The turmoil of the past year has robbed many of the Middle East and North Africa’s (MENA’s) poorest countries of vital economic growth while enriching the wealthy countries of the Gulf oil patch.
But could the Arab Spring ultimately turn out to be a Robin Hood in disguise?
At least two economists –Said Hirsh and William Jackson of London-based Capital Economics – think that in the long run the upheavals of the last year could end up helping countries like Egypt, whose economy has reeled in the face on political unrest and uncertainty. Meanwhile, the Gulf oil exporters are risking their long-term growth with the handouts they have bestowed on the populations from the profits from triple-digit petroleum prices, the two contend.
In a note to investors, “The ‘Arab Spring’ One Year On,” Hirsh and Jackson acknowledged the difficulties the resource-poor countries of the MENA region are now in.
In Egypt, for instance, foreign reserves have plunged by more than half to $16.4 billion in the past year and it faces a balance of payments crisis. Politics prevents from the government from acting decisively in seeking support from the International Monetary Fund and is now endangering $1.3 billion or more of US foreign aid as its government pursues a controversial investigation of foreign human rights activists.
The political chaos of the Arab Spring holds out the promise of more democratic and accountable governments that will crack down on corruption, tame bureaucracy and improve the business environment, Hirsh and Jackson said. Because of their low starting point, the economies of the poorest countries stand the best chance of leveraging economic growth by improvements in education, health and infrastructure, they said.
Per capita income in Egypt was $6,500 last year while in Morocco it was $5,100 and in Jordan $5,900. By comparison, Saudi Arabia has a GDP per capita of $24,000 and the United Arab Emirates $48,500.
“Egypt and Morocco are the ones with most promise,” Hirsh told The Media Line. “In Egypt, because of its size and the place where it is starting from, the potential for even small reforms could speed up economic growth in coming years. Morocco has already taken steps forward in terms of reforming its political situation and is heading in the right direction.”
In the Gulf, massive fiscal stimulus programs led by Saudi Arabia, which last year budgeted $130 billion, have helped boost short-term growth. In December, Saudi authorities estimated that 2012 budget expenditure would grow to the equivalent of $184 billion this year, and probably more as the kingdom traditionally spends more in practice than it officially budgets.
Spending like that, which has gone to things such as pay raises for civil servants, subsidized housing and public sector hiring, boosted Saudi Arabia’s real gross domestic product 6.8% in 2011, the fastest pace in eight years. But it also means oil producers are more vulnerable to a downturn in oil prices that could saddle them with fiscal deficits.
On average, Gulf governments need oil to be trading at $80 a barrel to avoid sinking into a deficit, up from an average of $50 a barrel in the previous three years. With the price for benchmark Brent crude pushing past $118 last week, its highest close since late July, the Gulf oil exporters have no immediate fiscal worries, but Hirsh and Jackson said they are vulnerable to a “prolonged period of low oil prices.”
Worse still, the largess is undermining programs by Gulf governments to coax more of their citizens into the work force and create a competitive and dynamic private sector, Capital Economics said.
Looking at the potential economic growth rates of MENA countries over the next two decades, Egypt comes out on top with a rate of nearly 8% annually, followed by Syria and Morocco, according to Capital Economics. Among Gulf oil producers, Saudi Arabia has the potential for growth of more than 6% annually, but most of its fellow Gulf economies fall at the bottom of the regional rankings.
In Tunisia, Morocco and Egypt – the three MENA countries that have held elections in the last several months – Islamic parties have come to power, arousing concerns among many inside those countries and in the West that they will not only roll back the democratic gains of the Arab Spring but discourage tourism and impose policies that deter economic growth.
But the Capital Economics analysts said they remain optimistic about the new, more Islamic Middle East, citing Saudi Arabia’s long history of conservative Islam and free market economics sitting side by side.
“Secular governments have largely failed in the Middle East,” Hirsh said. “Within Islam there is nothing that is anti-free market. I’m not talking about social policy, but in terms of economics there won’t be a socialist government, if Islamists follow their own ideology … The fears that there will be an Iran-style theocracy are overdone.”
For investors looking for where to risk their capital, however, the tables have not yet turned. Saudi Arabia’s gross domestic product will likely expand 3.5% this year, outpacing the MENA average rate of 3.3%, according to Capital Economics. Among the region’s resource-poor economies, Morocco will be a rare standout performer, expanding between 3.3% and 3.5%.
Egypt is likely to recover in 2012, with GDP growing 3%, compared with an estimated 1% in 2011. But that is a historically low rate for the economy, which has averaged 5% in recent years, and is insufficient to create enough jobs to put a dent in the country’s unemployment rate.
“The next year or two will be difficult. Egypt’s balance of payment position is very precarious. We expect to see devaluation and it could be significant,” Hirsh said. “That’s why we’re saying the near term is still difficult.”