MENA Weekly - May 14 2017

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Lighthouse Research
MENA WEEKLY
May 14 2017

www.lighthouseresearch.meThe Quick Read
A Summary of this Week’s Key Views
❖ Saudi Arabia’s Q1 budget data suggests recent reforms
have not yet improved the economy’s structural
weaknesses (pg. 3)
❖ The UAE’s Q1 Credit Sentiment Survey indicates
domestic banks are cautiously optimistic on the outlook
for lending growth in 2017, although they also expect
credit standards to tighten further (pg. 4)
❖ Oman’s sovereign credit downgrade to non-investment
grade status is not a surprise, and we expect to see
further downgrades in the GCC universe in 2017 (pg. 5)
❖ The successful passage of Egypt’s long-awaited
Investment Law is positive, and highlights ongoing
reform momentum (pg. 7)
❖ We have a more constructive outlook on the Turkish
lira than consensus, yet still see the currency
depreciating in H217 to average 3.65 (pg. 12-13)
❖ GDP growth in Morocco will rebound sharply in 2017
on the back of a stronger agricultural harvest. The
economy also maintains the best long-term outlook in
MENA (pg. 14-17)
2

v
www.lighthouseresearch.meRegional Developments
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Compensation of
Employees
Use of Goods & Services Financing Expenses Subsidies Grants Social Benefits Other Expenses Non-Financial Assets
(Capital)
Q116 Q117
Saudi Arabia Publishes Quarterly Budget Data
Saudi Arabia’s Ministry of Finance released data on the performance of the budget
through the first quarter of 2017. More important than what was seen in the data
itself is the simple fact that these figures are now being published. The Ministry of
Finance would previously only provide updates on an annual basis, however it now
appears as though these can be expected every quarter. According to the
introduction to the MoF’s statement, “Through the publication of this report the
Ministry of Finance seeks to provide more transparency on the performance of the
budget in accordance with global financial disclosure standards”.
Quarterly public finance data is relatively rare in the GCC, which is most likely the
result of the region’s limited need to tap debt markets prior to the collapse in oil
prices. However as many of these markets are expected to run twin current account
and fiscal deficits over the next several years, demands for more timely budgetary
data are likely to grow.
The data itself shows Saudi Arabia’s fiscal deficit narrowing to SAR26bn in Q117
compared to SAR91bn in Q116. The improved budgetary position was due almost entirely
to a 72% y/y increase in revenues, which itself was driven by a surge of 115% in oil
revenues. This is not surprising given the increase in global oil prices in Q117 relative to
Q116, however it is still encouraging given the extent to which Saudi Arabia has slashed
oil production in the first four months of the year. Total non-oil revenues in contrast
increased by only 1% y/y, highlighting the extent to which economic reforms need to
continue before the country’s public finances will be on a more stable footing.
Total expenditures fell in Q1, although only by a marginal 5% y/y. Moreover, given the
government’s decision in mid-April to reinstate bonuses and financial allowances to civil
servants, we would expect the Q2 data to show a massive jump in ‘Compensation of
Employees’, which already accounts for 55% of total spending. Looking at this data, it is
very difficult to see how Saudi Arabia’s public finances can structurally improve this year.
Chart: Saudi Arabia Government Expenses
Source: Saudi Arabia Ministry of Finance
3

