How will MENA countries hit FDI targets? 

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Emerging market investments are shrinking. How will MENA countries hit FDI targets? 

By Amjad Ahmad in Atlantic Council

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:

  1. 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.
  2. 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.
  3. Continuing to nurture the nascent entrepreneurial ecosystem. Entrepreneurial economies are consistently more resilient and lead to better outcomes over the long term.
  4. 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.
  5. 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.
  6. 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.  

Twitter: @AmjadAhmadVC.

 

‘Insufficient, uneven’ growth rates to weigh on MENA

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The above-featured image is that of the World Bank’s MENA Economic Update on how ‘Insufficient, uneven’ growth rates to weigh on MENA, is explained in Gulf Times of Qatar ViewPoint. Here it is:

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.

MENA growth to be ‘uneven and insufficient’ in 2022

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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

By Yousef Saba

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.”

GREATER TRANSPARENCY

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.

Reporting by Yousef Saba; Editing by David Holmes

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Climate-related disasters pose ‘major’ growth threat

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Climate-related disasters pose ‘major’ growth threat in Middle East, Central Asia – IMF

By Andrea Shalal

The above featured image is of An aerial view showing Iftin Camp for the internally displaced people outside Baradere town, Gedo Region, Jubaland state, Somalia, March 13, 2022. REUTERS/Feisal Omar

IMF Managing Director Kristalina Georgieva speaks during a conference hosted by the Vatican on economic solidarity, at the Vatican, February 5, 2020. REUTERS/Remo Casilli

WASHINGTON, March 30 (Reuters) – The frequency and severity of climate-related disasters are rising faster in the Middle East and Central Asia than anywhere in the world, posing a “major threat” to growth and prosperity, IMF Managing Director Kristalina Georgieva said.

A new International Monetary Fund paper showed that climate disasters in the region injured and displaced 7 million people in an average year, causing more than 2,600 deaths and $2 billion in physical damage.

“Droughts in North Africa, Somalia and Iran. Epidemics and locust infestations in the Horn of Africa. Severe floods in the Caucasus and Central Asia. The list of disasters is quickly getting longer,” Georgieva said in remarks prepared for the World Government Summit in Dubai.

Analysis of data spanning the past century showed that temperatures in the region had risen by 1.5° C, twice the global increase of 0.7° C, and already sparse precipitation had become more erratic than in any other region, the IMF report said.

Georgieva said extreme weather events typically cut annual economic growth by 1–2 percentage points per capita.

In the Caucasus and Central Asia subregion, she said, such events had caused a permanent loss in the gross domestic product level of 5.5 percentage points.

She called on all countries to adapt their economies to climate challenges, including through adoption of a steadily rising carbon price, increased green investments and work to ensure a just transition across and within countries.

She lauded the United Arab Emirates, a major oil producer, for its pledge to invest more than $160 billion in renewable energy to achieve net-zero carbon emissions by 2050. Egypt, meanwhile, was investing in modern irrigation techniques, education and health care.

Georgieva said it was also critical to ensure climate adaptation policies were included in national economic strategies, as investments in resilient infrastructure and better flood protection could avert economic losses.

In Morocco, for instance, simulations showed that beefing up water infrastructure improved resilience to droughts and cut GDP losses by almost 60%.

She said public infrastructure investment needs could amount to 3.3% of GDP per year for individual countries in the region over the next decade, more than twice the average for emerging market economies.

Given limited resources in the aftermath of the COVID-19 pandemic, countries would need a mix of domestic policy reforms, such as replacing fuel subsidies, and international support, including from the IMF, Georgieva said.

Reporting by Andrea Shalal; editing by Richard Pullin

Russia-Ukraine crisis poses a serious threat to Egypt

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The top featured image of Reuters is not only for illustration but meant to draw some attention to one of the most important cause of this traumatic situation of Egypt as well as that of many countries in the MENA region. Russia-Ukraine crisis poses a serious threat to Egypt, that with an over-population still on the rise, has a limited but diminishing arable lands area. Building on farmland coupled a certain lack of control of all real estate developments bear on the lower social classes; those supposed to be at the forefront of food production.


Russia-Ukraine crisis poses a serious threat to Egypt – the world’s largest wheat importer

By Kibrom Abay, The International Food Policy Research Institute (IFPRI) ; Clemens Breisinger, The International Food Policy Research Institute (IFPRI) ; David Laborde Debucquet, The International Food Policy Research Institute (IFPRI) ; Joseph Glauber, The International Food Policy Research Institute (IFPRI) , and Lina Alaaeldin Abdelfattah, The International Food Policy Research Institute (IFPRI)

Egyptian Prime Minister Mostafa Madbouly pledged to keep food prices in the fair range amid the ongoing conflict between Russia and Ukraine. Photo by Ahmed Gomaa/Xinhua via Getty Images

Russia’s invasion of Ukraine could create a global food security crisis. It is disrupting agricultural production and trade from one of the world’s major exporting regions. This threatens to drive rising food prices still higher and create scarcity, especially for regions most dependent on exports from Russia and Ukraine.

Particularly affected is the Middle East and North Africa – or MENA – region. These Arab countries consume the highest wheat per capita, about 128 kg of wheat per capita, which is twice the world average. More than half of this comes from Russia and Ukraine.

As agricultural and food security experts, we have explored the impacts of the war on the wheat market, focusing on Egypt.

Wheat is a key food item for Egypt, representing between 35% and 39% of caloric intake per person in the last few years. And wheat imports usually account for about 62% of total wheat use in the country.

Despite the government’s efforts following the global food crisis in 2007 to 2008 to diversify sources of cereal imports, the vast majority of cereal imports, between 57% and 60%, come from Russia and Ukraine.

