apofeed with “What Lies Beneath the Slow Economic Growth in the MENA?” attempts to elaborate on the current situation that is prevailing in certain MENA countries.
What Lies Beneath the Slow Economic Growth in the Middle East and North Africa?
A dynamic private sector is key for the economies of the region to grow out of their currently high debt levels; Unlocking sustainable growth in the region’s private sector requires reforms that facilitate innovation, the adoption of digital technologies and investments in human capital; Reforms to support these objectives must take account of sustainability and the global agenda to limit climate change
The European Investment Bank (EIB), the European Bank for Reconstruction and Development (EBRD) and the World Bank have published a joint report, Unlocking Sustainable Private Sector Growth in the Middle East and North Africa (MENA) (https://bit.ly/3H73CdA). The report analyses constraints on productivity growth and limited accumulation of factors or production in the MENA private sector.
The report is based on the MENA Enterprise Survey conducted between late 2018 and 2020 on over 5 800 formal businesses across Egypt, Jordan, Lebanon, Morocco, Tunisia, the West Bank and Gaza. Historically, economic growth in the Middle East and North Africa has been weak since the global financial crisis of 2007-2009 and the Arab Spring of the early 2010s. Since then, gross domestic product (GDP) per capita has grown by only 0.3% a year in the MENA region. That compares unfavourably with rates of 1.7% on average in middle-income countries and 2.4% in the developing economies of Europe and Central Asia.
Achieving higher and sustainable growth is particularly important in view of other economic challenges facing the region. Public debt has increased considerably over the last decade, accompanied by declining investment. More recently, the coronavirus pandemic has battered the region, further straining public finances. In addition, the Russian invasion of Ukraine affects the MENA economies through higher hydrocarbon prices, risks to food security and declining tourism.
Against this background, it is important that policymakers exploit the potential of the private sector to propel the region towards greater prosperity.
“The spillovers from the war in Ukraine add to structural vulnerabilities in the region. The prospects for global financial tightening, persistently high energy and food prices and concerns for food security come on top of concerns related to weak economic growth and rising debt levels,” said EIB Chief Economist Debora Revoltella (https://bit.ly/2UYJi4s). “When responding to the new shock, MENA countries need to tackle the main structural bottlenecks affecting the region. Reforms that lower regulatory barriers, tackle informal business practices, promote competition, and facilitate innovation and digitalisation are crucial for achieving sustainable economic growth and improving resilience to future shocks.”
The business environment in the MENA region as reported in the survey has been held back by various factors. Political connection and informality are undermining fair competition, bringing economic benefits to a limited number of companies. Management practices lag behind benchmark countries, with a decline in average scores in all MENA countries since 2013.
Customs and trade regulations appear to be more severe barriers for firms in the MENA region than in other countries. Firms need more time to clear customs to import or export than in other countries. The MENA economies depend on high levels of imports compared to low export activities.
Although firms trading in the international market are more willing to develop and innovate processes, only 20% invest in innovation, which can affect the long-term economic prospects for the region.
The region needs to make better use of its human capital. Predominantly, only a few foreign-owned companies invest in training their human capital, and they tend to be digitally connected exporting firms. Additionally, a significant share of companies are not engaging in financial activities with other economic players, opting to self-finance voluntarily.
Incentives for companies to decarbonise are weak, and MENA firms are less likely than their counterparts in Europe and Central Asia to adopt measures that reduce their environmental footprint.
Unlocking sustainable growth in the region’s private sector, the report calls for MENA economies to lower regulatory barriers for businesses, promote competition and reduce disincentives emerging from political influence and informal business practices.
The region is also in need of reforms to facilitate innovation, the adoption of digital technologies and investments in human capital, while being in line with the global agenda to limit climate change, enhance sustainability and protect the natural environment.
Improving management practices can be instrumental to that. “Good management practices can account for as much as 30% of differences in efficiency across countries,” said Roberta Gatti, Chief Economist for the Middle East and North Africa at the World Bank. “Management practices are lacklustre in firms in the region, particularly in those with some state ownership. Improving these practices can have substantial benefits, is not costly, but is not easy. It will require — among others — a change in mindsets.”
Companies should also be given incentives to exploit the benefits of participating in cross-border trade and global value chains more broadly, accompanied by better management practices.
At the same time, the state has a duty to ensure that this transition process is just, through measures that help workers to take advantage of opportunities to obtain new, higher-quality jobs linked to the green economy, while also protecting those at risk of losing their jobs. Such measures include labour market policies, skills training, social safety nets and action to support regional economic development.