UAE Credit Sentiment Survey Shows Cautious Optimism
Chart: Change in Demand for Business Loans Chart: Change in Demand for Loans Q1 vs Q4, Net Balance
The Central Bank of the UAE’s quarterly ‘Credit Sentiment Survey’ was released this
week, which showed banks and other lenders in the country reporting a slight
increase in the demand for both business and personal loans in Q1. The measure for
net demand in business loans came in at +7.6 (according to the CB this is calculated
as the weighted percentage of respondents reporting an increase in demand for loans
minus the weighted percentage of respondents reporting a decrease in demand for
loans). The measure for personal loans increased by a slightly more modest +3.0,
which is the first time this indicator has been in positive territory since the June
quarter of 2016.
Other key takeaways from the survey this quarter included: First, respondents noted
a slight tightening in credit standards. Judging by the survey, the most important
factor appears to have been the state of the economy, with 65% of panelists citing
‘Economic Outlook’ as a ‘Very Important’ reason for the change in standards in
business lending. Second, in terms of sectoral breakdown, the largest increase in
demand for loans came from the Construction sector, followed closely by
manufacturing. Looking ahead, banks are also expecting these two sectors to have the
strongest growth in demand for new loans in Q2.
Third, demand for loans from Abu Dhabi appears to be weaker relative to Dubai. In terms
of personal loans, 4.6% of respondents said personal loan demand out of Abu Dhabi
‘Decreased Substantially’ in Q1 (the overall net balance was 0.0). The most important
reason for the change in demand for personal loans was ‘Changes in Income’, with 44%
citing this as ‘a Very Important’ factor.
The overall picture from this latest survey is of a banking sector that is cautiously
optimistic on the outlook for loan growth over the coming quarters. Despite expectations
from the respondents that credit standards are set to tighten further, there is also an
anticipation that demand for new loans is going to accelerate across-the-board in terms of
sectors and locations. Latest official data from the UAE central bank shows total private
sector loan growth moderating to 5.0% y/y in March.
Source: UAE Central Bank Source: Central Bank of UAE
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Q414 Q115 Q215 Q315 Q415 Q116 Q216 Q316 Q416 Q117
-6
-4
-2
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Manufacturing Utilities Construction Property
Development
Trade T, S, C
4

S&P Cuts Oman’s Sovereign Credit Rating to Junk
Chart: Oman’s Sovereign Credit Rating Chart: GCC Breakeven Oil Prices, USD
Oman became only the second GCC economy to have its credit rating cut to non-
investment grade status on May 12, after Standard & Poor’s lowered its rating to BB+
from BBB- (Bahrain is rated non-investment grade by all three major agencies). S&P
also put a negative outlook on the rating, implying that further downgrades are
possible. The rationale for the decision was that ‘external buffers have weakened to
the extent that they are no longer sufficient to mitigate the risk from the volatile
export revenue base’. Indeed, in the statement accompanying the decision, S&P
focused on Oman’s deteriorating external position amidst a rapid build-up in foreign
currency debt. Other issues, such as a weak medium-term economic growth outlook,
and ongoing political uncertainty surrounding questions of succession, were also
noted in the report.
At the moment the other two rating agencies have a more favorable assessment of
Oman’s sovereign credit profile, with Moody’s’ Baa1 and Fitch’s BBB ratings sitting
three and two notches above that of S&P’s respectively. Looking at a longer-term
chart (see below) of the evolution of Oman’s sovereign ratings however, it is clear that
the trend is one of deterioration. The core issue is the lack of diversification in the Omani
economy (and the rest of the GCC for that matter), and the fact that prices of the country’s
main export are depressed, and unlikely to recover by any meaningful extent in the near
term. Indeed, hydrocarbons account for roughly 50-60% of total export earnings, and an
even larger 70% of budget revenues. The country’s external breakeven oil price is also the
highest in the GCC at roughly $75, while its fiscal breakeven is slightly higher at $79.
As oil prices are unlikely to recover to $75 in the short term, and reforms aimed at finding
new non-hydrocarbon sources of revenue will take time to implement, it is almost a near
certainty that Oman will continue to run large current account and fiscal deficits over the
coming years. The implication is that this deterioration to the country’s sovereign credit
profile has probably not come to its conclusion. Although Moody’s and Fitch currently
have Stable outlooks on their ratings, in our view they are highly likely to follow S&P in
making downward revisions before the end of 2017.
Source: Reuters Datastream Source: IMF
Jan-07 Feb-08 Mar-09 Apr-10 May-11 Jun-12 Jul-13 Aug-14 Sep-15 Oct-16
Moody's
S&P
Ba3/BB-
Ba1/BB+
Baa2/BBB
A3/A-
A1/A+
Aa2/AA
Aaa/AAA
Non-Investment Grade
Investment Grade
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60
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100
120
Bahrain Kuwait Oman Qatar Saudi UAE
Fiscal External
5

