Gasoline Gasoline prices regained some ground at the start of the year and, on 11 January, reformulated blendstock for oxyge...

Energy Commodity Price Forceasts

Gasoline prices regained some ground at the start of the year and, on 11 January, reformulated blendstock for oxygenate blending (RBOB) gasoline traded at USD 1.55 per gallon. This was up 4.5% from the same day last month, was 0.8% lower on a year-to-date basis, and was down 17.2% from the same day last year. Gasoline prices fell further in late December in line with the fall in global crude oil prices and on weaker-than-normal holiday demand. A report by the EIA showed gasoline demand for the week ending 28 December was the lowest in nearly two years. Moreover, gasoline stocks rose higher in the period, signaling ample supply. Prices, however, have bounced back in anticipation of tighter supply. Prices are expected to pick up later this year as OPEC and its allies trim output in order to boost crude oil prices. FocusEconomics panelists expect gasoline to trade at an average of USD 1.81 per gallon in Q4 2019 and USD 1.71 per gallon in Q4 2020.

Dry Gas
Natural gas prices have retreated over the last month after November’s multi-year high spike. On 11 January, the Henry Hub Natural Gas price was USD 3.10 per one million British thermal units (MMBtu). The price was 29.7% lower than on the same day in the previous month but was up 5.4% on a year-to-date basis. In addition, the price was 0.5% higher than on the corresponding date in 2018. The fall in prices was chiefly due to mild weather in the U.S. over the past month, which dampened heating demand and which is expected to persist in the coming months. Moreover, the previous month’s significant jump in natural gas prices caused utility firms to shift to alternative energy sources such as coal, which further weighed on demand. Some kind of pullback was always to be expected following such a dramatic price increase in November, which likely saw prices run ahead of fundamentals amid speculative demand. Looking ahead, prices are expected to tick up slightly from their current level going forward, supported by a global shift away from coal towards gas, a cleaner non-renewable energy. However, high U.S. supply should contain any price increase. FocusEconomics panelists see the spot price averaging USD 3.14 per MMBtu in Q4 2019, before climbing to USD 3.17 per MMBtu in Q4 2020.

Brent Crude
In January, Brent crude oil prices appear to be recovering following the freefall which began in October and led Brent crude oil prices to hit a one-and-a-half year low by the end of December. On 11 January, oil prices traded at USD 59.1 per barrel, which was 1.1% lower than on the same day last month. Although the benchmark price for global crude oil markets was 16.0% lower than on the same day last year, it was up 16.9% on a year-to-date basis. Thawing relations between China and the United States has fueled hopes that a full-blown trade war between the two superpowers will be avoided, boding well for the global economy. This situation, coupled with the oil production cut announced by OPEC and Russia in early December and effective in January 2019, has supported oil prices so far this year. However, Brent crude oil remains still at low levels due to the collapse in oil prices observed in the October– December period due to widespread concerns of a new global oil glut. The U.S decision to grant waivers to Iranian oil buyers, coupled with a somber global economic outlook and strong oil production by Russia, the OPEC and the United States, negatively impacted oil prices. Looking forward, analysts surveyed by FocusEconomics expect, on average, that the recovery in oil prices will strengthen in the coming months as the oil production cut agreed by OPEC+ will keep the global oil market adequately supplied. However, a potential global economic slowdown and strong oil production will limit the rebound. FocusEconomics panelists see prices averaging USD 69.2 per barrel in Q4 2019 and USD 68.3 per barrel in Q4 2020.

West Texas Intermediate (WTI) 
WTI crude oil prices declined sharply in recent weeks and hit an over one-year low of USD 44.5 per barrel on 27 December. Afterwards, however, prices for the black gold started to recover. WTI crude oil prices traded at USD 51.4 per barrel on 11 January, which was down 0.4% from the same day last month. Although the price was down 19.4% from the same day last year, it was 13.9% higher on a year-to-date basis. The price for WTI crude prices plummeted since U.S. President Donald Trump announced waivers for eight countries to continue purchasing Iranian oil in early November. Moreover, the United States continued to pump oil at record levels in recent months, reaching an average of 11.7 million barrels per day in the week ending 4 January. However, recent news that China–U.S. trade talks were progressing, coupled with reduced supply by OPEC+ members, boosted prices since the start of the year. In a sign that the U.S. economy could be cooling, U.S. crude oil stockpiles decreased less than expected in the week to 4 January, while inventories of refined products surged in the same period. Looking forward, WTI oil prices are likely to rise from current levels as the oil cut production by OPEC+ will reduce global oil supply. Robust U.S. shale production, however, will limit any sharp upward movement. For Q4 2019, analysts expect prices to average USD 62.2 per barrel, before increasing slightly in Q4 2020 to USD 60.9 per barrel.

