Most hydrocarbons-rich nations are seeing short-term economic growth on the back of high oil prices, but the long term could see their surpluses running out and their fiscal deficits growing. Published in MEED, 25 June 2012
With growth in Qatar falling back into single digits, Libya will take its place as the fastest-growing economy in the region this year. It is likely to be followed by Iraq, another post-conflict country where oil production is increasing.
There are few lessons for other governments to learn from the experience of these two countries, given their turbulent recent histories, but the situation does highlight how oil prices dictate economic prospects in the Middle East both negatively and positively.
After a 61 per cent contraction in gross domestic product (GDP) last year, when its oil output had all but stopped, Libya is expected to bounce back with growth of 76 per cent this year and 21 per cent next year, according to the Washington-based IMF. Iraq’s revival has been more gradual but also more consistent. After posting a 9.9 per cent growth in 2011, its economy is expected to expand by 11 per cent this year and 13.5 per cent next year.
These two states may be the stand-out performers, but almost all oil exporting countries are expected to do well. The high oil prices are fuelling government investment and, indirectly, private consumption. These factors are expected to contribute to an average GDP growth rate for oil exporters of 4.8 per cent in 2012.
Oil importers, by contrast, must try to cope with an increasingly tough environment. In 2007-09, oil-poor countries grew faster than oil producers, but since then the trend has reversed and there seems little likelihood of it changing back this year.
The gap between the two groups can be seen most clearly in terms of their fiscal balances, where the disparity is the widest it has been in four years. On average, governments without hydrocarbons revenue are expected to run a budget deficit of 7.6 per cent of GDP this year. By contrast, oil exporters should chalk up an average surplus of 6.9 per cent.
When it comes to inflation, however, oil importers are expected to perform slightly better. The consumer price index is expected to rise by an average of 9.2 per cent in those countries this year, compared with 10.6 per cent for producers. Most will do better than that suggests, though, as the figures are skewed by very high inflation in Sudan and Iran, where it will be 23 per cent and 22 per cent respectively.
However, a country’s economic vitality does not depend only on its oil reserves; political stability is another crucial factor. The six countries most closely associated with the Arab Uprisings – Bahrain, Egypt, Libya, Syria, Tunisia and Yemen – all underperformed last year. In 2012, with the exception of Libya, they are again expected to lag behind their peers.
Masood Ahmed, director of the IMF’s Middle East & Central Asia Department, highlighted the issue when announcing the organisation’s latest forecasts for the region at a press conference in Washington on 20 April. “In a number of countries in the region, there is a historic transition under way,” he said. “This transition has the promise of leading to a more prosperous, equitable future for the people of those countries, but the uncertainty associated with the transition has led to a short-term impact in relation to economic activity and confidence.”
Syria’s economic fortunes are impossible to predict, but among the others it is Yemen that causes the greatest concern. Its economy is expected to shrink again this year, its inflation is among the highest in the region at more than 17 per cent and the government is running a sizeable budget deficit of 5 per cent of GDP. The economic problems there, as in other countries, could lead to further political instability and even a reversal of the piecemeal democratic gains made over the past year.
“It’s not too strong to say there is a risk that macroeconomic instability can slow down or even derail these historic transitions,” said Ahmed. “Countries that are going through this difficult period are now having to look at how they can try to address and contain their spending, even as they try to deal with difficult trade-offs as social demands are high. The risk from slowing down or unsuccessful transition in these countries is one that will spill over beyond these countries.”
The IMF estimates that the fiscal needs of oil importing states will be about $100bn over the course of this year and the next, necessitating the need for help from itself and other lenders.
Egypt is also likely to have a difficult 2012. Economists predict that GDP growth this year will be just 1.5 per cent. The key issue there will be a smooth political transition, although this cannot be taken for granted, given that unrest has continued under the military junta that has ruled since President Hosni Mubarak was toppled by a popular revolt in February 2011.
