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International economist Moin Siddiqi analyses the prospects for development and growth in the MENA region in the year ahead.
The Middle East and North Africa (MENA) region continues to experience tepid economic growth for the fourth consecutive year as it struggles to promote inclusive and more widely shared prosperity for growing population and to markedly reduce unemployment – a critical issue facing nearly all countries. The energy-rich region of some 400 million people and vast financial resources is plagued by structural bottlenecks, weak institutional structures, social disintegration and total chaos in Syria, Iraq, and Libya and to lesser extent Yemen.
Echoing this view, the Washington-based Institute of International Finance (IIF) wrote: “The removal of authoritarian regimes that had ruled several countries for decades in the “Arab Spring” of 2011 shook the MENA region as a whole and brought in its wake unforeseen and unintended consequences. Emerging societies that had been stripped of their institutional infrastructure under “strong man rule” were left to face an uncertain future without support or direction. Tensions arose and gradually led to conflicts, which quickly turned, into deep-seated ethnic and sectarian strife. Large and historically important parts of the region fractured, spreading violence and tearing apart the delicate fabric of impacted societies.” Geopolitical risks have prevented the regional economy going forward – hence MENA continues lagging behind other emerging and developing regions.
Concurrently, the overall performance in 2014 was mixed, and in some cases, outright disappointing. Estimations of real GDP growth range from 2.6% (International Monetary Fund) and 3% (World Bank), but this average masks a wide difference between high-income Gulf Co-operation Council (GCC) and developing countries of MENA. The former has a projected growth rate of 4.9%, whilst the latter is expected to grow at paltry 0.7%, based on World Bank’s data.
The stagnation is due to two factors, ongoing regional crises – firstly, deadly conflicts, including the civil war in Syria, now in its fourth year and spillover effects on neighbouring Jordan and Lebanon; the spread of ‘so-called’ Islamic State (ISIS), which now controls large territories of Syria and Iraq; devastating Israeli onslaughts in Gaza over June-July 2014; and ongoing insurgencies in Libya and Yemen. Secondly, the fragile transitions in Egypt and Tunisia, as well as gradual political liberalisations in Morocco and Jordan, which accompanied with weak macroeconomic fundamentals and unfinished reform agenda, have kept these economies’ national output well below potential.
Three divergent paths
In recent years, the MENA region has increasingly developed along ‘three’ divergent paths: the GCC, politically stable and underpinned by prudent policies and ample external financial assets (estimated by IIF at $2.27 trillion as of end-2014); the non-GCC oil exporters, losing production and export revenues due to sabotage in the oilfields (Iraq and Libya) or international sanctions (Iran), with only Algeria maintaining a steady growth trajectory; and finally the non-oil countries, impacted directly or indirectly by regional chaos – thus resulting in a varied performance ranging from a precipitous decline in Syria to anemic growth in Egypt, Lebanon and only modest jobless growth in Jordan and Tunisia, and a slightly improved performance by Morocco.
The Gulf and Maghreb North Africa (excluding Libya) remain stable and have cushioned the impact of the Arab Spring. Rising capital expenditure and public sector salaries, along with ample private sector credit expansion – thus reflecting strongly capitalised and profitable banking systems with low nonperforming loans – primarily in wealthy GCC countries, continue to support domestic demand and investment. Public infrastructure megaprojects, especially in Qatar, Saudi Arabia, and the UAE, are expected to spur strong expansions in tourism, transport, construction and wholesale/retail trade.
Furthermore, investor confidence is fast improving – as evident in declining credit default swap spreads and long-term yields in GCC capital markets, notably in Saudi Arabia and Abu Dhabi, viewed as relatively safe destinations for risk-capital during periods of global financial market volatility.
In non-oil MENA, slowing reviving internal demand in Europe and solid GCC activity – sub-region’s two major trading partners – have helped to revive exports and foreign direct investment (FDI), as well as tourism and remittances. Egypt, Morocco, Tunisia, Jordan, and to lesser extent Lebanon, appear to be entering the period of sustained recovery from a period of volatility. These gradual improvements are, however, unlikely to reduce high unemployment.
Recent trade data and the number of tourist arrivals indicate a revival of activity in both Morocco and Tunisia. Egypt under the strong rule of President Sisi has taken steps to reduce subsidies and to revive private investment, including through a major undertaking for Suez Canal expansion. Morocco has successfully diversified its economy – especially in high value-added areas like cars, aeronautics and electronics – leading to increased FDI from Europe.
Public investment in oil-importing nations remained constrained by gaping fiscal deficits, while public/private investment continued to be low because of contagion from geopolitical uncertainties. The IMF cautioned that debt-to-GDP ratios are soaring, mainly in Egypt, Jordan and Lebanon, averaging 94%, 90% and 145%, respectively, of GDP in 2014 and gross external financing needs for non-oil MENA are projected at $100bn in 2015; they have risen by $15bn since 2014. The combination of official sources, including IMF/World Bank programmes, as well as FDI and other private inflows, especially in Lebanon, non-resident deposits, are expected to finance sub-region’s large funding gap.
In developing countries of the region, including non-GCC oil exporters, radicalimprovements to business environment, addressing infrastructure deficiencies, and enhancing access to finance for small and medium-sized enterprises (SMEs) – the engine of job creation and poverty reduction – are necessary prerequisites for raising investment, productivity, and sustained inclusive growth.