Egypt Inflation Hits Three-Decade High Dubai Economy Tracker Strengthens
Chart: Egypt Consumer Price Inflation, % y/y Chart: Dubai Economy Tracker
Consumer price inflation in Egypt rose to its highest level since 1986 in April, hitting
31.5% y/y and up 1.7% in m/m terms. Core inflation was basically unchanged at
32.0% y/y. The increase in the headline rate was driven almost exclusively by higher
food prices which jumped 3.2% m/m (43.6% y/y). The extent of inflationary
pressures comes at a sensitive time, with the holy month of Ramadan set to begin at
the end of May.
Recent reports suggest that the IMF’s primary focus on Egypt’s ongoing reform
program will be on the central bank’s apparent reluctance to raise interest rates to
help combat this spike in inflation. As the chart below shows however, it is clear that
the main cause of the jump in CPI has been November’s EGP devaluation. With the
currency having stabilized around 18.00 since the start of this year, we expect to see
a relatively large drop in the headline inflation figure by the end of 2017. Moreover,
given the relatively limited rate of credit penetration in the economy, and the
oversized role that food prices play in headline CPI, higher interest rates will do little
to bring down inflation in the near term.
The Emirates NBD Dubai Economy Tracker strengthened further in April, with the
headline reading hitting its highest level in 26 months at 57.7. Since falling to a series low
of 48.9 in February 2016, the DET has progressed on a steady uptrend, which would seem
to indicate conditions across the Dubai’s private sector have been gradually improving
over this time. The DET also appears to be closely mirroring the broader UAE Purchasing
Managers’ Index (PMI). Higher readings were recorded in all three sectors which the DET is
meant to capture, including ‘Construction’, ‘Travel & Tourism’ and ‘Wholesale & Retail
Trade’.
Drawing broad conclusions solely from the headline DET reading would result in a more
bullish outlook on the emirate’s growth momentum than is warranted. Some of the
underlying data paints a different picture, with employment growth remaining relatively
muted, while output prices have now declined for nine consecutive months (i.e. firms are
cutting prices in an effort to support demand).
Source: Reuters Datastream Source: Emirates NBD, Markit
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35
Feb-12 Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17
Headline
Core
EGP devaluation
48
50
52
54
56
58
60
62
64
Jan-11 Aug-11 Mar-12 Oct-12 May-13 Dec-13 Jul-14 Feb-15 Sep-15 Apr-16 Nov-16
6

Saudi Consumer Confidence Bounces Egypt Passes Investment Law, Finally
Chart: TR IPSOS, Saudi Primary Consumer Sentiment Index Chart: FDI in Egypt, USDbn
Consumer confidence in Saudi Arabia rebounded strongly in April according to the
latest Thomson Reuters/IPSOS Primary Consumer Sentiment Index (PCSI). The
headline survey jumped sharply from 53.3 in March to 58.3 in April, marking one of
the largest monthly gains in the entire time series dating back to 2010. The reading
for April is also now slightly above the one-year average of 57.4, but below the long-
term trend of 60.2.
The reason for the notable improvement last month is most likely the result of the
government’s unexpected reversal of some of its spending cuts, particularly the
decision to reinstate bonuses and financial allowances across the public sector. This
highlights a key issue with the near-term outlook for the Saudi economy, as despite
talk of reforms and diversification, the government remains the main driver of
growth. As we highlighted last week in our ‘Country Spotlight: Saudi Arabia’, there
are several high frequency indicators pointing to stagnant activity in the non-oil
economy in H1 2017. While our base case sees real GDP declining -1.2% this year, a
further loosening in fiscal austerity could pose an upside risk to this projection.
After several years of delay, Egypt’s parliament passed a new Investment Law on 7 May in
its efforts at attracting larger amounts of FDI. The establishment of free zones, tax
incentives for projects in underdeveloped areas and certain sectors (e.g. autos and
electricity generation), and the creation of ‘authorization offices’ and ‘investment windows’
are several of the most important aspects of the new law.
Some parts of the new legislation appear overly ambitious at first glance. For example,
decisions on requests for incorporation of new companies must be made within only one
business day. The broader picture is, however, very encouraging. Previous reforms such as
devaluing the EGP, raising the VAT or reducing energy subsidies have no doubt been steps
in the right direction, yet all can be considered ‘low-hanging fruit’ in that their
implementation was relatively straightforward and clearly necessary. In contrast, the issue
of reforming Egypt’s business environment will require a fundamental overhaul of the
bureaucracy, which also happens to be a massive source of employment.
Source: Reuters Datastream Source: Reuters Datastream
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Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
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3.5
Q110 Q111 Q112 Q113 Q114 Q115 Q116
7

