Diversification is pivotal to long-term economic recovery in the Middle East and North Africa, economists from trade credit insurer Atradius report.
The Atradius Regional Economic Outlook, entitled MENA economic growth engine falters – refuel or renew?, describes the coronavirus pandemic and related oil price slump as a ‘double whammy’ for economies in the Middle East and North Africa (MENA). Atradius reports that after a dramatic first half of 2020 with unprecedented recession, economic activity in the MENA region is staging a cautious recovery. Overall GDP growth is expected to have contracted 7% in 2020 with a forecast rebound of 3.6% in 2021 and 4% in 2022. However, Atradius economists warn this forecast may be too optimistic due to uncertainty in the oil sector outlook.
The report details how traditional MENA oil exporters have lost control over the oil price as they gradually lost market share to the US shale industry while the ramping up of production by Libya has put renewed downward pressure on prices. While some reports forecast global oil demand will continue to grow for another decade, Atradius cites British Petroleum’s recent Energy Outlook which suggests oil demand may already have peaked. Accordingly, Atradius anticipates that oil prices could remain low for a long period.
The struggles within the oil sector have impacted MENA markets from more than one angle. Atradius reports that due to the strong interconnection between oil and non-oil sectors, a steady flow of ‘petrodollars’ is required to drive private consumption and investment via banking sector liquidity and government spending on jobs and infrastructure projects. Therefore, there is not only a direct financial hit from lower oil prices but the knock-on effect has ripples across the economy.
Analysis by Atradius determines rigorous fiscal reforms, including the mobilisation of non-energy revenues, are needed to create a more sustainable economic model, reduce financial vulnerabilities and tackle rising unemployment rates which peak at around 20% in Iraq, Jordan, Tunisia and Lebanon. However, the report notes that previous diversification programmes have faltered through an unresolved conflict of interests. When the oil price is very low there is little funding afforded, but when the price recovers, renewed interest in hydrocarbon development crowds out investment in non-oil sectors. Additionally, some export diversification attempts have continued to focus on products closely related to the petrochemical industry and so still vulnerable to price movement.
Atradius’ report identifies services and goods in the areas of education, finance, information and communication and healthcare as the most promising stepping stones for economic recovery. Jordan has already been identified as a rising star in the pharmaceuticals sector while Egypt is MENA’s largest producer and consumer of pharmaceuticals and Saudi Arabia also shows growth potential in this area with a new law relaxing restrictions on foreign ownership which could enable production to increase by 20%. In North Africa, there is opportunity for economies such as Morocco and Tunisia to build on the ongoing shift to higher tech manufacturing and the expansion of their trade networks as well as to grow the automotive industry.
Meanwhile, MENA’s growing interest in renewable energy projects can be taken to the next level. Investing in renewable energy technology will stimulate technological development, investment growth and job creation with the Middle East well-endowed by a geographic location and climate highly suitable for generating solar and wind power.
Damien Dawson, Regional Manager for the Southern region at Atradius UK, explained: “The risk for the MENA region is that the current economic model based on a declining hydrocarbon industry will increasingly become a drag on potential economic growth. Key to the long-term prosperity of the region is a wider diversification of the economy and a movement away from the one-directional energy trade towards higher trade global integration. If successful, diversification will bring with it new prospects for regional businesses, investors as well as buyers and sellers of goods and services worldwide. Companies within the sectors for potential growth should seek to work together with MENA businesses for mutual benefit over the long term.”