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Mena economies living dangerously

27 December 2023

 

Gaza conflict puts the region on edge once again

Middle East and North Africa (Mena) economies enter 2024 in a state of flux. While most are well placed to continue their post-pandemic growth trajectory, albeit in the context of weaker oil sector growth, some states – Egypt and Tunisia notable among them — are under pressure to undertake painful reforms in order to elicit IMF funding packages.

Overall, hopes are high that growth in the Mena region will at least outpace the sluggish performance of the past year.  Policymakers across the region will also be looking to double down on the private sector dynamism that saw non-oil growth outpace hydrocarbons performances in 2023.

The overall rear-view mirror is not especially encouraging. The IMF’s Regional Economic Outlook has Mena real GDP slowing to 2 per cent in 2023 from 5.6 per cent in 2022, a decline attributed to the impact of lower oil production among exporters and tighter monetary policy conditions in the region’s emerging market and middle-income economies. Geopolitical tensions – not least the Gaza conflict – and natural disasters in Morocco and Libya have also weighed on regional economies. 

GDP growth

The World Bank estimates that in per capita terms, GDP growth across the region decreased from 4.3 per cent in 2022 to just 0.4 per cent in 2023. By the end of 2023, it says, only eight of 15 Mena economies will have returned to pre-pandemic real GDP per capita levels.

Much hinges on developments in the oil market. The Opec+ decision on 30 November to agree voluntary output reductions that will extend Saudi and Russian cuts of 1.3 million barrels a day (b/d), is designed to shore up prices, but it will come at a cost. 

Saudi Arabia’s GDP data for the third quarter of 2023 revealed the full impact of output restraint, as the economy contracted at its fastest rate since the pandemic. Saudi GDP notably declined by 3.9 per cent in the third quarter compared to the previous quarter – after the kingdom implemented an additional voluntary 1 million b/d oil output cut.

As a whole, GCC economic growth has been tepid, despite a resurgence in services hotspots such as the UAE, where retail and hospitality sectors have boomed. The World Bank’s Gulf Economic Update report, published in late November, sees GCC growth at just 1 per cent in 2023, although this is expected to rise to 3.6 per cent in 2024. 

Oil sector activity is expected to contract by 3.9 per cent in 2024 as a result of the recurrent Opec+ production cuts and global economic slowdown, according to Capital Economics. However, weaker oil sector activity will be compensated for by non-oil sectors, where growth is projected at a relatively healthy 3.9 per cent in 2024, supported by sustained private consumption, strategic fixed investments and accommodative fiscal policy.

“There has not been much GDP growth this year, but the non-oil economy has been surprisingly robust and resilient, despite the fact that the liquidity has not been as much of a driver as it was a year earlier,” says Jarmo Kotilaine, a regional economic expert. 

“Of course, the cost of capital has gone up and there have been some liquidity constraints. But we do have a lot of momentum in the non-oil economy.” 

In Saudi Arabia, beyond its robust real estate story, the ventures implemented under the national investment strategy are unfolding and semi-sovereign funds are playing a key role in ensuring continuity. “You are seeing more of these green energy projects across the region. It really has been a surprisingly positive story for the non-oil economy,” says Kotilaine.

Government spending

Fiscal policy will remain loose, at least among Mena oil exporters, whose revenues endow them with greater fiscal fire-power. 

Saudi Arabia’s 2024 pre-budget statement bakes in further budget deficits, with government spending for 2023 and 2024 expected to be 34 per cent and 32 per cent higher, respectively, than the finance ministry had projected in the 2022 budget.  This is not just higher spending on health, education and social welfare, but also marked increases in capital expenditure, including on the kingdom’s gigapojects. 

That luxury is not open to the likes of Bahrain and Oman, the former recording the highest public debt-to-GDP ratio in the region at 125 per cent in 2023. Those two Gulf states will need to maintain a closer watch on their fiscal positions in 2024. 

There are broader changes to fiscal policy taking place in the Gulf states, notes Kotilaine, some of which will be registered in 2024. “There are areas that the government will play a role in, but in a much more selective and focused manner. Much less of the overall story now hinges on government spending than it used to in the GCC,” he says.

For 2024, a consensus is emerging that the Mena region should see GDP growth of above 3 per cent. That is better than 2023, but well below the previous year and, warns the IMF, insufficient to be strong or inclusive enough to create jobs for the 100 million Arab youth who will reach working age in the next 10 years. 

The Mena region’s non-oil buoyancy at least offers hope that diversification will deliver more benefits to regional populations, reflecting the impact of structural reforms designed to improve the investment environment and make labour markets more flexible. 

“The labour market in the region continues to strengthen, with business confidence and hiring activity reverting to pre-pandemic levels,” says Safaa el-Tayeb el-Kogali, World Bank country director for the GCC. “In Saudi Arabia, private sector workforce has grown steadily, reaching 2.6 million in early 2023. This expansion coincides with overall increases in labour force participation, employment-to-population ratio, and a decrease in unemployment.”

