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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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    In the wake of the disruption to shipping through the Strait of Hormuz, Iraq has increased the volumes being exported via the ITP and has boosted its crude exports by truck through Syria.

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    In October, Youssef Qablawi, the chief executive of the state-owned Syrian Petroleum Company, said that about 1,000 trucks were transporting fuel oil to Syria each day, with each truck carrying about 220 barrels.

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    Syrian strategy

    In addition to its involvement in Iraq’s strategic export pipeline project, Qatar’s UCC is developing a pipeline project in Syria that will increase the country’s ability to deal with future supply disruptions.

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    The 36-inch pipeline will have a transmission capacity of up to 11 million cubic metres a day of gas and will connect gas networks in Jordan to those in Turkiye via Syria.

    In its announcement, UCC said that the project is scheduled for completion within 22 months and will contribute to strengthening Syria’s gas infrastructure; enhancing the capacity of its gas transmission network; and supporting regional connectivity with Jordan, Turkiye and Lebanon.

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    Speaking to the state-owned Syrian Arab News Agency, he said that the project will add an estimated 8 million cubic metres of storage capacity to the Syrian gas network, providing greater flexibility in managing gas production and use.

    Egyptian ambitions

    Egypt is also ramping up pipeline project activity in order to increase the number of oil and gas links that it has with neighbouring countries.

    The North African nation has long had ambitions to try and become a major regional energy hub.

    These plans have been given a boost by the ongoing disruption to shipping through the Strait of Hormuz and the Bab Al-Mandab Strait, which has reduced exports from nations like Qatar, Kuwait, Iraq, the UAE and Saudi Arabia.

    Concerns about the reliability of exports from Iraq and the GCC have led to increased investment in oil and gas infrastructure in countries that are not reliant on these waterways to transport hydrocarbons.

    In recent months, significant progress has been made on an integrated project that was launched to export offshore gas reserves in Cyprus via Egyptian energy infrastructure.

    In October, Italian oil and gas company Eni signed the main EPC and drilling contracts for the project, which will develop the Cronos field.

    The project includes contracts with several companies that will develop infrastructure in both Egypt and Cyprus.

    The awards include a $170m contract that has been won by Egypt’s Petrojet for a new onshore gas pipeline in Egypt that will help to transport gas to Egypt’s Damietta liquefied natural gas (LNG) facility.

    Separately, US-based Baker Hughes signed a contract for the design, procurement and construction of subsea production systems, including associated equipment and control systems.

    In September, it was announced that US-headquartered McDermott will carry out offshore work for the project, including the transportation, installation and connection of subsea pipelines and equipment.

    The Cronos development project will significantly increase the volume of gas being imported into Egypt, where it can be exported as LNG as well as helping to meet domestic demand.

    On top of the major pipeline project allowing the importation of gas from Cyprus, Cairo is also looking at other regional pipeline projects, including gas links to Libya.

    In a statement released earlier this month, Egyptian Foreign Minister Badr Abdelatty said that a Libyan team will ​visit ⁠Cairo soon to continue technical talks about the gas pipelines, as well as other energy projects, with Egypt’s petroleum and electricity ministers.

    Pipeline problems

    While the planned oil pipeline projects in Iraq are seen as a possible solution to the disruption to shipping through the Strait of Hormuz, they are also likely to face problems relating to the importation of necessary equipment that would normally be shipped through the waterway.

    The Common Seawater Supply Project, designed to bring water from the sea to inject into oil fields, is behind schedule, largely because of problems importing the pipeline segments through the strait.

    This issue could plague other planned pipeline projects in Iraq if the disruption to shipping continues, forcing contractors to use other, more costly, import routes.

    Challenging conditions

    Even when Iraq’s major export pipeline projects are completed, they may fail to resolve the country’s oil export problems to the extent many are expecting.

    While the export pipelines will go some way towards diversifying away from reliance on exports through waterways where oil and gas tankers are vulnerable to militant attacks, many industry insiders say Iraq could just be replacing one vulnerable export route with another.

    Oil pipelines in the Middle East and North Africa region have a long history of suffering attacks and often stretch long distances through remote regions where they are difficult to defend.

    Ultimately, it is likely that finding a diplomatic solution to the regional conflict will be the only way that Iraq can reliably increase its oil exports in the long term.

     

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    Wil Crisp