The Middle East and North Africa region is growing out of its downturn at a good speed, says the International Monetary Fund in its latest World Economic Outlook report.
Economic prospects across the region are quite diverse, as indicated by the chart, and this is shaped by different constellations of underlying forces.
There are several factors moulding the shape of the MENA region’s recovery. Pushing it forward are at least two forces. First, higher commodity prices and external demand are boosting production and exports in many economies in the region. Second, government spending programmes are playing a key role in fostering the recovery.
In some economies, vulnerable financial sectors and weak property markets are holding it back (Kuwait, United Arab Emirates).
The sluggish recovery in Europe is putting a damper on export growth, workers’ remittances, and tourism revenues in other parts of the MENA region (Morocco, Tunisia), although the latest data suggest that these flows are gradually improving.
Considering these and other factors, GDP in the countries of the region is projected to grow at 4½ percent in 2010, edging up to 4¾ percent in 2011.
As in other regions, recovery prospects vary substantially across MENA economies.
In the group of oil exporters, the strongest performer is Qatar, where real activity is projected to expand by 18½ percent in 2010, underpinned by continued expansion in natural gas production and large investment expenditures.
In Saudi Arabia and Kuwait, GDP is expected to grow at about 3¾ percent and 3 percent, respectively, this year supported in both cases by sizable government infrastructure investment.
In the United Arab Emirates, growth in 2010 is projected to be subdued at 1¼ percent, with property-related sectors expected to contract further.
In the group of oil importers, Egypt’s GDP is projected to grow 5 percent in 2010 and
5½ percent in 2011, helped by stimulative fiscal and monetary policies. Morocco and Tunisia will continue to grow at rates of 3¼ to 4 percent in 2010 and 4½ to 5 percent in 2011, assuming exports, tourism, remittances, and foreign direct investment continue to improve.
There is substantial uncertainty about this outlook, with two key risks on the downside.
The first risk is that a slower-than-expected recovery in advanced economies could dampen commodity prices and tourism. This would adversely affect the region’s export earnings, fiscal and external balances, and growth.
The second risk relates to the aftermath of the Dubai World debt crisis, whose economic impact has so far been relatively limited but whose full impact may not be felt for some time. In particular, a possible repricing of quasi sovereign debt could have a lasting effect on financial systems, corporate sectors, and, more generally, economic activity in the area.
Fiscal policy has played a critical role in cushioning the impact of the global crisis on the region and in supporting its recovery. Government investment programmes, especially in infrastructure, will continue to boost domestic demand in the near term in many MENA economies. These measures should remain in place to help cement the recovery. High debt levels, however, constrain the scope for fiscal stimulus in some oil-importing economies.
Given subdued inflation pressures, monetary policy should continue to be used as a countercyclical tool, if feasible. This pertains to MENA economies with nonpegged exchange rate regimes (Egypt). For other economies in the region that have hard pegs to the dollar (Saudi Arabia, United Arab Emirates), monetary policy mirrors US policy and is appropriately stimulative.
With regard to financial sector policy, assistance to financial systems has helped contain vulnerabilities and spillovers, especially from the Gulf Cooperation Council region.
In spite of such support, banks in the region have become more cautious, following recent episodes of financial sector distress that occurred amid sharp corrections in property markets.
This will likely curb the availability of bank loans and, ultimately, credit growth.
Turning to the external sector, current account surpluses in the MENA region are expected to widen again as the recovery proceeds.
Specifically, the current account surplus of the region, which declined from 15½ percent of GDP in 2008 to 1¾ percent of GDP in 2009, is now projected to rise to 5¼ percent of GDP in 2010.
But the recent increases in public spending on non-energy-related sectors should be helpful in diversifying activity toward these sectors, rebalancing regional growth, and reducing the region’s current account surplus.
Nonetheless, further efforts are needed to achieve such diversification, which will benefit not only the MENA region but the global economy as well.Global Arab Network
This is an extract from the report, World Economic Outlook: Rebalancing Growth, published by the IMF.