El-Kogali adds that non-oil exports across the GCC region continue to lag, however. “While the substantial improvement in the external balances of the GCC over the past years is attributed to the exports of the oil sector, few countries in the region have also shown progress in non-oil merchandise exports. This requires close attention by policymakers to further diversify their exports portfolio by further promoting private sector development and competitiveness.”

Regional trade

There is a broader reshaping of the Gulf’s international trading and political relations, shifting away from close ties with the West to a broader alignment that includes Asian economies. The entry of Saudi Arabia, the UAE and Iran to the Brics group of emerging market nations, taking effect in 2024, is a sign of this process.

The decision of the Saudi central bank and People’s Bank of China in November 2023 to agree a local-currency swap deal worth about $7bn underscores the kingdom’s reduced reliance on the Western financial system and a greater openness to facilitating more Chinese investment.

“You want to be as multi-directional, as multi-modal as you can,” says Kotilaine. “For the Gulf states, it is almost like they are trying to transcend the old bloc politics. It is not about who your best friend is. They want to think of this in terms of a non-zero sum game, and that worked very well for them during the global financial crisis when they had to pivot from the West to the East.”

Near-term challenges

While long-term strategic repositioning will influence Mena economic policy-making in 2024, there will be near-term issues to grapple with. High up that list is the Gaza conflict, the wider regional impacts of which are still unknown. 

Most current baseline forecasts do not envisage a wider regional escalation, limiting the conflict’s impacts on regional economies. The initial spike in oil prices following the 7 October attacks dissipated fairly quickly. 

Egypt is the most exposed to a worsening of the situation in Gaza, sharing a land border with the territory. However, the Gaza crisis is not the only challenge facing the North African country 

Elections set for 10 December will grant President Abdelfattah al-Sisi another term in office, but his in-tray is bulging under a host of economic pressures. 

Inflation peaked at 41 per cent in June 2023. A currency devaluation is being urged, as a more flexible pound would offer a better chance of attracting much-needed capital inflows. 

The corollary is that it would have to be accompanied by an interest rate hike. Capital Economics sees a 200 basis point increase to 21.25 per cent as the most likely outcome, ratcheting up the pain on Egyptian businesses and households. 

A deal with the IMF would do much to settle Egyptian nerves, with a rescue plan worth $5bn understood to be in the offing. But Egypt has to do more to convince the fund that it is prepared to undertake meaningful fiscal reforms.  Privatisations of state assets, including Egypt Aluminum, will help.  

Other Mena economies will enjoy more leeway to chart their own economic path in 2024. Iraq has achieved greater political stability over the past year, and may stand a better chance of reforming its economy, although weaker oil prices will limit the heavily hydrocarbons-dominated economy’s room for manoeuvre. 

Jordan is another Mena economy that has managed to tame inflation. Like Egypt, however, the country is also heavily exposed to what happens in Gaza. 

Few could have predicted the bloody events that followed the 7 October attacks. Mena region economic strategists will be hoping that 2024 will not bring further surprises.

Can the Gulf build back better?

The GCC has done much to put itself on the global map through effective reputation building. But, notes regional economic expert Jarmo Kotilaine, the focus of policy will now have to change from building more to building better, making the existing infrastructure and systems operate with greater efficiency. 

Above all, the region will need dynamic and adaptable companies and an economically engaged workforce. 

“The reality is the GCC has a lot of capital committed to the old economy. There is the question of how much of that should be upgraded, or made to work better, because fundamentally, one of the region’s big challenges is that local economies have very low levels of productivity.”   

It is by upgrading what the GCC has, by incorporating technology and energy efficiency, that the region can make productivity growth a driver, he tells MEED.

“One area where GCC economies have started to make progress is in services: logistics, tourism, financial services. This is bringing money to the region,” he says. 

“We are also starting to see new potential export streams with things like green energy, and obviously green hydrogen.  But the Gulf states have to manufacture more, and they have to manufacture better.”

 

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James Gavin

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    It is still early days, but Gulf fixed-income markets appear to have averted the worst of the conflict, with limited selloffs witnessed during the first six weeks of the Iran war.

    This reflects a strong tailwind for GCC debt capital markets (DCM) in 2026, for both conventional and sukuk (Islamic bonds) – even if geopolitical turmoil may upend issuers’ best-laid plans. 

    Issuers started this year on the front foot, with Fitch Ratings recording $1.2bn in outstanding issuance as of 9 March, an increase of 14% in year-on-year terms, almost two-thirds of which is denominated in US dollars. 

    Those issuers were taking a long-lens view of their funding priorities looking forward. Despite that, there is a strong sense that Gulf markets have been hit harder than other emerging markets by the Iran conflict. For example, in the first trading week after the US-Israel attacks on Iran on 28 February, Asian investors were reducing their exposure to Gulf sovereign and corporate paper.

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    The impact on the sukuk market has been particularly pronounced. According to Fitch Ratings, the global sukuk market experienced a notable slowdown in dollar issuance during March, following strong activity in the first two months of 2026.