A number of key policy actions are needed that will reduce dependence on Russia and Ukraine in the short term. This will help Egypt’s agriculture and food system to become fairer and more resilient – an absolute necessity in the context of looming threats from climate change, water scarcity and conflict.

Black Sea import disruptions

Egypt is the world’s largest importer of wheat. It imports a total of 12 to 13 million tons every year. With a population of 105 million, growing at a rate of 1.9% a year, Egypt has become increasingly dependent on imports to meet food needs.

Imports of cereal crops have been steadily increasing over the last three decades at a rate higher than that of domestic production.

Egypt’s wheat market and trade regime is largely controlled by government agencies. The General Authority for Supply Commodities, operating under the Ministry of Supply and Internal Trade, usually handles about half of the total wheat imported, while private trading companies handle the other half.

Government agencies are already feeling the impact of the war, which has led to recent cancellation of tenders due to lack of offers, in particular from Ukraine and Russia.

Still, there is no fear of shortage in the coming weeks. In early February, Egyptian MoSit Minister Aly Moselhy said that the country held sufficient inventory to cover five months of consumption. But the outlook beyond that is less clear.

With the abrupt closure of Ukraine ports and current maritime trade in the Black Sea – wheat is transported across the Black Sea – Egypt will have to find new suppliers if Ukraine is unable to export wheat this year and if sanctions against Russia impede food trade indirectly.

Such opportunities are, unfortunately for Egypt, limited.

Limited options

Currently, wheat producers in South America – Argentina in particular – have larger than usual surpluses from the last harvest available to export. Overall, however, it will be difficult to expand the global wheat supply in the short run. About 95% of the wheat produced in the European Union and about 85% of that in the United States is planted in the fall, leaving those regions little room for expanding production in the near term.

In addition, wheat competes with crops such as maize, soybeans, rapeseed, and cotton, all of which are also seeing record high prices. In combination with record-high fertiliser prices (also exacerbated by the Russia-Ukraine conflict), farmers in some regions may favour less fertiliser-intensive crops, such as soybeans.

About 20% of world wheat exports come from the Southern Hemisphere (primarily Argentina and Australia) which typically ship from December through March.

In addition, Canada and Kazakhstan are large producers that harvest in the fall. Over the coming year and beyond, their exports may be able to make up much of the deficit created by the loss from Ukraine production, but at a higher cost due to longer shipping routes and increased transportation costs triggered by higher oil prices.

Rising prices

Rising global wheat prices hit a 10-year high at US$523 per ton on March 7. This is a serious problem for the Egyptian government’s budget and a potential threat to consumer purchasing power.

Even just before the outbreak of the Russia-Ukraine war, prices of commodities in Egypt were increasing. The war has started adding further pressure and consumers are feeling these impacts.

Some countries have already imposed export restrictions in response to rising prices. These trends, coupled with disruptions in Russia’s and Ukraine’s exports, will likely add further upward pressures on prices going forward. Even under the most optimistic assumptions, global wheat prices will remain high throughout 2022 and the trend is likely to persist through 2023, given limits on expanding production.

The Egyptian government has been spending about US$3 billion annually for wheat imports. The recent price increase could nearly double that to US$5.7 billion. This, in turn, threatens Egypt’s Baladi bread subsidy program. This program provides millions of people with 150 loaves of subsidised bread per month. About 90% of the production cost is borne by the government at an annual cost of US$3.24 billion. The program requires about 9 million tons of wheat annually about half of the total wheat consumption in Egypt and three-quarters of Egypt’s wheat imports.

Policy options

In the short term, Egypt needs to diversify its food import sources.

The government is actively exploring this option, while also increasing planned procurement from domestic sources by 38% over last year’s figure. The government has just announced a new and relatively higher buying price for domestic wheat from farmers.

In addition, the government has decided to ban exports of staple foods, including wheat, for three months to limit pressure on existing reserves.

In the long term, Egypt needs to explore options for reducing the gap between domestic supply and demand. Here are some of its options.

Boosting domestic wheat production will be challenging, as Egyptian farmers are already achieving high yields, relying on high input and water use. While there are some opportunities to expand arable land, modernise farming systems and improve water management practices, the country’s principal focus should be to adapt the farming system to address imminent water shortages and climate change threats and increase resilience, rather than unsustainably expanding production.

Reducing the high consumption and waste of bread has significant potential. Egyptians on average consume about 145 kg of wheat per capita annually – double the global average.

Improve the efficiency and targeting of the Tamween food subsidy program. This provides beneficiaries with ration cards for various foods. The program absorbs a large share of imported wheat and vegetable oils. Reforming it could reduce inefficiencies in the wheat sector and the cost of running the program.

In conclusion, the Russia-Ukraine war poses a big challenge to global food security and particularly difficult obstacles for Egypt. The short-term and long-term impacts will of course depend on how the war unfolds and affects exports from Russia and Ukraine over the coming months and years. Impacts on Egypt will also depend on other countries’ responses to global price hikes and cereal shortages.

Egypt can mitigate some of these impacts with short-term actions as outlined above, but major global shocks like the Russia-Ukraine war are also reminders of the need of longer-term reforms and solutions.

Kibrom Abay, Research Fellow, The International Food Policy Research Institute (IFPRI) ; Clemens Breisinger, Senior Research Fellow, The International Food Policy Research Institute (IFPRI) ; David Laborde Debucquet, Senior Research Fellow, The International Food Policy Research Institute (IFPRI) ; Joseph Glauber, Senior Research Fellow, The International Food Policy Research Institute (IFPRI) , and Lina Alaaeldin Abdelfattah, Senior Research Assistant, The International Food Policy Research Institute (IFPRI)

This article is republished from The Conversation under a Creative Commons license. Read the original article.