55458 May 2010 . Number 24 MENA: RECOVERING FROM THE CRISIS Elena Ianchovichina 1 projected at 4.4 percent in 2010--a remarkable comeback, given close to zero growth in 2009. Introduction: The Middle East and North Africa These countries were hardest hit by the crisis region is recovering from the financial crisis along because of a negative terms-of-trade shock with the global economy. Growth in 2010 is associated with the drop in oil prices and a expected to be 4.4 percent region-wide, driven by financial shock which destabilized overextended domestic absorption as well as a positive domestic banks and led to the bursting of a real contribution from external demand. The recovery estate bubble. Accumulated reserves and other from the crisis differs by country depending on assets enabled governments to respond quickly initial conditions and the intensity of the impact via with monetary and fiscal stimuli, preventing a the three principal channels through which the deeper deceleration in growth, and supporting the global financial crisis affected MENA economies 2 - growth rebound. The recovery in the GCC the financial sector, the price of oil, and the balance countries is expected to have a positive impact on of payments, reflecting the impact on trade, other MENA countries, mainly through increased remittances and FDI flows. flows of remittances and FDI. The GCC Countries: The GCC countries are The Dubai financial crisis is still unfolding, but the leading the regional recovery as oil prices have Dubai World debt restructuring offer has rebounded and the GCC financial sector is contributed to greater clarity about UAE's stabilizing. Growth in the GCC countries is prospects. The restructuring package is partially funded through loans from Abu Dhabi to Dubai and its adverse impact on UAE banks is cushioned 1 The Middle East and North Africa Economic Update on which by the likelihood of increased support to these this Fast Brief is based on was prepared by Elena Ianchovichina banks from Abu Dhabi and federal entities. These (principal author) and a team comprising Lili Mottaghi, Kevin Carey, Nadia Spivak, Subika Farazi, and Ani Silwal. The report short-term measures are helping to contain the is available at http://siteresources.worldbank.org/INTMENA/ negative impact of these events on UAE growth. Resources/MENARecoveringFromCrisispub5-12-10webFINAL. pdf. Country-specific data and information were provided by Ongoing large fiscal spending by Abu Dhabi is also country economists and analysts working in the World Bank's Middle East and North Africa Region. The report was prepared expected to help the recovery and support the under the guidance of Shamshad Akhtar (Vice President, Middle "service center approach" to integration and East and North Africa Region) and Ritva Reinikka (Acting Chief economic development. The question remains Economist, Middle East and North Africa Region). Valuable whether growth of the private sector will pickup comments were provided by Roberto Rocha, Farrukh Iqbal and Mustapha Rouis. when the public sector starts spending less, and the effects of the stimulus packages in UAE and Saudi 2 For ease of analysis and exposition, the region is divided into Arabia wear off. three main groups: the GCC oil exporters, developing oil exporters and oil importers. The first group contains the Gulf The Developing Oil Exporters: Growth of Cooperation Council (GCC) countries, namely, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates. The developing oil exporters is expected to accelerate to second group comprises the developing oil exporters such as 4.2 percent in 2010 from 2.2 percent in 2009. Algeria, Islamic Republic of Iran, Iraq, Libya, Syrian Arab Developing oil exporters felt the impact of the Republic, and Yemen. Oil importers include countries with GCC crisis, and now the recovery, largely through the oil links (Djibouti, Jordan, and Lebanon) and those with EU links (Egypt, Morocco and Tunisia). price channel, due to the limited integration of their banking sectors into global financial markets and the importance of oil in their export baskets. The improvements in the near term. While the impact sustainability of their recovery therefore hinges on of the crisis on official unemployment rates has the evolution in the global demand for oil and oil been negligible in most MENA countries, prices. Iran and Iraq are especially vulnerable to oil participation rates, which were already low price volatility. At present, further upward compared to other countries prior to the crisis, have pressure on oil prices is not expected due to ample declined as discouraged workers dropped out of spare capacity and little or no growth in oil the labor force and decided not to seek work in the demand in the G3. Temporary spikes, however, official labor market. In addition, aggregate labor cannot be ruled out in response to unanticipated statistics hide the negative impact on some sectors. shocks over the course of 2010­11. Recognizing Workers in the manufacturing sectors have been their vulnerabilities, most countries in this group especially vulnerable during this crisis, although have launched stimulus packages, but the extent to job losses in these sectors were offset to some extent which they have been able to respond has varied by the job creation in the non-tradable goods and depending on their fiscal space, accumulated services industries. reserves, and access to external financing. World Bank Group Response: The World Bank The Oil Importers: The oil importers felt the Group responded actively to the economic impact of the crisis through the secondary effects of downturn in the MENA region. In Iraq, where the the crisis on trade, remittances, and FDI flows, so fall in oil prices severely affected public finances, their recovery will depend crucially on the recovery the World Bank provided financial