Friday, January 21, 2011

Analysis of Middle Eastern and North African Economy ( in the last 2 years)

                             fig 1 Dubai written on wall( source: insidethemiddleeast.blog.cnn.com)                                          

Middle Eastern and North African economy (MENA) has gone through a lots of ups and down in the past couple of years. In 2009 due to global economic downturn and dipping in the petroleum prices along with real estate bubble burst in Dubai hampered the MENA economy. The whole region whose GDP grew with the rate of 5.5% in 2008 witnessed a very slow growth rate of 2.9% in 2009. (Worldbank.org, 2009)


In the given blog the author attempts to do a comprehensive analysis of the MENA Economy in the past couple of years in a very simple and layman’s language. The blog will be divided into three parts: -


The crisis in 2009 and its effects on the various individual economies.

The corrective period of 2009 where Economy signaled coming back to normal condition.

The future prospects of the region in 2011 and thereafter.


Before further analysis it is essential that few points should be cleared. Middle Eastern North African region or MENA includes Middle Eastern countries such as Iraq, Iran, Kuwait, UAE, Saudi Arabia, Bahrain, Oman, Qatar, Yemen, Lebanon, Jordan etc and North African countries such as Egypt, Morocco, Libya, Algeria and Tunisia. The Socio-Economic conditions are not homogeneous across the region. There are countries which are oil and gas exporters where as there are countries which are importer. The whole region can be primarily divided into four parts purely based upon Economic conditions. (Worldbank.org, 2009)



Gulf Cooperation council (GCC): - These include oil exporters like Kuwait, UAE, Saudi Arabia, Oman, Qatar and Bahrain which have got a very small population.


Oil exporter like Iran, Iraq, Libya, Sudan and Algeria which have got large population for themselves.


Oil importers whose economy is closely linked with the GCC in the form of remittances, FDI, foreign aid and tourism. These include Jordan, Syria, and Lebanon etc.


Diversified countries like Morocco, Egypt, Tunisia whose Economy is linked with other countries in the region as well as with the Europe in the form of trade and tourism.


As mentioned earlier MENA has huge diversity in itself, it consists of some of the richest nations in the world as well as some of the most poor, some of the most politically and socially volatile nations as well as some of the most stable ones.


In 2009 there was the global economic downturn which did not have much impact on MENA directly since most of the financial institutions in this part of globe were not directly integrated with the global finance, but it had other indirect impacts in the form of (Middle East Economic survey, 2009) :-


• Due to drop in petroleum prices revenue of exporting nations got affected. In mid 2008 the petroleum price was at its record high of 150 US dollars a barrel where as in 2009 it went down to an average of 62 US Dollars a barrel. In order to deal with reducing price Oil exporting nations responded by reducing oil extraction to increase oil price, oil extraction got reduced by some 10% in 2009 in contrast to 2008, this further resulted in reduction of revenue.


• Drop in revenue affected their govt. expenditure, real estate investments, and other projects.


• Tightening of international credit resulted in lower investment and inflow of capital.


• The above factors affected the economy of non exporting nations whose economies were based on tourism and remittances. Nations like Egypt and Lebanon are primary source of labor for construction projects in the oil exporting nations. Investment crunch in such projects affected these non exporting countries indirectly as well.


Some of the other observations made during the period were:-


• Lower Oil prices have also helped oil importing countries in reducing their import cost.( International Monterey Fund, 2009)


• The average price per barrel went down to 62 US dollars per barrel. (meed.com, 2009)


GDP for the year 2009 were as follows (meed.com, 2009): -



Algeria                                             2.1

Bahrain                                            3.0

Egypt                                               4.7

Iran                                                  1.5

Iraq                                                  4.3

Jordan                                              3.0

Kuwait                                             1.6

Lebanon                                           7.0

Libya                                                1.8

Morocco                                          5.0

Oman                                               4.1

Qatar                                               11.8

Saudi Arabia -                                  0.9

Sudan                                               4.0

Syria                                                3.0

Tunisia                                             3.0

UAE -                                             0.2

Yemen                                             4.2



Few of the conclusions drawn could be: Qatar showed exceptional growth, non oil exporting countries like Morocco, Egypt, and Lebanon were less badly hit than the oil exporting countries.

