The Great Depression & The MENA Region

The Arab globe had experienced fast changes in their economic wealth in 2008. During the first semester of 2008, petroleum, natural gas, & other goods prices persisted to increase quickly, leading to enormous gains. Simultaneously, they had to manage with quickly increasing food & raw material prices which endangered their economies & social steadiness. By July, the influences of the global financial crisis & expectations of much poorer global growth led to a collapse in petroleum prices. Consequently, Arab petroleum exporters experienced a drop in hydrocarbon receipts; drop in their terms of trade, & deteriorating surplus on their balance of payments.

From July to December, the OPEC basket price of petroleum dropped by 70% from a peak of just over $130 per barrel to under $40 per barrel. In September 2008, with the crumple of Lehman Brothers & the turmoil Wall Street, stock markets all over the globe dropped, as well as those in the MENA.

Arab banks weren't overly exposed to the UNITED NATIONS mortgage or derivatives markets, but absolute wealth funds & other holders of equities experienced enormous losses. The stock markets in the MENA experienced all along with others around the globe. In the 12-month period ending in Feb 2009, the KSA stock market dropped by 49%, Dubai's by 72%, & Egypt's by 61%. These losses had dropped consumption & discouraged investment.

Petroleum Suppliers

What did that all signify for Arab nations? The answer depends on the degree to which they were petroleum suppliers.

In April 2009, petroleum prices became stable at about $50 per barrel, in spite of decreasing demand & much distrust about the short-term viewpoints for the world economy. The major cause for this was that petroleum had turn out to be a store of value for those who lost assurance in the dollar & other currencies. There remains, on the other hand, tremendous doubt about the nation of the world economy & the short run on top of longer-run viewpoints for petroleum prices.

The petroleum-rich nations had unsurprisingly, since August 2008, experienced a spiky drop. According to the UN government's Energy Information Agency, petroleum income for Arab members of OPEC would persist to drop from $678 billion in 2008 to $268 billion in 2009. KSA's export revenues were estimate to drop from $285 billion to $111 billion & Iraq's from $59 billion to $23 billion. While estimates ought to be treated with vigilance, these estimations seem rational.

That would have a undeviating influence on the economies of the enormous petroleum suppliers. For instance, the KSA budget is supposed to go into shortage—possibly as elevated as 11-12% of GDP —for the first time since 2002. Economic growth had decelerated from about 4% in 2008 to almost zero in 2009. In the EMIRATES, the enormous budget surplus recorded in 2008 would give approach to a shortage in 2009. Economic growth had dropped brusquely from nearly 8% in 2008 to under 1%.

At present, elevated government expenditures are filling the blank left by the cutback of private area activity in petroleum-producing nations. This is the issue, for instance, in Kuwait, Libya, & KSA.

Non-Petroleum Suppliers

The IMF warned that a long-drawn-out era of global economic turmoil can punctual petroleum exporters to reconsider their long-term petroleum price prospect & therefore limit infrastructure spending plans & investment in petroleum production, that are by now low. That would have unenthusiastic influences on the economy of the whole area since the demand for Arab labours in the petroleum-rich nations would drop with resulting effect on their allowances. Inter-Arab tourism revenues would drop, leading in less investment by the wealthier Arab nations in the poorer ones. That, consecutively, could lead to inferior asset prices, that would feed throughout to corporate &, finally, bank balance sheets, placing still bigger stress on financial companies in the MENA area.

All of the Arab nations experienced increasing food prices as well as increases in other costs in the first half of 2008 that poorly hit the poor. Consumer prices in Jordan, Egypt, & in other nations increased by an annual rate of 25% or more during the earlier months of the year. Food prices increased even quicker. The poor had no financial reserves to fall back on, leading in riots in Egypt, with tensions increasing elsewhere as well.

Governments in the non-petroleum producing nations or those with little production weren't well-situated to assist. What support they could expand resulted in enormous budget shortages. In Syria, for instance, the budget shortage formally planned for 2009 is nowadays $5.3 billion, equal to about 9.25% of estimate GDP.