EBRD Chief Economist Beata Javorcik said: “Climate change creates an opportunity the MENA region to build up its green credentials and use them as a source of competitive advantage. This will create the much-needed high-quality jobs linked to the green economy.”
Distributed by APO Group on behalf of European Investment Bank (EIB).
The Business Times in its section Global Enterprise tells us how opportunities arising from Middle East’s Asian pivot are moving up the ladder of development in both regions. Or could it be mainly about Leveraging Asean’s strengths Let us see what by Mindy Tan.
The Middle East has always been considered an energy exporter to Asean, but this relationship has become more nuanced in recent years, especially as the former has shifted its focus to boosting non-oil exports.
Notably, countries such as Indonesia and Singapore have benefited.
Late last year, the Indonesian government announced they had secured US$32.7 billion worth of investment commitments from United Arab Emirates (UAE) businesses in various sectors, such as vaccine manufacturing and distribution.
“Indonesia is a very typical case of how I think Asean is becoming a magnet for foreign direct investment (FDI) from the Gulf countries,” said Gyorgy Busztin, a visiting research professor at the Middle East Institute, National University of Singapore.
Dr Busztin cited Asean’s political stability (outside of Myanmar) as well as a general lack of labour unrest as key factors that draw these Gulf countries to the region, even as he qualified that these countries have to be looked on a case-by-case basis.
“Compatibility, stability, and predictability, which are, of course, combined with the presence of a large, young, and highly trained workforce – it all comes together very nicely.”
Singapore too has benefited from the relationship.
A spokesperson from the Singapore Business Council, Qatar, noted that with Qatar is diversifying its economy away from oil and gas as part of its National Vision 2030, some of the key sectors they are looking at include sustainability and technology.
These are sectors in which Singapore has strong capabilities, he said.
“This makes businesses that wish to expand outside of the Middle East region look to Singapore as one of the key destinations to explore opportunities and use it as a base to springboard into the wider region due to its strategic location and easy access from the Middle East,” he said.
Alessandro Arduino, principal research fellow at the Middle East Institute at the National University of Singapore, added: “Expertise from Singapore will be beneficial to development in the Gulf and at the same time, can increase profitable cooperation between the Gulf and South-east Asia in areas ranging from artificial intelligence to Internet of Things, and smart cities.”
Leveraging Asean’s strengths
Economic ties between the Middle East and Asean have strengthened significantly since the first Asean-GCC Joint Vision was adopted in 2009.
In 2019, the two blocs further agreed to finalise the Asean-GCC Framework of Cooperation for 2020-2024 to advance collaboration in multiple sectors including smart cities, energy, connectivity, agriculture and halal products. Bilateral partnerships between individual countries have also risen.
The Singapore-UAE Comprehensive Partnership (2019) and the Malaysian Investment Development Authority’s (MIDA) MoU with the Investment Promotion Agency of Qatar (2019) are notable examples.
Heidi Toribio, Regional Co-head, Client Coverage, Asia, Corporate, Commercial and Institutional Banking at Standard Chartered
Heidi Toribio, regional co-head, client coverage, Asia, corporate, commercial and institutional banking at Standard Chartered, said: “As countries across the Middle East diversify into new non-oil sectors, Asean is emerging as an important trade and investment destination.”
In 2020, investments from the Middle East into Asean reached US$700 million, a three-fold growth from 2017. In the first three quarters in 2021 alone, merchandise imports to Asean from the Middle East grew more than 30 percent year-on-year, reaching US$52 billion in value, she noted.
According to a survey of Middle Eastern companies commissioned by Standard Chartered and prepared by PricewaterhouseCoopers, 82 per cent of Middle East respondents expect more than 10 per cent growth in their Asean business revenues this year.
They identified access to the large and growing Asean consumer market (60 per cent); access to a global market (from Asean) enabled by a network of Free Trade Agreements (58 per cent); and diversification of production footprint (51 per cent) as key reasons why they are interested in the region.
The Regional Comprehensive Economic Partnership (RCEP) is also expected to attract more investments; all of the respondents agreed that the ratification of the agreement will lead to more investments from their company. Close to 70 per cent said they expect their company to increase investments by more than 50 per cent over the next 3-5 years.
In terms of geographical preference, respondents chose Malaysia (78 per cent), followed by Singapore (69 per cent) and Indonesia (67 per cent).