Is Turkey in complete shambles? The economy likely recorded a dismal fourth quarter, as the impact of the August 2018 currency crisis...

Turkey Economics In Peril Jan. 2019

Is Turkey in complete shambles?
The economy likely recorded a dismal fourth quarter, as the impact of the August 2018 currency crisis continued to reverberate. The manufacturing PMI was firmly in contractionary territory throughout the period on shrinking output and new orders, while business sentiment was decidedly pessimistic. Moreover, consumer spending was hit by higher interest rates, still-elevated inflation and depressed household sentiment, with retail sales declining sharply in October and vehicle sales plummeting throughout Q4. This comes after comprehensive data showed that GDP growth slowed sharply in Q3 on soft private consumption and fixed investment. More positively, the lira has recovered substantial ground since September, while external rebalancing continues apace, with a third consecutive monthly current account surplus in October. On the political front, President Erdogan announced a second 100-day plan in December. According to the president, it contains projects worth TRY 24 billion, which could provide a mild boost to demand going forward. Moreover, the government recently extended temporary tax cuts until the end of March, in a bid to fight inflation and support consumer spending. • The economy is set to perform poorly this year, depressed by restrictive financial conditions constraining private consumption and fixed investment. However, the external sector should provide some support. Currency volatility and the possibility of renewed geopolitical tensions pose significant downside risks. FocusEconomics panelists expect the economy to flatline in 2019, down 0.2 percentage points from last month’s forecast, and 3.1% in 2020. • Inflation fell from 21.6% in November to 20.3% in December. Price pressures should ebb in 2019 on a tighter monetary stance and tepid domestic demand, although the recent minimum wage hike will slow the decline. Our panel sees inflation ending 2019 at 15.1% and 2020 at 11.1%. The possibility of a further sharp currency depreciation, premature monetary loosening and a spending splurge in the build-up to local elections in March 2019 pose upside risks to the outlook. • At its 13 December meeting, the Central Bank left the one-week repo rate at 24.00%, to tame inflation and support the lira. The Bank is likely to maintain its tight stance in the short-term, before beginning an easing cycle later in 2019 as inflation ebbs. Our panelists see the one-week repo rate ending 2019 at 19.49% and 2020 at 15.22%. • On 4 January, the lira traded at TRY 5.33 per USD, strengthening 1.0% from the same day of the previous month. The lira is likely to depreciate going forward, with the currency set to remain vulnerable to a resurgence of friction with the U.S. and market skepticism over monetary policy independence and the government’s commitment to fiscal prudence. Our panelists see the exchange rate ending 2019 at TRY 6.29 per USD and 2020 at TRY 6.57 per USD

Growth slows massively in Q3
According to data released by Turkstat on 10 December, the Turkish economy lost further steam in Q3, amid significant financial market and exchangerate turbulence, soaring inflation and higher interest rates. Economic growth dimmed to a mere 1.6% in Q3, below market expectations and down from Q2’s revised 5.3% (previously reported: +5.2% year-on-year). Domestic demand weakened considerably in the third quarter. The expansion in private consumption slowed to 1.1% (Q2: +6.4% yoy), depressed by intensifying price pressures and weaker consumer sentiment. Meanwhile, fixed investment declined sharply (Q3: -3.8% yoy; Q2: +4.2% yoy) on lower investment in construction, and machinery and equipment. In contrast, government spending growth maintained the robust momentum observed in the build-up to the June elections (Q3: +7.5% yoy; Q2: +7.8% yoy). The external sector strengthened notably in the third quarter, due to the weaker lira and soft domestic demand. Exports of goods and services increased 13.6% (Q2: +4.2% yoy), while imports contracted 16.7% (Q2: +0.2% yoy). As a result, the external sector contributed 6.7 percentage points to growth, up from Q2’s contribution of 0.9 percentage points. Looking ahead, the economy is likely to contract over the next few quarters, as still-elevated price pressures, tight financial conditions and weak sentiment depress domestic demand. However, the external sector should continue to provide support thanks to increased price competitiveness. The economy should return to growth in the second half of this year as the impact of the currency crisis subsides. FocusEconomics Consensus Forecast panelists see GDP flatlining in 2019, which is down 0.2 percentage points from last month’s forecast, before expanding 3.1% in 2020.

