World Bank sees slow recovery, rising capital inflows

15 March 2002

Growth rates are expected to be modest in the Middle East and North Africa over the next two years as the global recovery will take some time to regain momentum, the World Bank says in the regional section of its 2002 Global Development Finance report. Capital flows to the region increased in 2001 after declining sharply over the previous three years, the report notes.

The bank estimates real gross domestic product (GDP) growth in the region at 3.1 per cent in 2001, with oil-exporting states registering a lower rate of 2.5 per cent, compared with 3.6 per cent in the more diversified regional economies. Growth rates for 2002-03 are forecast at 3.3 per cent across the region - 2.8 per cent for the oil economies, and 4.4 per cent for the non-oil economies.

The report says external conditions were responsible for the slowdown in growth in the oil-dominated economies, but the surpluses built up when oil prices were high in 2000 should ensure that these countries will not suffer serious difficulties with their budgets and external accounts.

In some of the diversified economies, 'internal difficulties, many of which were present prior to the downturn in global activity, were also responsible for the poorer growth performance in 2001'. The bank singles out Egypt in this context, noting that it has had to deal with the consequences of heavy deficits on both the current account and the budget. 'An adverse investment climate, high real interest rates, and some uncertainty about the direction of the exchange rate have slowed GDP growth to under 3 per cent in 2001,' the report says.

Gross capital flows from international markets to the region rose by 26 per cent in 2001 to some $15,600 million, mainly as a result of increased bond issues and a sharp rise in foreign direct investment (FDI) in Saudi Arabia. Commercial bank financing was the largest single category, at $7,700 million, roughly the same as in 2000. Bond issues jumped by $2,900 million to $5,300 million. Lebanon led the way, issuing some $3,100 million in bonds during the year. Egypt's debut Eurobond of $1,500 million also figured prominently. Spreads on regional bonds rose sharply in response to the 11 September events, hitting 700 basis points in some instances. However, the market has since settled down, although the bank notes there is some concern about Lebanon's high level of debt.

FDI flows into the region rose by $1,200 million to $2,600 million. The most dramatic increase was shown by Saudi Arabia, where inflows rose from virtually zero to $1,000 million, reflecting the efforts made by the government to open up the economy.

Portfolio equity issuance fell to just $7 million from $375 million in 2000 and a recent peak of $720 million in 1997.

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