looks good for 2007
Simply put, the economic outlook for the Middle East in 2007 is good. Investment flows, GDP projections, and international demand forecasts for the region’s export commodities, oil and gas, point to a year of growth for the Middle East-North Africa (MENA) region.
Within the forecast-happy pages of the World Economic Outlook (WEO, a product of the International Monetary Fund) the outlook for the Middle East region “generally remains favorable, given that oil prices are expected to remain high, and regional GDP growth is projected at close to 6% in 2006. With continued prudent financial politics and little growth in oil production, GDP growth is expected to moderate slightly to about 5.5% in 2007.”
These growth forecasts position the region well ahead of global averages for GDP developments in 2006 and 2007, which the IMF projects as 5.1% and 4.9% respectively. However, this big picture view easily crumbles into divergent and contradictory country details.
A look into country-specific assessments, such as the latest country risk summaries by the Economist Intelligence Unit (EIU) issued in November 2006, reveals assessments that are far apart. Oman gets solid “A”s for sovereignty, currency, banking, and economic structure risks. Iraq, however, receives straight “D”s in all these criteria.
Kuwait scores high in the finance-related risk categories, Egypt received risk assessments in the “B” range, Jordan was given a negative outlook on currency risk because of energy cost pressures, Syria got no more than a “CC” in political risk because of “Western antipathy to the regime” and potential sanctions over the Hariri investigation.
When examining Middle Eastern economic and socioeconomic prospects, it simply must be taken into account that this is not a region with so-called natural boundaries, but instead features plenty of unnatural boundaries, political and otherwise.
In consequence of this reality, even definitions of the region vary—implying from the start a less coherent picture of the Middle East as a world region than, say, North America, Oceania or Latin America.
These divergences make it more complicated to evaluate information such as the region’s position in global flows of foreign direct investments. The UNCTAD 2006 World Investment Report (WIR) credited Western Asia with having achieved the largest increase in FDI inflows worldwide with an 85% gain to a total of $34 billion. However, when breaking down the numbers, the WIR listed Turkey as one of the region’s major destinations for inward FDI flows, ranking it second after the UAE as the region’s top country for FDI inflows with $12 billion in 2005.
In all economic views on the however-defined region, oil features as the Middle East’s economic platform, unavoidably so because of its global importance as commodity and its dominant role as revenue source for the region’s most powerful economies. This means that oil economies traditionally have received a large share of analytical attention, even as large parts of the Middle Eastern population have historically been unable to benefit significantly from the oil economy.
The WEO, which groups the western Maghreb countries with Africa but Egypt and Libya with the Middle East, allocates a little under three pages to the Middle East in its 34-page chapter on country and regional trends.
Much of that space is dedicated to discussing how growing oil revenues have impacted and are likely to further impact producer countries, from reduction of government debt and improvements of the fiscal balance to inflationary pressures and risks of overheating of property prices and financial markets.
As the cherry on top of the cake, the WEO projects that the Middle East’s current account surplus will rise further to 23% of GDP in 2006—to around $280 billion—before starting to decline in 2007.
The region is indeed well positioned to do well in achieving return on its blessings, especially as the WEO asserts that the management of the oil-generated wealth has improved and “most countries have appropriately begun to use the opportunity provided by higher revenues to increase spending to address long-standing structural problems.”
The report expects that the Levant countries and Egypt will benefit from a supportive environment on both the regional and global levels, but acknowledged that near-term economic prospects for the region’s oil exporters are “generally more propitious” than for the energy have-nots.
Energy, money and blood
The sub-division of the Middle East into oil and non-oil based economies has been long standing and reveals sharp differences in areas such as GDP and current account surpluses.
But while it seems prudent to not entangle the regional identity issues into considerations of Middle Eastern economic growth prospects in 2007, it is necessary from an in-region perspective, to approach the outlook for the region’s diverse economies in the coming year not on a oil versus non-oil basis, but within a—perhaps somewhat provocative—triangle of the forces of energy, money and blood.
Energy is still the primary economic resource and export commodity of the region. Money reflects the productivity of the Middle Eastern economies in both their oil and non-oil segments. Blood, in a very figurative sense, represents the population development and human capital growth potential of these economies.
In another sense, however, the term blood can be used to symbolize the risks of intra-country, intra-regional and even extraneous armed conflicts targeting Middle Eastern countries—risks which have risen disturbingly in recent months.
The link between energy and money is very strong in the current period, much more so than in the final years of the last century when then Crown Prince Abdullah of Saudi Arabia urged the kingdom’s people to increase their efforts towards economic diversification. Exploitation of the energy resources oil and gas for a rather long period translated nowhere as easily into cash flow as it did in 2005 and 2006 and will, according to forecasts, in 2007.
From the economic outlook perspective, today’s renewed strong earning prospects of oil and gas exploitation and processing mean that more of the region’s countries are currently engaging in energy sector developments. In particular, the North African countries are aggressively prospecting new exploration blocks for oil and gas. At the same time, countries from one end of the region to the other are engaging in new refinery projects, expanding processing and often also transportation capacities for oil, gas or both.
