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Arab world economies on road to recovery

By David Morgan

Thursday, 04 February 2010 04:12

Most Arab countries are expected to record an average 3.6 percent economic growth this year as the price of crude oil rebounds from 2009, says a new United Nations economic report.

The global credit crunch brought a boom in Gulf to a halt last year but high state spending and a resurgence in oil prices have contributed to the recovery of the world's top oil exporting region, says the new World Economic Situation & Prospects 2010 report.

Global oil prices had hit record highs above $145 a barrel in July 2008, but slipped to a low just above $32 a barrel during the peak of the global crisis.

"As the prices of crude oil currently rebounded to about $80 per barrel, the mood in the region is shifting from pessimism to measured optimism," says the report which was launched in Beirut.

Abu Dhabi has already said it expected its economy to grow by up to 4 percent this year, Oman's finance minister said growth would reach 6.1 percent, and Saudi banks expect growth in the kingdom to sharply pick up to about 3.8 percent in 2010.

The world economic situation has been improving since the second quarter of 2009. International trade and global industrial production have been recovering noticeably, with an increasing number of countries registering positive quarterly growth of gross domestic product (GDP).

All African currencies depreciated by an average of 10 per cent in 2009 compared with 2008. African growth continues to rely heavily on agriculture and commodity exports, but progress has been made in improving governance.

FDI is likely to decline as projects have been interrupted. Preliminary data suggest that FDI flows to Africa declined in 2009, following five years of uninterrupted growth.

North Africa, with an average growth of 3.5 per cent in 2009, was more resilient than other parts of Africa, owing to robust domestic consumption and excellent harvests in Algeria and Morocco. In Morocco, the unemployment rate decreased from 9.6 to 8.0 per cent between the first and second quarters of 2009.

Due to prudent management of public finances during periods of robust growth, many African countries entered the current crisis in a better fiscal position than in past crises.

Some countries, such as Egypt, embarked on fiscal stimulus packages, primarily in infrastructure. Nevertheless, the economic crisis has strained budgets in the region.

While African countries have taken a number of initiatives to lessen the impact of the economic downturn, their recovery will mainly depend on the revival of the global economy.

Moreover, many African countries are expected to remain below their growth potential during the next few years, as the economic crisis will have long-lasting effects.

As global demand recovers, Africa is projected to grow by 4.3 per cent in 2010.

Turning to the major oil producers in the Arab world, the report says that resilient domestic demand, backed not least by fiscal stimulus measures, in countries such as Saudi Arabia helped to prevent an even sharper fall in economic growth. In 2010, the region is forecast to experience a rebound in economic growth to 3.6 per cent, underpinned by a solid performance of the oil-exporting economies in the light of higher oil prices.

External demand conditions, which in many respects led the region into the downturn, will also determine the extent and speed of the recovery. Oil exporters will benefit from the recovery in oil prices from their trough at the end of 2008, which was driven by more optimistic expectations regarding global growth and its effect on oil demand, by the fall in the value of the dollar and, at least in part, by a significant production cut by the Organization of the Petroleum Exporting Countries (OPEC) that became effective at the beginning of 2009.

In Saudi Arabia, for example, after a sharp contraction by more than 50 per cent in 2009 compared with the previous year, the trade surplus will move up again by about 37 per cent to $103 billion in 2010.

At the same time, non-oil exporters have been suffering from a sharp drop in global demand across virtually all product groups.

Meanwhile, domestic demand conditions varied widely among the countries in the region. Private consumption has suffered from generally weaker consumer sentiment in the course of the crisis. At the same time, personal disposable incomes are also under pressure from rising unemployment. Kuwait, Saudi Arabia and the United Arab Emirates are expected to experience continued growth in domestic demand, despite the contraction in real GDP and thanks to expansionary fiscal policies.

Consumer price inflation peaked in the second half of 2008. As a general trend, the rate of consumer price inflation has been declining since then in several countriesin view of weaker demand and lower commodity prices. In this context, in the oil-exporting economies, the lower oil price has removed upward price pressures both on the supply and the demand sides, as lower revenues have curtailed overall demand. The decline in inflation has been particularly pronounced in Qatar, with the estimated consumer price inflation declining from 15.0 per cent in 2008 to -1.4 per cent in 2009 owing to lower commodity prices and a considerably weaker housing market.

A similar scenario has been playing out in the UAE, with inflation dropping from 12.3 per cent in 2008 to 1.5 per cent in 2009. In 2010, inflation is forecast to pick up moderately owing to the impact of the decline in the value of the dollar in those economies with a currency peg and low base effects.

Exchange rates in the region stayed stable as of the end of the third quarter of 2009. Signs of fragility have been observed in Yemen, whose national currency has gradually depreciated against the dollar.

The report, World Economic Situation & Prospects 2010, is a joint product of the United Nations Department of Economic and Social Affairs (UN/DESA), the United Nations Conference on Trade and Development (UNCTAD) and the five United Nations regional commissions: the Economic Commission for Africa (ECA), the Economic Commission for Europe (ECE), the Economic Commission for Latin America and the Caribbean (ECLAC), the Economic and Social Commission for Asia and the Pacific (ESCAP) and the Economic and Social Commission for Western Asia (ESCWA).

Global Arab Network

Report will appear in Arab-British Business, the bulletin of the Arab-British Chamber of Commerce.