Inflation for the year 2009 is as follows(meed.com, 2009)



Algeria                                              4.6

Bahrain                                              3.0

Egypt                                                12.3

Iran                                                   12.0

Iraq                                                   6.9

Jordan                                               0.2

Kuwait                                              4.6

Lebanon                                            2.5

Libya                                                5.0

Morocco                                           2.8

Oman                                                3.3

Qatar                                                0.0

Saudi Arabia                                      4.5

Sudan                                               11.0

Syria                                                  7.5

Tunisia                                               3.5

UAE                                                  2.5

Yemen                                               8.4



It can be seen that inflation was comparatively moderate in oil exporting countries. In importing countries like Egypt inflation was high on account of high food inflation.( Later on though some incraese in inflation was observed in the oil exporting countries as well.)

• Though for GCC (Gulf Cooperation Council) other than Qatar the GDP growth have been abysmally low, they entered the crisis in a much stronger position and hence were able to provide cushion against it. (Auguste Kouame, 2009)

• For developing oil exporter countries ( Iran, Syria, Yemen, Algeria) GDP growth rate fell down from 2.9% in 2008 to 1.6% in 2009 and for non exporters it fall down from 6.6% in 2008 to 4.7% in 2009.(siteresources.worldbank.org, 2010)

• The revenue for all the oil exporting countries which included both GCC as well as developing oil exporters went down from 755 billion US dollars in 2008 to 485 billion US dollars in 2009; the current account deficit got reduced from 25% of the GDP to 7.3% of the GDP. (siteresources.worldbank.org, 2010)



• Diversified economies like Egypt and Morocco were hit not only due to being linked with the oil exporting economies but also due to alleviation in tourism and merchandise export activities to Europe. In Egypt the Merchandise export went from a 33% growth in 2008 to minus 15% in 2009, similar pattern was observed in Morocco and Tunisia. (siteresources.worldbank.org, 2010)



• Most of the MENA nations tried to respond by increasing their expenditure which resulted in increase in fiscal deficit.




• One of the major events happening in this period was the real estate crisis in Dubai. Dubai underwent an unbridled growth in past six years and the dessert state was transformed into a lavish metropolis with state of the art buildings, malls, towers, and even man made islands. But it all got a sudden break in 2009; more than half of construction projects worth 582 Billion US dollars have been halted or cancelled. Though there was no exact figures but there was a joke that Emirate airways is not making loss due to unemployed workers going back. It is estimated that the Dubai’s economy contracted by 5% in 2009(Paul Lewis, 2009)



Economic Analysis of the MENA in 2010

After the Economic slump of 2009, the year 2010 came with some favorable sign. Though the growth was yet to touch the pre crisis levels but things were much better than the previous year.


Middle East and North Africa had been benefited primarily due to the increase in Oil prices. From 62 US Dollar a barrel, the price had increased to an average of 79 US Dollar a barrel as well as increase in oil production which had risen to 25 million barrels a day for the GCC alone(Bloomberg, 2010). Rising price had some effect on importing cost for nations like Morocco but it had been observed that over all there had been an increase in FDIs and investments. Jordan saw a 31% rise in soft loans and aids. (Thomas White, 2010)

The important observations made during 2010 are as follows: -

• GDP in these countries grew by 3.8% this year compared to 2.9% a year before. (Bloomberg, 2010)

• Due to slow credit growth stimulus spending was important as well as useful.

• There had not been much increase in the non oil export.


Dubai had shown recovery with many of the non oil trade and tourism coming back to the basics. Dubai is the trading hub of the Middle East and  in this sixth largest container terminal of the world trade comprises 40% of the GDP. Though the total GDP growth is still expected to be very low in 2010 and the fate of many of the real estate projects are yet to be decided, it is expected that things will get much better in 2011. According to standard charted Dubai will grow by 4% in 2011.





