Q4 MENA Outlook Extended Outline

The Desert & the Dragon:

New synergies, old challenges

Our quarterly regional theme reviews MENA-China relations in light of the Belt & Road Initiative (BRI). We analyse BRI investments in the MENA region since its 2013 inception, and report on the findings of our survey into the familiarity of Arab businesses with BRI and its benefits and challenges. We also evaluate the effect of the yuan devaluation on the region and outline sectors where BRI is bringing diversification beyond oil and construction. Our regional pages also review Sino-Iranian relations in light of recent tensions with the US and the ongoing trade war.

• MENA countries have been among the major beneficiaries of China’s Belt & Road Initiative, unveiled by President Xi Jinping in 2013 as the Silk Route Economic Belt and the 21st-century Maritime Silk Route.
• To date, the region has received 14% of the global BRI outlay. The impact will grow as China sharpens its BRI focus and MENA economies redouble their diversification efforts, prompting new synergies.
• The USD 96B spent on BRI investments and construction projects in MENA from October 2013 has already exceeded non-BRI Chinese spending from January 2005 to September 2013 (USD 93.3B).
• While China has a long history of interacting and engaging with MENA, our latest survey found that Arab business executives are still not wholly familiar with BRI nor do they view it in the overwhelmingly positive light hoped for by Beijing.
• While we find this result slightly surprising given the double-digit growth in trade and investment exchanges between China and MENA, we believe it could partly be due to the fact that most projects signed under BRI have been G-to-G (between state-owned companies on both sides) rather than with the local businesses.
• This may change as Chinese provincial and city governments have started seeking partnerships with local business associations and entities in MENA countries.
• We view China's recent devaluation of the yuan as two-sided for MENA, but perhaps more negative than positive. We highlight the MENA winners and losers.

Although growth in MENA will be broadly stable this year, but economic activity among oil exporters will moderate, while those powered by domestic demand will strengthen.

• Egypt is expected to be a regional outperformer. But despite stronger growth, declining inflation and fiscal account deficits, the private sector remains under pressure and remittances into Egypt and net FDI remain lower than in peak years. We are monitoring political developments carefully.
• The Saudi Arabian Ministry of Finance is now expecting economic growth to be slower than it had assumed for the year, although it has given no forecasts.
• In July, the IMF forecast 1.9% growth for 2019, unchanged from its April estimate.
• But the uncertainty regarding supply disruptions following the attacks on Saudi oil fields -- as well as the global economic slowdown and its potential effect on the oil market -- could soften growth.

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