100393 X1` October 2015 – Number 151 MENA Economies Hit by Conflicts, Civil Wars and Lower Oil Prices Lili Mottaghi1 The GCC: Fiscal positions in oil exporters, particularly in GCC States are worsening. A surplus Introduction: Against the backdrop of a slowing of about 5.4 percent of GDP in 2013 is expected to turn global economy and lower commodity prices, into a deficit of about 9.8 percent of GDP in 2015 in economic growth in the Middle East and North the GCC countries. For the Gulf States, this means a Africa (MENA) is stagnating. The World Bank 2015 deficit of US$136 billion in 2015 with Saudi Arabia MENA Economic Monitor report projects overall bearing about US$129 billion (or a deficit of 19.5 GDP growth to be less than 3% for the third year percent of GDP in 2015); surpluses in Kuwait and running—about 2.8% for 2015 (Figure 1). Low oil Qatar are expected to halve in 2015. Current account prices, conflicts, and the global economic slowdown balances will follow the same pattern and surpluses make short-term prospects of recovery unlikely. In a are expected to shrink rapidly in 2015. Continued positive scenario of decreasing tensions in Libya, weakness in oil prices will prompt some of these Iraq, and Syria, together with recovery in the Euro countries to divert funds from Sovereign Wealth area that could boost external demand, growth in the Funds (SWF) to finance their deficits. region could rebound to 4.4 percent in 2016 and the following year. However, if current circumstances Figure 1. Real GDP growth rate 2 persist, overall growth is not expected to recover any time soon. % 6 Growth in MENA: Except for Egypt and Morocco, almost all MENA countries are growing slowly, but 4 for different reasons. The GCC countries and Algeria are suffering from low oil prices and high fiscal 2 spending. As a whole, GCC economies —Bahrain, 0 Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates—are expected to grow at 3.2 percent -2 in 2015 and the following year, down from 3.9 percent 2011 2012 2013 2014 2015 a year earlier, as low oil prices have severely hit these economies. For the same reasons, growth in Algeria Middle East & North Africa (all income levels) is expected to remain at 2.8 percent in 2015. Middle East & North Africa (developing only) Source: World Bank 1Lili Mottaghi, Economist, Office the Chief Economist, The Middle 2 All data for figures are from the MENA Economic East and North Africa Region, The World Bank. Monitor. The Developing Oil Exporters: The group of Figure 2. Developing oil exporters “developing oil exporters” have taken the double hit of low oil prices and civil war. Syria and Libya saw a drop of about 40% or more to their oil output, as a result of physical damage to the sector and a fall in production (estimates for Yemen are not yet available). The sabotage of oil fields may keep their GDP growth rates low. Overall growth for developing oil exporters may reach 1.3% in 2015, up from 0.9% a year ago, mostly due to the likelihood of a slow recovery in Libya and Iraq. The majority of the developing oil exporters saw a decline of about 40 percent or more in their output, with significant damage to their oil sectors and a fall Source: World Bank. in oil production (estimates for Yemen are not available). Conflict has severely hurt the economies Oil Importers: While benefiting from lower oil prices, of Libya, Yemen, Iraq and Syria. In Yemen, it has MENA’s oil importers are being hurt by terrorist resulted in a humanitarian catastrophe, the mass attacks, spillovers from neighboring wars, slow displacement of people and destruction of homes, growth in the Euro zone and political uncertainty. roads, bridges, and other infrastructure. The total Two terrorist attacks in 2015 and protracted economic number of people displaced from Yemen, Syria, stagnation in the Euro zone mean Tunisia’s real GDP Libya and Iraq is estimated at 15 million, many of growth is projected to drop to 0.8% from 2.3% in 2014. them fleeing to neighboring countries, such as Tourists arrivals have been cut in half (Figure 3) Lebanon and Jordan. Despite some benefits to their economies created by Syrian refugees, Lebanon and Figure 3. Tourism in Tunisia Jordan have shouldered greater responsibilities in health and education, and have also experienced disruptions to their regional trade because of the wars in Syria and Iraq. Although growth is expected to be 1.7% this year, Iran’s economy is expected to grow faster from 2016 onwards, following the agreement to limit nuclear development and allow more inspections of its nuclear sites. The lifting of sanctions—and Iran’s return to the global economy—may bring an extra 1 million barrels of crude a day onto the international market, contributing to the lower global oil prices. The lower prices are likely to hurt other oil exporters Source: UNWTO. more than Iran, as the positive effect of higher oil production in Iran should outweigh the negative The Palestinian economy is recovering from impact of falling global prices. recession following the 2014 summer war in Gaza with overall growth of 3 percent in 2015. Only Egypt Fiscal deficits are mounting in the group of and Morocco may have been experiencing stronger developing oil exporters (Figure 2). Libya stands out economic growth in 2015 although the tide is against with a fiscal deficit of more than 55% of GDP and them. With security reinforced and reforms current account deficit of 70% of GDP. Libya’s foreign underway, Egypt’s economic growth could hover at reserves are expected to drop to about US$50 billion about 4% in 2015 and 2016. Much of Morocco’s compared to more than US$100 billion in 2013. economy is based on agriculture, with economic growth depending on the weather. October 2015 · Number 151 2 What if oil prices go down again? A further drop in Conclusion: In summary, since the 2011 Arab Spring, oil prices, coupled with high fiscal spending, could though not necessarily because of it, the MENA mean worse to come. Falling oil pieces for MENA oil region has seen a slowdown in economic growth, an exporters mean diverting money from Sovereign escalation of violence and civil war and, more Wealth Funds and reserves to bolster their fiscal recently, substantial macroeconomic imbalances positions. Qatar and Abu Dhabi have already sold from lower oil prices. assets and Saudi Arabia’s reserves shrunk by more than US$60 billion this year and another US$80 billion is expected in 2016. Fiscal deficit of about 19.5% and 12.6% of GDP in 2015 and 2016 are Contact MNA K&L: projected for Saudi Arabia. Although some countries, Deborah L. Wetzel, Director, Strategy and particularly Saudi Arabia, Kuwait and UAE, have Operations. MENA Region, the World Bank started rethinking their huge spending on subsidies, Regional Quick Notes Team: the macroeconomic imbalances will likely spillover to Omer Karasapan and Mark Volk 2016 and the following year. Tel #: (202) 473 8177 The MNA Quick Notes are intended to summarize Investing in MENA: MENA’s investment needs are lessons learned from MNA and other Bank high and its shortage of foreign capital have made a Knowledge and Learning activities. The Notes do bad situation worse. Egypt may need an extra US$30– not necessarily reflect the views of the World Bank, 35 billion in investment and another US$10 billion for its board or its member countries. developing its infrastructure in coming years. Jordan needs more than US$6 billion a year in additional investment to put its economy on a better track. Tunisia is expecting to increase investment by an additional 7 percentage points of GDP during the next five years. Iran, post-sanctions, needs hundreds of billions dollars to upgrade its oil fields and bring production back to pre-sanctions levels. MENA’s Financing Needs: All of the developing countries in the region are in need of financing. Cheap oil and lack of fiscal adjustments have severely deteriorated MENA’s fiscal space. An overall fiscal surplus of about 2 percent of GDP in 2013 is expected to turn into a deficit of 9.2 percent of GDP in 2015 for MENA as a whole. By the same token, MENA’s external account surplus of the past two years is expected to turn into a deficit of about 2.6 percent of GDP in 2015. The main reasons are falling oil prices which started in 2014 and reduced the surplus in the group of oil exporters by 50 percent, and weak economic recovery in the Euro area, which has reduced external demand for oil and non-oil exports. October 2015 · Number 151 3