• Egypt had shown strong signs of resilience during 2010. The Economy was driven more by internal demand rather than depending on foreign trade. Compared to the 80s when the economy primarily depended on Suez Canal revenue and petroleum exports these days it exhibits a much more diversified portfolio with sectors like tourism and SME based export playing important role. The expected growth rate is 5.25% according to the government agencies and the govt. relied on expansionary measures. In spite of the high inflation, interest were not cut down by the national bank stating the reason that non food inflation is not high. One another upside of the economy was high foreign reserves (in mid 2010, it touched a record high of 35.5 Billion US Dollars). The downsides were/are high rate of unemployment, trade deficit , most of the growth coming through government investments alone and Egypt  still not insulated from the slowdown in Europe.(Meed.com, 2010)



• A recently released report by Dubai chamber of commerce estimates the GDP of GCC will grow  by 4% in 2010, a net foreign asset of 110% of GDP and fiscal balances are expected to increase by 7% between 2009 and 2011 (stellguru.com, 2010)



Middle Eastern Economy: the way ahead


                                          

The year 2011 seems to bring better growth results for the MENA economy. IMF estimates that the region will grow with the rate of 5% where as World bank predicts 4.4% in 2011. These estimates were made on the assumption that oil price will be around 75 US Dollars a barrel but given the fact that Oil price is approaching 100 US Dollars a barrel, highest in the past two years, a higher growth can happen( though higher price will also result higher import cost for importing nations like Morocco). It will also result in, increase in foreign direct investments, remittances, aids, credit and higher employment.



• Many parts of the region are going to invest heavily on infrastructure. Qatar which is hosting 2022 football world cup is going to invest 250 Billion US dollars in infrastructure, housing, roads, stadiums etc. Oman is going to invest 80 Billion in the next five years where as Kuwait 104 Billion us dollars in the next four years. Abu Dhabi will be investing 27 Billion US dollars in establishing world class museums and attraction centers. Saudi Arabia will be building 5 new cities in the dessert for business purpose. ( arabnews.com, 2011)



• Morocco had strong ambitions in the tourism sector. It aspires to be among the 20 most visited destinations in the world and wants to double its tourism revenue to 20 Billion dollars in next 10 years. It had planned to invest 20 Billion US Dollars in developing various facilities, hotels and infrastructure. (Thomas White, 2010)



• Economy in Egypt seems to be comparatively stable, though inflations and unemployment rate are still high. The govt. has strong plans to boost export, and aspires to reach a figure of 34 Billion US Dollars by 2013. (Thomas White, 2010)



• In the GCC crude oil extraction is expected to increase from 25 Million barrels a day in 2010 to 26 Million barrels a day in 2011.


• Dubai seems to come out of its short term challenges related to the real estate bubble burst. 2010 was the year of constant and moderate growth and 2011 seems to be better. Business men in UAE seem to be unanimously optimistic of doing good business in 2011. ( Manafn-Khaleejtimes.com, 2011)


Recommendations: -



In the end author will like to give some recommendations based on his readings and understandings of research papers and articles related to the MENA economy. These are as follows: -


• Egypt should try to diversify its export business to newer markets like Latin America, South East Asia etc. So far the growth is driven by govt. investment which is keeping the fiscal deficit high and not allowing the inflation to come down. In order to achieve a growth rate of 8.5% by 2015 govt. needs to build an economic structure which is less dependent on govt. spending.


• Unemployment is another major concern for the Egyptian Economy. In order to curb the current rate of unemployment it at least needs 850,000 to 870,000 new jobs a year. The only factor that can bring such a higher employment is a growth rate of at least 6-6.5% or above.


• In the Middle East region there had been hardly any considerable increase in the non oil revenue. It is high time that the various individual economies  diversify into various newer avenues other than  oil. The government needs to prudently invest into a diversified portfolio. Efforts must be made to reduce the dependence on non oil revenue.



• The MENA oil importers need to work on their competitiveness. This region is characterized by dominating public sector, inefficient and weak institutions and burdensome regulatory frameworks. The region needs to work on improving business climate along with implementing fiscal consolidations and sound Macroeconomic policies. (Middle East economic survey, 2010)



• As discussed earlier in Egypt’s case most of the MENA's oil importing nations are restricted to Europe for trading purpose. There had hardly been much growth in Europe in the recent time whereas most of the growth has come from emerging economies of Asia and Latin America. Today BRIC (Brazil, China, Russia and India) constitute 50% of the global GDP but only 9% of the total exports of the Oil importers of the MENA region. Hence it is imperative that it needs to diversify its trade to such new engines of global growth. (Middle East economic survey, 2010)



