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Economist Intelligence Unit | Middle East and North Africa: key economic issues in 2014

Since the onset of the Arab Spring in 2011 the Middle East and North Africa has in effect been a tale of the “haves” and “have nots”. The countries most affected by unrest, and in some cases war, have seen their economies stagnate. The more stable countries—which, not coincidentally, have also typically been oil-rich—have boomed on the back of fiscal stimulus and high oil prices. Yet 2014 should see the start of an unwinding of this trend, as the oil-rich “haves” take their foot off the fiscal pedal and the “have nots” begin to benefit from the upturn in the euro zone.

Nowhere has the opening of the fiscal spigots been more apparent than in the wealthy Gulf Co-operation Council (GCC). In the wake of the unrest in early 2011, all the GCC states dispensed with fiscal prudence and, buttressed by rising oil prices and production, their governments announced enormous public-sector salary and pension rises, huge new infrastructure and housing programmes, and increased subsidies. However, inevitably, such largesse has taken its toll on the public finances, and we expect all six of the GCC states to return either a narrower surplus, or, in the cases of Oman and Bahrain, wider deficits, in 2014.

GCC closes the fiscal spigots
In response, governments are being forced to act. Saudi Arabia, for example, recently announced a budget just 4% bigger than its predecessor (compared with a budgeted spending increase of 17% in 2013), and Oman’s 2014 budget projects spending just 5% up on its predecessor—a marked slowdown from the 29% spending increase announced in the 2013 budget. Similarly, for almost the first time since the collapse in oil prices in 1997‑98, several GCC governments are now publicly mulling tackling their overgenerous subsidy systems. In a blunt appraisal of the situation, the Omani oil and gas minister, Mohammed bin Hamad al‑Rumhi, told a conference in October that “subsidy is killing us” and, echoing his comments, the governor of the Central Bank of Bahrain, Rashid al‑Maraj, warned in December that the present situation is “not sustainable”. However, in reality, mindful of potentially fomenting unrest, any attempt to reform subsidies will be extremely cautious, with households almost certainly excluded, at least initially, from cuts, and industry prioritised.

Labour market policies will hinder businesses
The targeting of industries within the GCC is hardly going to help the business climate, however. Already, companies across the Gulf are being weighed down by increasingly aggressive labour market policies, which are focused on replacing foreign workers with locals. Saudi Arabia has been especially energetic in this regard, introducing a major reform to its expatriate sponsorship system, including inducements to encourage firms to hire nationals, and imposing fines on companies with more than 50% foreign workforces. Concurrently, a host of governments, including Oman, Saudi Arabia and Bahrain, have sought to encourage their wary citizens to embrace the private sector by raising the minimum wage for nationals. Overall, therefore, companies are increasingly being confronted with having to hire more, typically less well-educated and motivated locals, at a higher cost. Thus far, massive fiscal stimulus and high oil prices have shielded the GCC economies from the harmful effects of their labour policies. However, with oil prices stabilising (and forecast to decline in the coming years), the state will no longer be able to provide much of an economic prop, and thus there is a risk that the GCC’s stellar economic performance of recent years will become a thing of the past.

Governments eschew economic reform
Meanwhile, in the rest of the region the challenge is simpler: job creation, rather than worker replacement, is top of the agenda. However, in the absence of large oil reserves or swollen sovereign wealth funds, and confronted by long-fragile fiscal positions, boosting growth will prove an uphill task. This will be exacerbated in the near term by ongoing cuts in subsidies, which have typically been focused on larger users (namely, industry), rather than households. For example, a phased 50% cut in the price subsidy for gas and electricity in Tunisia is being initially focused on only large users, and the latest electricity price increase in Jordan for major users has prompted an outcry from industrialists.

More broadly, the business climate will be further impaired by the general governmental aversion to economic reform, as populations remain wary of the capitalist models pursued by the pre-2011 generation of leaders and technocrats (which, in reality, were always undermined by corruption and nepotism). The only exception to this trend will probably be Egypt, where the current interim administration (populated predominately by technocrats and academics) is working assiduously to create a more foreign investor friendly environment following the more statist policies of the previous Muslim Brotherhood administration.