These investments imply that the ratio of energy exporting to non-energy exporting countries in the region over the coming years will shift towards more producers and a wider spread of energy wealth.
Egypt has opened exploration concessions near its southern border and on its northern coast. Jordan, one of the main energy import dependent countries, has initiated exploration of its large oil shale deposits. Even Lebanon, where proven offshore gas reserves have remained untapped for non-economic reasons, has at least theoretical potentials to develop its energy resources as well as refining capacities.
In this context it has to be noted that the longer-term prospects of oil export-based economies are of course laden with their own question marks. Research by Credit Suisse recently investigated the sensitivity of oil producing countries to oil price changes.
CS found that the OPEC member countries in the EMEA region (Europe, Middle East, and Africa) derive about 77.5% of their fiscal revenues and 44% of their GDP from the oil sector.
According to the report, the nine countries—Algeria, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, and the UAE—face theoretical vulnerabilities to their fiscal and current account balances in 2007 if oil prices drop significantly, but the CS researchers considered the possibility as remote since the countries’ break-even prices for crude oil are significantly below the bank’s forecasted Brent oil price of $63 per barrel in 2007.
Excluding Iraq, Qatar would be most vulnerable to a decline in oil prices with a break-even price of about $47 per barrel in 2007, CS said, whereas Algeria, Saudi Arabia, the UAE, and Kuwait would not feel much pain before oil prices were to drop below $40, since their projected break-even prices range between $38.8 for Saudi Arabia and $22.4 for Kuwait.
In short, the energy exporters are not expected to run into any short-term danger of building new fiscal deficits. “Existing and potential fiscal reserves of the EMEA oil exporters suggest to us that the public sector’s debt-to-GDP ratio in these countries will likely continue to decline,” CS said.
On another note, however, a 10% decline in world oil prices would impact the current account balances of the regional energy exporters with some significance. In this regard, Saudi Arabia is the most sensitive, CS said, and 10% lower oil prices would impact its current account as percentage of GDP by -5.2%, followed closely by Qatar with a projected impact of -5.1%.
These pronounced potentials for direct influences of oil price fluctuations only underscore the importance of alternative money flows and investment strategies that are playing out in the region.
The annals of the developments funded with big money—new industrial cities in sectors such as petrochemicals and manufacturing, tourism-related real estate mega projects like Dubailand or the numerous new artificial islands along the Gulf, and entire new population centers such as the multi-billion dollar King Abdullah Economic City project in Saudi Arabia—are just writing in their forewords and first pages. In 2007 and the following years, these projects will start to unfold their economic performance, showing whether their strategies produce the expected returns.
In another manifestation of the liquidity impact on the entire region, intraregional flows of foreign direct investments in the sectors of real estate, tourism, finance, manufacturing, telecommunications, and services can be counted upon as development areas for channeling new or increasing flows of money, predominantly from the Gulf region to other parts of the Middle East.
Governance and structural improvements
According to the International Labor Organization, the unemployment rates for young people in the Middle East and North Africa are the highest in the world, with over one-fifth of the youth workforce having no jobs.
With so much new blood seeking to enter economic life every year, efforts to improve education, labor markets, business formation rates and social networks will have to be kept up and intensified.
The World Bank said in its Doing Business 2007 publication that 61% of countries in the MENA region implemented one or more positive reforms in 2005/06 that helped improve the business climate in the respective country.
MENA countries listed in the publication as achievers included Morocco, Egypt, Saudi Arabia, and Syria for improvements in business startup procedures; Kuwait and Morocco for registering property; Tunisia for protecting investors; Egypt, Morocco, and Yemen for paying taxes; and Jordan and Syria for improvements in cross-border trade facilitation.
However, with Saudi Arabia being the MENA country with the greatest ease of doing business—ranked 38 out of 175 in the worldwide charts—and Egypt as far down as rank 165, there is still more than enough room for Arab decisionmakers to improve productivity frameworks and business climates.
The same applies to the realm of national and corporate governance, where the September 2006 charts of the World Bank Institute show respectable performance values for GCC countries such as Qatar, Kuwait, Oman, the UAE and Bahrain, but still have many of the region’s other countries in the lower half (and Iraq in the bottom percentiles) of rankings by worldwide governance indicators such as the fight against corruption and the effectiveness of government, both of which are areas where performance improvements are proven economic growth boosters.
The final note of caution must belong to the security risk outlook. When Israel and Hizbullah entered into their open military confrontation in July of 2006, the capital markets in the Gulf region responded with substantial concern. Equally, as intraregional investments increase in size, the region’s big companies in the investment realm are becoming increasingly vulnerable to any deterioration of political stability in the MENA countries where they are investing.
The danger of new conflicts in any corner of the Middle East in the coming year is thus a major factor to consider. Whether it involves rumors of wars or civil wars, this risk, more than ever before, mandates policymakers and economic leaders in every country from Morocco to Kuwait to exert their maximum influence in working for regional stability as safeguard to realizing their countries’ economic and business growth.
If, however, the political risks are handled with efficiency, based on its GDP and investments outlook, the Middle East in 2007 will have high chances of private sector economic and business success for skilled individuals and smart companies, in areas reaching from education, tourism, hospitality and real estate to media and financial services.
