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Without equivocation, the events of 2020 have been hugely impactful on the economies of the Middle East and North Africa (Mena) region, coming at a time of pre-existing fiscal fragility, insipid growth by global standards and mounting social unrest over perceptions of the slow pace of government action.
With the expected continuation of the Covid-19 crisis, as well as its impact on global oil prices, the likelihood of a swift, near-term recovery from the effects of the pandemic has receded, and most regional economies now face a return to relatively weak growth, but with expanded debt burdens.
By the latest estimations of the IMF, the Mena region saw a real GDP contraction of about 5 per cent in 2020, and is projected to experience 3.2 per cent real GDP growth in 2021, representing a stabilization of the economy, but far from a full recovery of 2020’s lost output.
The IMF projections also show the Mena region performing more poorly than the global average, with the world expecting a real GDP drop of 4.4 per cent in 2020 followed by 5.2 per cent real GDP growth in 2021 – both a less severe decline in 2020 and more meaningful recovery in 2021 than seen in the regional outlook.
As noted by Jan Friederich, senior director at the US’ Fitch Ratings: “The [Mena] region will see a return to growth in 2021, but the recovery will be dampened by fiscal consolidation efforts after a sharp rise in debt in 2020 and, in the case of oil exporters, by continued Opec+ oil production quotas.
“The balance sheets of oil exporters will continue to deteriorate, although for higher-rated GCC sovereigns, they still remain very strong. Political dynamics also complicate consolidation efforts in non-oil exporting sovereigns in the region.”
Saudi Arabia, the only regional economy to receive a mid-year update, notably improved its outlook in October, with the IMF forecasting a 5.4 per cent real GDP contraction for the kingdom in 2020, compared with the June forecast of a 6.8 per cent real GDP contraction.
Saudi Arabia’s forecast of 3.1 per cent real GDP growth in 2021, meanwhile, did not improve, reflecting the ongoing problem that weaker oil prices represent for oil-exporting economies, in addition to the challenge of stimulating a non-oil recovery as the Covid-19 crisis recedes.
The outlook for the UAE is projected to be slightly bleaker than the Mena average, with the IMF forecasting a real GDP decline of 6.6 per cent in 2020, and anticipating a real GDP growth rate of only 1.3 per cent in 2021. This weaker growth forecast comes despite the IMF earlier in the year recognising the UAE as having one of the region’s best responses to the pandemic in terms of its safety measures and delivery of testing capacity.
It also comes despite the moving of the Dubai Expo 2020 event, which had originally been expected to deliver additional growth to the economy of the emirate and the wider UAE, into 2021.
IMF regional director Jihad Azour highlighted the fact the UAE’s diversification, connectivity and strong links have left its non-oil economy especially vulnerable to the contraction in the global economy due to the severe impacts to trade, transport and tourism.
In a regional exception, Egypt has been projected by the IMF to defy global trends and become the only Mena country to exhibit a positive real GDP growth rate, at 3.5 per cent, in 2020.
The IMF’s Azour credited Egypt’s positive outlook on a range of robust responses by the government, including the central bank’s slashing of interest rates by 300 base points in April, followed by 50 further basis points in September. The IMF itself also supported Egypt with a $2.8bn rapid finance facility in April and a further $5.2bn loan in June.
The very worst-affected countries in the region in terms of real GDP growth have been Iraq and Oman, both heavily oil-dependent nations, which are forecast by the IMF to see their real GDP contract by 12 per cent and 10 per cent respectively in 2020.
Oman is alone in having a negative forecast for 2021, when real GDP is expected to contract by a further 0.55 per cent. Kuwait’s economy, expected to contract by 8 per cent in 2020, is forecast to see the second-slowest recovery in 2021, with a forecast real GDP growth rate of 0.65 per cent.
Underlying the growth assumptions for many Mena economies for 2021 is a modest increase in average oil prices for the year. The IMF assumed an oil price of $41.7 a barrel in 2020, and expects a price of $46.7 a barrel in 2021, averaging UK Brent, Dubai Fateh and West Texas Intermediate crude prices and futures.
The EIA expects Brent crude specifically to average $46.6 a barrel in 2021, up from an average of $40.6 in 2020, while other estimates such as those of the US’ Citi and Goldman Sachs place the Brent crude price for 2021 considerably higher, at $54 and $55 a barrel respectively.
Oil price impact
Oil exporters in the region have faced particularly dire straits due to the twin impact of Covid-19 and low oil prices on both the non-oil and oil components of their economies. Among the major oil exporters in the Mena region, the IMF estimates that real GDP has contracted by 6.6 per cent in 2020.