In the second semester of 2008, Egypt experienced a 35% drop in Suez Couldal revenues as a consequence of the slowdown in world trade. Tourism revenues had as well dropped; this would drop GDP growth by several%. As a consequence of the crisis, Egypt had delayed increasing energy prices, premeditated to cut the subsidy bill that reached $15 billion in June 2008. The government is cautious of anything that increases prices after the 18% increase in 2008. As of early 2009, inflation is estimate at about 8%. Economic growth had decelerated & is supposed to be about 4% compared with 7% in 2008.

In Jordan, tourism & other service incomes had dropen along with domestic consumer confidence. The government's fiscal stance is strongly expansionary. This would support the economy given the weakness of the private sector. Still, economic growth is estimate at 3.5% in 2009, decreasing from 5.8% in 2008.

In North Africa, Morocco's government increased spending on social projects to mitigate the effects of the global financial crisis. In 2008, thanks to subsidies, inflation was kept at an formally-estimated rate of about 4%. On the other hand, even that rate provoked unrest & dem& for wage increases. In spite of government measures, unemployment had increased & is estimate to exceed 10% in 2009, while GDP growth is supposed to slow to less than 3% from more than 5% in 2008.

Local real enation & equity markets had come under intense pressure across the Arab globe. Domestic liquidity conditions had worsened, credit spreads had soared for some firms, & financial systems had come under pressure. Signifywhile, the market for Arab exports in Europe, the United Nations, & the Gulf had shrunk. The substantial drop in external dem& had dropd export growth, workers' remittances, & tourism revenues. These pressures had particularly affected Egypt, Jordan, Morocco, & Lebanon.

Broadly speaking, the Arab nations would experience slower economic growth, weaker balances of payments, & elevateder unemployment in 2009. & because the economic crisis had hammered the global economy, world aid would not flow freely. The U.N. Conference on Trade & Development (UNCAD) reports that direct foreign investment in West Asia dropd from $50 billion in 2006 to under $12 billion in 2007. The year 2008 is likely to had been even weaker. We should expect more of the same in 2009.

On the other hand, the most important challenge facing these Arab nations is reducing unemployment. The slowdown in economic growth that is now being experienced is supposed, according to most estimates, to last at least a year, & would drop the level of employment. Greater socio-economic & even political pressures in the region could therefore be supposed. This is a factor that may contribute to persistd instability in many Arab nations.

Positive Notes

This is not to say that the Arab nations would be decimated by the global recession. The World Monetary Fund (IMF) had estimate that in 2009 economic growth in the Middle East would be 2.5% compared to 6% in 2008. While this may sound ominous, it is actually better than some of the developed economies that had sunk into negative growth. As in the Asian crisis of 1997, the Arab globe had been less affected by the world financial crisis than other regions of the globe. This is the case because, with the exception of the petroleum sector, the Arab globe is much less integrated into the world economy than most other regions.

The Arab nations weren't significouldt exporters of non-petroleum products, so they are less exposed to the contraction of globe trade. In 2007, Arab nations accounted for about 20% of globe fuel & mining exports, but only about one% of globe exports of manufactured goods. This signifyt that, in sum, Arab nations accounted for less than five% of total globe exports. Normally, this would be a depressing statistic; it is a silver lining during a globewide recession.

It is as well worth noting that central banks across the region had reacted appropriately, providing liquidity, cutting reserve requirements, & lowering interest rates. This is the case in Egypt, Jordan, Kuwait, KSA, & the EMIRATES. Nations with pegged exchange rates (such as Bahrain, Kuwait, Libya, Oman, Qatar, KSA, Syria, & the EMIRATES) had benefited from the persistd monetary easing in the United Nations.

