95826 April 2015, Number 145 RECENT ECONOMIC DEVELOPMENTS AND PROSPECTS Lili Mottaghi1 around $50 per barrel in late March. Oil prices are extremely volatile and notoriously difficult to Introduction: This MENA K&L Quick Note predict, but the futures market points to a Brent crude summarizes the first section - “Recent Economic price of about $61 for delivery in December 2015, Developments and Prospects” - of a longer report increasing to $67 for December 2016. The pace of entitled “MENA Economic Monitor: Towards a New growth in oil prices is so slow and unlikely to hit $100 Social Contract” and provides an overview of global or above any time soon. Weak economic recovery in and regional economic developments. the Euro area and moderate growth in China and India, the demand to absorb continued excess supply. The Global Outlook: The global economy will grow 3 to 3.5% this year, 0.5% higher than last year’s 2.6%, MENA Regional Outlook: Low oil prices have and surpassing the average growth rate of 3.1% significantly affected the economies of the oil during 2000-08, before the financial crisis. Behind the exporters- accounting for 2/3 of the countries in the recent recovery are better than expected growth in region. The rest of the countries, oil importers are the U.S., the U.K., select Euro area countries, and— benefitting from the low oil prices helping to keep the most important—the sharp fall in oil prices. Low oil regional growth average between 3.1% and 3.3% prices have contributed in net terms to the global according to the World Bank and Consensus recovery, but the impact varies across countries, Forecasts2 respectively (Figure 1). Economic growth particularly between oil exporters and importers. in MENA is expected to continue on the same path in Lower oil prices have increased oil importers’ real 2016. If the security situation in Libya improves and GDP growth, improved trade balances and - to the oil exports increase, the regional average could surge extent that they subsidize fuel - eased fiscal pressures. to 4% to 5% in 2016. The magnitude of the gains will depend on, among other factors, the share of oil imports in GDP. Oil Figure 1. World Bank and Consensus Forecasts for MENA exporters (including Russia) could see a sharp fall in growth deteriorating fiscal balances with significant regional consequences (Mottaghi, 2015). Next year, World GDP is estimated to grow 3.3 to 3.7%. Most forecasters expect a continued recovery in the U.S., with a slower one in the Euro area in 2016. G7 countries are likely to see growth of 2.3% in 2015 and 2016 and in the Euro area by 1.2 to 1.6% in the same years. Growth in developing economies is expected to increase 4.8% and 5.3% in 2015 and 2016, respectively. But risks continue on the downside. The oil market is witnessing a sharp recession. After Source: World Bank and FocusEconomics (March 2015). Note: falling by more than 60% since their peak in June Consensus forecasts is the mean average of economic indicators from 2014, oil prices (Brent crude) were fluctuating at international leading forecasters. 1 2 Lili Mottaghi, Economist, Office the Chief Economist, The www.focus-economics.com Middle East and North Africa Region, The World Bank. Several other reasons are behind the tepid growth in 2% in 2015. While still low, this figure is about 0.5% the region; prolonged conflict and political instability point higher than the previous year, owing to better- in Syria, Iraq, Libya and Yemen; and the slow pace of than-expected growth in oil importers--estimated at reforms that is standing in the way of a resumption 3.9 and 4.1% in 2015 and 2016, respectively, about of investment. The continuation of this situation will 1.5% points higher than last year. Furthermore, fiscal significantly hurt the overall unemployment rate, deficits are expected to improve in the group of oil now standing at 12%, and poverty in the region. importers in 2015, partly due to fiscal savings Fiscal deficits are also on the rise, leaving the region resulting from low oil prices. with a deficit of 8% of GDP in 2015, after 4 years of surpluses (Figure 2). At this point, the overall Economic Growth and the Gulf oil exporters: economic outlook for MENA remains tepid, though Economic growth in the group of high income Gulf longer term forecasts, if the regional conflicts subside states is plummeting3. Growth in Saudi Arabia is set and necessary reforms are implemented, could be to decline to 4.6 % in 2015, after a period of high more optimistic. growth. Fiscal deficits are mounting as cheap oil has severely affected oil revenues. The World Bank has Figure 2. Regional Economic Stance, Before and After estimated that Gulf countries could lose about $215 Falling Oil Prices billion in oil revenues, equivalent to 14% of their combined GDP, in 2015. Saudi Arabia, UAE, Kuwait and Qatar have managed to withstand the worst effects of low oil prices through their large reserves, Bahrain, and Oman have less of a cushion. Even those countries with large buffers are starting to feel the pressure on their fiscal balances. The large fiscal surplus in Saudi- Arabia is disappearing, leaving the country with double-digit fiscal deficits in 2015 and the following year, for the first time in a decade. Saudi Arabia and Kuwait continue their expansionary fiscal policies, financed partially by their large foreign assets. Abu Dhabi's sovereign wealth fund, believed to be worth $800 billion, could