have on the economy. Furthermore, reduced workers' remittances, especially from those in KSA, have hit household spending. Nevertheless, Bangladesh is set to outgrow most of its peers in GDP growth in the next few years and remains an economy to watch closely.


Pakistan's economy should continue to grow at 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. In addition, improved inflation dynamics and fiscal deficit reduction will improve the economic fundamentals. We also see a potential catalyst from the lead-up to elections in 1H18, while the MSCI EM upgrade (May 2017) should have a positive impact on stock market performance. The country still faces some challenges, but we are optimistic of the overall outlook for the economy of Pakistan.

Sri Lanka

Sri Lanka's economy has continued to grow at a mild 4-5% over the past few years and we expect it to remain in this low-growth orbit until 2020. The disastrous drought in Sri Lanka, the worst in 40 years, had a serious effect on the economy and meant that the last harvest was a massive failure for large swathes of the countryside. However, the overall impact on GDP is limited thanks to growth in other sectors.


Mauritius remains the most stable economy and political entity in Africa, which offers investors calm in a turbulent region. The IMF expects 3.9% growth in 2017, and a slight acceleration thereafter. The main driving forces behind the Mauritius economy are financial services, an expanding outsourcing sector, and tourism. While its stability is a virtue, Mauritius lacks the high risk/high reward potential seen in other African countries. We are moderately positive for Mauritius in 2017.


The outlook for Zimbabwe's economy remains dire and its crippling cash shortage has left a black hole in the financial system that is affecting the whole economy. The country's liquidity squeeze needs to be addressed but there seems to be few options available to fix this, making us negative on Zimbabwe in 2017. According to the IMF the economy shrank 0.3% last year, and will contract a further 2.5% this year.


Although Botswana's economy is expected to see a step-up in real GDP growth to 4% in 2017 (from 2.9% in 2016 and -1.7% in 2015), concerns remain about the financial stability of its banking system, which was negatively impacted by the decline in mineral prices in 2015 and the sluggish recovery in global consumption post the financial crisis. Putting in place a legislative framework that clearly outlines how distressed banks will be resolved will be key to meeting its growth targets in 2017 and beyond. We are positive on Botswana consumer names in 2017


With a new administration having won a strong mandate, there is scope for the government to pursue the structural adjustment (under the IMF program) and reforms required for real GDP growth to continue to accelerate in 2017 (5.8% vs 4% in 2016) and beyond (9% by 2018). Key to Ghana's outlook is continued financial discipline (reduced recurring expenditure and debt levels) and more transparency and accountability in the energy sector. The latter would allow for increased production and a rapid build-up in foreign reserves, which are essential for sustainable development. We are positive on Ghana in 2017.


For Kenya, 2017 is dominated by the general elections. Peaceful elections that provide the president and winning political party to govern with a strong mandate will allow for growth to accelerate in 2018 (5.8% vs 5.3% in 2017). However, there are considerable challenges; most immediate are the food shortages following the 2016 drought and poor harvests this year. Also, the interest rate caps have slowed bank intermediation significantly and resulted in a notable deterioration in asset quality. Our forecast for Kenya in 2017 is mixed, as we are concerned by financials but consumer and telco names remain sturdy.


Continued uncertainties around the health of the president will make 2017 a challenging year to forecast in Nigeria. Key to putting the country on the road to recovery will be exchange rate stability. Market belief and support in a managed exchange rate is a prerequisite for FDI to return to Nigeria. Additionally, clarity on how the administration intends to fund its expansionary budget will be needed for the rate environment to stabilise. With regards to Nigeria's banks, we would highlight a widening gap between the tier 1 banks and the rest of the banking system. This will force rapid consolidation and/or bank closures. We are negative on Nigeria in 2017, but very optimistic on its tier 1 brands across all sectors, as the macro challenges represent significant scope for market share gains.


Although the growth outlook is expected to remain broadly stable on 2016 levels of c. 6% y-o-y (real GDP), the operating environment is expected to be increasingly challenging as the Central Bank tightens rates and the government controls expenditure. Year-to-date we have already seen a faster than expected depreciation in the currency and a higher inflationary environment. Long-term, these structural adjustments should be a positive for Rwanda, which we expect to grow at an annual rate of between 6% and 7%. Rwanda looks cloudy for 2017 but a positive increase is expected for 2018.


Tanzania has had a challenging start to 2017, despite ending 2016 on a very strong note, with real GDP growth of 7%. These challenges can be explained by the slow budget implementation, a decrease in monetary aggregates and credit to the private sector, and the impact of a drought. Encouragingly, we expect these factors to ease in the second half of the year and the growth momentum to strengthen. We remain positive on Tanzania in 2017, as we expect real GDP growth to stay at around 7%, which will notably be bolstered by increased gas exportation in 2019.


Whilst we expect real GDP growth in 2017 to remain generally stable at around 5%, the start of the year seen some rough patches for Uganda. These include a very tense general election in 2016, the continued depreciation in the currency and slowdown in economic activity. Although the government has continued to invest in infrastructure, low tax collection and reduced fiscal support have limited expenditure. Additionally, poor job creation in the private sector continues to threaten the social fabric of the country. However, with oil production expected to begin in 2018/19, economic activity should pick up considerably over the next couple of years. We are moderately negative on Uganda in 2017, but do see value in its market leading franchises.


Like 2016, 2017 will be a challenging year for Zambia, although moderately better. In 2017, we expect Zambia to benefit from a better harvest following good rains and stronger exports on higher commodity prices. However, its structural challenges with power and inadequate infrastructure will continue to restrict its growth. With regards to Zambia's banks, we remain concerned by their financial stability due to their poor back books and tight levels of capitalization. We are hopeful for a notable turnaround for Zambia in 2018 while remaining pessimistic of its prospects in 2017.