www.lighthouseresearch.meSecondTier Data Roundup
Chart #2: Bahrain Private Sector Credit, % y/y Chart #3: Oman Inflation, % y/y
Chart #1: Tunisia Inflation, % y/y
Chart #4: Turkey Industrial Production
Chart #3: Oman Inflation
Consumer price inflation in Oman dropped to
1.8% y/y in April from 2.8% in March. Over the
past year headline CPI has been well contained
and has averaged only 1.6% y/y.
Chart #1: Tunisia Inflation
Inflation in Tunisia hit a 22-month high in April,
coming in at 5.0% y/y. Food prices rose 5.2%
y/y, while transport prices increased at their
fastest pace in over three years at 4.7% y/y.
Chart #2: Bahrain Private Sector Credit
Private sector credit growth in Bahrain declined
in y/y terms for the second consecutive month in
February, with loans declining -0.4% y/y,
compared to a fall of -1.5% y/y in January.
Chart #4: Turkey Industrial Production
Industrial production in Turkey rebounded to
2.8% y/y in March from a decline of -1.7% in
February. Output has recovered slightly relative
to the sharp drops seen in H216.
Source: Reuters Datastream
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-1
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Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16
-4
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Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
8

www.lighthouseresearch.meGlobal Developments
China’s Export Growth Slows
Chart: China Goods Trade, % y/y Chart: University of Michigan Consumer Confidence Survey
Trade data out of China released at the start of last week surprised to the downside,
showing sharper-than-expected slowdowns in both import volumes and exports. In
terms of the latter, exports increased 8.0% y/y in April, compared to 16.4% in
March. Export growth to the U.S. dropped from 19.7% y/y in March to 11.7% in
April. The trade data follows figures released the previous week which showed
China’s latest PMI readings also coming in below expectations, adding to concerns
about the state of underlying demand.
Some of the most important figures to monitor, particularly for emerging markets, are
volumes of commodity imports. In April, Chinese imports of crude oil expanded 5.6%
y/y, down from 19.4% in March (in nominal terms imports rose 50.0% y/y). Imports
of other commodities did not fare as well, with iron ore imports contracting -2.0%
y/y, and steel product imports falling -1.8% y/y.
One of the most closely watched surveys of consumer confidence in the U.S. rose in May,
nearing its cycle high and suggesting the slowdown seen in household consumption in Q1
GDP was an anomaly. The University of Michigan index of consumer sentiment increased
to 97.7 compared to 97.0 in April, and is now just marginally below the high of 98.5
posted in January. The largest improvement in this month’s report came from the
‘Expectations’ component which rose 1.1 points to 88.1, while the ‘Current Conditions’
component was unchanged at 112.7.
Retail sales figures released the same day were also encouraging, which increased 0.4%
m/m, marking the largest gain in three months. Stripping out purchases of automobiles,
sales rose only a slightly more modest 0.3% m/m. Both of these reports – retail sales and
consumer confidence – are suggestive of a reasonably bright outlook for the consumer
sector in the U.S., and reinforce the trends evident in unemployment and nonfarm payroll
growth so far this year.
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May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16
Imports
Exports
UM Consumer Confidence Near Cycle High
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65
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Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16
9

