The Middle East and North Africa region will see its lowest growth since the 1980s, as countries tighten fiscal policy in response to low oil prices, according to a new study.
While the UAE has the best long-term economic prospects, with anticipated GDP growth of up to 3% in the coming years, Bahrain and Oman are likely to be poor performers with GDP growth of maximum 1% in 2016-2017, according to Capital Economics’ Q2 2016 Middle East Outlook, Arabian Business reported.
Fitch this week downgraded Bahrain’s long-term foreign currency credit rating from BBB- to BB+, making it the first of the six (Persian) Gulf Cooperation Council Arab countries (Saudi Arabia, Kuwait, the United Arab Emirates, Qatar, Bahrain, and Oman) to receive “junk” status since oil prices started to fall in mid-2014.
Qatar’s economy grew by 3.7% in 2015, but this is also likely to soften to 2-3% in 2016-2018. “We are concerned about the rapid expansion of private sector credit. At the very least, credit conditions will tighten and a period of deleveraging is likely,” the report said.
Kuwait’s economy, meanwhile, is expected to remain “sluggish”, with forecast growth of just 1-1.5% in 2016-2018.
The outlook is poor in the rest of the region too, Capital Economics said.
Morocco has the brightest medium-term prospects in the region but it, too, will see weaker growth in the coming year due to a drought.
“Overall, we forecast the MENA region as a whole to expand by just 1.3% this year which would mark the weakest growth since the late-1980s,” the report said.
Saudi Vision
Saudi Arabia’s economy is also set to slow sharply to 0.3% this year and remain weak “for the foreseeable future”, with anticipated growth of 0.8% in 2017, said Capital Economics.
It noted that low oil prices have resulted in large twin budget and current account deficits, and although the country’s strong balance sheet provides some buffer, the shortfalls will need to be addressed within the next two years and the kingdom’s Vision 2030 economic diversification strategy is a longer-term solution.
Saudi Arabia is turning to the private sector because the government can no longer afford to increase spending rapidly in an era of cheap oil and shrunken state revenues. It posted a record budget deficit of nearly $100 billion last year.
The reform plan envisages state spending of around 270 billion riyals ($72 billion) in the next five years on projects to diversify the economy beyond oil, from industrial zones and power stations to housing, schools and communications. The private sector would provide 40% of funding for the projects, or about $48 billion.
This is not impossible in an economy where the private sector's output was $320 billion last year alone. But with domestic money market rates rising sharply because of reduced flows of oil money into the banking system, it is not clear that local firms can raise funding at economic rates.
That implies Saudi Arabia will have to rely much more heavily on foreign investment in coming years.
Egypt to Finance SMEs
In Egypt, depressed tourism revenues along with tighter fiscal and monetary policy will result in very slow growth this year.
In a bid to help improve inclusive growth and employment, Egypt’s central bank has taken aggressive steps to help expand commercial lending to the country’s SMEs.
Small and medium-sized enterprises are already a mainstay of the Egyptian economy, accounting for 80% of GDP and employing a majority of the country’s workforce.
In January the Central Bank of Egypt announced that credit to SMEs must account for at least 20% of any commercial bank’s loan book by 2020. This stimulus package could amount to an injection of $25 billion, according to figures from Wamda Research Lab, an organization focusing on entrepreneurship in MENA.
Under the new lending guidelines, companies with revenue of between $130,000 and $255,000 can access loans at highly attractive rates of less than 5%, which is significantly lower than the CBE’s main credit rate of 11.25%.
