Optimism has melted away for economic growth

07 March 2011

Slowdown in growth due to the unrest will hit the the Middle East’s oil-importing countries the hardest

At the end of 2010, the outlook for this year looked positive. Momentum had built up in the capital markets, banks were slowly starting to lend more, and although the oil price was slightly higher than some wanted it to be, it was in a good position after crashing during 2008.

While so much is uncertain, foreign investors will be cautious. Even local banks will pull back on extending loans

That optimism has quickly dissolved, following the protests that have spread across the Arab world. The Middle East and North Africa region is expected to have lost up to 2 per cent of its growth this year as a result of the unrest. Next year, it could still be seeing slower recovery.

Political unrest has made everyone acutely aware of the concerns that were always in the background. The handover of power has always threatened to be an ugly process in the region, where succession is determined by a small powerful elite. Sudden and dramatic change, to the extent being witnessed at present, also threatens the institutional strength of regional governments and policy stability.

While so much is uncertain, foreign investors will be cautious. Even local banks will pull back on extending loans, at a time when the region was already facing a shortage of credit growth. Consumer confidence has also taken a dive and the equity markets are in freefall. Together, they will derail what limited private sector economic growth there was in the region.

The only bright spot is the oil price, which acts as a hedge against political unrest. But even that could prove to be a double-edged sword. If the price goes too high, it will dent the global economic recovery and end up coming back to haunt the Middle East later.

The slowdown in growth will be easier to deal with in the oil-exporting countries, which have the savings to spend on handouts and stimulus measures. For the oil importers, low growth means leaders will face a tough challenge meeting the demands of the people, while steering their countries back onto a growth path.

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