Of those who picked Singapore, 94 per cent of the senior executives from the 45 companies based in the Middle East said they consider the city-state a major regional R&D/innovation centre.
A further 87 per cent said Singapore is a desirable hub for regional procurement and that Singapore is an ideal place to set up their regional sales and marketing headquarters.
Finding new growth opportunities
The report identified 5 growth sectors which it expects to drive the future of the Middle East-Asean corridor. They are namely refining and petrochemicals; infrastructure and real estate; renewable energy; retail and consumer goods; and digital infrastructure and services.
Perhaps unsurprisingly, consumption of fuels and petrochemicals continues to grow strongly in Asean, driven by rising consumer and industrial demand. To address energy security concerns, the region is also now focusing on boosting local production capacity by building integrated refining and petrochemical facilities.
Similarly, rapid economic and social progress have accentuated Asean’s infrastructure needs.
“The infrastructure segment will continue to dominate the construction industry, maintaining a 46 per cent share in sector GVA (gross value added) by 2025, followed by commercial real estate (32 per cent) and residential real estate (22 per cent),” said the report.
“In particular, demand for healthcare and transport infrastructure as well as logistics and industrial real estate are expected to drive growth, which is creating new investment and business opportunities for Middle East companies.”
Separately, demand for digital solutions and enabling digital infrastructure is expected to see significant growth. Indeed, the region’s flourishing digital start-ups are increasingly attracting capital from leading investment firms globally, including many from the Middle East.
In terms of more nascent sectors, Asean nations are increasingly prioritising solar and wind solutions to meet their future energy requirements. Retail and consumer goods sector in Asean is also expected to regain momentum in the years ahead, led by an expected surge in consumer spending.
As the pandemic-fuelled liquidity begins to wane and the reality of inflation and higher interest rates sets in, many economies will face considerable challenges. Middle East and North Africa (MENA) countries are vying to attract global investors and increase Foreign Direct Investment (FDI). Yet, capital flows are reversing from emerging to developed markets—specifically in the United States, where interest rates are rising to levels not seen since 2018. The year 2018 is illustrative: during that time, emerging markets experienced substantial capital outflows as international investors reduced their exposure and consolidated their risk into emerging economies with fewer perceived risks, given their proactive and progressive economic policies.
Attracting foreign investors into emerging market economies has always been difficult. Nevertheless, thanks to the extended period of near-zero interest rates, emerging markets were blessed with investors hungry for higher returns. The plentiful supply of money coupled with historically low yields in rich countries led investors to explore higher yields in riskier markets across various assets, including public equities, public debt, private equity, and venture capital. The lower cost of capital allowed investors to finance opportunities that otherwise would have been unfeasible.
Unfortunately, the party is over, and the pain is just beginning. The US Federal Reserve has started an aggressive interest rate hiking campaign, which will likely be the sharpest rise in interest rates since former chair of the Federal Reserve Paul Volcker’s war on inflation from 1979 to 1982. Many economists believe this will likely lead to a recession in the world’s biggest economy.
A US economic slowdown or a recession couldn’t come at a worse time for emerging markets, particularly those in MENA, where most are fighting chronic unemployment, especially among youth and women, slowing growth, and higher debt levels. Large oil-exporting countries in the Gulf Cooperation Council (GCC) — such as Qatar, Saudi Arabia, and the United Arab Emirates (UAE) — are better positioned given heightened commodity prices. However, their lack of interest rate autonomy given the dollar peg limits their ability to deviate their monetary policy from that of the United States.
Additionally, the global demand destruction cannot be ignored as the post-pandemic surge in demand levels off, with consumers beginning to feel the pinch from inflation and rising interest rates. This may put a damper on global energy demand and tourism. Inflation also impacts global emerging markets, causing a perfect storm for the arrival of tough economic times. Currency depreciation against the dollar is increasing the cost of imports and repaying foreign currency debts for banks, companies, and governments, many of which racked up significant debt during the pandemic.
Research suggests that the impact of US monetary tightening on emerging markets will vary depending on the factors for the change. Interest rate hikes driven by US economic expansion will likely lead to positive spillover effects that benefit more than hurt emerging markets and, therefore, are neutral on capital flows. On the other hand, interest rate hikes to fend off inflation will likely lead to emerging markets disruption. Here, there are two key points to mention. First, there is a more significant effect on emerging markets from rising interest rates due to inflation than those due to growth. Second, emerging economies with stable domestic conditions and policies tend to fare better and experience less volatility. In a global economic environment with slower growth, higher cost of capital, and a shrinking capital pool for riskier assets, discerning international investors will consolidate their investments in the highest-quality emerging markets.