cushion the impacts of Source: World Bank. low oil prices on its economy. But these remedies cannot last forever since fiscal deficits are rising. In MENA’s Oil Exporters: The group of oil exporters December 2014 alone, alongside oil prices, Gulf stock are estimated to grow by around 2.8% in 2015 with markets plunged, losing $16 billion in three weeks. growth stagnating in developing oil exporters. Growth for the group of high-income Gulf Remittances outwards from the Gulf countries are Cooperation Council (GCC) oil exporters is estimated slowing down. Estimates by the World Bank show to range between 3.2 to 3.8% in 2015, predicted by that while remittances are expected to increase, there Consensus Forecasts and the World Bank may be a deceleration in growth rates. If oil prices respectively, about 0.5% point lower than last year. remain low for a sustained period of time and the The World Bank estimates that growth in developing fiscal situation in the Gulf States deteriorates, it may oil exporters in MENA, pinched by cheap oil, is further slow growth in remittances outflows from expected to drop to 0.9% compared to 6.3% prior to GCC countries to the rest of the region, mainly Egypt, the oil collapse. The impact on fiscal savings from the Yemen and Jordan (where they are a major source of oil price collapse has outweighed the uptick in income). Aid flows from GCC to the rest of MENA consumption due to a spending increase. may also decline as a result of fiscal deficits. Developing MENA Countries: Growth in The Developing Oil Exporters: Among developing developing MENA countries as a whole will stay at oil exporters, Iran’s economic prospects are 3 Growth in Kuwait is expected to rise slightly in 2015 due to moderate increase in oil production and acceleration in growth of the non-oil sector. April 2015 · Number 145 contingent on the timing of lifting of sanctions and subsidies, particularly for the power sector, following a nuclear agreement framework that was constituting almost 70% of government expenses. reached in early April, as well as on fluctuations in oil The public sector accounts for more than 50% of Iraqi prices. Under this agreement, which is expected to employment, leaving little room for investment lead to a final deal by end of June, a comprehensive spending. Public investments are declining and most lifting of sanctions is envisaged. This could capital investments are disrupted because of the fiscal significantly boost economic activity and accelerate shock. Libya is in recession. In addition to the impact growth to an estimated 5% in 20164, while improving of cheap oil, the violent conflict has interrupted oil Iranians’ living conditions. Growth is estimated to exports, a major source of government and external continue on the same path for the following year. In revenues. The economy is estimated to have this case, however, the Iranian economy will face a contracted by 24% in 2014, following a contraction of massive oil windfall, which if not managed carefully, about 14% in 2013. While there are signs that the could lead to an oil boom, an over-valued real political conflict is easing and two oil ports have exchange rate and a loss of competitiveness of the reopened, a rapid recovery in crude oil supply is non-oil tradable sector, a major source of foreign unlikely and growth will remain low in 2015. The revenues. It could also lead to an increase in budget deficit is estimated at more than 40% of GDP unemployment in tradables, as the oil sector does not in 2014 and 2015. The major forces behind this create many jobs. In the case of continued status quo, alarming budget deficit are, in addition to lower the Iranian economy is expected to slow down to revenues due to low oil prices, the existing wage bill 0.6% growth in 2015 with attendant consequences for and subsidies estimated at 70% of expenditure; unemployment, fiscal deficits and inflation. In this capital spending has fallen to a fifth of it pre- setting, the government has adopted a contractionary revolutionary period. Libya is counting on its large fiscal policy that is reflected in the new budget. foreign reserves, which have declined dramatically. Capital spending is prioritized, the rich are to be Estimates by the Central Bank of Libya show that excluded from the current cash transfer system, and foreign reserves stood at $85.5 billion in December an increase in gas prices by 5% should keep the 2014, a 40 % decline from July 2013. budget deficit at 3.4% for 2015 and 2016 respectively. In Yemen, the conflict among multiple forces vying to Growth in Algeria is estimated to fall to half its rate in rule the country have weighed heavily on the 2015, standing at 2.6 %. The country is facing a economy, bringing growth down to nil in 2014 from doubling of its fiscal deficit (subsidies alone account 4.8% the previous year. In addition to the political for 18 % of GDP) as a share of GDP in 2015 and a instability, economic activity is hampered by widening current account deficit from 4.2% of GDP sabotage of oil fields and weak infrastructure, which in 2014 to 18.6 % in 2015.Weakening economic have caused severe fuel shortages and power cuts. activity has hit the unemployment rate, which is The economy is estimated to contract by 2.8% in 2015, expected to increase from 9.8% in 2013 to 10.6 and with growing political and security risks. Oil exports 11% in 2015 and 2016 respectively. are estimated to drop by 10% in 2015 