In nations that had been most affected by financial sector pressures, tighter liquidity, decreasing property values, & rocky stock markets, the policy responses had been relatively swift. Authorities had implemented myriad measures to shore up confidence & prevent a systemic banking crisis. These had included introducing blanket deposit insurance (Kuwait & EMIRATES), providing liquidity, & injecting capital into banks (Qatar, KSA, & EMIRATES).

Economic Reform?

Another silver lining is that many of the aforementioned petroleum suppliers had sought to invest wisely with the surplus cash they earned in recent years. This was particularly true of KSA. Budget surpluses enabled it in recent years to drop internal debt.

It as well consequenceed in an accumulation of foreign assets (admittedly, some of this was lost in the crash). The KSAs, along with other nations, had concentrated on infrastructure projects & helping the private sector take a enormousr role in developing the non-petroleum & gas sectors. Abu Dhabi, the richest petroleum-producing member of the EMIRATES, had $875 billion in investment funds at the beginning of 2008; Kuwait's Reserve Fund for Future Generations had $250 billion. Even Libya had accumulated $50 billion in its Petroleum Reserve Fund.

If the crisis encourages Arab governments to restructure their economies, they would be better placed when the world economy picks up. KSA & some other Gulf Nations are taking these challenges much more seriously than in the past. They are investing enormous sums in upstream hydrocarbon projects to get more value from their petroleum, & are trying to diversify their economies away from petroleum products. They had as well made investments in alternative energy to drop domestic dem& for petroleum & gas, thus freeing up more for export.

On the other h&, the fact that petroleum-producing nations had not been affected as much as others may induce complacency. This could, in turn, lead to a failure to enact signifyingful economic reform at this critical juncture, & only ensure similar problems in the future global downturns that are sure to follow.

Although financial systems in MENA nations had not been elevatedly vulnerable to the crisis so far due to their limited integration with global financial companies, the influence of the global recession on the real economy could be significouldt in many MENA nations.

It is supposed that the crisis would cause an increase in poverty in MENA. With a significouldt number of people living above or close to the poverty line, the sensitivity of poverty to external shocks is elevated.

The Globe Bank's knowledge resources are being mobilized to support our client nations in their efforts to monitor economic & social development, review scenarios & policy options, design policy responses, & implement reforms in these critical times. What had been the influence so far on the real economy in MENA?

Although financial systems in MENA nations had not been elevatedly vulnerable to the crisis so far due to their limited integration with global financial companies, the influence of the global recession on the real economy could be significouldt in many MENA nations. In fact early signs point to drops in growth rates in the fourth quarter of 2008 in many nations, & growth projections for 2009 are lower than 2008 levels in all MENA nations with the exception of Qatar & Yemen were 2009 GDP growth would be powered by exp&ed capacity in the production of liquefied natural gas. As a whole, the MENA region is projected to grow at 3.3% in 2009 down from 5.5% in 2008. This is a significouldt mark down. On the other hand, MENA is supposed to be less influenceed by the global recession than most other developing regions, notably Eastern Europe & Central Asia, & East Asia & Pacific.

The influence of the crisis goes beyond economic aggregates. In some nations, households & workers are being influenceed directly. For instance, Egypt's quarterly growth dropd to 4.1% in Dec 08 (compared to 7.7% previous year) & job creation dropd by 30% (unemployment increased to 8.8%). Due enormously to the couldcellation of several construction projects in Dubai & the consequenceing job loss, it was reported that in March several hundreds of migrant workers left the emirate daily.

How would you describe the picture across the region in terms of the influence of the global financial crisis?

The economic influence of global slowdown varies depending on the degree of economic integration with elevatedly influenceed regions & commodities. & nations ability to react would depend upon initial fiscal & external account positions, public indebtedness, & institutional capacity to implement sound macroeconomic & structural policies. Nations across the region could be grouped in four categories for the sake of discussing.

