Middle East and North Africa MENA Market
Middle East is the ultimate example of a region in a rapid transition. Significant investment for public and private sectors are currently being made
The Middle East has rarely enjoyed better business conditions than it does today and as a consequence a larger percentage of the wealth generated in the Gulf is being reinvested in its domestic markets than ever before. “Quickening liberalisation, privatisation and regional integration as well as an increased pace of project implementation has lured capital [into the Middle East] that would have headed away from the Arab world,” the US-based think tank the International Institute of Finance recently reported. In the current uncertain global economic climate, this is a trend that looks set to continue if not accelerate.
For most oil exporters, the expected increase in oil prices—from US$79 per barrel to US$107 per barrel— and production volumes lead to higher growth in 2011 and stronger fiscal and external balances, notwithstanding recent increases in government spending. Average real GDP growth (excluding Libya) is projected to reach 4.9 percent in 2011 compared with 3.5 percent in 2010, while non-oil growth is projected to stay at 3.5 percent in 2011.
For the GCC, growth is projected to reach 7.8 percent in 2011 as oil production expands to stabilize global oil supply in the face of supply disruptions elsewhere. GCC non-oil growth is set to accelerate by more than 1 percentage point to 5.3 percent in 2011. The oil exporters’ combined external current account surplus is estimated to increase from US$172 billion to US$378 billion (excluding Libya), and for the GCC from US$136 billion to US$304 billion.
The economic outlook for the oil importers is mixed. For Egypt and Tunisia is projected this year’s growth to be 2½–4 percentage points lower than in 2010, reflecting disruptions to economic activity during the protests, a decline in tourism, and lower investment. Political uncertainty is also weighing on Lebanon’s economy. In most other countries, however, growth has continued to pick up, with Jordan, Mauritania, and Morocco benefiting from high prices for phosphate and iron ore.
Governments across the region are responding to political developments—and higher commodity prices— with expansions of fuel and food subsidies, civil service wage and pension increases, additional cash transfers, tax reductions, and other spending increases. The size of the national fiscal packages in 2011 ranges from less than ½ percent of GDP in some MENA oil importers to about 22 percent of GDP in Saudi Arabia (with the spending spread over several years). While some countries can easily afford this extra spending, others will find it straining public finances and debt levels: support from the international community would help bridge financing needs and contain the buildup of debt.
In the group of Arab oil exporters, Iraq and Qatar are projected to record double-digit growth, underpinned by large increases in crude oil and LNG production, respectively. For GCC countries, average growth is projected to rise from 5.1% in 2010 to 6.5% in 2011, buoyed by higher oil production and large increases in government spending. Higher oil prices (up from $80 per barrel in 2010 to $115 in 2011 and $110 in 2012) and production levels should help lift the GCC’s budget revenues from hydrocarbon exports from $362 billion in 2010 to $533 billion in 2011. This surge in revenues far exceeds the increases in government spending and underlies the widening of the consolidated fiscal surplus from 8.0% of GDP in 2010 to 13.2% in 2011.
The combined external current account surplus of the GCC is projected to rise from $128 billion in 2010 to $292 billion in 2011. Consequently, gross foreign assets of the GCC countries in 2011 are projected to rise to $1.7 trillion (against foreign liabilities of $0.5 trillion) and of the Arab countries to $2.2 trillion (against total foreign liabilities of $0.7 trillion). More than one-third of the region’s gross assets are held by sovereign wealth funds (SWFs). Despite the turmoil in the region, we do not expect to see significant shifts in funds managed by the sovereigns as a specific response to the crisis.
In the oil importing countries, the economic toll from the political turmoil will translate into a sharp drop in growth rates in 2011, with a likely rebound in 2012. For the countries affected by the turmoil, we expect no increase in real output this year. Real GDP growth in several nonoil countries—Egypt, Jordan, Lebanon, Morocco, Syria, and Tunisia—will contract from 4.4% in 2010 to –0.5% in 2011. Furthermore, inflationary pressures are expected to rise, and current accounts to weaken, while some countries will see the erosion of reserves and pressures on their currencies. Nonetheless, these countries are buffered by adequate reserves and therefore not expected to suffer serious external vulnerabilities, although the risks will remain on the downside.
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