MEA region's economic struggle continues as Egypt's political crisis heightens
Moderate growth is anticipated in Middle-East and North Africa (MENA) region as the International Monetary Fund (IMF) notes that economic expansion in the oil exporting countries has slowed down due to subdued global oil demand. While oil importing countries are expected to make a slight recovery, nations in transition are facing complex socio-political issues, which could further delay their recovery.
Meanwhile, political crisis in Egypt reached a flashpoint when massive protests against the government’s economic mismanagement gripped the nation leading to a military coup deposing the democratically-elected president. Elsewhere, countries like Morocco and Jordan are facing liquidity problems in addition to rising inflationary pressures and widening deficits.
Though far removed from the impact of the turmoil in the Middle East, Israel is considering austerity measures to shore up the economy amidst a slowdown. In the case of South Africa, economic conditions have worsened due to mining strikes, a volatile labor market, a fall in exports and delayed investments. There is also a growing risk of capital outflow as labor market relations have hurt business confidence.
The IMF has emphasized the need for bold structural and policy reforms in countries in transition as deteriorating public finances and foreign currency reserves pose a serious threat to these economies. It further noted that economic growth in the MENA region is expected to fall to 3.1 percent in 2013 from a healthy 4.7 percent growth in 2012.
South Africa: Growth outlook cut, mounting structural problems
While the rest of the African countries continue to expand at an encouraging pace, South Africa’s growth in recent times has been the slowest since the recession back in 2009. The economy is struggling with a number of critical structural issues, starting with power outages, wildfires and maintenance problems that have led to a slump in manufacturing output and a contraction in the manufacturing sector, a Bloomberg report noted.
Adding to the woes, the threat of mining strikes looms large as wage negotiations between gold producers and trade unions is expected to begin shortly. Another factor that could deeply impact the mining sector is the fall in gold prices in the global commodities market. This, coupled with higher wage pay-outs would hike overall costs of production, eat into mining profits, and negatively impact producers. Statistics South Africa (Stats SA) notes that weak growth and private sector job losses, particularly in the mining sector, have pushed the unemployment rate further up to 25.2 percent. On another discouraging note, official data reported a fall in consumer confidence index to a nine-year low, amidst growing concerns about economic growth, unemployment and dwindling household finances. Despite an anemic economy, the reserve bank has left its key interest rate unchanged at 5 percent due to a declining rand and inflation edging closer to the South African Reserve Bank’s upper target limit of 6 percent. Slower growth and falling tax revenueshave worsened the fiscal deficit gap.
As well, business confidence has slumped to a ten-year low due to weaker industrial activity, Reuters has reported. Foreign capital inflows, which typically aid the government in bridging the current deficit gap, have also slowed down, adding to funding risks. In the light of a faltering economy, the Reserve Bank has cut South Africa’s growth outlook for 2013 to 2.4 percent from an earlier projection of 2.7 percent.
Israel: State budget draws criticism, consumer confidence dips
The initial approval of the state budget by the Knesset for 2013-2014, involving tax hikes and spending cuts to rein in budget deficits, drew sharp criticism from the public, a Reuters report noted. With this, Bank Hapoalim’s consumer confidence index dropped sharply, mirroring consumers’ concern over the impact of these austerity measures on their disposable income and purchasing power. The final approval of the budget is expected at the end of July. Given the blow to the consumer confidence, private consumption, which is a vital economic driver and accounting for 60 percent of GDP is expected to fall in the coming months.
Meanwhile, despite increasing home prices, the Bank of Israel left its key interest rate unchanged at 1.25 percent, in anticipation of a slight rise in inflation and slackening economic activity. Additionally, the low interest rate is expected to restrain the shekel’s appreciation against the US dollar and the euro, helping to shore up exports. The central bank is considering foreign exchange purchases to stem the currency from gaining further and affecting the exchange rate.
Encouragingly, an Israeli online trade news portal reported that following the global demand slump in 2012, exports have shown improvement since the beginning of this year . Globes, an Israeli financial daily, reported that the cabinet has approved exporting 40 percent of Israel’s natural gas reserves found at Tamar field off the coast of Haifa. Excluding the benefit of these natural gas exports, the Bank of Israel expects GDP growth of 2.8 percent in 2013 against the backdrop of a sluggish global economy. Labor market activity in Israel has remained subdued as job vacancies in the private sector dragged.