www.lighthouseresearch.meGlobal Developments
U.S. Job Openings Start to Taper
Chart: U.S. Job Openings, mn Chart: Japan Eco Watch Survey, Current Conditions
The latest Job Openings and Labor Turnover Survey out of the U.S. showed the
number of job openings holding steady in March at 5.7mn, while February was
revised down slightly to 5.6mn. The monthly JOLTS report is released with a lag and
not as timely as the NFP, yet still contains enough labor market indicators to make it
one of the more closely watched monthly surveys at the U.S. Fed. The ‘quits rate’,
which measures the share of individuals who have voluntarily left their jobs and is
therefore seen as a bullish indicator on the health of the labor market – was
unchanged at 2.1%.
There is a slight disconnect between the pace of job gains seen in the NFP (strong)
and the JOLTS (moderate). While the latest NFP was strong across-the-board,
particularly the decline seen in the U6 unemployment rate, this is not being matched
by corresponding wage growth or optimism about the health of the labor market.
Nevertheless, at this stage there appears to be little that should dissuade the Fed
from continuing to gradually normalize policy, with another interest rate hike likely
at the next meeting in June.
Japan’s latest Eco Watch Survey showed a slight improvement in April, although the gains
were relatively marginal and did not fully reverse the drop seen in the March report. The
Current Conditions Index rose to 48.1 from 47.4, marking the first monthly improvement
since November 2016 and bringing the average over the past 12 months to 47.0.
Improvements were noted in both the Household and Corporate components of the survey.
Japanese data flow in recent weeks has not provided many clues about the near-term
direction of the economy. The latest IPSOS Primary Consumer Sentiment Index rose to
43.8 in May from 40.8 in April, while the most recent Consumer Confidence survey
showed a marginal drop to 43.2 from 43.9. April’s Purchasing Managers’ Index (PMI) was
effectively unchanged on the month at 52.7. Q1 GDP data is due out on May 18, with
consensus currently penciling in a rise in annualized growth to 1.7% from 1.2% in Q4.
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Apr-12 Nov-12 Jun-13 Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16
Japan’s Eco Watch Survey Improves
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May-12 Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 May-16 Nov-16
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www.lighthouseresearch.meChart of the Week: Egypt Resorts
This is a chart from Google Trend Analysis showing worldwide searches for ‘Egypt
Resorts’. Using Google Trend Analysis is a useful way of examining the relative
popularity of different search terms, providing one of the most up-to-date
assessments of how much interest is being generated on a given topic. Searches can
be customized for different time periods and isolated to specific geographic locations.
It is a particularly useful tool for topics on which there is a lack of timely data. The
chart above is indexed to 100, and thus shows the relative popularity of the search
term ‘Egypt Resorts’, rather than the absolute number of searches. The results above
are, however, broadly consistent with many other related search terms which can be
applied to examining the interest in Egyptian tourism at the moment.
There are two ways to look at this data. The bearish case would highlight how
interest in Egyptian tourism is nowhere near pre-2011 levels, and despite some brief
upturns in recent years, the longer-term trend has been declining. The more
optimistic case would point to the upturn that has been evident since November
2016 when the EGP was devalued.
While good arguments can be made that concerns over the security environment will
continue to undermine the tourism sector’s performance this year, we believe the
devaluation of the EGP has been the key factor that will see visitor arrivals jump to
multi-year highs in 2017. Some positive news on this front is already evident, with
the total number of tourist arrivals increasing 52.3% y/y in Jan-Feb to 1.1m.
Source: Google Trend Analysis
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Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17
EGP Devaluation
11