However, it will be undermined in this by the unpromising political and security outlook, which will in turn depress domestic confidence and foreign investment—a handicap that will also affect Tunisia and Lebanon, as well as hydrocarbons-rich but hyper-unstable Libya and more resource-poor Yemen. Adding to the unhelpful climate, the ongoing war in Syria will also continue to spill over its borders, strengthening the economic headwinds in Lebanon, depressing the recovery in Jordan, and potentially setting back Iraq’s recent oil-led economic bounceback.

In contrast, thus far at least, Israel has managed to remain at least economically aloof from Syria’s problems, and indeed it is well placed to benefit from the strengthening economic picture in its two primary export markets, the US and the EU. The long overdue recovery in the euro zone will also offer a rare bright spot for some of the more troubled North African states, notably Morocco, Egypt, Tunisia and Algeria, reflecting its primary importance as an export market, and as a source of remittances and tourists.

A little help from their friends
Nevertheless, in many cases such positives will be more than outweighed by the continued fallout of the Arab Spring, prompting governments in the more unstable and less resource-rich states to continue to rely heavily on outside support. The IMF play a crucial role in this regard. Jordan, for example, has had a US$2bn lending facility in place since August 2012, and the IMF also formally agreed a US$1.74bn financing programme with Tunisia in June 2013. Despite popular misgivings about the conditions attached to this lending, the Fund is likely to remain relatively flexible in its assessments, primarily reflecting the overarching desire on the part of both itself and its financers to promote stability and assist in the democratic transition.

Nevertheless, talks between the IMF and Egypt over a US$4.8bn stand-by arrangement appear to have run into the ground. Prior to the ousting of the president, Mohammed Morsi, in early July, efforts to reach a deal had been persistently hindered by the then government’s failure to follow through on promised reforms. Since July, however, it appears that talks have in effect come to a standstill, with the new interim government eschewing the option, citing the need to wait until the installation of a permanent administration.

Egypt’s reticence about the IMF stems from a trend that has been increasingly prominent over the past few years: the disbursement of financial support from the region’s oil-rich states, in particular the GCC, to regional allies. In this regard, the GCC has been especially generous to the new leadership in Egypt, with Kuwait, the UAE and Saudi Arabia offering US$13.9bn in assistance However, it remains to be seen whether Qatar, which also gave a US$500m loan to Tunisia in April 2012, will curtail its hyperactive financial assistance programme, in line with the receding of support across the region for the Muslim Brotherhood (which Qatar has proactively backed).

Money buys influence
Even without active Qatari participation, however, Saudi Arabia and its allies in the GCC will continue to work assiduously to defend the current crop of autocratic rulers. For example, Saudi Arabia, the UAE, Kuwait and—possibly—Qatar will provide further backing to Jordan and Morocco, as part of their long-term pledge in 2011 to give US$5bn to support development projects. This reflects a desire on the part of the GCC to shore up political stability, as well as maintain influence, but humanitarian concerns will also increasingly come to the fore: amid the civil war in Syria, millions of refugees have poured into neighbouring Jordan and Lebanon, threatening the authorities’ ability to cope and prompting their governments to plead for foreign assistance. (In response, Saudi Arabia pledged US$3bn to Lebanon’s army in late December.) However, given the GCC’s states hostility to the Syrian government, Syria’s leadership will instead rely on Iran, which has set up a US$4bn credit line and, unlike other parts of the region, could see a major upturn in its fortunes if a diplomatic deal can be reached over its nuclear programme.

However, again, 2014 could mark a turning point. With the GCC’s fiscal situation deteriorating rapidly and austerity in vogue, the region’s non-oil producers will increasingly be left to fend for themselves (although this may not become truly apparent until next year). With governments under-resourced and the public sector typically inefficient, the responsibility for raising living standards and boosting job growth will once again have to be shouldered by the private sector—as was much the case prior to 2011.