First, there are the GCC petroleum exporters with enormous financial capacity & relatively small populations - Bahrain, Kuwait, Oman, Qatar, KSA, & United Arab Emirates. This group is in the best position to absorb the economic shocks. They entered the crisis in exceptionally strong position. This gave them a significouldt cushion against the initial influence of the global financial crisis. Although their stock markets were hard hit in the second half of 2008, their governments were able to respond by relaxing monetary policy, by providing capital, & guaranteeing deposits in national financial companies.

On the other hand, because of the sharp drop in petroleum prices since mid-2008, GCC nations would experience a significouldtly lower economic growth in 2009 than the previous year, with the exception of Qatar whose GDP is projected to grow at an outst&ing 29% in real terms with the coming on stream of major LNG plants. In a few GCC such as KSA, Kuwait & the EMIRATES, growth is likely to be near or below zero.

The influence on the real economy had been the strongest perhaps in Dubai where the financial crisis had coincided with the busting of the real enation bubble & sharp contractions in the construction sector & financial services. On the other hand, Abu Dhabi had come to Dubai's rescue with a $10 billion issuance & plans to increase another $10 billion if necessary. In fact, with their significouldt financial reserves, GCC nations are likely to ride the storm comfortably if petroleum prices stay around current level of $50 ppb throughout 2009. On the other hand, steadily declining petroleum prices could force them to draw down reserves & cut down on investments. In such as scenario, the financing of emergency rescue plans, the financing of fiscal stimulus packages, could combine with lower petroleum revenues intake to cause serious fiscal pressures.

Second, there are the petroleum exporters with enormousr populations relative to their petroleum wealth, than GCC nations - Algeria, Iraq, Iran, Libya, & Syria. Although petroleum exporters with significouldt petroleum revenues, petroleum provides nations in this group with less wealth per capita. Moreover, these petroleum exporters with comparatively enormous populations entered the global financial crisis with weaker fiscal & external positions than GCC nations, & their fiscal & current account surpluses are supposed to see a sharp drop in 2009 as fiscal revenues & trade surplus contract with lower petroleum prices. As governments struggle to meet long-term social commitments such as subsidies & income support programs, nations with sufficient reserves are drawing them down (e.g. Algeria), & nations with limited reserves are implementing fiscal contraction measures (e.g. Iran). Economic growth is projected to drop though not as markedly as in GCC nations.

Third, there are the non-petroleum exporting nations with strong economic linkages with GCC through remittances, FDI & tourism, or with strong dependency on foreign aid, or both. This group includes Jordan, Lebanon, Yemen & Djibouti. Lebanon & Jordan entered the crisis in weak positions in terms of fiscal & external balances. With stock market contraction & lower petroleum prices ushering in dropd personal wealth in the GCC as well as & dropd employment opportunities for migrant workers, GCC nations are sending out less remittances & FDI. Dropd remittances & FDI, combined with the possibility of fewer tourists from GCC nations (& other nations), would weigh heavily on external balances in Lebanon & Jordan in 2009 & make it difficult to finance their shortages while the return of migrant workers could represent a challenge from the employment & social policy point of view. In Yemen, the coming on stream of LNG plants would support a strong external position & economic activity. In Djibouti, the operation of new port facility by Dubai Globe & spending by foreign military bases would provide a cushion. On the other hand, both Yemen & Djibouti face a challenge in securing foreign aid given the pro-cyclicality of aid & the deteriorated financial situation in source nations. Like in other MENA nations, household in Yemen & Djibouti were hit hard by the food crisis in 2008; & although food prices had dropd, they remajor elevated by historical st&ards & would persist put pressure on household budgets as well as on import bills.