www.lighthouseresearch.meFX Outlook
Recent Performance: After falling to a low of 3.87 in the late January, the Turkish lira has since embarked on
multi-month appreciatory trend against the USD to sit at 3.57 in mid-May. Relative to trend however, the
currency is still considerably weaker compared to its past five-year average of 2.32.
Policy Considerations: The role that interest rates play in public discussions over the performance of the
economy is clearly unique. As recently as 2 May President Erdogan was quoted as saying that Turkey would
‘certainly’ bring down interest rates, and reiterated his belief that high rates were the cause of inflation. The
central bank has so far appeared content with tackling rising inflation (chart #1) with its policy of ‘backdoor
tightening’ by raising (and utilizing to a greater extent) the late liquidity window rate, thereby increasing banks’
average cost of funding (chart #2). Efforts at unifying the multiple interest rate corridor appear to have been put
on hold, and we do not expect to see a shift towards orthodox monetary policy anytime soon.
Fundamental Drivers: Compared to other EM currencies, Turkey’s macro backdrop plays a relatively minor
role in shaping the outlook for the TRY at this stage. Growth momentum appears to have rebounded slightly in
recent months following on from the sharp decline seen in Q3 2016, yet remains well below medium-term
trends (chart #3). The current account deficit is also still a structural concern from a balance of payments
perspective (chart #4), yet with oil prices appearing to have settled around $50bbl, and the U.S. Fed looking
likely to normalize monetary policy only gradually this year, two of the biggest external risk factors for the TRY
have been greatly diminished. Although we would argue that Turkey’s long-term outlook has deteriorated
following April’s constitutional referendum, in the short term the net effect has been a reduction in political
uncertainty and more clarity over the direction of economic policy.
Risks to Outlook: As we are slightly more optimistic on the outlook for the TRY relative to consensus, the
majority of risks are to the downside. The key factors to monitor are less in terms of the data flow, and more
about the direction of monetary policy. In particular, we would be concerned to see any signs that the ongoing
‘debate’ surrounding the relationship between interest rates and inflation was gaining traction inside the doors
of the central bank.
Turkish Lira
Chart: USD/TRY
Current Forecast: USD/TRY
Spot 2017 2018
AVG 3.60 3.70
EOP 3.57 3.65 3.80
Policy*
Rate, (%)
11.75 12.25 11.50
*Refers to Late Liquidity Window
1.5
2
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3
3.5
4
Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17
12

www.lighthouseresearch.meFX Outlook:TRY
Chart #1: Consumer Price Inflation, % y/y Chart #2: Key Interest Rates Chart #3: GDP Growth, % y/y
Chart #4: Current Account Deficit, USDbn Chart #5: Loan Growth by Currency, % y/y Chart #6: Real Sector Confidence
Source: Reuters Datastream Source: Reuters Datastream Source: Reuters Datastream
Source: Reuters Datastream Source: Reuters DatastreamSource: Reuters Datastream
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Headline
Core
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Jan-13 Oct-13 Jul-14 Apr-15 Jan-16 Oct-16
Overnight Borrowing Rate
1 week Repo Lending Rate
Late Liquidity Window Rate
'Backdoor' Tightening
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Q111 Q112 Q113 Q114 Q115 Q116
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Jan-12 Dec-12 Nov-13 Oct-14 Sep-15 Aug-16
TRY FX
85
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105
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115
Jan-14 Aug-14 Mar-15 Oct-15 May-16 Dec-16
13

www.lighthouseresearch.meCountry Spotlight: Morocco
Key Forecasts
Strong Rebound Ahead in 2018
The Moroccan economy looks set to be the fastest growing in the Middle East and North Africa in 2017,
which is a position it has held several times over the past few years. Latest data shows the economy
grew 4.3% y/y in Q117, marking the fastest pace since Q415. A full breakdown of GDP by industry is
not yet available, however it is likely the agricultural sector was a key factor driving the rate of
expansion significantly higher compared to last year when growth came in at a multi-year low of only
1.0%. Our base case sees real GDP expanding 4.6% y/y in 2017, which is above the IMF’s projection of
4.4%.
Our expectation for a strong bounce in headline GDP is based primarily on a likely rebound in the
agricultural sector, which last year saw production collapse -10.8% y/y as a result of a poor harvest.
The agricultural sector in Morocco accounts for 15% of GDP and employs roughly 35% of the workforce,
meaning that consumer spending patterns can often be volatile and hostage to unpredictable rainfall
patterns. We should note that the agricultural sector is expected to post strong growth across all of
North Africa this year, helping to support household consumption not just in Morocco but also Algeria
and Tunisia in particular.
Industrial production only increased 1.7% y/y in Q416, although this appeared to be dragged down by
weaker mineral and mining output. More encouraging is the underlying data that shows automotive
production (a burgeoning sector for Morocco) increasing 11.3% y/y in the same quarter. Other data
such as credit to the economy (growing at roughly 5.0% y/y in the first quarter of 2017) and
unemployment (9.4% at the end of 2016, representing the lowest end-year figure since 2012) are both
suggestive of steady rates of growth in the economy as we enter the second half of the year.
Morocco should also start to benefit from the ongoing recovery taking place in the Eurozone, which
absorbs nearly 55% of its exports. What is most remarkable about the growth in the country’s export
sector over the past several years (particularly automobiles and aviation components) is that it has
taken place at a time of prolonged weakness in demand from its largest trading partners.
2015 2016 2017 2018 2019
GDP, USDbn 100 102 105 107 110
Real GDP, % y/y 4.5 1.0 4.6 3.5 5.0
GDP per capita 2958 2985 3039 3059 3088
USD/MAD 9.79 9.82 10.15 10.50 11.00
CPI, % y/y 1.6 1.6 2.0 2.0 4.0
C/A % GDP -2.2 -4.4 -1.6 -1.8 -1.7
Budget % GDP -4.2 -4.2 -3.5 -2.7 -2.5
15