The Goldilocks moment experienced in markets over the past couple of years is subsiding. Geopolitical risk, inflation, and US interest rates are all rising. In addition, two crucial macroeconomic trends will impact the future capital flows to emerging markets. First, globalization policies that have focused overwhelmingly on cost efficiency and rationalization will now focus on resiliency and values-based investments. At an Atlantic Council event on April 13, US Treasury Secretary Janet Yellen articulated a blueprint for US trade policy, stating, “The US would now favor the friend-shoring of supply chains to a large number of trusted countries that share a set of norms and values about how to operate in the global economy.”
Second, Environmental, Social, and Governance (ESG) issues are gaining more attention with countries and companies putting them on the agenda. For an indication of what’s to come, consider Total, the French oil and gas giant, marking its shift to renewable energy and rebranding to TotalEnergies, as well as Engine No. 1, a US impact hedge fund, hijacking ExxonMobil’s board to drive a green strategy at the company. As a result of the confluence of these complex issues on top of challenging macro-economic concerns, investor appetite for emerging market assets is weakening. It will become more discerning in the coming years.
But all isn’t lost. There will be divergent outcomes and risks depending on the domestic conditions of each emerging market. Thoughtful investors will continue to seek opportunities in emerging markets, especially in private markets, where the predominant share of opportunities exists. However, as financial conditions tighten, differentiation between emerging markets will increase. MENA countries can better position themselves amongst others competing for capital by:
Attracting and empowering strong policymakers to make dynamic and bold decisions that complex changes in the global economy require. Deepening the bench of talented policymakers should be another priority.
Driving policies supportive of private sector development and investment. Reducing government-owned enterprises and providing ample space for private companies to grow and prosper on an even playing field is critical to building a dynamic economy.
Continuing to nurture the nascent entrepreneurial ecosystem. Entrepreneurial economies are consistently more resilient and lead to better outcomes over the long term.
Enhancing regional and international economic integration through bilateral and multilateral agreements with more robust economies. Proactive engagement with multilateral financial institutions will also increase financial stability and resilience.
Standardizing policies according to global norms for greater regional and international integration. Investor appetite is greatly improved in emerging markets that adopt regulations and standards from developed countries.
Increasing transparency and reducing uncertainty around laws and regulations. Investors and companies need more clarity on the game’s rules in order to play it confidently and competently.
Several MENA countries continue to take bold steps to improve their global competitiveness. One such example is the privatization programs of government-owned enterprises in Egypt, Saudi Arabia, and the UAE to increase liquidity in local capital markets, improve transparency, and expand private sector participation. Those countries that maintain their momentum will be clear winners in the coming years. History is rich with evidence that economic challenges are followed by periods of historic gains.
Amjad Ahmad is Director and Senior Fellow at the Atlantic Council’s empower ME Initiative at the Rafik Hariri Center for the Middle East.
Just as the war in Ukraine is disrupting supplies and fuelling already-high inflation, economic growth in the Middle East and North Africa (Mena) region is forecast to be “uneven and insufficient” this year, according to the World Bank.
Growth rates in the region envisage a narrative of diverging trends. As oil exporters benefit from surging prices, higher food prices have hit the whole region.
The GCC is expected to notch up 5.9% growth this year, buoyed by oil prices and helped by a vaccination rate much higher than the rest of Mena. But most Mena economies — 11 out of 17 — are not seen exceeding their pre-pandemic GDP per capita in 2022, says the World Bank.
GCC economies have seen a relatively strong start to 2022 with the hydrocarbons sector having benefited from increased oil production so far this year, says Emirates NBD. Its survey data for the first quarter of the year point to a solid expansion in non-oil sectors as well, with strong growth in business activity in the UAE, Saudi Arabia and Qatar. In the wider Mena region, however, countries like Egypt, Morocco and Tunisia – home to large, mainly urban populations, but lacking oil wealth – are struggling to maintain subsidies for food and fuel that have helped keep a lid on discontent.
Egypt has been struggling to maintain a bread subsidy programme used by about 70mn of its citizens with the coronavirus pandemic hitting the national budget, and surging wheat prices are exacerbating the challenge.
The World Food Programme has warned that people’s resilience is at “breaking point,” in the region. Global foods costs are up more than 50% from mid-2020 to a record and households worldwide are trying to cope with the strains on their budgets. In North Africa, the challenge is more acute because of a legacy of economic mismanagement, drought and social unrest that’s forcing governments to walk a political tightrope at a precarious time.