Industrial production falls in October Industrial production declined 5.7% in October in calendar-adjusted year-on-year terms, a deterioration from September’s revised 2.4% decrease (previously reported: -2.7% year-on-year). October’s reading was driven by contractions in the manufacturing, and electricity, gas, steam and air conditioning supply sectors, while the mining and quarrying sector grew solidly. On a seasonally- and calendar-adjusted month-on-month basis, industrial output fell 1.9%, up from September’s 2.6% drop. Annual average growth in industrial output fell from 6.9% in September to 5.7% in October. Industrial production is likely to continue to perform poorly in the months ahead, dampened by high domestic interest rates and weak domestic demand. FocusEconomics Consensus Forecast panelists expect industrial production to rise 0.7% in 2019, which is down 1.0 percentage points from last month’s estimate. The panel sees industrial output increasing 3.3% in 2020.

Consumers grow gloomierin December The consumer confidence index, published by the Statistical Institute in cooperation with the Central Bank, worsened from 59.6 in November to 58.2 in December. As a result, the index moved further below the 100-point threshold that separates pessimism from optimism among Turkish households. Weak consumer confidence readings throughout Q4 bode poorly for private consumption in the period. December’s dip was driven by consumers’ less optimistic views regarding the labor market, general economic conditions and their personal financial conditions. Nevertheless, consumers grew slightly more upbeat about their ability to save. FocusEconomics Consensus Forecast panelists see private consumption declining 1.5% in 2019, which is down 0.4 percentage points from last month’s forecast, before expanding 3.1% in 2020...

Inflation dips in December Consumer prices fell 0.40% from the previous month in December, up from November’s 1.44% decrease, according to data released by the Turkish Statistical Institute (Turkstat). December’s drop was chiefly driven by lower prices for clothing and footwear; and transport. Inflation fell from 21.6% in November to 20.3% in December, the second consecutive monthly slowdown, while core inflation went down from 20.7% to 19.5%. The lessening of price pressures was likely driven by numerous factors, chiefly government tax cuts on some goods, temporary price discounts, lower oil prices and the recovery in the lira. Looking to Q1, a less supportive base effect will keep inflation elevated, although this could be partly offset by the recent announcement that tax cuts will be extended till end-March. Over the rest of the year, inflation should gradually ease on weak domestic demand, although a 26% minimum wage hike will likely slow the decline. The evolution of the volatile lira and monetary and fiscal policy will be key factors to watch. FocusEconomics panelists see inflation closing 2019 at 15.1%, which is up 0.5 percentage points from last month’s forecast, and 2020 at 11.1%.

Central Bank keeps rates unchanged in December 
At its monetary policy meeting on 13 December, the Central Bank of the Republic of Turkey (CBRT) left the one-week repo rate unchanged at 24.00% for the second consecutive month. The Bank’s decision to keep rates at their current high level was motivated by a desire to consolidate the strengthening of the lira observed in recent months, as well as to temper inflation, which is still extremely elevated despite dipping in November. Any rate loosening would have risked damaging the Bank’s credibility—already shaken following a period of policy inaction earlier this year—and putting downward pressure on the currency. On the other hand, with price pressures dipping and domestic demand depressed, the CBRT saw no need for further tightening. In its communiqué, the Bank’s language was slightly less hawkish than at the previous meeting. However, the CBRT reiterated its commitment to a tight monetary stance “until [the] inflation outlook displays a significant improvement”—taking into account fiscal policy, inflation expectations and the lagged impact of previous rate hikes—and left the door open to future rate hikes if required. According to analysts at Unicredit: “Considering the inflation outlook, we do not think that the CBRT will have room to cut before late 2Q19. Having said that, we cannot rule out the possibility that political calls for lower interest rates will resume in the run up to the local elections, which are expected on 31 March 2019.” Our panellists expect the one-week repo rate to end 2019 at 19.49% and 2020 at 15.22%

The economy benefited from increased crude oil production and higher prices for the black gold in the third quarter, prompting GDP...

Saudi Arabia Deteriorates

The economy benefited from increased crude oil production and higher prices for the black gold in the third quarter, prompting GDP to expand at the fastest pace in two-and-a-half years. Although growth in non-oil private activity accelerated slightly, it remained low compared to historical figures. Subdued dynamics in the private sector, a rising unemployment rate and low levels of foreign investment are casting doubts over the much-trumpeted Saudi Vision 2030. In order to shore up economic growth, on 18 December, the government announced an expansionary budget for 2019, which focuses on boosting capital expenditure. Analysts, however, warn that the projected revenues could be on the optimistic side. While the implied price is about USD 70 per barrel, oil prices have fallen in recent weeks and hit an over one-year low of USD 50.1 per barrel on 26 December.

