The latest Crédit Agricole Private Banking research report, ‘Macro Comment – Eastern Promises: MENA Update’, noted that in terms of economic growth, Q1 2014 ended on a bright note in the UAE and Saudi Arabia, and on a sour one in Egypt and Lebanon.
“As oil-rich Gulf countries like the UAE and Saudi Arabia sign off the last quarter on a growth trajectory, it is interesting to note that the Arab nations of the Middle East are heading towards being two-speed economies again, with non-oil countries like Egypt and Lebanon registering less encouraging numbers. This fact is clearly evident from the Purchasing Managers’ Indexes (PMI) in March 2014,” said Dr. Paul Wetterwald, Chief Economist, Crédit Agricole Private Banking.
In the UAE, the PMI index mark improved slightly to 57.7 (from 57.3 in February). In Saudi Arabia, the headline PMI (non-oil private sector economy) retreated further (to 57 from 58.6 in February), but from a fairly high level. PMIs in both countries remained largely above the expansion/contraction frontier set at 50. Does this mean that the two countries are now prone to inflation?
Indications derived from the PMI index for the UAE signals some increases in raw material prices and salaries. Part of these increases translated into higher output prices.
In Saudi Arabia, March prices increases, be it in terms of output prices, input costs, or staff compensation, were muted. To make a link with the CPI evolution one has to remember that what weighs the most in the Saudi consumer basket are foodstuffs and beverages (26% of total weight). Renovation, rent, fuel and water count for 18% and transport and telecommunication 16%. On its side home furniture represents 11%, fabrics, clothing and footwear 8%. Other categories are education and entertainment (6%), medical care (2%) and other expenses and services (13%). Given this breakdown it is worth to mention that expressed in USD terms, the FAO food price index is up 3.4% in Q1 2014. Combining the effect of the currency movements and of the USD food price variation allow us to compute a yearly rate of change of the food price in the local currency, and then to compare it with the consumer price inflation. Assuming that the current USD food price and exchange rate remain the same until September 2014 results in a yearly food price change which will be higher than the most recent change. This assumption is illustrated by the dotted line values between March and September 2014 in the graph below. The positive difference between the current rate of food price change and the September one means that there will be no contribution to disinflation stemming from the food prices. The conclusion is obvious: the largest component of the CPI basket will inflate the Saudi CPI over the coming months.
Dr. Paul Wetterwald continued, “At this stage, we know that Saudi activity is bright, but does not accelerate anymore, and that inflation could increase somewhat. Can we infer from the macroeconomic analysis some indication for sales growth? A natural candidate to gauge the economic activity in value terms is the nominal GDP. Unfortunately, this is a quarterly series released with some lag. We therefore tried to select higher frequency series, available with a very short lag, such as the monthly PMI, the daily oil price or the monthly cash withdrawal at the automatic teller machine. All of the three series are displayed as graph below.”
Dr. Paul Wetterwald concluded, “Having identified the most significant series we are able to get a forecast for the Q4 2013 and Q1 2014 nominal GDP (Q3 2013 is the most recent available figure). The graph below compares the actual and estimated series: the start of 2014 looks like a period of high and stabilizing nominal GDP. This can certainly be viewed as the fulfilment of a necessary condition for an investment case.”
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