To the extent that faster growth in an economy’s major trade partners can help lift
demand for exports, the Eurozone’s recovery is undoubtedly a positive sign for
Morocco’s outlook. In this respect, the size of a country’s export sector relative to
GDP matters, as more developed industries can have larger spillovers to the rest of
the economy. As the global average is at 29.4%, Morocco at 34.2% appears to be
well positioned to take advantage of this cyclical upswing in global demand (in
contrast, this ratio is only 13.2% in Egypt).
Long-Term Outlook is Still the Real Story
More important than what happens in 2017 is Morocco’s still bright longer-term
outlook. In addition to being the only investment-grade credit in North Africa, the
country also possesses the highest rating of MENA’s oil importing markets under
our proprietary Long-Term Growth Index, and is second in the entire Middle East
behind only the UAE. There are clear reasons for this, and leaving aside its
relatively more solid economic, social and political backdrop, the key factor in our
view has been reform momentum. Not only is the country a regional
outperformer in terms of streamlining its business regulations and taking steps at
encouraging foreign investment, but it is also a global outperformer. According to the
World Bank’s Ease of Doing Business report, since 2010 the country has moved up
60 places in the global ranking, while much of the rest of the MENA region has been
moving in the opposite direction.
The most anticipated reform this year will be the liberalization of the MAD exchange
rate system. Over the past several years authorities have been working in conjunction
with the IMF to help make the currency regime more flexible (the dirham is currently
pegged to a basket of EUR and USD at 60:40). According to the central bank, this
liberalization will now begin in H2, although the start data has been postponed on
previous occasions. In our view, these liberalization efforts are likely to result in a
slightly weaker MAD in the near term, although the amount of volatility permitted by
the central bank in the initial stages of these reforms should also be small.
Chart: Morocco Real GDP, % y/y Chart: Regional Sovereign Risk Ratings*
Source: Reuters Datastream Source: Reuters Datastream, *Fitch, except Jordan which is S&P
0
1
2
3
4
5
6
7
Q208 Q209 Q210 Q211 Q212 Q213 Q214 Q215 Q216 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16
Morocco Jordan
Egypt TunisiaA
BBB+
BBB-
BB
B+
B-
CCC
Non-Investment Grade
Investment Grade
16

Chart #1: Agricultural Sector Growth, % y/y Chart #2: Consumer Confidence Chart #3 Goods Trade, % y/y (3mmavg)
Chart #4: GFCF % of GDP Chart #5: WB Doing Business, chg b/w 2010-17 Chart #6: FX Reserves, USDbn
Source: World Bank
Source: World Bank
-15
-10
-5
0
5
10
15
20
25
30
35
Q208 Q309 Q410 Q112 Q213 Q314 Q415
70
75
80
85
90
95
Q407 Q209 Q410 Q212 Q413 Q215 Q416
-15
-10
-5
0
5
10
15
20
25
Jan-12 Dec-12 Nov-13 Oct-14 Sep-15 Aug-16
Exports
Imports
0
5
10
15
20
25
30
35
Morocco Algeria Tunisia Egypt
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
Morocco Algeria Tunisia Egypt
Improving Business Environment
Deteriorating Business Environment
10
12
14
16
18
20
22
24
26
28
Jan-10 Apr-11 Jul-12 Oct-13 Jan-15 Apr-16
17