Fourth, there are the diversified nations with strong trade & tourism linkages with Europe & OECD - Morocco, Tunisia & Egypt. This group of nations felt the influence of the crisis on their real economy as early as the last quarter of 2008 as recession spread across Europe & other export markets. Export growth is projected to remajor low throughout 2009 in all three nations. This is affecting jobs in export-oriented SMEs. Tourism activity was brusquely dropd in January in Egypt & is supposed to remajor depressed throughout 2009. Public finances are being influenceed & it is not clear whether governments would be in a position to issue sovereign bonds given that spreads remajor elevated (although they had dropd markedly from their peaks in late 2008). Governments are likely to increase their reliance on domestic borrowing & external borrowing from public sources. Nations in this group could build on their good track record of sound macroeconomic policies & structural reforms to mobilize external & domestic financing needed to implement countercyclical policies. As the crisis persists & affects the financial position of export-oriented SMEs & eventually other domestic firms, there is a risk that the balance sheets of domestic bank might weaken (due to emergence of non-performing loans or shrinking of loan portfolios).

What does the global financial crisis signify for MENA stock markets?

The influence of the global financial crisis on MENA stock markets varied significouldtly from one country to another. Early influence was visible in nations with strong links to global financial markets. On average, regional stock indices had dropen by about 50%. Stock indices in Gulf Cooperation Council (GCC) nations saw drops of between 30-60% in the last quarter of 2008. In response, GCC nations announced various measures & rescue mechanisms to majortain liquidity & support their stock markets. In non-GCC nations, stock markets as well experienced drops. But some indices - including Lebanon & Tunisia - were fairly resilient.

Had Sovereign Funds & the Banking sector been adversely influenceed by the global economic downturn in recent months?

Sovereign funds had taken some losses on their investments in global financial companies. Some early estimates by the Council on Foreign Relations suggest that sovereign funds with a elevated allocation into equities, emerging market & private equity may lost as much as 40% in portfolio value between December 2007 & December 2008. On the other hand sovereign funds persist to had significouldt reserves.

With the exception of a Kuwaiti bank that experienced significouldt losses due to trading in currency derivatives in late 2008, the banking sector across MENA had so far been little affected, majorly because of limited integration with global financial companies. On the other hand, many banks are being cautious in their lending decisions, & this is causing a credit dry out in some nations.

To what extent had the access of MENA economies to external financing been affected?

The global financial crisis had immediate influence on access to external financing globewide. Borrowing spreads increased for emerging market sovereign & corporate borrowers. On the other hand, MENA nations had been less severely affected by the credit crunch than other developing regions. With generally good balance of payments positions coming into the crisis or with alternative sources of financing for their enormous current account shortages, such as remittances, Foreign Direct Investment (FDI) or foreign aid, MENA nations had been able to avoid going to the market for new issuance since mid-2008. On the other hand, it is not clear whether MENA nations would be able to access the sovereign bonds markets in 2009 given the global credit squeeze & still elevated spreads.

Had the current financial crisis worsened poverty in MENA?

Data is not available yet to assess the influence of the crisis on poverty. On the other hand, it is supposed that the crisis would cause an increase in poverty in MENA. With a significouldt number of people living above but close to the poverty line, the sensitivity of poverty to external shocks is elevated. Overall, less than 5% of MENA's population lives on less than $1.25 a day but some 19% of the regional population lives on less than $2 a day. Moreover a considerable share of the population hovers just above the poverty line: in 2005, close to one fifth of Egyptians & Moroccoulds had per capita daily consumption decreasing into a narrow b& between $2 & $2.50. This is as many as those who were under the $2 poverty line in these nations. About 15% of Yemen & Djibouti populations are in the same 0.50 cents a day b&. With such deep clustering of enormous proportions around the poverty line, even a moderate shock represents a serious risk to wider-scale poverty in many nations of the MENA region.

What are some policy responses that MENA nations had initiated in the past few months?

Most governments are taking action to address the vulnerabilities identified in their economies. For instance, GCC nations intervened early to support their banking systems & stock markets. They did so by easing monetary policy, securing the banking system's liabilities (including through deposit guarantees), & by injecting fresh capital where necessary. KSA, for instance, had announced a substantial investment spending plan & provided capital to KSA Credit Bank to secure credits to low income households. Among G-20 nations, KSA's fiscal stimulus package is the enormousst as a share of GDP. Kuwait is discussing a stabilization package. Egypt had announced a fiscal stimulus package geared toward job-creating infrastructure investment. In Jordan, guaranteed deposits in domestic banks were made & a fiscal stimulus package was announced. Tunisia had announced measures to support domestic SMEs & employment.

