Turmoil slows MENA region’s growth while focus turns to fiscal, monetary and structural reforms
Economic activity in the Middle-East and North Africa (MENA) has been hindered by prolonged political unrest and civil strife. The region’s vulnerability has increased over the last two years due to mounting structural challenges. What’s more, widening fiscal deficits due to the economic slowdown and dwindling foreign currency reserves remain sources of concern, as noted by a World Bank report.
Some of the countries are finding it difficult to reform their expensive subsidy systems, creating huge current account imbalances. Export volumes have fallen considerably in several countries with trade ties to a weakened Euro-zone, such as Morocco. Additionally, Morocco is facing a liquidity crisis due to an economic slowdown. On the upside, an improved farm output is expected to boost domestic growth.
Elsewhere, Egypt’s economy is worsening with the ongoing political turmoil, necessitating urgent reforms to set right severe fiscal imbalances. Jordan is bearing the brunt of cross-border political unrest, while civil strife in Syria has spilled over and disrupted the country’s economic activity. Providing for the refugees has drained Jordan’s sparse resources and fragile finances. Meanwhile, Israel is keen on implementing austerity measures to narrow widening deficits. The World Bank expects growth in the MENA region to slow to 2.5 percent in 2013.
The Sub-Saharan African region has had encouraging growth with sufficient domestic demand and foreign direct investment inflows. Yet, a few countries like South Africa are challenged with domestic issues, labor strikes in particular, which have dampened investor sentiment and affected growth. Excluding South Africa, The World Bank expects the rest of the Sub-Saharan region to expand by 6.2 percent this year.
At a Glance
- Many countries in the MENA region continue to face political and civil turmoil threatening the economic stability of the region. Additionally, weak demand from the Euro-zone, the region’s key trading partner, has led to contraction of the manufacturing sector in many countries.
- South Africa : South Africa’s economy has been weighed down by several structural problems, which have also led to drastic falls in consumer and business confidence indices.
- Israel : Israel is keen on improving its growth momentum and lowering the fiscal deficit gap by implementing spending cuts and raising taxes.
- Egypt : Egypt’s economy is in shambles due to constant turmoil over the past two years. More recently, violent clashes between security forces and supporters of the deposed president Mohammed Morsi have further dented economic activity.
- Morocco : In addition to a liquidity crisis, Morocco has been burdened with high energy costs and inflation. The only bright spot is the agriculture sector’s improved output, which is expected to support the economy.
- Jordan : Encouragingly, Jordan’s economy has managed to sustain growth despite being burdened with hosting the growing number of Syrian refugees.
SOUTH AFRICA: ECONOMY LOSES MOMENTUM, CHALLENGES GALORE
South Africa is dealing with myriad challenges, starting with slower economic growth compared to other emerging markets, volatile labor relations, and a large current account deficit that has left the rand vulnerable. For the first time in five months, the purchasing managers index slipped into negative territory in September, indicating a contraction in the manufacturing sector, Bloomberg reported. These prolonged labor strikes with demands for higher wage pay-outs have hurt the economy and the job creation process.
Meanwhile, Bloomberg notes that the rand has been one of the worst performing currencies in the emerging markets, experiencing the longest losing streak in 12 years. In addition to local labor tensions, an anticipated paring down of the stimulus program by the U.S. Federal Reserve has caused the rand to plummet along with other emerging market currencies. While there was some respite with the Fed’s decision to continue the stimulus, South Africa’s structural problems and an absence of considerable foreign capital inflow typically used to bridge the current account deficit, could prevent the rand from recovering substantially. Though a weak rand might prove beneficial for exporters, it threatens to stoke inflation. The South African Reserve Bank (SARB) has left its key interest rate at 5 percent, despite inflation briefly breaching the 3 percent-6 percent target range, as lowering the interest rate would soften the rand further and fan inflation.
