GCC to lead Mena growth: World Bank

The economies of Gulf oil producers are projected to sharply rebound by about 4.4 per cent in 2010 to spearhead growth in the Middle East and North Africa (Mena) on the back of strong oil prices, the World Bank has said.

In a 20-page study on regional economies, the Washington-based World Bank estimated Mena's real GDP growth at about 4.4 per cent in 2010, while growth in all oil exporters in the region was put at 4.3 per cent.

The projected growth for the six-nation Gulf Co-operation Council (GCC) this year is far higher than the 0.8 per cent rate recorded in 2009, while that of Mena is also nearly double the 2009 growth of about 2.2 per cent.

"The Middle East and North Africa region is recovering from the financial crisis along with the global economy. Growth in 2010 is expected to be 4.4 per cent regionwide, driven by domestic absorption as well as a positive contribution from external demand," it said.

Financial sector stabilising

"The GCC countries are leading the regional recovery as oil prices have rebounded and the GCC financial sector is stabilising. Growth in the GCC countries is projected at 4.4 per cent in 2010 – a remarkable comeback, given close to zero growth in 2009… the recovery in the GCC countries is expected to have a positive impact on other Mena countries, mainly through increased flows of remittances and foreign direct investment (FDI)."

The report noted that the GCC countries, which pump over 15 per cent of the world's crude supplies, had started growing at moderate rates as oil demand picked up and the region's financial sector is stabilising.

It said the strong rebound in crude prices, which have recently shot above $80 to their highest level in more than a year, was due to the rapid recovery in emerging markets, most notably Asia, and improvements in global financial conditions. US demand for oil has started growing, too, as it swelled by about 1.9 per cent for the four-week period ending April 2 compared with the same period a year earlier, according to the World Bank.

Although oil prices are far below the levels reached during the oil boom years, they have moved to levels in the range between $75 and $85 a barrel – a level that is comfortable for many hydrocarbon exporters, the study said.

"As a result of these positive developments, GCC oil exporters are expected to lead the regional recovery. In 2010, growth of GCC economies is projected to rise by 3.6 percentage points compared to a year earlier," it said.

"GCC countries were hit hard by the global crisis so a return to growth of 4.4 per cent in 2010 and 4.9 per cent in 2011 represents a remarkable comeback. The expected rise in oil revenue will also enable governments in GCC countries to continue implementing supportive policies."

The bank said such policies, including high state spending and cash injections into the financial sector, had helped domestic growth, which in turn had an important stabilising impact on other Mena countries by contributing to workers' remittances and foreign direct investment (FDI).

The impact through trade is likely to be limited since exports from oil importers to the GCC nations are just eight per cent of these countries' total exports. However, countries with strong trade links to the GCC states, including Djibouti, Lebanon, Jordan, and Syria, are likely to benefit more than other oil importers, according to the World Bank.

"The impact of growth in the GCC countries through remittances and FDI, however, is expected to be stronger and positive. The UAE's share in cumulative outward remittances in the period 2001–2008 was 20.1 per cent and the oil importers most likely to be benefit include Jordan, Lebanon and Egypt. These are the countries for which remittances from the GCC countries represent a non-negligible share in GDP."

The study said outward FDI from the GCC countries directed to other Mena nations is also believed to be significant.

"Remittance flows to developing Mena are expected to grow by 1.3 per cent in 2010 and 3.4 per cent in 2011. Demand for migrants in the Gulf is expected to pick up at a faster pace than that in the EU, since GCC countries are expected to grow at much higher rates than EU member states, have substantial financial resources and long-term infrastructure development plans. In addition, protectionism is on the rise in Europe. A number of countries are imposing immigration controls in an attempt to deter future migration flows. Several European countries are considering measures that may reduce the inflows of new migrants," the study said.

Euro zone may be a snag

The World Bank said it believed the recovery in the regional oil exporters and the European Union would be crucial for recovery in most oil importers.

While the oil importers weathered the crisis better than regional oil exporters, the feeble recovery expected in the euro zone will drag down their growth in the near term, especially the growth of those with strong links to EU markets, the study said, adding that growth of Mena oil importers is expected to decelerate slightly relative to 2009, averaging about 4.5 per cent in 2010 and nearly 5.2 per cent in 2011.

It said exports of services have been more resilient than merchandise exports and are likely to remain a bright spot for oil importers in the short to medium term. "The importance of tourism in oil-importing countries has grown substantially over the past decade, with the share of tourism revenue in GDP climbing from 4.4 per cent in the period 1996-1999 to 6.5 per cent in 2007."

The report noted that the region has made significant investments in the tourism sector in the past few years, and with tighter constraints on private spending in EU markets, demand for tourism services in the Middle East and North Africa might increase as it offers quality services at attractive prices.

"Growth of oil importers with strong links to the EU is expected to be lower than growth of oil importers with links to the GCC markets as the outlook for growth in the EU is the weakest among advanced economies, and much lower than the expected growth in the GCC economies," the report said.

"Output growth in the euro area is expected to be one per cent in 2010, compared to 4.3 per cent in the GCC countries, 2.5 per cent in the United States and 1.3 per cent in Japan. Import growth in the EU is also expected to trail growth in Japan and the US."