Egypt: Economy spirals as political crisis deepens
In a dramatic turn of events, Mohammed Mursi, Egypt’s first democratically-elected President was overthrown by the military, a year after he became Egypt’s top leader. Protests against the Mursi government over its failure to revive a battered economy, deteriorating security conditions and lack of an inclusive government had reached a tipping point by June-end. Millions of demonstrators gathered at Tahrir Square erupted in joy at the fall of their elected president. While the future course remains uncertain, the military presented a temporary civilian government and called for early elections after suspending the Islamist-drafted constitution.
Against this backdrop, the economy continues to grapple with a slump in tourism and dwindling foreign currency reserves. Although there has been a slight improvement in the visitor footfalls this year, Nuqudy.com notes that revenue growth has been sluggish in a tourism sector trying to regain some lost ground. What’s worse, a declining Egyptian pound has threatened foreign investments, and Saudi Arabia, which is one of the largest investors in Egypt, is considering withdrawing its investments. The unrest has also sparked fears of a spike in global oil prices due to disruption along the Suez Canal, a key oil supply route.
In other news, economic instability in Egypt has severely dented the labor market, hiking the unemployment rate, which official reports fear could worsen social problems. Ahram Online also notes the concern of a worsening fiscal gap, which has been exacerbated by fuel subsidies that have ballooned to almost a fifth of budget expenditures. Making matters worse, the much needed IMF loan of $4.8 billion, which was expected to ease financial stress, yet again hangs in balance in the light of ongoing political turmoil. With no reform programs in sight, it appears that the outlook for Egypt’s ailing economy remains bleak.
Morocco: Liquidity strain, growing fiscal deficit threaten the economy
Morocco is need of urgent fiscal reforms as strained liquidity, and growing budget and trade deficits threaten its key economic sectors. In particular, the central bank notes that liquidity strains have hurt the volume of bank deposits and growth of consumer loans. Despite the cash crunch, the bank has left its benchmark interest rates unchanged at 3 percent, which augurs well for the debtors.
While the agricultural sector is expected to benefit from favorable weather conditions this year, the economic downturn in Morocco’s key trading partner countries, especially those in Europe, has choked the non-agricultural areas of the economy. With this, the central bank intends to implement a new program that would help small to medium-sized export-driven businesses secure financing.
Meanwhile, spending on wage hikes, pensions, fuel and other subsidies have overstretched the budget, and the government has been unable to reform its expensive subsidy system due to political sensitivity and continued high energy and oil prices. The Moroccan Department of Economic Studies and Financial Forecast also points to the widening trade deficit gap, which has increased nearly five-fold from 2000 to 2012 due to higher imports of food and energy.
On a more positive note, according to the tourism ministry, the Moroccan tourism sector, which is a vital source of revenue and foreign currency, has shown improvement this year. The impact of the political uprisings in Morocco’s neighboring countries had dragged the sector’s revenues over the past two years. The Kingdom hopes to attract more tourists mainly from the Persian Gulf, Germany, and the United Kingdom. Still, given the mounting economic challenges, the central bank projects that GDP growth is expected to slow to 2.5 percent in 2014 from an estimated 5 percent in 2013.
Jordan: Rising inflation, deficits are key concerns
Jordan’s economy continues to face several challenges such as funding constraints, a high rate of inflation, and an energy crisis, not to mention dwindling public finances due to the high cost needed to host Syrian refugees. The influx of refugees has also worsened Jordan’s existing water crisis, but fortunately funding for water projects from the German Development Bank is expected to improve water availability. In other news, the Department of Statistics notes that the Jordan’s inflation rate is expected to continue to rise, as the government cancelled fuel subsidies and is looking to hike electricity tariffs in a bid to bridge the budget deficit gap.
Encouragingly, the supply of natural gas from Egypt has stabilized after extended periods of disruption, albeit at a lower quantity than expected. Known to import 95 percent of its energy needs, Jordan has incurred mounting import costs since the 2011 Egyptian uprisings, due to purchase of fuel from alternate sources. To further stabilize its energy supply, Jordan is considering a natural gas purchase deal with Israel, which would alleviate its energy crisis.
Meanwhile, the central bank reported that tourism revenues continued to fall as the number of visitors to the Kingdom for medical treatment declined. While on the one hand several tourism related projects are underway to attract more tourists, the sector continues to face operational challenges on the other. On the upside, the government’s decision to lower its tourism budget, raise hotel taxes and cut state subsidies are in line with its efforts to improve Jordan’s fiscal position. Still, these steps might drive up operating costs of hotels and other businesses, making them expensive.
Remittances, which are one of the key pillars of the economy, increased in the first five months of 2013, bringing some needed cheer. What’s more, the central bank notes that the economy is forecasted to expand by 3.5 percent in 2013 on the back of higher remittances, improved domestic consumption, and positive construction activity.
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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