October 2016 Number 160 WHAT CAN MENA GOVERNMENTS EXPECT IN 2016? Lili Mottaghi1 Emerging markets have also slowed despite a decade of fast growth. China’s growth is Introduction: This year will be the fifth projected at 6.7 % in 2016, down from 7.7 % in consecutive year with global growth below its 2013. Brazil and Russia are still in recession. Oil long-term trend of 3.5% observed during 2000-07, exporters face by persistently low oil prices. standing at last year’s 2.4% (Figure 1.1). This is Nigeria’s and Angola’s 2016 growth will fall 0.5% below January’s forecast. Many countries below 1% from almost 3% last year. Among are plagued by recession, several others suffer MENA oil exporters, growth in GCC countries is from terrorist attacks and refugee crises, while expected to fall sharply with Saudi Arabia’s some are mired in civil wars together with declining to 1% in 2016 from over 3 % last year. extremely uncertain commodity markets, especially oil. The result has been lower potential The global outlook is expected to remain tepid in output and investment, and weaker global the short term and growth expected below 2000- demand. In advanced economies, real growth 07’s average for the seventh year. The World remained uncomfortably low, almost 1% below Bank projects this 2.8% in 2017, nearing 3% in the long term average from 2000 to 2007. 2018. The slight improvement in 2016 is due to some advanced economies, particularly the U.S. Figure 1.1 Real GDP Growth, percent expected to grow 1.9% in 2018. Recessions in Russia and Brazil are expected to bottom out with growth turning positive in 2017. Oil markets are expected to remain over-supplied and, in the absence of a pick-up in demand, prices could be around $53-$60 by the end of the decade. Risks to these projections are mostly downside, mainly geopolitical risks that could heighten uncertainty and dampen investment and growth. Decelerations in major emerging market Source: World Bank. economies and rising private-sector indebtedness could increase vulnerability in Growth in the U.S., the EU and Japan is expected some of these countries. Other major risk factors around 1.7%, 0.5% slower than expected in are a potential EU slowdown, particularly the January. Already weak UK growth is expected to U.K. after Brexit, and persistent low oil prices that fall in 2016 via the “Brexit effect”– likely through could further destabilize the outlook for oil- investment contractions. This is expected to exporters. hamper medium term UK and EU growth. Prospects for a rebound are dim, as confidence in Oil Market Developments: The oil market has services and manufacturing is deteriorating. entered a new normal of low oil prices. A World 1Lili Mottaghi, Economist, Office of the Chief Economist, The Middle East and North Africa Region (MNACE), the World Bank. October 2016 · Number 160· 1 Bank study (Devarajan and Mottaghi, 2016) finds MENA governments buoyed by high oil prices of that oil markets are expected to work through the past decade (2000-10) embarked on a vast but their current oversupply and rebalance in early untargeted social program including food and 2020 at market-clearing prices close to the fuel subsidies, public sector jobs, free health and marginal cost of US shale oil producers. Oil prices education and handouts in return for muted are likely to be in the $53 - $60 a barrel range since citizen voice and limited accountability. With oil global stockpiles are expected to remain well prices falling, the picture has changed above historical averages. Iran, Kuwait, United dramatically. MENA countries dependent on oil Arab Emirates (UAE) and Iraq are increasing for most of their exports are facing a major and production. Russia and Saudi Arabia, among long-standing terms of trade shock. In almost all others, are producing at their highest levels since cases, oil prices have remained well below the January 2016; and Libya has lifted restrictions on prices needed to balance budgets, resulting in ports unlocking 300,000 barrels a day of supply. large fiscal and external account deficits. OPEC In August 2016, OPEC production of crude oil members’ net oil export revenues in 2015 was increased by 40,000 barrels per day over July $404 billion, 46 % lower than in 2014 according to 2016, with Saudi Arabia’s output reaching a U.S. Energy Information Administration (EIA) record high. estimates. Based on EIA price forecasts, OPEC revenue is expected to fall to $341 billion in 2016 To lift prices, OPEC members agreed to freeze oil before rising to $427 billion in 2017. output at September meeting in Algiers to about 32.5 to 33 million barrels a day. This is about 0.7% In Africa, Nigeria, which relies on oil for 70% of to 2.2% below current output. Iran, Nigeria, and its fiscal revenues, needs a price of $123 a barrel Libya is allowed to produce at its maximum level to balance the budget. The situation is even worse but members will wait for the November meeting for those countries whose primary market for to settle how the overall cut will be distributed crude oil exports is the U.S., as the shale oil boom among the members. Expectations of a has wiped out their exports.2 These