MENA region faces an old-new crisis: Barclays

Michael Gunn, Wednesday 31 Aug 2011

Barclays Capital's report on emerging markets points to the challenges faced by net oil importers like Egypt

Economic and political developments in the US and the euro zone are weighing on investor appetite and jeopardising global growth which could have a long-term effect on the Middle East and North Africa region, claims research from an international bank.

Barclays Capital's emerging markets report, released this week, compares the 2008 and 2011 prospects for the region's net oil importers and exporters. The former group of countries -- which includes Egypt -- is facing the most sustained challenge from the building economic crisis, the report says.
The downgrade of the US sovereign credit rating by Standard & Poor's in August was not a surprise to investors, says Barclays, but suggests that fiscal policy in the US and in many major economies has little alternative but to retrench for some years to come. 
MENA economies, already facing their own headwinds from political upheaval which has hit growth, will likely feel the impact of western troubles too. The deciding factors, says Barclays, will be the macroeconomic standing of invididual countries. Those with healthy supplies of domestic oil seem far likelier to weather the storm.
The outlook for net oil importer Egypt -- with a larger fiscal deficit than 2008, poor fiscal dynamics and reliance on overseas trade - looks especially challenging.
"In oil importers, the macro outlook is much more challenging than three years ago," says the report. 
"Heightened political volatility since January has undermined growth and investment in several countries, and it has rendered external and fiscal positions weaker than in 2008.
"The possible prolongation of transition periods may also delay further much-needed fiscal and economic reforms and exacerbate financing needs."
The proximity of Tunisia and Morocco to Europe mean they are most vulnerable to weakening trade, tourism and investment flows. But Egypt is also likely to be affected, claims Barclays, "though foreign positioning in the bond and equity markets is lower than at the onset of the Lehman bankruptcy."
The report also says that a prolongment of the US and euro zone's problems could mean pressures emerge that negatively affect the MENA region via a drop in energy prices as demand is stifled, or in trade and funding flows -- both of which are an issue for Egypt.
Barclays also notes a combination of domestic problems has already weakened the economic ground in countries like Egypt, where domestic consumption -- at least outside the month of Ramadan - has slowed and private investment practically collapsed. At the same time, Egypt's more statist economy means it stands to suffer less from a drop in western demand for its produce than Lebanon, Jordan or Tunisia.
Further bad news comes in terms of debt: though lower than its neighbours', Egypt's debt is near the 80 per cent threshold.
"The inability to make fiscal adjustments where necessary [in 2008], and the corresponding upward pressures on interest rates, worsened debt dynamics in Egypt," says the report.
"Today, not only are the outstanding adjustments larger, but indications are that they have become even more difficult politically as the newly emerging political elites seem opposed to embracing orthodox fiscal adjustment plans that have in the past hurt employment and widened income gaps."
Remittances for Egypt are also expected be affected slightly should European and global growth deteriorate further, though not to as acute a fall as in 2008-09.
But there are some crumbs in comfort in Barclay's mid-term outlook for foreign direct investment. Since the uprisings in February, Egypt and Tunisia have been hit the most, with FDI falling more than 150 per cent quarter-on-quarter, and the bank predicts any weakening of the global economy would only exacerbate their situation, especially since FDI is critical to boosting growth and exports.
Barclays expects Egyptian FDI to drop an annual 35 per cent in 2011, with flow to make a slow recovery early the next year should the post-election political situation stabilise. Much of this renewed flow would come from Gulf countries, claims the bank.
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