The International Monetary Fund (IMF) anticipates weak growth in the Middle East and North Africa (MENA) region mainly due to heightened political instability. What’s more, after years of healthy performance, growth in the oil exporting nations is expected to lose pace due to lower international demand and local oil supply disruptions. Given that these countries are witnessing a population boom, the IMF emphasized the need for economic diversification by the oil exporters and job creation in private non-oil sectors.
Oil importing nations such as Egypt among others are experiencing ongoing social strife, with political tensions delaying structural and fiscal reforms, and in turn, impeding economic recovery. Although the IMF has provided financial assistance to Jordan, Morocco and Tunisia, a deal with Egypt has not progressed due to constant political upheavals. Egypt’s economy has been battered and is in urgent need of reforms to help usher in economic and political stability.
Elsewhere, Israel’s economy managed to sustain growth, albeit at a slower pace, benefiting from natural gas production. In sub-Saharan Africa, South Africa’s growth has been much slower compared to its sister nations. The economy is reeling under myriad problems starting with infrastructural bottlenecks, a slowdown of capital inflows amid constant labor tensions, and weaker domestic consumption. Despite the economy’s present vulnerability, the IMF anticipates an improvement in South Africa’s growth rate in 2014 gaining from better global growth and improvement in domestic structural issues.
At a Glance
South Africa: The economy has been weighed down by several structural and fiscal challenges. The IMF’s growth outlook for South Africa remains unchanged at 2 percent for 2013 before improving to 2.9 percent in 2014.
Israel: According to the Bank of Israel, the economy is expected to remain stable and inflation will continue to hover within the target. Still, the strength of the shekel could dampen the export recovery.
Egypt: The economy lays listless after a series of dramatic political events stalled the country’s transition to democracy in 2013. Without concrete reforms, Egypt’s recovery could be delayed further.
SOUTH AFRICA: ECONOMY CHOKES UNDER STRUCTURAL CONSTRAINTS, WEAK DEMAND
The sub-Saharan country’s growth was stifled in 2013 due to mounting challenges that are expected to persist.Reuters notes that continuous labor disruptions in South Africa, in particular, have put a lot of pressure on both the country’s public and private sectors, which have grappled with lower production and the challenge of above-inflation pay outs. Additionally, economic weakness in Europe, South Africa’s largest trading partner, and lower international demand, have severely dented exports offsetting the advantage of the weak currency. A decline in demand has made it difficult for both the country’s private and public sectors to create job opportunities, at a time when the unemployment rate is exceptionally high.
Meanwhile,Bloombergnoted that the rand recorded one of its biggest annual slides by the end of 2013. This was due to slower expansion in the money supply and the offloading of the rand by investors after the U.S. Federal Reserve’s decision to wind down its stimulus program. Despite a growing clamor to reduce interest rates to aid the anemic economy, the inflation risk heightened by the falling rand is one of the main reasons why the South African Reserve Bank (SARB) has left its key interest rate unchanged at 5 percent. Although there was a drop in inflation towards the end of 2013, it still remains close to the upper end of the 3 percent-6 percent target range set by the SARB.
Elsewhere, the South African finance ministry reported that the budget deficit gap is expected to remain wide due to weaker economic growth and a decline in tax revenues as mounting unemployment shrinks the country’s tax base. Adding to the woes, the country’s current account deficit widened to a five-year high in 2013 due to a slump in exports and rising import costs with the weak rand. The consumer confidence index, measured by the Bureau for Economic Research, plummeted to a ten-year low due to downward pressure on disposable income growth and a reduction in household consumption with lower credit availability. Likewise, the South African Chamber of Commerce and Industry’s (SACCI) business confidence index also plunged due to unfavorable market demand and supply dynamics.
A Reuters poll showed that South Africa’s economic growth is expected to be subdued this year, due to the lack of labor market reforms, structural constraints, and falling investments.
ISRAEL: NATURAL GAS PRODUCTION SHORES UP THE ECONOMY
Israel’s Central Bureau of Statistics (CBS) reported a lower-than-expected GDP growth in 2013, the slowest in a decade. The slowdown was mainly due to a decline in exports and stagnation in fixed capital investments, which are key drivers of the economy. However, economic growth was boosted by an improvement in consumer spending compared to the previous year and increased natural gas production from the Tamar field.
Meanwhile, a stubbornly strong shekel continues to dampen international sales and whittle down profits, posing a major challenge. A Wall Street Journal report noted that the shekel has been on a rise since March 2013 due to higher natural gas production, stronger economic growth than other developed countries, and higher interest rates compared to the U.S. and Euro-zone. What’s more, a widening current account surplus, benefiting from natural gas production, has added to the currency’s rally. In an effort to stall the shekel’s appreciation, the Bank of Israel has repeatedly reduced interest rates and purchased billions in foreign currency. As the rising currency makes Israel’s goods and services more expensive, exports which account for over 30 percent of the GDP growth might decline further in the coming months.
Elsewhere, the Bank of Israel has left the interest rates for January 2014 unchanged at 1 percent to help sustain growth while maintaining financial stability. Factors such as a retreating inflation rate and a moderation in housing price increases were instrumental in holding the interest rates steady. On a positive note, the CBS reported that Israel’s unemployment rate continued to decline towards the end of 2013 due to increased employment opportunities in public services as opposed to the private sector.
Meanwhile, the government’s decision to cancel a planned income tax hike comes as a relief to the public, in particular the middle class, which is a critical driver of the economy. This move was triggered by an unexpected rise in tax revenues from companies paying taxes on captured profits, which trimmed the worrisome budget deficit. The finance ministry expects the 2013 budget deficit to be below the target level of 4.3 percent due to higher tax revenues and plans for lower government spending.
EGYPT: FOCUS ON RESTORING ECONOMIC AND POLITICAL STABILITY
Egypt ended 2013 on a tumultuous note, witnessing the deposition of its first democratically-elected President Mohammed Morsi in a military coup, and the bloody clashes between Morsi supporters and the military that ensued. With the violence, the country’s business activity was crippled by the curfew imposed by the military-backed interim government. In an effort to restore stability and aid Egypt’s transition to democracy, interim President Adly Mansour has called for a referendum on the country’s new constitution.
Meanwhile, Egypt’s economy remains in shambles as it grapples with wide budget deficits, which are mainly due to higher spending on subsidies and lower public revenue generation. Ahram Online notes that the deficit gap may increase with the government’s plan to increase the personal tax exemption limit, the setting of the minimum income law, and the launch of finance stimulus packages. Fortunately, aid from various Gulf nations has eased some of the pressure on the government’s coffers. The finance ministry is also looking to reform the country’s property tax laws, replacing the country’s sales tax with value added tax (VAT) and raising fees on quarry extraction to bridge the deficit. Meanwhile, Reuters reported that the Central Bank of Egypt, in a surprise move, decided to cut its key interest rate despite rising inflation.
Adding to Egypt’s challenges is the rising unemployment rate, particularly among the youth. The labor market has been bogged down due an economy battered by several years of turmoil and the inability to create job opportunities due to declining foreign investments. Affected the most by the continuous civil strife, the tourism sector, which is one of the pillars of the economy, has suffered with losses in revenues and jobs. A Middle-Eastern online daily noted that tourist footfalls have plummeted with advisories issued by many governments against travelling to Egypt.
Despite the turmoil, the economic outlook for Egypt has been upgraded to stable from negative by Fitch, citing among other things aid from various Gulf nations, the enactment of fiscal and monetary stimulus measures, and increased availability of foreign exchange.
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.
© Thomas White International