Adding to the woes, online daily Fin24 notes that household debt service risk remains significantly high, as the economic slowdown has reduced the pace of disposable income growth. Unemployment remains a worrying issue due to the rising number of job losses, particularly in the mining, transport, construction and financial services industries. These factors, coupled with rising fuel prices, have led to a deteriorating consumer sentiment resulting in consumer confidence levels plunging to a ten-year low, Bloomberg has reported. As well, the business confidence index has slumped due to a slowdown in growth momentum and persisting labor disruptions.
SARB’s governor is keen on boosting South Africa’s competitiveness by improving the education system, labor market dynamics, and the cost of doing business. The central bank expects the economy to expand by 2 percent this year.
ISRAEL: AUSTERITY MEASURES TO NARROW DEFICIT
Israel’s Central Bureau of Statistics (CBS) reported an unexpected surge in GDP growth in the second quarter, the strongest in over two years. The expansion has been fueled by higher consumer spending ahead of the value-added tax (VAT) hike, a rise in government expenditure and the commencement of natural gas production. With the anticipation of a hike in VAT in June, dictated by the 2013-2014 state budget, consumers went on a spending spree purchasing homes, cars and other consumer durables. However, the economy expanded moderately by an annualized 3.4 percent in the first half of 2013, and with the budget cuts kicking in, growth in the second half is expected to slow down as both private and government consumption is expected to decline.
The CBS further noted that the drivers of growth for Israel have changed in 2013, with private consumption being the key source as opposed to the investment in fixed assets and exports and services seen in previous years. Elsewhere, the shekel’s strength against foreign currencies is worrisome, eroding exporters’ profits. The Bank of Israel has been trying to curb the shekel’s appreciation by buying billions of U.S. dollars coupled with interest rate cuts. Still, the currency has remained stubbornly strong partly due to favorable economic growth and the impact of domestic natural gas production at the Tamar field off the coast of Haifa. The central bank hopes to offset the effect of gas production and weaken the shekel by purchasing $3.5 billion in 2014.
Meanwhile, Israel’s unemployment rate dropped to a two-decade low in August, under a new CBS methodology for calculating the jobless rate. However, Globes, an Israeli financial daily, noted that the jobless rate may rise in the coming months due to a slowing world economy and lower domestic production and exports.
While Israel’s inflation rate has encouragingly retreated in recent months due to weaker growth, the Bank of Israel forecasters have opined that inflation could rise in the future due to high housing prices. On a positive note, higher revenues due to tax hikes and austerity spending cuts are expected to narrow the fiscal deficit gap in the coming quarters.
EGYPT: ECONOMY CONTINUES TO GRAPPLE WITH VIOLENCE AND PROTESTS
Over the last few months, Egypt has witnessed one of the bloodiest clashes between security forces and supporters of the former president, Mohammed Morsi, who was ousted in a military coup earlier in July. The military-backed interim government that replaced Morsi has been unable to establish stability for an economy teetering at the edge.
Several years of turmoil in the country have driven away investors and tourists alike. The ongoing unrest has rendered a deadly blow to the tourism sector, which accounts for around 11 percent of the nation’s GDP. A Middle-Eastern online daily reported that the tourism sector has lost over $2.9 billion in revenues over the last year and hotel occupancy rates have plummeted by 85 percent since the ouster of the former president. As well, Reuters reports a fall in worker remittances citing the probability of funds transfer through unofficial channels to profit from the black market for foreign currency. Although the turmoil has disrupted revenues from the Suez Canal, encouragingly, foreign currency reserves increased due to foreign aid from other gulf countries.
In an effort to revive the battered Egyptian economy, Ahram Online notes that the interim cabinet has announced a stimulus plan involving investments in low-income housing and natural gas distribution, as well as infrastructure projects comprising roads and railways. But with a budget deficit mounting to a whopping 14 percent of GDP, it remains to be seen how the government will fund these projects without plans to raise taxes or cut social spending. Elsewhere, the Central Agency for Public Mobilization and Statistics noted that Egypt’s inflation had slowed down due to lower consumption following Ramadan and the curfew imposed following the break out of violence in the last few months. An improved currency has also helped to keep the inflationary pressure low.