The economic recovery should broaden this year due to renewed fiscal stimulus, which should support domestic demand. Although the Saudi government sees the recent drop in oil prices as temporary, it is still unclear whether the recently-approved oil production cut will be enough to push up oil prices. Our panel expects growth of 2.2% in 2019, which is down 0.2 percentage points from last month’s projection. In 2020, growth is also seen at 2.2%.

Inflation rose from October’s 2.4% to 2.8% in November, the highest reading in eight months. Inflation should moderate this year on the back of subdued domestic demand and as the impact of the VAT fades. Panelists project that inflation will average 2.0% in 2019, which is down 0.1 percentage points from last month’s estimate. Next year, the panel sees inflation at 2.2% in 2020.

The riyal has been officially pegged to the U.S. dollar at a rate of 3.75 SAR per USD since January 2003 and has had a de-facto peg to the greenback since 1986. To defend the currency peg against the USD, the Saudi Arabian Monetary Authority hiked its repo and reverse repo rates by 25 basis points on 19 December following a similar decision by the U.S. Federal Reserve on the same day. Our panelists do not foresee a change in the current exchange rate system during the entire forecast horizon, which ends in 2023.

Government unveils an expansionary budget for 2019 despite the recent fall in oil prices On 18 December Saudi Arabia presented its budget for 2019, which is the Kingdom’s largest ever in a bid to spur faltering economic growth. Despite the media-grabbing Saudi Vision 2030—intended to diversify the economy away from oil—the Saudi economy is still heavy reliant on state-funded activity, which mostly comes from oil revenue. Moreover, foreign investment remains low and the unemployment rate among Saudis continued to climb in the first half of 2018, despite the implementation of the Saudization scheme, an initiative to force companies to hire Saudis. The government plans to increase total spending by 7.3% to a record high of SAR 1.1 trillion (USD 295 billion) this year, despite the recent decline in oil prices. The increase will be mostly driven by a 20.0% increase in capital expenditure, while current expenditure will rise a modest 4.2%.

Although the 2019 budget does not include a reduction in Saudi Arabia’s lavish subsidy system, it entails a sizeable reduction in military spending despite Saudi Arabia’s significant involvement in the conflict in neighboring Yemen. Finally, unlike in preceding years, authorities did not include details about the planned off-budget spending by the Public Investment Fund, Saudi’s main sovereign wealth fund, suggesting that investment could be even higher. Government revenues are expected to jump 9.0% this year, leaving a fiscal gap of 4.2% of GDP (2018: deficit of 4.6% of GDP). Analysts warn that the increase in oil revenues could be on the optimistic side as the implied oil price assumption for the 2019 budget is around USD 70 (Q4: USD 56.5), threatening to derail the government’s consolidation efforts. The budget also includes an increase in non-oil revenues mainly due to higher expat levies. The public debt is expected to rise from 19.1% of GDP in 2018 to 21.7% of GDP in 2019.

The Saudi government presented a budget intended to shore up growth amid sluggish economic conditions, especially in the private sector. Although projected revenues appear to be optimistic, the government considers that the current drop in oil prices will be temporary and that the planned oil production cut (effective January 2019) will prop up crude oil prices going forward. While the increase in capital expenditure is good news for the economy, there are doubts about the pace of execution of the investment projects. FocusEconomics panelists project the fiscal deficit to reach 4.6% of GDP in 2019. Next year, the fiscal deficit is forecasted to inch up to 4.7% of GDP.

The oil sector propels economic growth in Q3 Saudi Arabia’s economic recovery gathered steam in the third quarter on the back of higher oil prices and increased crude oil production. GDP expanded 2.5% year-on-year in Q3, following the 1.6% rise in Q2 and marking the best result in two-and-a-half years.

The Kingdom ramped up production in the July–September period in order to offset declining output in Iran and keep global oil markets adequately supplied. The United States was piling pressure on Iran’s trade partners to cut down purchases of Iranian oil to “zero” by 4 November, when the bulk of the new sanctions had been planned to be reimposed. As a result, crude oil production in Saudi Arabia jumped from an average of 10.11 million barrels per day (mbpd) in Q2 to 10.42 mbpd in Q3. Fears that increased oil production by key players, mainly Russia and Saudi Arabia, was not enough to compensate Gross Domestic Product | variation in % Note: Year-on-year changes of GDP in %. 