support in key markets, especially the EU and the GCC through a development policy loan, working countries. The feeble recovery expected in the euro closely with the IMF. In oil importing countries, zone will drag down growth in the near term, such as Egypt, Jordan, Morocco and Tunisia, the particularly the growth of those with strong links to World Bank has provided technical support EU markets. Growth of oil importers is expected to through diagnostics work as well as financial decelerate to 4.5 percent in 2010 from the moderate, support through several development policy yet respectable pace of 4.8 percent in 2009, when operations focusing on financial sector, public key non-oil sectors, such as services, remained sector reforms and trade integration. These relatively resilient. Trade is recovering, with export operations also aim to build crisis resilience for the revenue of oil importers expected to grow by 7.7 future. In the GCC countries, the short-term percent in 2010, after contracting by 13 percent in response of the World Bank Group was to step up 2009. Remittance flows are expected to grow by 1.3 economic and financial monitoring. percent in 2010, albeit this pace is much slower than the one observed during the pre-crisis years. IFC's Global Trade Finance Program has helped businesses, especially small ones, access trade The crisis has not led to reform reversals, and finance, while its Global Trade Liquidity Program reforms have broadly remained on track, while in has helped infuse liquidity into the trade finance some cases countries have steamed ahead with market. IFC has also helped banks across the reforms started prior to the crisis. Examples of the MENA region by sharing views and solutions on latter include the financial sector reform in Egypt how to successfully navigate the crisis, structure and trade liberalization and economic integration robust risk management systems, and train key in Tunisia. Fiscal policy is expected to continue to bank staff on risk management. be expansionary, as countries use various measures to stimulate demand, and in some cases the private Longer Terms Challenges in MENA: Ample oil sector. Expansionary fiscal policy will have an and gas resources, a youthful and growing adverse effect on fiscal balances. For some oil workforce, and a growing momentum to look for importers, including Lebanon, Jordan and Egypt, ways to diversify their economies imply that the the fiscal space is limited and the fiscal situation growth potential of the region is high. Looking may become a long-term growth issue, hence the beyond the next couple of years, however, MENA need for these countries to trim fiscal deficits in the countries continue to face formidable longer term coming years. challenges. Standards of living in the region have stagnated as income growth has not been sufficient MENA's Employment Challenge: High given MENA's high population growth. High unemployment has been a problem in MENA for unemployment rates, particularly youth years, and the crisis has dimmed prospects for unemployment, low labor force participation, May 2010 · Number 24 · 2 especially for females, and informality have translated into one of the world's lowest formal Contact MNA K&L: Emmanual Mbi, Director, MNA Operational Core employment rates. Private investment rates have Services Unit: not increased commensurately with greater market David Steel, Manager, MNA Development and private sector orientation in most countries in Effectiveness Unit: the region. Among key long term growth challenges are access to finance, which is very low Regional Quick Notes Team: in MENA, competitiveness, and the non- Omer Karasapan, Roby Fields, Hafed Al-Ghwell competitive business environment facing and Aliya Jalloh enterprises in MENA. Tel #: (202) 473 8177 MENA K&L Quick Notes: Ensuring access to finance without compromising http://www.worldbank.org/mena-quicknotes financial stability will be a major challenge in MENA, although issues related to weak regulatory The MNA Quick Notes are intended to summarize systems, corporate governance and lessons learned from MNA and other Bank Knowledge overdependence on the banking system also loom and Learning activities. The Notes do not necessarily large. The slowdown of credit growth as a result of reflect the views of the World Bank, its board or its the crisis has added urgency to the access agenda member countries. because the credit tightening expected in the post- crisis period affects disproportionately the underserved segments, typically high risk households and firms. Addressing the stability agenda will be equally challenging. The pre- conditions for effective market discipline are weaker in MENA than in developed countries due to weaker institutions and less sophisticated market players. In addition, the generous support programs in response to the crisis may have further weakened financial institutions. The severity of the financial crisis and the uncertainty about how the financial system will evolve has sparked interest in regional and domestic financial markets. Pursuing financial integration in MENA might be a good strategy given the mix of countries, which include both capital exporters (the GCC countries) and capital importers (oil importing countries), as this would facilitate trade integration. Key problems of the business environment in MENA include policy and regulatory uncertainty and discretion in implementing reforms which prevent a level playing field for all firms and encourage the pursuit of privileged access. These problems, coupled with barriers to entry and exit, have created an environment of stagnation. Addressing these issues will require applying rules and regulations consistently and without discrimination among firms and introducing reforms that promote business dynamism, private investment, and innovation. May 2010 · Number 24 · 3