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Middle East and North Africa - 2010 Arab economic prospects

Global Arab Network - David Morgan

Thursday, 21 January 2010 16:08

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In 2009, the world economy was confirmed as having entered the deepest recession since the Second World War. Declining growth, credit constraint, diminishing demand and job losses are the most apparent problems associated with the world recession in 2009.

The Middle East and North Africa (MENA) region has been feeling the impact of the world recession like everywhere else. The effect of the crisis has varied country to country, depending on the economic conditions. Economies that are oil based were strongly hit in their current accounts, as their trade balances depended on oil exports, Gulf Investment House says in a new report.

The main problem with the oil prices peaking over US$140 per barrel is that many of these economies built their future budgetary spending in coming years assuming the sustainability of such high prices. Such countries have had to rearrange their expansionary budgets to match plummeting energy prices. Other countries, where services receipts are the main sources of national income, have been hardly hit by the current stagnation of the world economy and are awaiting signs of recovery. However, few countries showed real resilience to the recession and have managed to optimize the current situation to get least affected by the world turmoil.

Algeria
Algeria is among the top African countries holding hydrocarbons reserves. An increase of 22.7% in its hydrocarbons sector, which contributed to 45.6% of nominal GDP, was the main reason behind the real GDP growth of 3% in 2008.

In addition, other sectors, including agriculture, industries, construction and public works, services and imports taxes and duties, which all combined contributed to 54.4% of nominal GDP, grew by 27.8% in the same year.

However, the current waning international demand, resulting from the world financial turmoil, along with the plummeting prices of oil and gas, compared to 2008, are expected to lessen the real GDP growth in 2009, to around 2%. With the expectations of partial economic recovery in the international markets by 2010, Algeria is expected to realize an escalation of more than 3.5% in real terms, as expected by the IMF. It is worth mentioning that the fact that Algeria reduced considerably its external debt from US$17.2bn in 2005 to US$5.6bn in 2006, helped alleviate the effects of the international crisis.

Egypt
After three consecutive years of a real GDP growth of around 7%, the Egyptian economy gained momentum and grew by 4.7% in 2008/09, despite the negative effects of the world recession. The Egyptian economy, thanks for the reforms adopted since 2004, proved resilience amid the world financial crisis. Though the IMF projected, in its World Economic Outlook that was issued in April 2009, a real GDP growth for Egypt of 3.56% in 2008/09, the country has recorded an actual 4.7%.

The Egyptian economy has safely passed 2009 and is on the brink of successfully going through 2010. It is worthy to note that in the first quarter of 2009/10, which ended in September, Egypt succeeded to grow by 4.9% in its real GDP.

Libya
With oil and gas making up around 70% of the country’s nominal GDP and about 98% of exports, the Libyan economy is highly dependent on hydrocarbons and lacks diversification. The country’s wealth is greatly tied to the performance of the international hydrocarbons sector.

Despite the occurrence of the financial crisis, real GDP rose by 6.1% in 2008, compared to 5.6%, a year before. The main driver was the soaring prices of oil in 2008. In addition, positive performance of other non-oil sectors contributed to the rise of the economy, including construction and transportation.

A number of initial public offerings (IPOs) are planned in 2010, on the

Libyan Stock Market, which was first launched in 2007. The Libyan government is going through material changes in its regulatory capital market authority to conform to the international norms, in order to attract regional, as well as international investors into the stock market in 2010. It is worth mentioning that there are currently 10 listed companies on the Libyan Stock Market.

Morocco
The Moroccan economy is an export oriented economy, tied to the European Union, where almost 66% of the country’s exports in 2008 headed.

The real growth rate of the economy reached 5.6% in 2008. As a result of the financial crisis, the real GDP is expected to grow at 5% in 2009, a lower rate, yet still fairly high. A good season for agricultural sector, triggered by abundant rainfall, is one of the factors that are expected to support economic growth. This is supported by the performance of the economy over the first half of 2009, as GDP grew by 5.4% Y-o-Y, showing an acceleration of the agricultural sector by around 29% Y-o-Y. The government initiated the “Maroc Vert” plan in 2008, to reform the agricultural sector.