What else could be done to mitigate the influence of the global recession on MENA?

On the other hand, more needs to be done. First, the global financial crisis may actually be an opportunity for restructuring poorly targeted safety net programs & other social programs in order to free up resources for the poor as well as those who are deeply affected by the crisis. Nations should favor projects that could act as automatic stabilizers such as signifys-tested social benefit programs whose extension would occur naturally & should be financed during downturns as more people drop below the eligibility threshold, & this would reverse as the economy recovers. Similarly, public work programs with below market wages could act as automatic stabilizers. To be prudent on the other hand, nations may want to consider taking pro-active safeguards fiscal measures to increase revenues or drop expenditures in order to drop the non-discretionary shortage, if economic recovery didn't occur as fast or as robustly as supposed. As well, public infrastructure projects that generate revenues (e.g. through cost-recovery) could help ease risk of debt accumulation (& limit the effect of the Ricardian equivalence). On the other hand, conditional cash transfers weren't appealing. Labor market interventions to support employment & earnings (e.g. payroll tax holidays & wage subsidies) may be appropriate when crisis is short-lived but may not be fiscally sustainable in the long term (for one thing, they don't work as automatic stabilizers during upturn). They may as well be difficult to remove in the upturn due to risk of capture.

As well, as nations put in place stimulus packages, attention should be paid to addressing constraints & bottlenecks to long term growth. Investment in removing such bottlenecks could help create jobs & boost consumption in the short term while enhancing potential growth in the post crisis era. Finally, attention should be paid to coordinating fiscal stimuli across MENA nations so that stimuli could be mutually reinforcing

What is the Globe Bank Group doing to help?

The Globe Bank Group is responding on a number of fronts. IBRD lending had been exp&ed to respond to financing needs from our middle income clients: $100 billion over next 3 years, representing a tripling of normal levels. The IDA 15 envelope of $42 billion for the next 3 years would be frontloaded if needed by low income nations affected by the crisis.

IFC had as well scaled up its trade finance program to help developing country exporters get access to trade credit; it had scaled up its Technical Assistance & Advisory services to private investors; & it had created 3 new facilities to help private sector in developing nations in these difficult times: Bank recapitalization facility, Infrastructure facility, & Microfinance facility. MIGA would as well use its guarantee facility to help secure FDI to our client nations.

In addition to financing, the Globe Bank group would remajor close to our clients to gain a good underst&ing of the crisis' implications for each country. The Globe Bank's knowledge resources are being mobilized to support our client nations in their efforts to monitor economic & social development, review scenarios & policy options, design policy responses, & implement reforms in these critical times. We would persist to play a major role in knowledge creation & sharing by raising the effectiveness of our analytic, advisory, & capacity enhancing services & strengthening our adaptation & learning.

We are as well increasing our reaction time & lead time in loan preparation & operational services. Would persist to play a major role in donor coordination, resource mobilization & aid effectiveness particularly in our fragile & conflict affected nations, & scale up cooperation with Arab & Islamic development partners under the Arab Globe Initiative. We would support regional projects & work on emerging global challenges, & improve our consequences measurement & enhance outreach efforts to make our work is better known & better leveraged.


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• INFLATION: AN ECONOMIC & POLITICAL THREAT. (2008, July). Middle East Monitor: The Gulf, Retrieved October 7, 2008, from Business Source Complete database.
• LONG TERM SHIFT IN ECONOMIC DYNAMICS. (2008, July). Middle East Monitor: The Gulf, Retrieved October 7, 2008, from Business Source Complete database.
• WORLD MONETARY FUND. (2007). United Arab Emirates: Financial System Stability Assessment (IMF Country Report No. 07/357). Washington D.C.: World Monetary Fund.

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