include production cap led to a slight rebound of oil Angola, Gabon and Nigeria, all facing a sharp prices to the tune of $3 a barrel (Brent crude) but drop in exports in addition to lower oil prices. failed to lift prices beyond that. The main reason The twin effect of lower oil prices and dropping lies in high inventories and uncertainties over demand from a major importer are reducing their whether a production freeze could affect world’s fiscal space. In Latin America, Venezuela and oil supply, for example from Russia and Mexico. Brazil have also been hit hard by the crash in OPEC members control less than half of world oil commodity prices, pushing their economies into production. If cap deal fails, oil prices could fall their deepest recession. Oil exporters in the further and if holds, prices will not increase MENA region are facing the same problem. Libya beyond $52 in the fourth quarter of 2016 and Algeria have been hit by lower oil prices and according to UBS. Historical patterns show that lower oil demand from the U.S., their major oil OPEC agreements have failed to work because trading partner. Some of them have been members do not adhere to their quotas and that drawing down their reserves and turning to Shale oil producers will enter the market by capital markets. Estimates show that Libya lost opening up idled wells and rigs when prices start two-thirds of its reserves between 2013 and 2016, to rise beyond $50 a barrel (See World Bank equivalent to $75 billion. Algeria lost $86 billion, Study above). While the overall impact of the and Iraq $29 billion during the same period. recent agreement on oil prices is left to be seen, we expect oil prices to settle around $53-$60 by MENA Economies in 2016 and beyond: This end of decade when markets will rebalance. year appears to be one of the toughest as MENA governments face serious policy challenges. The biggest for oil exporters is managing their 2 Though oil is presumed as a commodity that is traded a country’s trade prospects with the rest of the world, freely, constraints such as crude grade, structure of making them vulnerable to demand shocks. refineries in oil importers and market share could limit October 2016 · Number 160· 2 finances and diversification strategies with oil treating the price decline as permanent and below $45 a barrel. Fiscal consolidation in a taking tough measures including spending cuts, difficult sociopolitical environment and lowering growth in the non-oil sectors. Non-oil spillovers from conflicts is also creating growth in Algeria and Oman is down to 3.7% in challenges for oil importers. Real 2016 GDP 2016 compared to 2015’s 5 and 7% respectively. growth in MENA is projected to fall to its lowest level since 2013, 2.3%, lower than last year’s GCC reliance on oil has increased over the past growth by 0.5% and about 1% lower than decade, making it difficult to cope with low oil predicted in April 2016. prices (Table 1.2). In 2016 GCC growth is expected to fall to 1.6%, less than half the 2015 MENA’s weak growth is partly due to austerity rate. GCC countries are projected to grow around measures such as cutting capital and current 2% this year and rebound prospects are weak spending to counter lower fiscal revenues from Table 1.2 GCC Oil Dependency cheap oil. Over $20 billion in projects may be canceled in Saudi Arabia in 2016. Ongoing 2000-05 2006-10 2011-14 Oil export revenues as % of total exports of goods and conflicts in Syria, Iraq, Libya and Yemen are services ravaging these economies while refugees drain Bahrain 58.7 60.5 65.1 Kuwait 82.7 80.5 87.6 fiscal space in neighboring countries. Also, Oman 76.9 69.4 64.3 private-sector growth has been slowing down, Qatar 88.5 85.9 88.9 preventing absorption of the large of number of Saudi Arabia 83.4 88.1 83.0 United Arab unemployed. The latest labor market data show Emirates 45.0 38.7 32.6 that 2016’s unemployment rate remains high in Fiscal oil revenues as % of total fiscal revenues Bahrain 71.7 82.2 87.2 Egypt, Iran, Iraq, Jordan, Morocco and Tunisia. Kuwait 72.7 79.2 83.6 Oman 83.4 83.4 88.7 We expect regional growth to improve to 3.1 and Qatar 90.5 88.3 90.7 Saudi Arabia 82.8 88.3 90.3 3.5% in the next two years, as governments’ United Arab 60.2 65.1 69.9 reform and diversify away from oil. The Emirates Source: IMF. measures include eliminating fuel subsidies, unless reforms occur. Fiscal and external account reducing public-sector jobs and wage bills, 2014 deficits are expected to increase to 10.1 and privatizing State Owned Enterprises, and 5% of GDP, equivalent to $155.4 and $77.1 billion diversifying fiscal revenues away from oil respectively, but they could improve slightly through higher direct and indirect taxes.3 These over the projection period. reforms are expected to transform at least part of the old social contract and enhance economic efficiency. The 2016 regional fiscal deficit is Saudi Arabia’s economy is expected to grow at expected to increase to 9.3% of GDP, up 0.5% 1% in 2016, much lower than expected in April from 2015. The 2013 regional fiscal surplus of $63 2016. The fiscal deficit remains high and is billion is expected to become 2016’s deficit