The MENA region’s net food and energy importers are especially vulnerable to shocks to commodity markets and supply chains resulting from Russia’s war on Ukraine, according to the International Monetary Fund.
That’s in countries where the rising cost of living helped trigger the Arab Spring uprisings a little over a decade ago. The region’s GDP is forecast to rise 5.2% this year after an estimated 3.3% expansion last year and a 3.1% contraction in 2020.
“Even if this high growth rate for the region as a whole materialises in this context of uncertainty, and there’s no guarantee that it will…(it) will be both insufficient and uneven across the region,” according to Daniel Lederman, World Bank lead economist for the MENA region.
Countries that are net importers of oil and food and which entered 2022 with high levels of debt as a ratio of GDP are most vulnerable, he said, pointing to Egypt and Lebanon as examples. Even before Russia invaded Ukraine, food prices had been rising around the world, driven by the higher shipping costs, energy inflation and labour shortages that have followed in the pandemic’s wake, along with extreme weather. Food crisis was likely to worsen in the Middle East and North Africa as Covid-19 continued, according to a report from the regional directors of Unicef, the Food and Agriculture Organisation, WFP and World Health Organisation in July 2021.
The World Bank says MENA growth to be ‘uneven and insufficient’ in 2022, which should not come as a surprise to anyone if considering all elements of the current conjecture. This is what the World Bank has assessed prior to coming out with this story.
MENA growth to be ‘uneven and insufficient’ in 2022, World Bank says
DUBAI, April 14 (Reuters) – Economic growth in the Middle East and North Africa (MENA) is forecast to be “uneven and insufficient” this year, as oil exporters benefit from surging prices while higher food prices hit the whole region, the World Bank said on Thursday.
The war in Ukraine is also disrupting supplies and fuelling already-high inflation, it said.
GDP in the region is forecast to rise 5.2% this year after an estimated 3.3% expansion last year and 3.1% contraction in 2020, the World Bank said in a report, noting its own and others’ forecasts had been overly optimistic in the past decade.Report ad
“Even if this high growth rate for the region as a whole materializes in this context of uncertainty, and there’s no guarantee that it will … (it) will be both insufficient and uneven across the region,” Daniel Lederman, World Bank lead economist for the MENA region, told Reuters.
High-income oil exporters in the six-nation Gulf Cooperation Council (GCC) will benefit the most, but middle-income ones like Iran, Algeria and Iraq are also set to benefit. All MENA countries, however, are net importers of food “and will suffer the consequences,” Lederman said.
The GCC is expected to notch up 5.9% growth this year, buoyed by oil prices and helped by a vaccination rate much higher than the rest of MENA as the risk of COVID-19 variants also looms.
The GCC’s GDP is estimated to have risen 3% last year after contracting 5% in 2020.
“The oil futures markets are predicting that in a few years ahead, the equilibrium price of oil will be no more than $70,” Lederman said.Report ad
“So it’s prudent to treat the current circumstances as temporary, or transitory, and do everything that is feasible to save a significant portion of this oil windfall in order to save for the future, especially in times of uncertainty.”
GDP per capita, a measure of people’s living standards, is expected to rise 4.5% in the GCC this year and is not seen surpassing pre-pandemic levels until 2023, the World Bank said.
Most MENA economies – 11 out of 17 – are not seen exceeding their pre-pandemic GDP per capita in 2022, it said.
Lederman urged greater transparency from MENA governments regarding their economic data, citing this as a factor behind previously overoptimistic forecasts.
“Published research in leading economic journals in the world indicate that overly optimistic and imprecise forecasts are associated with debt and financial vulnerabilities, higher probability of financial crises and even economic contractions in the near future,” he said.
Countries that are net importers of oil and food and which entered 2022 with high levels of debt as a ratio of GDP were most vulnerable, he said, pointing to Egypt and Lebanon as examples. He said food security was a serious risk, even in Morocco, where a drought is expected to turn it from a modest net exporter of food to an importer this year.
The region’s oil importers are seen growing by 4% this year from an estimate of 4.2% growth in 2021 and 0.8% contraction in 2020.
“There’s a lot of pain that’s being felt, particularly by the poorest and the most vulnerable families among us, and that’s because the poorest and most vulnerable families spend a larger share of their family income and budgets on food and energy,” Lederman said.
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