“We think the recovery in Egypt is going to be very weak because of political issues and the delay in securing financing, whether from the IMF or some of the GCC countries,” says Rachel Ziemba, a director at New York-based financial analysis firm Roubini Global Economics. “We’ve pencilled in 1.5 per cent growth this year. Ultimately, it’s an environment where we see more precautionary saving by households, very high unemployment and wages under pressure.”
Other North African countries are generally performing better, although they are beset by a variety of problems, ranging from a weak economy in key European export markets to a drought in Morocco. The weakest performer is Sudan, which, following the secession of the oil-rich South Sudan in July 2011, can no longer rely on the plentiful oil exports that once fuelled its economy. The fighting between Khartoum and Juba since then over disputed territory and oil revenues means a resolution looks as far away as ever.
Fighting in Syria is having a negative impact on the country’s economy and it is also hurting its neighbours in Lebanon and Jordan, where GDP growth this year is expected to be 3 per cent or less, well below the regional average.
The Jordanian economy has also been adversely affected by repeated sabotage of the gas pipeline from Egypt. Amman has had to import far more expensive fuel oil for electricity generation.
Jordan remains one of the more fragile economies in the region, but it also has one of the more delicate political scenes. In early May, King Abdullah appointed yet another prime minister, Fayez Tarawneh, to bring in economic and political reforms. There is little reason to suppose he will fare any better than the three other men who have held his job over the past two years, and the patience of the population may start to run out at some point.
The strongest economic performances in the region will come from the GCC where, on average, growth rates are higher, inflation is lower and budget surpluses are larger. Among the Gulf states, Saudi Arabia and Qatar have the best economic prospects, while Kuwait, Oman and the UAE are all likely to have a relatively quiet year. Within the UAE, Abu Dhabi may see slower growth than in the past, while Dubai’s economic recovery is continuing, albeit not in every area.
“The financial sector here is still struggling, still shedding people,” says one Dubai-based banker. “The rest of the economy, though, is in pretty good shape. The tourism industry has done incredibly well and the retail sector has had a fantastic six to nine months. That doesn’t tell me Dubai is fixed, but it does tell me that some of the immediate fear has passed.”
Bahrain, however, remains in a critical state both politically and economically. Media coverage of the country at the time of the Formula One Grand Prix in April highlighted the reality of continued demonstrations, repression and an increasingly polarised society worldwide.
Even if the ruling Al-Khalifa family wanted to make serious political concessions, which seems unlikely, the increasing dependence it has on Saudi Arabia gives it little political room for manoeuvre, although it does provide the financial underpinning the economy needs. However, wider economic activity continues to suffer as businesses look to other regional centres such as Dubai and Doha.
What has helped many GCC countries has been the boost in oil output over the past year to make up for the shortfall from Libya. According to estimates from the Institute of International Finance (IIF), oil production rates could rise further this year. It expects GCC oil production to be 17.3 million barrels a day (b/d) in 2012, compared with 16.5 million b/d in 2011.
The IIF forecasts that the GCC’s external current account surplus will rise to a record $358bn in 2012, based on an average oil price of $114 a barrel. This could change, however, depending on the outlook for the global economy. Oil prices fell below $100 a barrel in early June.
Yet, for all the short-term gains in wealth their oil is bringing, the long-term pressures on these economies remain the same as before. They need to create jobs and diversify. High oil prices and, in some cases, political turmoil make that difficult for oil importers, but the high prices have also led oil exporters to increase spending to the point where many are now vulnerable to any reduction in prices.
“[Judging from their] recent spending commitments, there is a real risk that [oil exporters] could start to struggle, not in the next two or three years, but in the next 10 years,” says Said Hirsh, Middle East economist at UK-based research consultancy Capital Economics.
“Most of the spending is current spending on subsidies and salaries and so on. This is being done against a growing population, so they will have to increase spending every year. They’ll need increases in oil prices every year to counter that, otherwise their surplus will narrow and eventually they’ll go into deficit.”
Such concerns will not dampen the sense of prosperity that many oil-rich states are currently feeling. But they do highlight how, even in times of high revenues, long-term challenges for all countries in the region are considerable.