Long-term economic prospects could offset short-term risk

01 March 2011

Growth projects are being revised downwards, but the outlook could still be positive for the region

In the coming weeks, there will be a spate of revised economic forecasts for the region that will provide the first estimates of the impact of the unrest on the regional economy.

These numbers will come with heavy caveats, but most economists will continue to forecast strong growth across the Middle East and North Africa (Mena) region for the year, probably somewhere around 3-3.5 per cent gross domestic product (GDP) growth for 2011, rising to 4-5.5 per cent in 2012. With oil now forecast at $116 a barrel for the year, the oil producers are likely to have much stronger figures (last year’s average was $80 a barrel), particularly in the GCC.

This is still solid growth compared with the rest of the developed world (behind emerging markets), but it is a downward revision of between 1-2 per cent on previous growth projections for the Mena region.

The primary reason is Egypt, the region’s fourth-biggest economy, which has been hit in tourism, construction, consumer spending and stock market falls. Tunisia and Libya will also contribute to the falls. Foreign direct investment and business confidence has also been knocked.

But there are some mitigating factors, which could reduce the negative impact of the unrest. First is the continuing strength of oil prices. Clearly this is a double-edged sword for the region as the non-oil producers will not benefit, but broadly it ensures the governments remain fiscally strong. Oil surpluses will be diluted by increased spending on benefits packages, however. Second, the governments have healthy balance sheets. This will enable governments to deliver short-term benefits packages that should create breathing space to deliver fuller reforms. Third, the core GCC markets – the UAE, Kuwait, Saudi Arabia and Qatar – remain stable. Although, political uncertainty will combine with bureaucratic incompetence to stall decision-making.

The short-term view will be that growth will be knocked by continuing political uncertainty. The broad assumption will be that the fundamentals that led to the unrest will not quickly go away and the risk of unrest will remain unless governments take significant steps to fix the problems. The most at-risk countries are in North Africa and the Levant. Although local issues mean there are other hotspots, such as Bahrain. While stable in the short term, Saudi Arabia is the biggest potential concern because of its status as the world’s biggest oil producer, as well as the region’s biggest economy. While there is little concern about the short-term risk of unrest, the lack of clarity over the succession is a big concern.     

The long-term view is more optimistic and a sense of an ‘Arab Spring’ could really propel the region forward strongly for the coming decade. Much will depend on how the governments react to the call for change. But the number of significant benefits packages, as well as economic concessions, that have been announced suggest the governments will react positively.        

After the depths of the financial crisis and global recession, the corporate sector is stabilising and facing a better operating environment, however, the unrest means any optimism should be cautious. Company (and government) Debt restructuring problems have been largely deferred rather than dealt with, this means more restructuring could be coming in 2011/12 as companies struggle to refinance debt because of impact turmoil has on credit markets.

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