www.lighthouseresearch.meRegional Risk Ratings: Long-Term Growth Index
Long-Term Growth Index:
Our Long-Term Growth Index was created to help assess which markets in the Middle East and North Africa are most likely to outperform over a multi-year time horizon. The index
is broken down into six broad categories (Demographics, Economic Fundamentals, Social Backdrop, Political Stability, Reform Momentum, National Endowments), and includes 17
separate variables. The index was designed due to our belief that the majority of popular acronyms that investors often use to describe key growth markets suffer from several major
flaws. The biggest weakness in our view is that they do not attempt to take into account reform momentum, and often simply rely on market size or population growth as the main
inputs. Although demographics is a key determinant for long-term growth, our index attempts to assess which markets actually have a higher probability of turning their potential
growth into real growth.
*Note: Please contact us at info@lighthouseresearch.com to gain access to the full PCI methodology and regional risk ratings.
80-100
60-80
40-60
20-40
0-20
18

www.lighthouseresearch.meOverheard in the Desert
Chart: Labor Market Outcomes in Egypt by Sector Chart: Share of Informal Employment in Total Employment
Source: AfDB Source: AfDB
“The economy might be in bad shape, but the grey economy is doing better”
This is a common statement heard in reference to economies that are in the midst of a downturn (you very rarely hear the reverse when the official data is showing
strong growth). Although it has most recently been referenced in regard to Egypt, it can be applied to almost any emerging market around the world. The core of the
issue is that there is always a large segment of the economy that operates outside of formal channels, where businesses do not pay taxes and workers are afforded
little protection. Trying to quantify the size of informality is inherently difficult, however in the case of Egypt, a recent working paper from the African Development
Bank noted ‘the informal economy in Egypt is judged to be substantial, ranging between 37% and 93% of the overall economy, depending on the definition of informality
and proxy variable applied’.
This raises some significant challenges from a forecasting perspective, as consumption and investment patterns that are outside of the formal system will tend not to
be captured by official statistics. As a result, such high levels of informality can result in forecasts which underrepresent the size of economies by a wide margin
(particularly GDP per capita). Recent efforts at improving statistics and capturing informality have led to massive revisions in the case of several African economies,
with GDP in Nigeria and Ghana revised higher by over 80% and 60% respectively.
‘Overheard in the Desert’ is a weekly feature where we analyze comments that have been overheard on the ground in the Middle East, whether in conferences, meetings
or public spaces. You can submit your suggestions to info@lighthouseresearch.com with the Subject: ‘Overheard in the Desert’
0
10
20
30
40
50
60
Government Public Enterprises Formal Private Sector Informal Private Sector
1990 2008
0
10
20
30
40
50
60
70
80
90
S. Asia Africa E. & SE. Asia L. America MENA E. Europe Egypt
19

Lighthouse Research
MENA WEEKLY
CONTACT US
info@lighthouseresearch.me
+971 501812387
www.lighthouseresearch.me

Disclaimer
Lighthouse Research believes that information contained in this Publication is accurate and true but makes no representation or warranty in
respect of its accuracy, sequence, completeness, reliability, suitability or timeliness. This Publication is provided for private and informational
use only and is not intended for trading purposes, nor designed to initiate or conclude any transaction, and it does not constitute a solicitation,
offer or recommendation to buy or sell any security, nor does it provide investment, banking, tax or legal advice. Lighthouse Research accepts
no responsibility whatsoever for any loss or damage caused by any act or omission taken in connection with the Publication.
In receiving the publication, you acknowledge and agree to be bound by the terms and conditions available at www.lighthouseresearch.me and,
in particular, you agree (i) TO USE THE PUBLICATION SOLELY FOR YOUR OWN NONCOMMERCIAL USE AND BENEFIT, AND NOT FOR RESALE OR
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The data contained herein is prepared as of a particular date and time, and does not reflect subsequent changes in the market or changes in any
other factors relevant to their determination; likewise, it does not take into account investment objectives, financial situations and/or specific
needs of recipients. Anyone proposing to rely on or use the information contained in the Publication should independently verify and check the
accuracy, completeness, reliability and suitability and should obtain independent and specific advice from appropriate professionals or experts.
21

MENA Weekly - May 14 2017

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