Expansionary fiscal policy

The World Bank expected fiscal policy to continue to be expansionary in the oil importers, resulting in further deterioration of fiscal balances. But it added that some oil importers have less need and much less fiscal space to rely on public spending as a source of growth. In some countries, including Lebanon, Jordan and Egypt, the fiscal situation may turn into a long-term growth issue, unless these countries trim their fiscal deficits in the years to come, it said.

"For example, Lebanon remains vulnerable to external shocks despite high growth in recent years. Even with some fiscal adjustment, continued donor financing, and average growth of six per cent, estimates suggest that debt will remain high, above 100 per cent, in the next few years," it said.

"This outcome is largely attributed to the high cost of servicing the existing large debt stock. Aware of these problems, the government of Lebanon has decided to change its debt financing strategy. In 2009, the government increased the net financing from domestic sources in domestic currency."

Continued shortage of jobs

Despite high growth in the previous years, Mena countries have not been able to create enough jobs for their citizens, according to the World Bank. It said overall, standards of living in the region have nearly stagnated, as economic growth in per capita terms has been low relative to other developing regions and not sufficient to raise household incomes.

"The region is struggling as economies have not been able to generate jobs for the millions of young people entering the workforce. Unemployment rates have dropped in the past five years to 11 per cent, but unemployment for young people between 15 and 24 is more than 25 per cent – double the world average. High unemployment rates, low labour force participation, especially for females, and informality translate into one of the world's lowest formal employment rates – less than half of the adult population is formally employed," the World Bank said.

"Private investment has not increased commensurately with reform acceleration and despite a move in many countries from a model of state-led growth to one relying more on the private sector. Among key long-term growth challenges are access to finance, which is very low in Mena, firms' competitiveness, and the non-competitive business environment facing enterprises in the Mena region."

Cause for concern

The report considered such outcomes as "a cause of concern" but added they also signal Mena's potential for growth, which could be a lot higher than growth in the past two decades, provided Mena countries tackle their key constraints to sustainable and inclusive growth. "In Mena, the issue of access to finance was a major one before the crisis, despite the fact that many countries have large banking sectors," it said. "The region lags in a number of areas, including loan and deposit accounts per capita, microfinance coverage, different aspects of financial infrastructure, especially legal rights, public registry coverage, and private bureau coverage in non-GCC countries. A higher percentage of companies in Mena identify access to finance as a major constraint to their business growth than in any other region except Sub-Saharan Africa."

According to the report, credit remains concentrated and large segments of households and SMEs remain underserved.

It said the slowdown of credit has added urgency to the access agenda because the credit tightening expected in the post-crisis period affects disproportionately the underserved segments, typically high-risk households and firms. This situation is worse in developing oil exporting countries that have state-dominated financial sectors, it added.

"Prior to the financial crisis, these countries had some of the highest non-performing loan rates in the world which curbed the efficiency of financial intermediation, and resulted in low access to credit," the report said.

"By contrast, in many of the GCC countries NPLs were low, and firms had high access to credit. Furthermore, the extent of NPLs has been directly linked to the prominence of state-owned banks, and in some cases lending to SOEs and connected private firms which resulted in misallocation of financial resources. Privatisation and opening of the sector to competition have been hailed as the answer to these problems, but the experience in some countries, including Syria, has been one in which private banks have continued to serve well-connected clients, limiting access to credit for small and medium-size enterprises."

Weak market discipline tools

The report said that in addition to the access agenda, Mena governments will have to face a challenging financial stability agenda.

It noted that the financial crisis has revealed the failure of Pillar 3 in Basel II on disclosure and market discipline, even in advanced countries such as the US. It said the pre-conditions for effective market discipline are weaker in Mena than in developed countries, due to weaker institutions and less sophisticated market players, and the generous support programmes during the crisis that may have weakened these institutions further. "Most Mena countries will also need to make an effort to deal more effectively with systemic risk and implement the recommendations issued by the Financial Stability Board," the World Bank said.

"Very few central banks in Mena have been able to develop an effective macro-prudential supervision function, and produce reliable financial stability reports. Mena countries have not introduced counter-cyclical elements in their provisioning rules and increase capital charges for systemically important institutions."

Banking sector resilient

Turning to banks' performance, the study said the GCC banking sector has remained relatively resilient, but added that credit growth slowdown has been steep, and the trend has not reversed. It said profitability declined, but banks continued to be profitable in 2008 and the first half of 2009, and most recent available financial sector indicators also remained generally strong.

"Islamic banks in GCC were less affected in the months following the global financial crisis, but mid-year 2009 results indicate slightly larger declines in profitability for Islamic banks in some countries due to second-round effect of the crisis on the real economy and real estate," the study said. "The outlook for bank performance, and banks' ability and willingness to extend credit remains uncertain, and so does the outlook for growth."

As for oil importers, banks are undergoing second-round effects of the crisis, but are likely to weather these effects, the report said. It noted that NPL ratios have increased, but these increases are expected to be moderate as growth declined but not substantially, and the recovery in these countries is underway.

"In addition, oil importers did not experience real estate bubbles and bank real estate portfolios do not seem to be distressed. However, interest rate and liquidity risks have increased in many countries, suggesting that credit will become more expensive, and access to credit may become more restricted as banks become more conservative in the contraction phase," it said.

"The extent to which underserved sectors have been affected cannot be measured with accuracy due to lack of data. Most central banks in Mena have not been able to generate reliable data on SME lending."

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