The interim government aims to achieve GDP growth of 3 percent-3.5 percent in fiscal year 2013-2014 through foreign funding assistance and fiscal and monetary reforms.
MOROCCO: CASH-STRAPPED ECONOMY IN NEED OF REFORMS
Morocco’s liquidity crunch continues to loom over the economy, as energy costs have risen and exports have been dented by a downturn in the Euro-zone. A Moroccan online daily reports that the liquidity crisis has also been triggered in part by massive asset withdrawals by investors following the government’s intention to modify taxes. Meanwhile, the central bank has taken several steps to ease its monetary policy, pump money into the financial markets, and encourage lending. Notably, Reuters reports that the liquidity crunch has not resulted in interest rate hikes for the banks, which have been hurt the most. In an effort to diversify sources of revenues and reduce the burden on bank resources, three of Morocco’s largest banks are considering borrowing from international capital markets to aid expansion projects and lending.
Morocco’s high planning authority reports that inflation has continued to rise due to higher price growth in housing, food, restaurants and hotels, and other goods and services sectors. As well, under the new fuel price indexation system- where fuel prices in the country will be altered if international prices change over 2.5 percent in a two-month period and planned energy subsidies cut, the prices of fuel and gasoline should move in tandem with international oil prices, and this would most likely increase the prices of transport and utilities. More recently, government’s increase of fuel prices under the new system drew criticism from the public and industrialists who opined that cost increases would eat into their bottom line, a Moroccan daily reported. To reduce unemployment, Morocco is establishing an entrepreneurship program through funding from World Bank to aid young adults in starting their own businesses.
Meanwhile, Morocco’s trade deficit narrowed due to a sharper drop in imports relative to exports, particularly in energy and food. Export volumes dropped mainly due to lower sales of phosphates. While a 31.9 percent surge in the flow of foreign direct investment helped bridge the trade deficit gap, the IMF emphasized that the economy needs urgent reforms in the areas of taxes and the compensation fund that pays subsidies for fuel and basic goods.
JORDAN: ECONOMY SUSTAINS GROWTH DESPITE CHALLENGES
Despite mounting economic challenges, the Hashemite Kingdom managed to clock 2.8 percent GDP growth during the first half of 2013, as noted by the Department of Statistics (DoS). Expansion was fueled by improved performance in sectors such as the extraction industry, agriculture, social services, insurance, and banking and real estate. In other news, the finance ministry noted a narrowing budget deficit, thanks to a rise in foreign grants and an increase in tax revenues. In an effort to reduce the fiscal deficit, the parliament is considering amendments to the tax laws, where businesses particularly in the financial, telecom and mining sectors would pay higher taxes, much to the displeasure of Jordan’s industrialists.
Meanwhile, providing for a growing Syrian refugee population continues to drain the Jordanian economy. Although the country has received foreign assistance to ease this burden, the government noted that it would need an additional $850 million funding should the refugee headcount cross one million. Another worrying issue is the lack of job opportunities, which has resulted in a high rate of unemployment, notably among the predominantly young labor force.
Coming as no surprise, the DoS noted that inflation in Jordan over the first eight months of 2013 was higher compared to the same period in 2012. This was expected due to the government’s cut on subsidies on items such as fuel, bread, electricity and water to reduce fiscal spending. The central bank noted that tourism revenues, which are a crucial source of national income, continued to drop due to a decline in medical tourism, and last minute tourist cancellations on the back of deteriorating security conditions in Syria and other surrounding countries. Yet, on the upside, expatriates’ remittances, another key driver of the economy increased bringing some cheer.
On the political front, the Hashemite Kingdom recently reshuffled its cabinet by adding more technocrats to help implement the IMF-directed reforms and kick-start the sluggish economy. The IMF expects Jordan’s economy to expand by 3.3 percent this year.
FORWARD LOOKING STATEMENTS
Certain statements made in this article may be forward looking. Actual future results or occurrences may differ significantly from those anticipated in any forward looking statements due to numerous factors. Thomas White International, Ltd. undertakes no responsibility to update publicly or revise any forward looking statements.
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