Epsilon Capital Management’s First Quarter Middle East/ Africa Economic Round Up

May 14, 2012 - PRLog -- In the first part of our report we will look across the region as a whole and more specifically at South Africa, one of the more prominent economies in this area.

Middle East/Africa First Quarter 2012 Economic Review

MEA region’s lackluster growth to continue

While the Middle East and Africa (MEA) region continues to weigh the impact of the tumultuous Arab Spring uprisings, the area is facing against another challenge yet again. In addition to the existing domestic instability, a strained external environment (the Euro debt crisis) is proving to be a major threat to the region’s trade, tourism, remittances and other exports receipts. According to the World Bank’s Global Economic Prospects report, the economic recovery seen in Morocco,  Jordan and Tunisia in late 2011 is likely to stall in 2012.

That’s more, Morocco, one of the largest importers of wheat, continues to battle ballooning imports bills. As for Jordan, disrupted gas supplies have exacerbated the Hashemite Kingdom’s energy bills. Jordan imports around 95% of its energy needs.

Elsewhere, the possibility of downside risks from the ongoing disruptions in Syria spilling over to its neighboring countries looms large. According to a senior World Bank official, investments have been held off in countries including Tunisia, Libya and Egypt as they continue to mend their economies after the ouster of their dictators. Egypt remains beleaguered by political uncertainty while its key industries continue to grapple with poor demand. Adding to the woes has also been quickly waning foreign reserves, which are a critical component of the economy.

Decelerating global growth mainly due to the ongoing sovereign debt crisis in the Euro region has dented the trade environment in South Africa and Israel. Wide budget and trade deficits, a high unemployment rate, and the threat of strikes remain South Africa’s foremost concerns. On the other hand, Israel remains upbeat about its growth prospects in the year 2012 thanks to positive domestic economic indicators.

According to the International Monetary Fund (IMF), growth in the Middle East and North Africa (MENA) region is projected to be 3.2% in 2012 before accelerating to 3.6% in 2013, lagging behind both global as well as emerging markets growth expectations. While the emerging economies are anticipated to expand 5.4% in 2012, the world economy is expected to grow 3.3%, according to the IMF. The IMF has cut South Africa’s growth estimates to 2.5% from an earlier projection of 3.6% against the backdrop of fragilities in the Euro region.

South Africa: Weak demand to stem 2012 growth

According to the SA Chamber of Commerce and Industry (SACCI) trade activity index (TAI), trade activity gained more momentum in February after a slow start in January 2012. The TAI rose to 57 points in February, mirroring a gain of 9 points due to an all-round improvement in index components comprising sales volumes, inventory levels, new orders, supplier deliveries, and employment. The trade environment had suffered considerable setbacks in the final quarter of 2011 before recovering to 48 points on the TAI in January 2012.

What’s more, the SACCI’s business confidence index (BCI) gained 2.4 index points to 99.5 in February, the best since June 2011. Business confidence this year is expected to be buoyed further by measures outlined in the National Budget for 2012 such as additional allocations for industrial and economic development, initiatives to enhance employment and a boost to infrastructure spending. Yet, the SACCI has expressed concerns over the impact of protest activities and rising oil prices, which could mar business optimism.

The South African Reserve Bank held steady its key repo rate at 5.5% to aid economic recovery.

The central bank expects inflation to remain above its target range of 3%-6% in 2012, peaking to a high of 6.6% in the second quarter before falling within the target limit in the initial quarter of 2013. According to Statistics South Africa (Stats SA), inflation slowed to 6.1% (year-on-year) in February from 6.3% in January. Yet, according to a Bloomberg report, inflation is likely to remain at elevated levels due to increasing food, fuel and administrative costs.

The FNB/Bureau for Economic Research (BER) consumer confidence index (CCI) remained unchanged at +5 index points in the initial quarter of 2012 from the final quarter of 2011. The report also noted that consumer purchasing power is likely to be constrained in the coming months due to rising inflation. Standard Bank anticipates household consumption expenditure to drop to 3.5% in 2012 versus a 5.0% rise earlier in 2011.

Elsewhere, a cut in the budget deficit target for the current fiscal year through March 2013 announced by the finance minister Pravin Gordhan is expected to ease investors’ concerns over South Africa’s accelerating debt. The finance minister expects the budget deficit to decrease to 4.6% of the GDP versus an earlier estimate of 5.2%. Reduced spending on wages and a rise in taxes are expected to keep the deficit in check. Further, the government is also keen on boosting infrastructure spending to enhance economic growth and create employment.

The unemployment rate eased to 23.9% in the fourth quarter of 2011 from 25% in the third quarter, as noted by Stats SA’s Labor Force Survey. Jobs were added in the trade, social services, manufacturing sectors. Yet, the report noted that the current economic growth remains grossly insufficient to reduce unemployment, as an economic expansion of 7% is needed to make a significant impact. Africa's largest economy has lost around a million jobs as it slipped into its first recession in almost twenty years in 2009.

Meanwhile, a widening trade deficit also remains a concern. Data released by the South African Revenue Service, showed that South Africa recorded a trade deficit of $1.8 billion in January, the highest in three years, as a surge in machinery imports completely dwarfed anemic exports.

According to the National Treasury, the current account deficit is expected to widen to 4.3% in 2012 from an earlier estimate of 3.3% in 2011. Exports are likely to remain subdued as the debt crisis in Europe, a region that purchases over 30% of South Africa’s manufactured goods, continues to dampen demand.

South Africa ended the year 2011 on a rather encouraging note as the nation’s fourth quarter GDP growth beat analysts’ forecast. According to Stats SA, the sub-Saharan country’s GDP accelerated to 3.2% (quarter-on-quarter) in the final quarter of 2011, exceeding the growth estimate of 3.1% polled by Reuters economists. While weaker global demand continued to weigh on the primary sector’s lackluster performance, economic growth was enhanced by improved performances in the manufacturing and tertiary sectors, in particular.

Meanwhile, in the equities market, South Africa’s stock exchange (Johannesburg Stock Exchange (JSE) turned out to be one of the better performers, as noted by Moneyweb, South Africa’s leading online source of investment information. In Moneyweb’s early January report, the JSE’s benchmark index returns of -0.59% in 2011 compared with investors’ losses of -52.9% on the Athens stock exchange and -18.3% on the Eurostox 50. Nicky Newton-King, the new CEO of the Johannesburg  Exchange, commented that the JSE is looking to provide increased access to African companies and other products as a springboard to new investments.

In the second part of our Middle East/ Africa Economies report we will cover Israel and Egypt. Although they have smaller economies than that of South Africa they are no less important on the Global scale and a vital indicator to the region’s economic health.