Therefore, the average price of the OPEC oil basket rose from USD 72.0 in Q2 to USD 74.1 in Q3. Against this backdrop, growth in the oil and gas sectors rose from 1.3% in Q2 to 3.7% in Q3, marking the best result in nearly two years. On the downside, economic dynamics in the non-hydrocarbon sector moderated from a 2.4% increase in Q2 to a 2.1% rise in Q3. That said, the deceleration came entirely from the non-oil public sector, suggesting that authorities took their foot off the pedal following several quarters of stimulus, although growth in the non-oil private sector in Q3 still remained sluggish compared to historical figures. Saudization, the government’s initiative to reduce unemployment among native Saudis, is prompting an exodus of foreign workers this year, likely impacting the performance of the private sector, especially that of retailers. 

From the expenditure point of view, economic growth was fueled by an acceleration in gross fixed capital formation (Q2: +5.2% year-on-year; Q3: +8.9% yoy) and robust government spending (Q2: +7.5 yoy; Q3: +7.6% yoy). Conversely, private consumption growth moderated from 2.5% in Q2 to 1.6% in Q3. Exports of goods and services benefited from healthy dynamics in the oil market and expanded 8.0% in Q3 (Q2: +7.0% yoy). Improved domestic activity boosted imports, which rose 7.2% (Q2: -6.5% yoy). In the accompanying release to the 2019 budget unveiled on 18 December, Finance Minister Mohammed al-Jadaan announced that the economy likely expanded 2.3% in the full-year 2018, implying a growth rate of around 4.0% for the final quarter of 2018. Looking ahead, the recent fall in oil prices, the agreement to cut oil output in 2019 and weaker prospects for the global economy all threaten Saudi Arabia’s economic recovery.

Moreover, geopolitical risks remain large, with the country engulfed in a war in Yemen and the killing of journalist Jamal Khashoggi in the Saudi consulate in Istanbul rattling relations with the West. That said, the Saudi government approved an expansionary budget for 2019, which should shore up growth this year. The government projects growth of 2.6% in 2019. FocusEconomics panelists project GDP to expand 2.2% in 2019, which is down 0.1 percentage points from last month’s estimate. For 2020, panelists also expect the economy to expand 2.2%.

MONETARY SECTOR | Inflation hits an eight-month high in November Consumer prices fell 0.2% over the previous month in November, following October’s 0.3% decline. The drop was mainly due to lower prices for housing, water, electricity, gas and other fuels as well as for restaurants and hotels. In November, inflation climbed from 2.4% in October to 2.8%, marking the highest reading in eight months. Meanwhile, the annual average variation in consumer prices increased from 1.8% in October to 2.2% in November, reaching the highest level since March 2015. FocusEconomics Consensus Forecast participants expect inflation to average 2.0% in 2019, which is down 0.1 percentage points from last month’s projection. The panel sees inflation averaging 2.2% in 2020.

EXTERNAL SECTOR | Oil prices drop in December on global oil glut fears On 26 December, OPEC oil prices fell to their lowest since September 2017 (USD 50.1 per barrel) due to concerns over excess supply. In the following days, the price for the OPEC oil basket was broadly stable and, on 4 January, it traded at USD 53.0 per barrel, down 13.3% from the same day in December and 19.9% lower than on the same day in 2018 The slide in oil prices was triggered by President Trump’s decision in early November to grant sanction waivers to eight countries, allowing them to continue buying Iranian crude oil until May. Russia, Saudi Arabia and other producing countries had already started pumping more oil in order to keep global oil markets adequately supplied in the event of a sharp reduction in Iran’s oil exports. The United States also continued to produce oil at all-time highs in recent months due to the country’s flourishing shale oil industry. On the demand side, there had been growing concerns about an economic slowdown in 2019, which would likely trim demand for energy products. Moreover, OPEC and Russia’s decision to cut oil production by 1.2 mbpd as of January in an attempt to support prices had little impact on the global oil markets. The deal was clinched at OPEC’s regular meeting on 7 December. Before the meeting, Qatar unexpectedly announced its withdrawal from the oil cartel, effective January, after nearly 60 years of membership. Although Qatari officials stated that this was driven by the Kingdom’s strategy to focus on its gas industry, analysts point out that the ongoing diplomatic spat between Qatar and Saudi Arabia likely prompted the decision.

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