Economic Recovery and Prospects
Growth has rebounded in most MENA countries. It is expected to average 4 percent in 2010 and to reach 4.8 percent by 2012.
It is clear that MENA has escaped a severe recession in the last two years. This is due in part to sound macroeconomic management and a conservative approach to financial sector regulation.
However, the key challenge now is to sustain growth after the rebound. And here we must note that MENA’s recovery from the crisis has been much less impressive than the recovery of other regions. Growth in MENA is expected to increase by just 2 percentage points in 2010, compared to 5.6 percentage points in the advanced economies and 4.5 percentage points in developing regions.
In the post crisis world, MENA cannot afford to lose sight of the longer-term, structural, challenges of sustained growth and job creation.
Before I turn to the longer term challenges let me share with you some observations on the key drivers of and impediments to recovery, bearing in mind, of course, that different factors have been important to different degrees in different economies.
Drivers of Recovery:
- The rebound of the global economy, and especially the demand from Asian emerging countries, increased demand for oil (a major resource of GCC and oil exporting countries).
- Most countries adopted fiscal stimulus programs. The largest one by far is that being implemented by Saudi Arabia, a $400 billion public expenditure program which has contributed to recovery both among MENA countries and globally.
- Anemic credit trends. Several countries have experienced low growth of credit to the private sector despite ample liquidity in the overall banking system. While Central Banks undertook expansionary monetary policy in most countries, this did not result in rising flows of credit to the private sector as many banks chose to simply accumulate greater liquidity.
- Credit growth to the private sector is in single digits in all GCC countries except Qatar. Credit growth is even lower in oil importing countries in the region while among developing oil exporters it has slowed down but much less than in the GCC and oil importers.
- Some OPEC countries in the region could have benefited more from the rebound but they did not because they had to limit their oil production in order to support oil prices. Some countries – notably Iran and Iraq – faced production-related problems limiting their oil output.
- A hesitant recovery in Europe has also dampened growth for countries such as Morocco and Tunisia that have strong trade and remittance flow exposure to the EU.
- With the exception of Yemen, MENA’s average poverty rates are low – 3.6 percent (at $1.25 a day poverty line), and 17 percent (at $2 a day poverty line). However, MENA’s poverty gradient is flat, meaning that there are many people who exist just above the poverty line. This implies that the recent crisis has likely pushed a lot of people below the poverty line.
- In most MENA countries the impact of the crisis on labor markets was mild—evidence for this comes from special surveys conducted during the pre- and post-crisis periods. Job losses in the GCC countries were steep, but they affected mainly expatriate workers, not nationals. This however is not a cause for complacency as MENA has a fairly high unemployment level – at about 11% over the past decade. Unemployment is even higher for youth, women and graduates.
- Vulnerability is high in MENA as the region has few formal social assistance programs targeted to the very poor. In recent years, several countries have started enlarging their social safety nets, and rationalizing their public food distribution systems (Iraq) and other social programs to ensure proper targeting. The World Bank is assisting about 10 MENA countries with the design and development of targeted social safety nets, reform of subsidy systems, and fiscally-efficient social insurance programs
Recuperation of Financial sector
Financial markets did get unsettled – though the degree of disruption caused depended on the level of regional or global integration. Generally, countries that experienced high credit growth and had overextended banks with excessive exposure to real estate and with large reliance on external funding and higher loan to deposit ratios have experienced serious problems.
GCC Government’s did act decisively and quickly and offered packages that resembled those adopted in the EU, US and Eastern Europe, including monetary easing, CB liquidity support, blanket guarantees, guarantees on new debt and deposits, capital injections and asset purchases. This has helped stabilize the banking system. There were no bank failures and banks remained profitable.
The main issue in the GCC countries is that credit to the private sector is tight and credit growth remains very low. Significant government support has enabled the market for large project and corporate finance to continue functioning despite heightened risk aversion and uncertainty. When government has not been directly present in bond markets, yields have been high. Two UAE banks have successfully tapped the Malaysian sukuk market at attractive yields but these banks benefit from implicit government backing. For other borrowers, conditions remain tight.
Recent instability has been transmitted from global markets. GCC stock markets, which are more globally integrated than markets in other MENA countries, have followed global trends, while non-GCC stock markets reacted less to these global developments. MENA’s risk premiums and CDS spreads have declined somewhat and are below those for ECA, but remain higher than those in East Asia and Latin America, even when Iraq is excluded because many countries in the region are dependent on European markets where uncertainty about future growth prospects remains high. In addition, a few countries – most notably Lebanon – have limited fiscal space, and remain sensitive to negative shocks which push their credit spreads higher than those of their peers.
Yields on new sukuk issues have also been high at around 10 percent, and yield spreads on existing securities of LIBOR benchmark have not returned to their Nov 2009 levels prior to the first DW announcement, and are higher than East Asian sukuk. Clarity on asset recovery in the event of default could boost activity in sukuk trading and lower yields.
Further movements in the markets will depend on evidence that private sector growth in consumption and investment has started to pick up globally. Despite a sharp decline in global corporate default rates, and the possibility for further declines in the short term, serious concerns remain about the ability of companies, especially those in Europe, to refinance a large stock of leveraged loans due for repayment in the next few years.
Medium term challenges
While acknowledging that the region has escaped a serious recession in recent years, we must also take note of the challenges that loom ahead. The region’s economies have not been able to generate jobs for the millions of young people entering the workforce. Despite recent improvements, unemployment rates are high on average and higher still for youth. And MENA underutilizes its human potential – less than half of the adult population is formally employed. Economies have made progress with diversification, but growth in some countries still appears to rest largely on minerals and hydrocarbons.
The countries in the region should not settle for low-equilibrium growth in the post-crisis era. Annual per capita growth of developing MENA averaged just 2.5 percent in the last decade – a rate that compares poorly with the average of 4.6 percent in the developing world over the same period. The region has a higher growth potential than recent experience would suggest.
Measures are being taken to rise to this potential. Governments have improved the business climate in several countries by simplifying business regulations, strengthening macroeconomic management, reducing restrictions to trade and investment, and opening up financial sectors. Indeed, the average number of reforms in MENA has steadily increased during the last 5 years. Particularly impressive has been progress in raising primary and secondary education enrollment rates.
Still, many obstacles remain. Several MENA countries maintain high barriers to trade and investment flows, both among themselves and with the rest of the world. Restrictions to entry and business conduct in services will need to be reduced in order to unleash the full potential of trade in services. Another major problem is the discretion available to bureaucrats in implementing regulations. This creates an unlevel playing field and encourages the pursuit of privileged access. Coupled with barriers to entry and exits, this has created an environment of private sector business stagnation. Addressing these issues will require applying rules and regulations consistently and without discrimination among firms and introducing reforms that promote business dynamism, private investment and innovation.
Thank you very much for your attention. We now turn to a graphic presentation that will further elaborate these messages.