Regional turmoil has caused both human tragedies (affecting more than 10 million people) and colossal economic losses across the region. A World Bank impact analysis estimated that civil strife in Egypt, Iraq, Libya, Syria, Tunisia and Yemen, with their spillovers into Jordan and Lebanon, cost roughly $168bn from 2011 to 2013, the equivalent of 20% of combined GDP of these countries. Intensifying Syrian conflict, which shows no signs of ending, cost Lebanon $7bn, or quarter of 2010 GDP, between 2011 and 2013, thereby worsening public finances in a country burdened by spiralling fiscal deficits and national debt.
More than half of Syria’s population is displaced, either internally or as refugees across borders. Syria’s real output is 40% (or two-fifths) lower than its pre-crisis level in 2010, with contractions in all economic sectors. Around 75% of the population has fallen into poverty, with 54% in extreme poverty. The official unemployment rate reached 35% in 2013 – unofficial numbers are believed to be higher – increasing four-fold since the start of civil war in 2011.
The spread of [terrorist group] ISIS has blocked trade between Iraq, Jordan and Lebanon. Iraq is the outlet for about 20% of Jordanian exports. The number of trucks crossing the Iraq-Jordan border has collapsed from an average of 500 per day to now just 25. For Lebanon, Iraq is also a transit route to the Gulf; the ongoing Iraqi crisis has effectively blocked Lebanese exporters’ access to GCC markets. The breakdown of intra-regional trade is unfortunate since the countries of the ‘Greater Levant’ – Turkey, Syria, Iraq, Jordan, Lebanon and Egypt – were seeking to deepen their bilateral trade relations in 2010.
Ironically, global oil prices, which would have been expected to soar with heightened geopolitical risk premium – due to insurgencies in Iraq/Libya and events in Ukraine – have instead weakened since June 2014 by more than 30%. Until the summer, prices were relatively stable for almost four years, at about $10 per barrel, generating hefty windfalls for MENA oil producers.
Whatever risk premium has disappeared on account of market fundamentals – reflecting waning demand in Europe and Japan, growth slowdown in China (the world’s second-largest energy consumer) and surging US production, coupled with sustained higher volumes in Mideast Gulf (notably Saudi Arabia), the world’s No.1 oil exporter and OPEC-cartel’s kingpin. The short-term outlook for Brent (global benchmark) is to trade within the range of $80-85/barrel. Plunging price worries MENA producers as most require a price above $80/barrel for balancing national budgets and some need $100/barrel.
“Saudi Arabia and the Gulf states can resist for a while,” explained Simon Wardell, energy expert at Global Insight. “They have significant financial assets that mean they can sustain a lower oil price. They can secure their budgets without a higher oil price.” But Algeria, Iran, Iraq and Yemen, with growing domestic budgetary demands because of their large populations in relation to their oil revenues, have less room for manoeuvre. Hence, they are vulnerable to fluctuations in global petroleum markets compared to core GCC producers.
The oil-factor, however, has mixed effects upon the wider region. For example, based on World Bank’s economic modelling, where oil prices drop to $80/barrel in real terms in one year, GDP growth would be reduced by 1.4 percentage point (pp) in MENA developing oil exporters. The current account and fiscal balances of this group would also deteriorate by 3.5 and 2.1 (pp) of GDP, respectively, on average in the first year of the decline.
On the other hand, though cheaper fuel benefits oil importers, the economic impact is relatively modest. Their growth would improve by 0.5 (pp) on average, while current and fiscal accounts would improve by 0.5 and 0.2 (pp) of GDP on average respectively. GCC countries are vital sources of official aid and bulk of inward investment into non-oil countries. Hence, a protracted downturn in the developed Gulf (though unlikely) will negatively impact exports, tourism, remittances and capital flows to less-developed MENA sub-region.
The World Bank’s 2015 forecast is more bullish. There is an optimistic scenario that regional growth could recover to 5.2%, driven by higher private consumption from expansionary fiscal policies, easing political tensions spurring investments in Egypt and Tunisia, and, importantly, a resumption of full-scale oil production in Libya, coupled with increased Iraqi crude exports. Without the latter, overall MENA growth will be around 4.2%, according to the World Bank.
The IMF, on the other hand, expects the MENA region to grow at best by 3.8% in the New Year. Even this moderate outlook faces significant risks. “Spillovers from regional conflicts, setbacks in political transitions, as well as lower-than-expected growth in key trading partners [principally Europe] could undermine even the modest recovery that we are expecting for the region,” cautioned IMF.
The multilateral institutions reckon that on current spending programmes, oil-exporters’ budget surpluses would vanish by 2017 and notes that all countries (excluding Kuwait, Oman, Qatar, Saudi Arabia and the UAE) are running budget deficits already. The marked 30% plunge in oil prices within three months adds to growing fiscal pressures. Key reasons behind faltering fiscal and external balances are sizeable energy subsidies and public wage bills. The oil-exporters need to contain recurrent spending to ensure fiscal sustainability and to provide future generations with an equitable share of resource wealth.
Looking ahead, enduring stability and prosperity in much of MENA are likely to remain ‘overarching’ challenges for the remainder of this decade. Over the medium term, a return to ‘trend-growth’ of 4-5% hinges on reducing geopolitical risks, achieving political order and implementing long overdue structural reforms. An increase in intra-regional trade and capital flows, especially foreign investment, to non-oil countries would boost growth prospects further and potentially, promote much-needed convergence in the region.
In all probability, regional growth should improve in 2015/16, but the recovery is unlikely to be robust or sufficiently forceful to make deep inroads into social inequities and joblessness. According to World Bank, the MENA region needs to create 28 million jobs in the next seven years or about 4m per year just to keep the unemployment rate from rising. Historically, the region prior to 2013 created 3.5m jobs at an average growth rate of 5%; since then growth has weakened.