    “If you look at the numbers for the first quarter of 2026 overall, the volume of sukuk issuance is slightly up, but the volume of issuance in FX [foreign exchange] is definitely down,” says Mohamed Damak, senior director, financial services at S&P Global Ratings.

    “And the volume of issuance in FX in March was supported by some transactions that were announced before the start of the war.”

    If there is a much more protracted conflict or with a much more severe implication on the economy, there could be a much more severe implication on the overall volume of issuance in the GCC. But the numbers as of the end-March indicate this is still not yet fully visible.

    “The drop in the volume of issuance in FX is just 12% compared with March 2025, and the overall volume of issuance in local currency and foreign currency is still up by 2.3% year-on-year,” says Damak.

    Strong foundations

    Last year proved an active one for Gulf DCM issuance. Overall, GCC countries accounted for 35% of all emerging market dollar debt issuance in 2025 (excluding China). According to Kuwait-based Markaz, primary debt issuances of bonds and sukuk in the GCC amounted to $189.47bn, through 515 issuances, up 28.13% on 2024.

    “Prior to the conflict, GCC DCMs were performing strongly and building clear momentum,” says Bashar Al-Natoor, global head of Islamic finance at Fitch Ratings. “Most GCC issuers maintained robust market access throughout 2025 and into early 2026.”

    Combined GCC issuance in January and February 2026 reached about $73bn, marking a 14.5% increase from the previous year, according to Fitch. “Sovereign and quasi-sovereign issuers remained foundational to the GCC DCM, but corporate and institutional participation was steadily rising, driven by favourable financing conditions,” says Al-Natoor.

    Kingdom equation

    Saudi Arabia made an auspicious start to 2026, raising $11.5bn on international markets in January, in a sale that was three times oversubscribed. 

    Saudi debt issuance forms part of the kingdom’s wider plans for increased borrowing, framed not just to plug a widening fiscal deficit, but also to take on a greater burden of debt repayment. The kingdom’s outstanding central government debt portfolio reached SR1.52tn ($405.15bn) by the end of 2025, about one-third of GDP. 

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    The Public Investment Fund sold $2bn of bonds on the London Stock Exchange in January, an issuance that was more than five times oversubscribed. In 2025, monthly Saudi debt issuance averaged $6.4bn a year, more than double the figure seen two years earlier. 

    Saudi banks’ interest in bonds is driven by a need to support loan activity, with credit outpacing deposits. Issuing bonds will help close a rise in the loan-deposit ratio, which is well above 100%. 

    “You would expect to see probably a lower level of issuance in Saudi Arabia, where the banks were contributing to a significant amount of issuance. They will probably see lower landing growth this year, which could result in lower overall refinancing needs,” says Damak. 

    The UAE is another prominent Gulf issuer that entered 2026 with a robust pipeline of DCM activity in the works. 

    Last year, issuance of $47.71bn absorbed a quarter of all GCC issuance, a 24% increase on 2024. That put it comfortably ahead of Kuwait on $23.7bn, and Qatar on $22.47bn, although one of the fastest increases in DCM issuance last year was from Bahrain, which raised $11.24bn, a 63% increase on the previous year.

    UAE DCM was expected to exceed $350bn this year, notes Fitch Ratings, supported by strong sukuk issuance and the need to diversify funding sources. Dollar sukuk issuance in the UAE last year grew on 21.4% in 2024.

    Ceasefire dependency

    Much will inevitably hinge on the evolution of the Iran conflict. Here, it may pay to take the long-lens view, say analysts. “The liquidity declines observed in the Middle East and North Africa and GCC sukuk are unlikely to be permanent,” says Fitch’s Al-Natoor. 

    “As stability returns and the ceasefire holds, liquidity is expected to gradually recover, although the pace of recovery will be heavily dependent on investor confidence and sentiment.”

    Al-Natoor emphasises that the market itself has not undergone a structural transformation. Instead, some investors have repriced risk and adjusted premiums to reflect heightened geopolitical uncertainty. 

    “This distinction matters, as the underlying fundamentals of GCC credit remain intact, with the majority of issuers holding stable outlooks. Notably, the number of GCC issuers placed on Rating Watch Negative increased during this period, reflecting elevated uncertainty.”

    Rating Watch Negative flags that the rating is under review and could be resolved either by affirmation or downgrade, depending on subsequent developments.

    “Perceptions and risk appetite may take time to recalibrate,” says Al-Natoor. 

    “Despite that, there has been some private placement activity during this period, which hints that investors may be selectively engaging with the market while monitoring developments. 

    “If current stability is sustained, a broader return to public markets could follow.”

    This reinforces the sense that it is the sustainability and longevity of the ceasefire that will be decisive in shaping both the pace and strength of market recovery. 

    Fitch Rating’s base case leans towards gradual recovery in GCC DCM markets, both sukuk and conventional, rather than sustained structural damage. 

    “The fundamentals remain solid, but longer-term effects will ultimately depend on post-war sentiment and market access,” says Al-Natoor. 

    “We continue to see subdued dollar-denominated issuance, although some local currency activity persists.” 

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