• For Oil exporters in the region fiscal stand should be expansionary as long as there is no sign of overheating in the Economy. (Middle East economic survey, 2010)





• For Oil exporters, development of financial market is another area where there is ample scope of development, non GCC oil exporters need to develop their financial market by working on free entry and exit barriers. GCC members though have sound fiscal policies which helped them cushion against the global meltdown but still there are ample scope of development. For both GCC and non GCC oil exporters development of bond market can be another strong alternative. (Middle East economic survey, 2010)



Referencing: -

1> Worldbank.org, 2009, Q & A on economic crisis and MENA, available at <  http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/MENAEXT/0,,contentMDK:22153569~pagePK:146736~piPK:146830~theSitePK:256299,00.html  >


2> Worldbank.org, 2009, Q & A  on economic crisis and MENA, available at <  http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/MENAEXT/0,,contentMDK:22153569~pagePK:146736~piPK:146830~theSitePK:256299,00.html   >


3> International Monetary fund, 2009, Middle East economic analysis, p-10


4> Meed.com, 2009, Economy 2010: Middle East returns to growth, available at < http://www.meed.com/supplements/2009/meed-yearbook-2010/economy-2010-middle-east-returns-to-growth/3003020.article  >


5> Meed.com, 2009, Economy 2010: Middle East returns to growth, available at <  http://www.meed.com/supplements/2009/meed-yearbook-2010/economy-2010-middle-east-returns-to-growth/3003020.article >


6> Auguste Kouame: (chief economist world bank, Middle East region), 2009, Interview on: QA on global economic crisis and MENA …..On April 23, 2009


7> Siteresources.worldbank.org, 2010, Regional economic prospects, p-140


8> Siteresources.worldbank.org, 2010, Regional economic prospects, p-142


9> Siteresources.worldbank.org, 2010, Regional economic prospects, p-142


10> Paul L, 2009, Dubai's six-year building boom grinds to halt as financial crisis takes hold, Gurdian.co.UK, available at < http://www.guardian.co.uk/world/2009/feb/13/dubai-boom-halt     &gt ;, Accessed on January 2011


11 Bloomberg, 2010, Middle East, North Africa Economies Will Accelerate Next Year, IMF Says, available at < http://www.bloomberg.com/news/2010-10-24/middle-east-north-african-economies-will-accelerate-next-year-imf-says. html >


12>Thomas White, 2010, Middle East/Africa: Economic review, available at < http://www.thomaswhite.com/explore-the-world/economic-reviews/middle-east-africa. aspx >


13 > Bloomberg, 2010, Middle East, North Africa Economies Will Accelerate Next Year, IMF Says, available at < http://www.bloomberg.com/news/2010-10-24/middle-east-north-african-economies-will-accelerate-next-year-imf-says. html  >


14 > Meed.com, 2010, Egypt’s economy shows resilience during financial crisis, available at < http://www.meed.com/supplements/2010/middle-east-economic-review-2010/egypts-economy-shows-resilience-during-financial-crisis/3007349. article  >


15 > Steelguru.com, 2010, GCC economic outlook indicates robust growth – DCCI, available at < http://www.steelguru.com/middle_east_news/GCC_economic_outlook_indicates_robust_growth_-_DCCI/182585. html >


16 > Arabnews.com. , 2011, Faster growth in Middle East economies expected in 2011, available at < http://arabnews.com/economy/article232333.ece?service= print  gt;


17 >
Thomas White, 2010, Middle East/Africa: Economic review, available at < http://www.thomaswhite


18 > Thomas White, 2010, Middle East/Africa: Economic review, available at < http://www.thomaswhite.com/explore-the-world/economic-reviews/middle-east-africa. aspx >


19 > Manafn-Khaleejtimes.com, 2011, UAE businessmen bullish on economic growth in 2011, available at < http://www.menafn.com/qn_news_story_s.asp? StoryId=1093386251>


20> International Monetary fund, 2010, Middle East economic analysis, p-33


21> International Monetary fund, 2010, Middle East economic analysis, p-36


22> International Monetary fund, 2010, Middle East economic analysis, p-16


23> International Monetary fund, 2010, Middle East economic analysis, p-22 to 24

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