IIF sees widening gulf in Arab economies

Posted on October 20, 2011

The fallout from a year of Arab revolts will further deepen divergent economic outcomes for the region’s oil exporters versus importers, according to a report released on Thursday.

The Institute for International Finance said oil-exporting Arab states would see growth speed up to 6.5 per cent by the end of the year on higher crude prices, but that the region’s oil-importers – including Egypt, Tunisia, Jordan and Morocco – would face an average contraction of 0.4 per cent.

Serious difficulties surrounding transitions into post-revolutionary eras in Egypt and Tunisia were undermining economic performance, prompting the need for governments to deepen economic reforms and limit fiscal deficits, according to the IIF, an association of global financial institutions.

The IIF expected oil-importers’ GDP to recover to grow by 2.3 per cent next year on a modest recovery in investment, but it warned about risks of further political turmoil, shortfalls in external support and European economic woes.

Egypt, Tunisia, Morocco and Jordan have collective external financing needs of $35bn this year and next, the IIF estimated.

Egypt, which has seen its reserves and foreign direct investment fall this year, will need to push ahead with reforms.

“It will be hard to resist increasing spending, but they need to be patient, and Egypt should take external offers of financial support,” said George Abed, IIF director for the Middle East and Africa. “There also needs to be a clear vision on elections.”

In contrast, oil exporters, excluding Libya, were likely to be the beneficiaries of a sharp recovery thanks to high oil prices and strong government spending, although the IIF saw growth moderating to 4 per cent next year as the wealthier Gulf states sought to minimise dissent via handouts and investment.

The IIF projected Brent crude oil prices averaging $109 a barrel in 2011 and $97 a barrel in 2012, with the Gulf states, led by Saudi Arabia, cutting production to keep prices above their average break-even price of $85 a barrel.

Arab exporters’ current account surpluses – a measure of their ability to invest overseas – would drop from a collective $322bn this year to $225bn in 2012, with gross financial assets topping $2,000bn.

Libya would face challenges in reconstituting its political system once the fighting stops, the IIF said, forecasting a 56 per cent decline in GDP this year amid a decline in foreign assets from $150bn to $110bn.

Assuming smooth regime change, which is more likely than not according to Mr Abed, medium-term economic prospects were good.

The IIF forecasted GDP growth to rebound in 2012 by 55 per cent on rising oil production and infrastructure spending. Returning crude production to prewar levels would take at least two years.

Given the divergent needs of the divided region, it would make sense for the oil-rich Gulf to help fund the new and transitioning regimes in north Africa and the Levant.

The high levels of pre-financial crisis investment from the Gulf into north Africa was too often associated with real estate deals linked to members of the previous regimes, said Mr Abed.

“Now would be a great time to invest in new regimes and a new order to cement regional relationship,” he said.

Saudi Arabia, however, remains unhappy with the quick disposal of former president Hosni Mubarak and, without its lead, oil-rich states will be unable to lead a collective Arab push to contribute to these states’ nation-building efforts.

“It’s a great opportunity, but it won’t be taken,” he said.

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