JEDDAH – In Middle East and North Africa (MENA), hard choices are needed, but unlikely. For political transitions to be successful, economic fundamentals need to be solid. Yet, MENA countries are facing political change and pressing social demands while enduring economic strains. Sluggish global outlook, eurozone recession and China's deceleration hamper exports, remittances and capital inflows. Prolonged policy uncertainty constrains investment and hinders tourism. Monopolistic practices keep hampering job creation. Without bold structural changes, economic stagnation and persistent unemployment are likely. Between 2012 and 2013, growth will slow from 3.3 to 3.2 percent. The Gulf Cooperation Council (GCC) will grow the fastest, led by Qatar, Saudi Arabia and a diversified Oman. Given population growth, 50-75 million jobs are needed over the next decade. Neither the public nor the private sectors are likely to create them. Government spending supports consumption, but fiscal and foreign exchange cushions are eroding. While most “Arab Spring” demands remain unanswered, the most affected countries - Tunisia, Egypt, Libya, and Bahrain - are recovering. Syria remains in turmoil. Given political concerns, social tensions and rising global commodity prices, governments increased spending, particularly on wages. In 2011, about $212 billion (over 7 percent of regional GDP) was spent on energy and food subsidies, of which 80 percent in fuel - considered an entitlement, especially in resource-rich countries. Going forward, oil-exporting countries, helped by resilient global fuel demand and oil prices, will support growth in oil importers, via trade and financial links. Fiscal policy will remain supportive across the region, but over the last year fiscal deficits increased (to about 8 percent of national GDP on average), debt levels rose and domestic government borrowing started crowding-out the private sector. External positions also weakened, with a drawdown of international reserves - most noticeably in Egypt - and a worsening of creditworthiness and other financial market indicators. Maintaining macroeconomic stability will be challenging. Inflation is elevated, but monetary conditions remain easy. Via subsidies, food and fuel price-hikes were absorbed by public deficits, not by consumers. As weaker global and domestic demand eased prices, inflation decelerated in most countries - except in Jordan, Tunisia, Iraq and Saudi Arabia - but is expected to gently pick up. Between 2012 and 2013, inflation will rise from 5.8 to 6.2 percent. Central banks are importing easy monetary conditions through US dollar-pegs or close-tracking, and are likely to remain on hold, hence providing liquidity to the economy. In countries where government deposits are supporting the banking sector (Kuwait, Qatar, and Saudi Arabia) liquidity might be mopped up. Tightening is likely in Tunisia, and possible in Iraq. Oil exporters (Algeria, GCC, Iraq and Libya) are performing better than oil importers. Growth rates are declining below potential, but – thanks to higher oil prices - the combined current account surplus almost doubled by end-2011, approaching $400 billion. Official reserves exceeded $1 trillion, and foreign assets rose. On average, in GCC countries current account surpluses rose to more than 20 percent of GDP. Mergers and acquisitions are back on the agenda, although small in volumes and deal size. While natural gas exploration and infrastructure should stimulate the GCC economy, Qatar's rapid hydrocarbon growth is likely to stabilize. Social demands fostered government spending, especially public-sector salaries. Going forward, higher expenditures will support growth and improve local liquidity, particularly in Libya, where economic output is bouncing back, and Iraq, Oman, Qatar and Saudi Arabia. Yet, fiscal breakeven prices - the price of oil needed to balance the fiscal accounts at current oil-outputs and spending levels - are rising. In 2013, oil-output might decline in Saudi Arabia, UAE, and Kuwait, possibly depressing local consumption and asset markets. Oil importers (Egypt, Jordan, Lebanon, Syria, and Tunisia) are likely to grow below trend. Lower global growth, negative spillovers from the eurrozone crisis and Syria's conflict kept growth well below-potential. Economic activity deteriorated because of declining investments, meager tourist arrivals, capital outflow, stock markets underperformance, widening sovereign-spreads, credit rating downgrades, rising non-performing loans and high commodity prices. While remittances and exports helped stabilize income, governments increased spending on wages and subsidies to cushion food and fuel price-increases. — The writer is the Founder and CEO of Foresight Advisors. Prior to creating Foresight Advisors, he was chief economist and member of the management team and Investment Committee at the KuwaitChina Investment Company (KCIC).