Morocco plans to enhance the performance of its stock market, which is considered the third largest stock exchange in Africa, after Johannesburg and Egypt. Bourse de Casablanca currently consists of 77 listed companies and it plans to list 75 additional companies by 2015, in addition to the inclusion of a derivatives market.

Since Morocco is not highly dependent on a single sector, the economy has proved to be somehow resilient amid the financial crisis and was not considerably impacted. It is expected that once the European economy recovers, the sectors that were mostly affected by the financial crisis, will be those driving economic growth.

Tunisia
Growth in the Tunisian economy in 2008 was achieved mainly through household demand, which is considered the main catalyst for growth, in addition to Foreign Direct Investments (FDI) inflows. Tunisia was successful in attracting investments in the last few years, especially from the GCC countries.

Tunisia ranked 69th among 183 countries in 2010, in terms of the ease of doing business, which is considered an improved position, compared to the previous year, as it ranked 73rd. This explains the flow of investments.

It is believed that the open economy policy adopted by the Tunisian government will bring benefits once the global economies bounce back. Obviously, the external trade sector suffered from the European recession, especially that there is a free-trade agreement between Tunisia and the EU on industrial products. Nevertheless, such policy is expected to provide the substantial paybacks in the recovery phase.

Sudan
Since the discovery of oil in economic quantities, its exports have been the true driver of the economy, which grew by 10.2% and 6.8% in 2007 and 2008, respectively. The IMF projected the real GDP to grow at around 4% in 2009, mainly influenced by the freefall of the oil prices amid the world financial crisis. The 2010 projected growth in real GDP is 5.5%, based on anticipations of partial recovery for the world economy by then.

Jordan
The Jordanian economy witnessed a stable GDP growth between 8% and 9% over the past 5 years. This growth was mainly driven by the healthy performance in the financial services and trade sectors, in addition to the continuous inflows of FDI. The manufacturing sector is the major contributor to the GDP, accounting for around 20% in 2008.

The slowdown in the global economy negatively affected the Jordanian economy, resulting in a growth of 3% in real GDP during the first 6 months of 2009, compared to 8.9% over the same period a year earlier. The IMF says Jordan’s economy will grow by 3% in 2009, followed by 4% in 2010.

Improvements experienced in the Jordanian economy resulted from the government implemented structural reforms, which included trade liberalization, privatization and tax reforms. Jordan is expected to resume its good economic performance, as the global economy improves.

Lebanon
Lebanon recorded a healthy real GDP growth of 8.5% in 2008, as opposed to 7.5% in 2007. The Lebanese economy is a service-oriented one, where the services sector has always accounted for around 66% of the total economy. Privatization of public companies could be a major tool to lower public debt and improve the fiscal balance. Tourism receipts is expected to increase, as tourists arrivals increased by 32.6% during the first 6 months of 2009, compared to the same period of 2008.

Palestine (West Bank and Gaza Strip)
Though the world financial turmoil and the international recession that followed have negatively impacted economies around the world, its impact has been limited on the Palestinian economy in 2009. Aggregate Palestinian’s real GDP grew by 2.3% in 2008, after dropping by 1.2% in 2007. The GDP growth was triggered by the growth in Services sector, the main contributor to the GDP, accounting for more than 60% in 2008. The 2009 GDP is expected to grow by 5.5%, followed by 6.5% in 2010.

The fiscal balance surplus has improved between 2007 and 2008, thanks to the international grants, which supports the Palestinian Authority and the developmental projects.

In 2009, regardless of the world recession, the international grants to Palestine are not expected to drop, as the decision is not economic, yet political.

Syria
Syria’s GDP growth is expected to lose its momentum gained in the last years to report 3.0% in 2009, ameliorating in 2010 to 4.2%. Economic reforms adopted by the Syrian government yielded its fruits, where FDI inflows improved remarkably to reach US$2.1bn in 2008, compared to US$1.2bn in 2007, as reported by United Nation World Investment Report 2009. However, the world economic slowdown adversely impacted these inflows in 2009.

