Countries across the Middle East and North Africa have weathered the Great Recession relatively well, despite steep declines in oil prices. Although recent signs of a recovery have emerged, improvements are expected to be sluggish, particularly in oil importing countries.
Masood Ahmed, Director of the International Monetary Fund’s (IMF) Middle East and Central Asia Department, and Jean-Francois Seznec, visiting professor at Georgetown University, provided an economic outlook for the region, while Marina Ottaway, Director of Carnegie’s Middle East program, discussed the political and social consequences of the recession. Uri Dadush, Director of Carnegie’s International Economics program, moderated.
Oil Exporters and the Gulf Region
The recession’s plunge in oil prices, from almost $140 a barrel in July of 2008 to under $35 a barrel in January of 2009, rocked the oil sector, which is projected to see a 3.5 percent decline in activity. Governments responded with quick and decisive counter-cyclical spending, moderating the downturn in non-oil sectors of the economy, which are expected to grow by 3.2 percent in 2009. Though fiscal and current account surpluses are expected to fall sharply in 2009 because of massive government spending, they are expected to improve in 2010 as oil prices recover. Iran’s situation, however, remains perilous.
- Saudi Arabia: In the months leading up the crisis, the government was able to accumulate massive amounts of cash, which it is now spending on state investment projects. Over 100 billion dollars have been invested so far, particularly in the chemical industry.
- Abu Dhabi: The government has been pouring massive amounts of spending into its economy, particularly in industrial development and cultural projects. These reserves, comprised mostly of sovereign wealth funds, remain strong, despite losing significant value during the crisis.
- Iran: Iran’s 2010 budget was drawn up under the expectation that oil would be 90 dollars a barrel, significantly higher than the current price. Since Iran cannot borrow money to finance its resulting deficit, it will be forced to print it, likely triggering high inflation.
Iraq is on the verge of becoming a major oil producer. Bids have been placed recently on developing Iraq’s oil fields, which could increase production by 4 to 8 million barrels per day in the next four years. Security issues still remain, but the recent improvements in Iraq’s economic potential have been striking.
Weakness in the Financial Sector
The region’s financial sector remains vulnerable. In the years preceding the crisis, a rapid expansion of credit drove up real estate and asset prices. These bubbles burst by the end of 2008, driving down lending and drying up credit. Governments also acted quickly to stabilize the banks, and while weaknesses still remain in the sector, they are neither systemic nor unmanageable.
- Dubai: Declining asset and real estate prices have put Dubai’s debt at 120 billion dollars, most of which will come due in the next two years. Though Abu Dhabi will provide some support, Dubai will likely suffer, as business to Dubai is transferred elsewhere and some of its extravagant spending projects are pared down.
The region’s oil importers also escaped the crisis relatively unscathed. These countries, which have limited connections to the rest of the world through financial markets, were able to rely on the region’s oil exporters as outlets for goods and surplus labor, and benefited from favorable climate conditions in their agricultural sectors. The IMF predicts 2009 GDP growth to continue, although at only 3.6 percent, compared to an annual average of almost 6 percent in 2005-2007. Growth was maintained by:
- Spillover Effects: In the months following the crisis, oil importers benefited from spillover effects of spending in oil exporting countries through improving trade and remittance payments, which the IMF projects to hold up remarkably well in 2009.
- Agriculture: Additionally, strong agricultural harvests—Morocco is expecting its best harvest in 25 years—have also helped buoy growth.
However, a return to the 6 percent pre-crisis growth rate is expected to be slow and the IMF projects that 2010 growth will be little better than that in 2009. Despite declining inflation, real effective exchange rates have been appreciating, raising concerns about the region’s competitiveness in the global market. With government spending constrained by limited fiscal space, the recovery must be driven by growth in private domestic demand, which has yet to materialize. Once the recovery takes hold, these countries will need to focus on raising their productivity and find a stable place in the world economy.
The economic crisis will also have social and political consequences across the region, though the effects will likely be delayed. Strong economic growth has long been the lone safety valve for easing social unrest under the current regimes. If growth remains sluggish, political pressures will mount on the current leadership, slowly eroding their political capital.
Employment in the area has declined, but the impact has fallen overwhelmingly on migrant workers, not citizens. Private industries that have been hit the hardest by the downturn, particularly construction, employ mostly foreign workers, while the majority of citizens work in the public sector, where employment held strong. Therefore, the region has exported much of its unemployment to countries such as Pakistan and Sri Lanka, minimizing the social and political unrest that could be caused by job losses among nationals.
Nevertheless, unemployment will emerge as a pressing issue in the coming years. The rapid growth in the region’s population will only exacerbate the imbalance between labor supply and the inadequate creation of private sector jobs, placing an even greater burden on the state as the employer of last resort. Until political structures and governance allow for a better business climate, private investment will lag, and productivity and technical advancement will suffer.