on top of an 11% drop in 2014, to an average of 140 thousand barrels For those countries already in conflict, Iraq -- Libya, per day. The budget deficit rose to 8.7% of GDP in Yemen, and Syria -- economic prospects are grim. The 2014 as subsidy reforms were reversed and the ISIS insurgency and large military expenditures have savings did not materialize. The trend is expected to hit the Iraqi economy hard. Growth is expected to turn continue in 2015. And in Syria, the civil war has negative in 2015 following a contraction of 0.5% in caused a sharp drop in government revenues 2014 due to the decline in economic activity in the together with a hike in military spending, increasing areas occupied by ISIS. The fiscal deficit as a %age of the fiscal deficit significantly. While data are scarce, GDP is estimated to double and reach 10.6 % due to some forecasters estimate that the rate of economic high military expenses and the recent government contraction will slow down. The EIU, in particular, decision to keep fuel subsidies intact, together with estimates a positive growth rate of about 2% in 2015, low oil prices5. Current spending is high with wages largely driven by major businesses’ moving to more 4 5 The P5+1 and Iran issued a joint statement on general points of State-supplied gasoline is currently priced at Dinar 450 agreement on April 2nd. All parties will continue negotiations ($0.387/liter) in Baghdad, compared with Dinar 1,000/liter aimed at achieving a comprehensive accord in June. in private filling stations. April 2015 · Number 145 stable coastal areas of an expanded industrial zone. from the ISIS conflict, lower oil prices have helped While exports have begun to increase for the first time economic activity pick up, although growth is since 2011, investment remains stalled due to estimated to remain at a low level of about 2.5% in continued violence and political instability. 2015 and 2016. With a break in the political deadlock and some fiscal consolidation, a growth rebound, MENA Oil Importers: Lower oil prices together with similar to that observed in the 2000s is possible. some policy reforms, notably in Egypt and Morocco, have helped the economies of oil importers recover, The Palestinian Territories, West Bank and Gaza, are albeit slowly. In fact, this group of countries are still feeling the brunt of the 2014 Gaza war and a helping to maintain MENA’s overall growth at 3%. In precarious political and security situation. After 7 Egypt, low oil prices have helped contain domestic years of continuous growth, the Palestinian economy inflationary pressures triggered by the subsidy contracted by 0.8% in 2014 with a sharp contraction reforms introduced in July 2014. Some estimates of 15% in Gaza. The West Bank economy, on the other show that low oil prices could reduce the fiscal deficit hand, experienced 4.4% growth, largely driven by by about 2% of GDP in 2016. At the Economic investments in construction. As a whole, the Development Conference in mid-March, Egypt Palestinian economy is expected to grow by less than raised about $36.5 billion, with the Gulf countries 1% in 2015. The pace of the reconstruction process in pledging a package worth $12.5 billion. All of these Gaza has been much slower than expected due to could help boost growth in the coming years, albeit inadequate donor funding and Israeli restrictions on with some delays if the pledges do not all materialize. import of construction materials into Gaza. Around Tourism and manufacturing posted double-digit 70,000 households continue to be internally growth in 2014. The Suez Canal and construction also displaced, which has created an extremely fragile saw strong growth in 2014, which should continue in environment that could lead to more conflict. 2015. Growth is estimated to surpass 4% in 2016, close Unemployment is on the rise from 27% in 2014 to 43% to growth rates observed in the pre-revolutionary in Gaza and 17% in the West Bank. Particularly period. alarming is youth unemployment in Gaza which soared to 60% in 2014. Preliminary estimates indicate Economic recovery in Tunisia has been slow partly that the poverty rate in Gaza increased from 28% in due to weak external demand from the Euro are a’s 2013 to 39% in 2014. anemic economic stance and slowing domestic demand. The World Bank estimates a moderate increase in growth of about 0.5% in 2015, to 2.6% and gradually reaching 3.4% the following year. This is likely to happen on the back of a moderate rebound in the manufacturing and tourism sectors (although the recent attack on the Bardo Museum has affected tourist arrivals6). Low oil prices together with fiscal consolidation have helped reduce the fiscal deficit from 6.8% in 2013 to 4.2% in 2016 - helping contain inflation to about 4%. Jordan’s and Lebanon’s economies are recovering slowly but steadily, despite being buffeted by civil wars in neighboring countries. The Jordanian economy is expected to grow by more than 3% in 2015, slightly higher than the growth observed since 2010. This uptick in growth is mostly due to an increase in public investment following grants from the GCC, and a narrower trade deficit. In Lebanon, despite a domestic political deadlock and spillovers 6 The Tunisian tourism ministry reported that around 3,000 Museum on March 18, 2015. The tourism industry accounts bookings have been cancelled since the attack on the Bardo for more than 12 percent of GDP. April 2015 · Number 145