BRIEF

The Economic Outlook for the Middle East and North Africa - October 2015

October 5, 2015


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Economic growth in the Middle East and North Africa (MENA) is stagnating. The World Bank projects overall GDP growth to be less than 3% for the third year running—about 2.8% for 2015. Low oil prices, conflicts, and the global economic slowdown make short-term prospects of recovery unlikely.

Except for Egypt, Morocco and Iran, almost all MENA countries are growing slowly, but for different reasons. The GCC countries and Algeria are suffering from low oil prices and high fiscal spending. As a whole, GCC economies—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates—are expected to grow at 3.2% in 2015 and the following year, down from 3.9% a year earlier, as low oil prices have severely hit these economies. For the same reasons, growth in Algeria is expected to remain at 2.8% in 2015.

A group of “developing oil exporters” have taken a double hit of low oil prices and civil war. Syria and Libya saw a drop of about 40% or more to their oil output, as a result of physical damage to the sector and a fall in production (estimates for Yemen are not yet available). The sabotage of oil fields may keep their GDP growth rates low. Overall growth for developing oil exporters may reach 1.3% in 2015, up from 0.9% a year ago, mostly due to the likelihood of a slow recovery in Libya and Iraq.

Conflict has severely hurt the economies of Libya, Yemen, Iraq and Syria. In Yemen, it has resulted in a humanitarian catastrophe, the mass displacement of people and destruction of homes, roads, bridges, and other infrastructure. The total number of people displaced from Yemen, Syria, Libya and Iraq is estimated at 15 million, many of them fleeing to neighboring countries, such as Lebanon and Jordan. Despite some benefits to their economies created by Syrian refugees, Lebanon and Jordan have shouldered greater responsibilities in health and education, and have also experienced disruptions to their regional trade because of the wars in Syria and Iraq

Although growth is expected to be 1.7% this year, Iran’s economy is expected to grow faster from 2016 onwards, following the agreement to limit nuclear development and allow more inspections of its nuclear sites. The lifting of sanctions—and Iran’s return to the global economy—may bring an extra 1 million barrels of crude a day onto the international market, lowering global oil prices by about 13%. The lower prices are likely to hurt other oil exporters more than Iran, as the positive effect of higher oil production in Iran should outweigh the negative impact of falling global prices.

Fiscal deficits are mounting in the group of developing oil exporters. Libya stands out with a fiscal deficit of more than 55% of GDP and current account deficit of 70% GDP. Libya’s foreign reserves are expected to drop to about US$50 billion compared to more than US$100 billion in 2013.

While benefiting from lower oil prices, MENA’s oil importers are being hurt by terrorist attacks, spillovers from neighboring wars, slow growth in the Euro zone and political uncertainty.

Two terrorist attacks in 2015 and protracted economic stagnation in the Euro zone mean Tunisia’s real GDP growth is projected to drop to 0.8% from 2.3% in 2014.

The Palestinian economy is recovering from recession following the 2014 summer war in Gaza with overall growth of 3 percent in 2015.

Only Egypt and Morocco may have been experiencing stronger economic growth in 2015, although the tide is against them. With security reinforced and reforms underway, Egypt’s economic growth could hover at about 4% in 2015 and 2016. Much of Morocco’s economy is based on agriculture, with economic growth depending on the weather.

What if oil prices go down again? A further drop in oil prices, coupled with high fiscal spending, could mean worse to come. With a fiscal deficit of about 19.5% and 12.6% of GDP  in 2015 and 2016 projected for Saudi Arabia, a reduction in foreign reserves of more than US$60 billion is expected this year and another US$80 billion in 2016. Although some countries, particularly Saudi Arabia, Kuwait and UAE, have started rethinking their huge spending on subsidies, the macroeconomic imbalances will likely spillover to 2016 and the following year.

MENA’s investment needs are high and its shortage of foreign capital have made a bad situation worse. Egypt may need an extra US$30–35 billion in investment and another US$10 billion for developing its infrastructure in coming years. Jordan needs more than US$6 billion a year in additional investment to put its economy on a better track. Tunisia is expecting to increase investment by an additional 7 percentage points of GDP during the next five years. Iran, post-sanctions, needs hundreds of billions dollars to upgrade its oil fields and bring production back to pre-sanctions levels.

In summary, since the 2011 Arab Spring—though not necessarily because of it—the MENA region has seen a slowdown in economic growth, an escalation of violence and civil war and, more recently, substantial macroeconomic imbalances from lower oil prices.