Iraq
Despite the anticipated increases in Iraqi oil production and export volumes over the coming two years, the drop in oil prices has negatively affected Iraq’s real GDP growth, which amounted to 9.8% in 2008. The IMF projected Iraq’s real GDP growth in 2009 at 4.3% and to partially rebound back in 2010 to 5.8%. IRAQ needs to increase the shares of all sectors in the GDP, in order to lower the dependence on oil, which contributes to about two thirds of the Country’s GDP.

Bahrain
Similar to all GCC countries, Bahrain’s economy relies on oil as its main source of wealth. The oil sector accounted for almost 29% of GDP in 2008. Another main contributor to GDP is the financial sector, which accounted for more than one-fourth of GDP.

Reliance on the oil sector, as well as the financial sector represents challenges to the Bahraini government. Therefore, efforts should be undertaken towards diversifying both the economy and the government sources of revenue.

Kuwait
The hiking oil prices during the majority of 2008 resulted in a significant improvement of 48.5% in the fiscal balance, as the oil sector generated 94.4% of fiscal revenue and achieved a remarkable growth of 44%, boosting the overall fiscal revenue by approximately 42%.

The Kuwaiti economy is more vulnerable to the negative consequences of the financial crisis than other GCC economies because besides its heavy dependence on the oil sector, most of the oil proceeds were invested in financial ventures that were severely hit in the crisis.

Oman
The reverse direction taken by the international hydrocarbons prices in 2009 is believed to trim down the Omani real GDP growth, which is projected to attain 4.1% in 2009 and 3.8% in 2010. Main source of revenue comes from hydrocarbons, which constituted 79.1% of the total fiscal revenues in 2008. Gains from the unprecedented hikes in oil and gas prices pushed the fiscal surplus higher, which more than doubled in 2008.

Qatar
In 2008, the real GDP grew by about 16.4%, supported by surging oil prices by then. This buoyant growth is not anticipated to be sustained in 2009 at the same level, since the drop in oil prices has strongly hit most of the oil based economies. The IMF expects an 11.5% growth in GDP in 2009, followed by a strong 18.5% in 2010.

Qatar’s 2010 growth comes mainly on the back of the new liquefied natural gas (LNG) facilities that will come shortly on stream. Qatar is the largest LNG exporter in the world.

Saudi Arabia
The hydrocarbons sector contributed to 89.3% of Saudi Arabia fiscal revenue and 87% of its total exports proceeds in 2008.

Saudi Arabia GDP recorded a growth rate of 22.1% in nominal values, whereas in real terms it grew by 4.4% in 2008. The Kingdom’s real GDP is to Increase by 0.15% in 2009, and to rebound back to positive growth in 2010, by 3%.

Saudi Arabia government announced a stimulus package to mitigate the consequences of the financial crisis, by announcing that it intends to spend US$400bn on development projects over the coming five years to support the level of investment in the economy, in order to sustain the long-term growth potentials.

Saudi Arabia is the largest recipient of FDI inflows in the MENA region, capturing around 40% of FDI inflows to the MENA in 2008.

UAE
The IMF estimates shrinkage by 0.2% in the UAE’s real GDP in 2009, to rebound back to positive growth in 2010, by 2.4%.

The reliance on volatile sources of funding was the key problem of the UAE’s economy. The rebound in the oil price will positively affect its trade balance and as a consequence, the current account balance is estimated to return positive. Ease of investment as well as the tax free environment will be the key catalysts for a rebound in the UAE economy through the coming years.

Yemen
Yemeni GDP growth is expected to receive a boost in 2010, owing to the coming Liquefied Natural Gas (LNG) project, which is planned to start production in late 2009. In late October 2009, the Yemeni Minister of Finance announced the launch of the stock exchange by the end of 2009, with the help of bourse operator Dubai Financial Market.

Global Arab Network

This report will appear in the bulletin of the Arab-British Chamber of Commerce.

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