Today, Mohamed Abdelmeguid, MENA economy specialist for the Economist, organized a webinar to discuss the evolution of MENA economy in 2017, proposing some views about the incoming year. The Middle East region is suffering a long-term stagnation. To better understand this dynamic, we can compare the real GDP growth in the Middle East, which has been an annual average of 0.4%, to the one in East Asia, which has been ten times more (4.0% annually). According to the Economist analysts, in 2017 many regimes are in a vulnerable position, especially in North Africa, due to inflation and cost of living increasing, and the widespread unemployment. On the opposite, the Gulf’s economic reforms will challenge the traditional social pact between rulers and ruled.
The election of Donald Trump could have important consequences on the MENA economy. The new president questioned the American defense of the Gulf region, asking countries to contribute to the costs of maintaining the military bases. However, a decrease in the Saudi power would open a political space in the Middle East, that could be bridged easily by Iran, an issue that Trump probably does not prefer. In fact, he has the intention to end the diplomatic agreement with Tehran, which he considers too soft with the Iranian regime. Trump will not act unilaterally, but in this case Iran could still count on the economic partnership with Europe and several emerging markets. It is not easy to imagine a final sunset for the Iranian agreement.
Iran is the most promising economy in the Middle East: it has an expected 5% growth in the next year, because of a consumer market that has been unable to interact with the international economy for several decades. Although it is difficult to forecast after years of freezing, this consumer market looks promising. Iranian labor force is highly qualified and the economy is diversified. The victory of the battle of Mosul and Iraq’s recovery, an important partner of Iran, could be a point in favor of the Iranian trade. We will see if the American administration decisions will affect this country’s economy.
Egypt is another key country for the 2017 economy. This is an important example of the Middle Eastern countries’ trend to change their economic partners. During the year, the region will face the consequences of the economic diversification that is taking place in the Gulf countries: they are leaving the hydrocarbons-oriented economies with significant spending reductions. The main consequence on the other MENA countries is the decline of Arab aid and investments. This lead two consequences: spending cuts in these countries and opening to new partners, such as Russia and China. In Egypt, the new commercial arrangements will allow to avoid a liquidity crisis, thanks to foreign investment. At the end of the last year, the Egyptian pound fluctuated and it is expected that this volatility will continue for the first half of 2017. During the summer, the first results of the new Zohr field, the largest gas reserves in the world discovered in front the Egyptian coasts of the Mediterranean, will be available. As a result, the Egyptian currency will appreciate again on the dollar and it will gradually return to a less favorable foreign exchange.
As it turns out, the Persian Gulf countries are reformulating their economies to be less dependent on their energy reserves. For the first time in 60 years, Saudi Arabia begun a process of economic diversification, which will have positive and negative results. It is wrong to talk about “economic crisis” in this case, because there are no elements of crisis in progress, but rather a change of approach to the structural problems of the Saudi economy. The UAE are reforming the banking system and we can exclude a financial crisis in the Gulf during the 2017. These countries’ indicators are all positive, although trade balances are slowly becoming negative: this mainly involve some problems for the smaller Gulf countries.
In conclusion, the Middle East faces some major changes. In general, government’s presence in the economy is decreasing, which will give more space to the private sector. The processes are quite gradual in the Gulf, conversely the countries that signed new agreements with the IMF (Egypt, Tunisia, Iraq, Yemen, Jordan, Morocco) will have faster developments. At the moment, the risks to economic growth in MENA region are severals: the high inflation (especially in North Africa), the reduction of public spending, the OPEC cuts, the hard-landing of China, the slowdown of Europe (which is a key trade partner for North African countries), and American protectionism. Who wants to invest in the Middle East will have to consider the lower growth of North Africa’s countries andsome delays in public payments, with some cash crisis towards its creditors. Some promising countries confirmed their positive trend – such as Morocco – while other realities – such as Iran – are still susceptible to international political developments. A general return to protectionism will have an impact on the Middle East as in the rest of the global economies.