Nominal gross domestic product, or GDP, in the MENA region is put at US$1,766 billion for 2007 and the International Monetary Fund expects the region’s nominal GDP to grow at a three-year compound annual growth rate of 20.4% to reach US$2,642 billion in 2009, Global Investment House said in a report.
“With limited disclosed exposure to the infected global financial markets, MENA banks have remained relatively immune to the worst that the subprime mortgage crisis and what the ensuing debacle had to offer,” Global Investment House said.
The medium-term outlook for the region, according to the IMF is generally favourable with Middle East expected to grow at 6.1% in 2008 and 5.3% while Africa expected to grow at 5.2% in 2008 and 4.7% in 2009.
The oil exporting countries in the MENA region have benefited from the oil surpluses built over the last couple of years. The aggregate current account surpluses of the MENA economies amounted to US$292 billion in 2007 and IMF expects the same to reach US$495 billion by end of 2008. Driven by the oil exports, external positions have continued to strengthen in 2008 with gross official reserves of the region increasing substantially.
Gross official reserves of the region have increased almost fivefold in the last five years, and are set to surpass US$1.0 trillion in 2008. Though oil prices have reduced by 58.5 %, from their peak this year at US$147 per barrel to US$61 per barrel as on 6 November 2008, it is likely that the production cuts by OPEC, increase in seasonal demand in the fourth quarter of 2008 and the economic stimulus packages announced worldwide should spruce up the demand and cause a rebound in the oil prices.
Diversifying
The regional economies are diversifying in order to reduce their dependence on oil. Non-oil sectors like construction, retail, transportation, and financial services have contributed significantly to growth.
According to an IMF working paper namely 'Fiscal Policy and Economic Cycles in Oil-Exporting Countries', apart from their effect on fiscal policy, oil prices do not independently influence underlying non-oil output. As a result, fiscal policy tends to be pro-cyclical because it drives the output cycle. We can expect that the increase share of non-oil activities in the regional GDP should help sustain its economic activities and expansion plans without resorting to external debt.
National savings are expected to rise considerably in 2008, with the total fiscal surplus rising to 11% of GDP in 2008. This increase to the current level of 11.0% in a span is commendable, given the tremendous growth in GDP. All GCC countries have large current account surplus creating substantial liquidity. The aggregate MENA current account surplus has grown at a five-year (2003-2008) CAGR of 50.6% from US$64 billion in 2003 to US$495 billion in 2008. Owing to a weakness in oil prices, there could be a decline of about 18.0% in 2009 current account surplus, the same ending at US$406 billion.
High average oil prices and increased oil exports have resulted in strengthening of external positions in 2008, with gross official reserves of the region increasing substantially. Gross official reserves of the region have increased at a five-year (2003-2008) CAGR of 43.3% from US$180 billion in 2003 to US$1,087 billion in 2008. The external debt as a percentage of GDP has decreased substantially from 31.6% in 2003 to 21.4% on 2008. It is expected to drop even further in 2009 to reach 20.7% of the aggregate GDP of the MENA region.
MENA and especially the GCC region have enjoyed a virtuous and unparalleled economic growth in the recent years driven mainly by high oil prices, massive investments in infrastructure, and expansionary monetary policies. The rapid growth in the region was also accompanied by significant increase in rates of inflation. Inflationary tendencies were accentuated in the GCC region because of its necessity to reduce interest rates (in lock-step with interest rate cuts by the US Federal Reserve), high growth in money supply and high rents due to supply-side constraints in housing. The commodity price boom and dollar depreciation have also driven regional inflation higher due to increasing prices for key imported raw materials including metals and agricultural products. Moreover, the rising cost of labor in the real estate sector has also driven prices upwards.
Various efforts were taken by the countries in the region to overcome this situation. Saudi Arabia announced a series of measures which included: 50% reduction in fees collected by state-owned ports on imported commodities, government employees and pensioners would be paid 5% of their salaries as a 'high cost allowance' for three years, Kingdom’s cabinet also decided to increase allocations of social insurance by 10% and to continue subsidies for essential commodities.
To control increasing rents, the Saudi cabinet approved the urgent initiation of the General Housing Authority initiation of building low-cost housing units for which a sum of SAR10 billion has already been allocated from the Saudi budget for this purpose. UAE government is making sincere efforts to control inflation. In order to have a check on substantial rent hikes in the housing market, the UAE government introduced rent caps. This was first introduced in Dubai at 15% and then lowered to 5.0%. In Abu Dhabi rent cap is at 7.0% while in Ras Al Khaima and Fujairah at 15.0%.
Significant
However in the backdrop of recent developments in global market, Global Investment House said it expects inflation to come down. We have witnessed significant decline in global commodity prices including oil in recent weeks.
The decline in global food prices, strengthening of US Dollar against major global currencies and expected cool down in real estate markets will help in bringing down the inflation.
With limited disclosed exposure to the infected global financial markets, MENA banks have remained relatively immune to the worst that the sub-prime mortgage crisis and what the ensuing debacle had to offer. Ripples of the free-falling markets, worldwide, did take a toll on the local bourse which has lost substantial ground as yet, with little hope for any sudden respite.
Banks (mostly GCC banks) which derive an un-ignorable portion of their bottom-lines from capital gains on investment securities, felt the brunt of the inescapable situation. Banks in MENA are nevertheless well capitalized for any delinquency or erosion in value of investments as visible from the regulatory capital ratios.
FDI inflows into the MENA region have grown over the years and is expected to keep up its momentum in the coming years due to buoyant growth, competitive pressures, and improvements in business environments in most countries. However, constraining factors such as geopolitical risks, may keep flows below what they might otherwise be. It is expected that the bulk of the increase in global FDI will flow into developing countries.
The private sector is at the forefront of the beneficiaries of this new vision as the bulk of these new investments will be facilitated by GCC-based groups and finance houses. The destination for these investments would not only be the GCC itself, but the broader MENA region. Recent cross-border investments originating from the area have been in the range of billions of dollars. Saudi Arabia and UAE have been leading in Middle Eastern regions in terms of FDIs whereas Egypt has been at the forefront among North African countries.
In the coming years, hundreds of billions of dollars of investments are expected in upgrading and refurbishing existing but old infrastructure as well as new infrastructure projects in the broader MENA countries. This includes ports, roadways, airports, power plants, water purification plants and other investments in the health sector to provide for the increased growth in population as well as economic activity. International groups, including some of that are GCC-based, are showing increased interest in addressing these opportunities, but investors will go first where they think they have the most chance of success.
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