The IMF then projects a slightly higher rate of real GDP growth, at 3.4 per cent, for oil producers in the coming year – slightly above the regional average in 2021, but hardly compensation for the additional 1.6 per cent decline in 2020.
The task faced by Mena oil producers in managing their economic recovery from Covid-19 amid a protracted period of low oil prices is causing a heightened level of strain on government budgets, much as in the aftermath of the collapse of oil prices in 2014. Then, as now, the spike in fiscal deficits among oil producers set in motion a range of austerity measures including the slashing of budgets for capital-intensive project schemes.
In 2020, similar effects have been at play, including notable cuts to ministry budgets in countries such as Oman and Kuwait, where the governments are particularly dependent on oil revenues.
Despite such efforts, the fiscal deficits of many countries have risen considerably and, perhaps more importantly, are expected to remain elevated for the foreseeable future. From a fiscal perspective, Covid-19 has not been a one-year event, but one with lasting ramifications for government budgets as a result of emergency healthcare spending and fiscal stimulus programmes.
From a position of a modest fiscal deficit in 2019, at 3.6 per cent of GDP, the Mena region has seen its imbalance weaken to 8.6 per cent in 2020, and a higher fiscal deficit of 6.5 per cent is then expected to be maintained through into 2021, according to the IMF.
Much of this additional unplanned spending has been paid for through additional debt issuance. In the GCC and Jordan, the equivalent of an estimated $50bn in hard currency bonds was issued in 2020, representing “about 26 per cent of all sovereign hard currency issuance in emerging markets” for the year, according to UK-based business analysis firm Tellimer.
A July report by the US’ S&P, meanwhile, projected the total additional financing needed in the GCC for the year at $180bn, combining an $80bn run-down on assets with a $100bn increase in government debt levels. Looking forward, S&P projected that debt issuance will meet about 60 per cent of the $490bn financing requirement in 2020-23, based on recent financing trends and the dwindling of regional assets.
These numbers highlight the significant financing challenges potentially facing the region, particularly as the historically stellar credit ratings of many GCC governments begin to come under pressure in the face of persisting oil price weakness and high fiscal deficits.
The uncertainty of the outlook for regional recovery was reflagged as recently as 8 December 2020, when a Fitch Ratings report assigned a negative credit outlook to five Mena sovereigns: Iraq, Jordan, Tunisia, Oman and, most critically, Saudi Arabia. Among the concerns presented by Fitch for these five countries is the risk of “social backlash against fiscal consolidation” and reform efforts.
While Iraq and Oman have been on a negative ratings trajectory for several years, and Jordan and Tunisia face severe non-oil economic weakness, the gloomy perspective on the credit-worthiness of Saudi Arabia – the region’s largest economy – is an especially worrying sign.
The risk of a credit downgrade could also have a long-term impact on Riyadh’s fiscal position as it continues to partially finance the additional capital requirements of its economic reform programme and megaproject development schemes through debt. In 2020 alone, the kigdom is estimated to have increased the scale of its debt burden by 10.6 per cent of its GDP, according to the IMF, although it should be noted that this singular leap is not expected to be repeated in subsequent years, and remains at the lower end of the amount of additional debt accrued by sovereigns in the region.
Bahrain, Morocco, Oman and Tunisia have all separately been downgraded by credit rating agencies over the course of the year, further hampering any prospective debt issuance by these sovereigns.
Despite the glum indicators, most Mena sovereigns will register improving growth and fiscal and external balances in 2021 as economies bounce back from the coronavirus shock and oil prices recover. In MEED’s assessment of the recovery potential of regional economies, the highly rated and financially supported GCC sovereigns are generally expected to perform better in 2021 than the wider region, with the exception of Egypt.
Regional economies in a notably weaker position than the regional average include Algeria, Iran, Iraq and Lebanon, without mentioning Libya, Syria and Yemen, all of which remain war zones.
Across the region, however, balance sheets will continue to deteriorate despite efforts to mitigate the impact of the pandemic on financial sustainability, and this will force governments into an even trickier balancing act in their attempts to square fiscal consolidation with necessary fiscal reforms and economic diversification efforts.
Despite the “improvement in economic indicators” and “better-than-expected” growth, the IMF’s Azour noted the challenges ahead, not least in the need to continue deepening structural reforms.
At the same time as all of these concerns are broached, there remains a broad policy consensus among governments in the region that economic diversification plans must not be derailed by current events. Indeed, if anything, the disruption of 2020 has lent yet further weight to the proposition that Mena economies need to develop greater resilience to economic shocks.
All in all, 2021 will make for a tricky year for regional governments to navigate, and in which the decisions that are made could ultimately have implications for years or even decades to come.
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