of expected to stay elevated in later years. Qatar’s $320 billion. GCC countries, developing oil 2016 growth, the GCC’s best performer, is exporters and oil importers are expected to face expected to drop to 2.1%, lower than forecast significant deficits in 2016-2018 but with earlier and half the growth rate of last year while prospects of reducing them afterwards. its two decades long fiscal surplus is expected to become a deficit estimated at 12.1% of GDP in 2016 with the prospect of remaining high in 2017 Growth in MENA oil exporters is expected to and 2018. remain subdued at 2.3% in 2016 due to a sharp drop in GCC growth. If OPEC’s September meeting fails to cap production, oil prices will fall Responding to low oil prices GCC countries further. Oil exporting governments are now tightened fiscal policy, used foreign reserves and utilized debt markets to finance deficits. They 3 Saudi Arabia is planning to privatize its postal system by early government is considering privatization of non-oil 2017 and considering new income taxes on expatriates. The Kuwaiti production units of Kuwait Petroleum Corporation. October 2016 · Number 160· 3 have issued $88 billion in sovereign bonds or for the group is expected to turn to 3.4% in 2016 government-related enterprise debt to plug from below 1% last year, solely due to budget deficits. They are looking to diversify expectations of Iran and Iraq producing more oil. fiscal revenues away from oil through a Value These countries face major fiscal and external Added Tax. The outlook is expected to improve imbalances due to the high cost of war, low oil slightly in the projected period as reforms and prices and trade declines. Iranian 2016 growth diversification measures are taken but still weak will be 4.3%, four times last year’s, due to oil compared to the pre-2001 boom era. output reaching pre-sanctions levels. Iranian oil production increased to 3.7 million barrels a day, Lower oil revenues and the slowdown in doubling its sanctions era level. economic activity have lowered GCC financial outflows. Data from the Saudi Arabian Monetary In this group Syria, Iraq, Libya and Yemen are Agency (SAMA) shows remittances fell 19% in mired in conflict. Syria’s war has ravaged the July 2016 compared to 2015 i.e. $640 million. economy, output has shrunk 50-60%, the Syrian Foreign transfers declined by 35% compared to Pound has lost 80% of its value, population has June 2016, from $4.21 billion to $2.74 billion, their fallen by 23%, 12.4 million are displaced – lowest level since February 2013. The decline in including 7.6 million internally and 4.8 million outflows to the region have seriously affected externally. Education is on hold for many receiving MENA oil importers. children inside and outside the country. The 18- month civil war in Yemen has resulted in 10,000 The outlook is better but still weak in developing civilians killed, 2.8 million people displaced and oil importers who were hit by terrorism, conflict most Yemenis suffering from shortages of food, spillovers, and lower GCC financial outflows. water, sanitation and healthcare. Safety nets in Growth is expected at 2.6% in 2016 (3.4% last Yemen have significantly deteriorated. It is year) before improving to 3.5% on average for the estimated that more than 85% of Yemenis are projection period. Fiscal and external account living in poverty and the situation is worsening. deficits are expected to remain high. Egypt and In addition to humanitarian costs, the World Tunisia face lower tourism revenues, remittances Bank estimates that reconstruction will cost over and financial inflows with tighter fiscal and $15 billion. monetary policies with less growth and higher inflation this year. Egypt’s urban inflation was All in all, if MENA economies could take 15.5% in August, up 2% over July. There are advantage of the opportunity provided by low oil expectations that the Egyptian pound will be prices to implement reforms that are planned, it further depreciated due to foreign currency could improve economic performance in the shortages, which could accelerate inflation. region. Morocco’s heavily agriculture reliant economy, will see 2016 growth weakening to 1.5% Contact MNA K&L: compared to 4.5% last year. The agricultural Antonella Bassani, Director, Strategy and sector poses the greatest risk to the Moroccan Operations. MENA Region, the World Bank Sajjad Ali Shah, Manager, MNADE economy with estimated negative growth of 9.5% Regional Quick Notes Team: this year due to drought versus positive growth Omer Karasapan and Mark Volk Tel #: (202) of 2% in other sectors. Growth in Jordan and 473 8177 Lebanon will be subdued throughout the The MNA Quick Notes are intended to summarize projection period due to spillovers from conflicts lessons learned from MNA and other Bank in Syria and Iraq and lower remittances given a Knowledge and Learning activities. The Notes do sharp GCC slowdown. not necessarily reflect the views of the World Bank, its board or its member countries. The economies of several developing oil exporters in the region are doubly hit by the slump in oil prices and conflict. Average growth October 2016 · Number 160· 4