Europe’s seemingly intractable financial crisis is threatening to make itself felt across the Mediterranean in the economies of North Africa that can least afford another blow, economists say.
Struggling to recover from the chaos and uncertainty of the Arab Spring, Egypt and the other economies of North Africa now face new troubles as Europe’s debt woes threaten to hurt exports and investments. By contrast, the Gulf economies, which have largely been spared the upheavals of the Arab Spring, are enjoying growing oil revenues that insulate them from Europe’s problems.
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“North Africa, which has had to resolve many of the issues raised by the so-called Arab Spring, now has something else to contend with,” Daniel Broby, chief investment officer for London-based Silk Investment, told The Media Line. “Growth is still reasonably robust across the region, but it is slowing.”
Shaken by regime change, the North African countries of Tunisia, Egypt and Libya are all expected to post negative economic growth this year and enjoy only a mild rebound in 2012 amid strikes, political uncertainty, declining tourism and, in Libya’s case, plunging oil revenues.
The economic fallout is almost certain to complicate the transition these countries are all trying to make toward more democratic rule by forcing governments to put off economic reform to keep a lid on unrest and unemployment and deterring investors.
Two weeks ago, the Washington-based Institute for International Finance forecast that the economies of oil-importing countries, which include Egypt, Tunisia, and Morocco, would contract 0.4% this year. By contract, it projected oil-exporting Gulf economies would gallop ahead at a rate of 6.5%. Next year, the gap will narrow, it said, but the rich will get richer: Oil importers will grow just 2.3% while Gulf economies expand 3.7%.
Now, the risk that Greece’s debt troubles will reverberate across Europe and push the continent into a slowdown or even recession may cause the gap to widen again next year. Even countries that have avoided the most severe unrest, like Morocco and Algeria, are likely to affected, economists say.
Chill winds from Europe are reaching North Africa in four ways – trade, tourism, workers remittances and foreign investment – according to a report by London-based Capital Economics.
The European Union is the main export market for Algeria, Morocco and Tunisia as well as the main source for foreign tourism, the report by Capital’s Said Hirsh and William Jackson noted. Europe is also a source for employment from these economies, which have suffered high levels of unemployment for years, forcing many to seek work in Europe and send home money to their families.
A slowing European economy will hurt all these revenue streams. In the latest sign of the continent’s problems, Germany reported on Monday that its industrial output fell; 2.7% in September, its biggest drop since February 2009. The German economy, which had been pacing Europe’s pre-crisis recovery, might shrink in the fourth quarter, some analysts warned.
The Arab Spring countries have already seen foreign investment dry up this year, but a troubled Europe will also be more hesitant to invest in the MENA region, the report said. Moreover, without foreign assistance, the Arab Spring governments will have trouble funding their swelling budget deficits as they pour subsidies and make-work programs on their constituents to douse political unrest.
Meanwhile, in the Gulf, Europe’s troubles seem far away. Asia is the leading export market for the Gulf countries and oil prices and production have remained high despite concerns about the global economy. On Monday, the price of benchmark Brent crude rose above $113 a barrel as hopes that a cold winter would spur demand outweighed concerns about Europe.
“The oil-rich Gulf Cooperation Council (GCC) states’ close links to Asia and healthy balance sheets should help to counteract the drop in hydrocarbon revenues next year,” Hirsh and Jackson said in the report. “Meanwhile, the near term economic prospects for the rest of the MENA countries are poor.”
The Saudi central bank's net foreign asset reserves have climbed steadily to a record high of 1.879 trillion riyals ($500 billion) in August. The country has enough cash to have allocated some $130 billion to boost in social spending, equal to nearly 30 percent of gross domestic product. Except for Bahrain, a tiny country with little oil and ridden with sectarian conflicts that spilled over into violence earlier this year, all will enjoy big fiscal surpluses this year and next.
“If there is a big decline in the economic conditions of Europe... it
will affect all nations including the kingdom to some degree, but I
stress that the impact would be very limited because we have the
appropriate means to limit the negative effect on the kingdom's
economy,” Saudi Finance Minister Ibrahim told state news agency SPA last
Indeed, the financial position of the Gulf countries is so strong that
indebted European financial institutions have been seeking fresh funding
as they seek a cushion against their Greek and other troubled
investments. A Qatari investment group with links to the state's royal
family will take over KBC's private banking unit and BIL, a part of
Dexia and last month France’s BNP Paribas was reported to be seeking a
capital infusion from Gulf investors.
In the same vein, Arab solidarity will mitigate some of the impact,
noted Brody. Egypt has received some $8 billion in financing from the
Gulf countries to help it through its economic crisis. “In that respect,
the GCC’s strong fundamentals are playing to the advantage of the North
African states,” he said.