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Global Economic Outlook
Middle East and North Africa Outlook Update: Politics Breed Divergence
By Ayah El Said and Rachel Ziemba
- GCC far outpaces the rest of MENA, with the Maghreb and the Levant barely growing due to slumps in countries most affected by political unrest.
- Expansionary fiscal policy will be the main growth driver across the region, as subsidy and wage hikes support consumption and infrastructure investment lags.
- These policies will breed inflationary pressures, even in countries currently experiencing a reprieve.
Macroeconomic Dynamics: Dampened by Political Unrest, Strengthened by Oil Prices
Continued political unrest dampened the growth outlook for the MENA region and we now expect growth of about 3.9% in 2011, well below the 4.8% expansion in 2010. Significant downward revisions for Egypt, Tunisia, Syria and Bahrain, which continue to suffer the most extensive political unrest, dragged down the regional average, as in our previous Outlook. Industrial production, private investment and consumption declined in countries plagued with unrest in H1 2011 and the continued instability will only allow tourism receipts to rebound ever so slowly in H2 2011. FDI plunged, while stock markets experienced noticeable volatility.
By contrast, we expect higher growth for the GCC and Israel, expanding 6% and 5% respectively due to government spending and oil output increases and stronger domestic demand respectively. Qatar, growing at double-digit pace, will continue to lead the region boosted by its LNG output and government spending, while Egypt will be the region’s growth laggard as uncertainty disrupts most components of aggregate demand and investors wait to see what type of policies emerge. We assume Libya underperformed Egypt, but the pace of contraction is near impossible to forecast and we have excluded it from our regional figures. Social transfers and subsidies offset weakness of investment and private sector activity, propped up by foreign finance in the case of oil importers.
Rising unemployment, especially in the Maghreb and Egypt, will dampen private consumption as households increase precautionary savings. Minimum wage and public wage and pension hikes will provide a partial offset. In Israel, Saudi Arabia and the UAE, private consumption will continue to be an important driver of growth. Expanding the public payrolls is only a short-term fix, and greater skills training is needed to meet the goals of increasing hiring of nationals.
The region’s banking sector remains liquid, supported by deposits, but risk aversion may dampen lending growth and public sector continues to crowd out corporates. Tourism receipts should decline across most of MENA, but Lebanon, the UAE and, to a lesser extent, Morocco should receive some diverted travelers. Heavy discounting implies that revenues will remain suppressed. The slowdown in real estate is no longer confined to the UAE, as policy uncertainty stalls activity in Egypt and Lebanon’s property boom continues to ease. Public housing pledges in Saudi Arabia, Bahrain and Oman, and new regulation in Israel may dampen housing prices in 2012, but ongoing structural issues will maintain supply shortages.
Policy Implications: Fiscal Consolidation Off the Table
Aside from Israel, fiscal policy will remain expansionary in H2 2011, particularly in the oil exporters who have more finances to deploy domestically. Oil importers face unsustainable fiscal deficits, and will rely on external funding as revenues disappoint and political demands mount. In 2012, oil exporters will continue spending, albeit modestly, and oil importers will continue favoring unsustainable populist measures, further widening their fiscal deficits.
Rising inflationary pressures, exacerbated by an expansionary fiscal policy, will be a common characteristic. Higher wages, especially in the public sector, and rising liquidity may prompt some central banks, particularly in the Levant, to tighten to avoid capital outflows, but dollar peggers will stay on hold. Israel will continue hiking modestly in H2 2011, while rates will remain on hold in Egypt, as part of the growth bias.
- Stabilization of political situation improves investor sentiment, attracting more capital to strongest growing economies and boosting economic growth.
- Higher oil prices boost hydrocarbon receipts and related investment.
- Availability of external funding for oil importers to support government expenditure increases.
- Weaker growth and political unrest are self-reinforcing, dampening output and investment and leading to a deterioration of the investment climate that hangs over even stronger-growth countries.
- Messy political transitions and persistent protest weaken growth and ratings, increasing cost of capital.
- Capital outflows, especially in Egypt and Bahrain, weigh on sentiment.
- Increase in foreign lending adds to unsustainable debt burdens, raising future financing risks.
Figure 1: Latest Data and RGE Forecasts
Note: The regional figures exclude Libya given the ongoing conflict
Figure 2: Regional Growth Divergence
Source: IMF, RGE
Figure 3: Governments Drive Expansion
Source: World Bank
Source: World Bank, RGE
Oil price is an average of WTI, Brent and Dubai Fateh