Mena GDP growth rate will slow to 5.1%

Oil output and non-oil revenues will drop, lowering GDP growth of the Mena region. (AFP)

Gross domestic product (GDP) growth of the Middle East and North Africa (Mena) region is expected to decline from 5.7 per cent in 2007 to 5.1 per cent by 2010 as oil output and non-oil GDP revenues diminish, according to new World Bank report.

The Mena region's GDP growth stepped up to a 12-year high of 5.7 per cent in 2007 from 5.4 per cent in the previous year, thanks to record-high crude oil prices, stronger growth in key export markets – particularly in Western Europe – and continued flows of remittances and tourism earnings, the bank's Global Development Finance report said.

It projected the global oil price will average $108 per barrel this year, but drop to $99 per barrel in 2010. The report said that strong demand from emerging markets, shortfalls in non-Opec supply and restraint exercised by Opec will keep the oil prices high.

The report forecast that the region's oil export revenues will be boosted by higher global prices, carrying the current account balance of oil-dominant economies to $132 billion (Dh484bn) in 2008 from $77bn during 2007, increasing sharply to 21.3 per cent of GDP from 15.6 per cent, before easing to 10.5 per cent by 2010.

Foreign direct investment continued to play an important role in shaping the Mena region's growth, registering some $30.5bn in 2007, up from a record $27.5bn in 2006. Three countries – Saudi Arabia, Egypt and the UAE – attracted the bulk of flows and account for more than half of inward FDI in to the broader geographic region, the report found.

Highlighting the risks and uncertainties, the World Bank said rising food prices represent a growing vulnerability and risk for the region. The sharp rise in both oil and food prices have highlighted the region's heavy subsidisation of prices within the domestic market, which particularly threatens fiscal positions for resource-poor economies.

The report warned that markets for manufactures and services may suffer a more pronounced slowdown linked to the ripple effects of financial difficulties already present in the United States and the European Union.

"Moreover, should a significant credit crunch occur, slowing growth across developed as well as developing countries will see demand for crude oil and refined petroleum products decline quite abruptly, leading to a sharp falloff in price, with attendant effects for revenues and growth. For the region's oil exporters, management of hydrocarbon windfalls remains a continuing challenge. And with oil prices anticipated to remain at quite elevated levels through 2010, the risk of overheating domestic demand with potentially inflationary consequences looms as an overarching threat, the report said.

The World Bank suggested that judicious use of oil stabilisation funds to counter such trends and offer a cushion for future growth should be a priority.

Moreover, domestic reform efforts may stand at some risk against the background of abundant liquidity and rapid growth.

For diversified countries such as Morocco, Egypt and Tunisia, the World Bank said that GDP advances are anticipated to average six per cent beyond 2008, as investment-led growth appears increasingly well established in Egypt, and activity there should remain within a 6.5 to seven per cent range in the next years.

Growth in Jordan and Tunisia is also expectedly to be close to six per cent, grounded in services exports and increasingly in investment and construction funded by foreign direct investment. And a stronger profile of growth emerges in Lebanon as economic conditions gradually improve.

The region's growth advances have had significant spillovers for job creation, one of the greatest development challenges facing the region. The countries are at the absolute crest of a labour force growth surge with an average growth of 3.4 per cent a year between 2002 and 2007.

Yet in the middle of this burgeoning labour force, unemployment dropped from more than 15 per cent in 2000 to 11 per cent in 2007, most of them coming from the private sector.

The World Bank report hailed the region's performance in job creation, especially for an increasingly educated population.

Inflation picked up across most countries in the region, however, due to sharp escalation in food and fuel prices, and will continue to present a difficult challenge for policy-makers. On balance 2007 was an exceptional year for growth, but the external environment and economic activity could potentially take a turn for the worse moving into 2008.

Exports of merchandise from the region's oil exporting countries amounted to $285bn in 2007, of which $130bn came from oil and related products.

This represents a 9.6 per cent advance on 2006, with oil gaining 6.7 per cent and non-oil exports growing at a robust 15 per cent. Higher oil prices account for the full upswing in export receipts in the year, while a pickup in shipments of manufactured goods helped underpin export gains for the diversified group. Adding services exports (largely tourism at $20bn) and remittances receipts ($29bn) to goods exports, current account revenues as a share of GDP moved up to a record 45.1 per cent for the diversified economies in 2007 from 28 per cent in 2000.

In contrast, revenues for oil-exporting countries diminished relative to GDP, reflecting declines in hydrocarbon output and other production difficulties.

Net debt flows to the region rebounded to $8.4bn in 2007, following negative levels in 2006. Both bank and bond flows to the region increased, with bank loans showing strong gains in 2007 reaching $5.4bn from $0.9bn in 2006. Net equity flows (FDI and portfolio equity) picked up fairly sharply in the year to $32.6bn – a growth of 10.5 per cent following the large-scale gains of 2006. FDI flows to the region increased to $31bn in 2007 from $27bn the previous year.

While resource-related investment in the region is on the rise – particularly in Algeria, investment in other sectors such as banking, manufacturing, real estate, tourism, and transportation is also increasing. In addition to European countries, the main investors in the region also include Gulf countries as well as a few developing Asian economies – China, India and Malaysia.

World GDPgrowth to decline

World GDP growth will slow down from 3.7 per cent in 2007 to 2.7 per cent in 2008, while growth in developing countries is expected to slow from an extraordinary 7.8 per cent in 2007 to 6.5 per cent in 2008, said the World Bank's Global Development Finance report.

It said private capital flows to emerging markets, which hit a record $1 trillion (Dh3.67trn) in 2007, are expected to drop to $800bn by 2009, which would still be the second highest level ever.

"Strong growth in the developing world is certainly helping to offset the sharp slowdown in the US," said Uri Dadush, Director of the World Bank's Development Prospects Group and International Trade Department. "But at the same time, rising global inflation – especially food and energy prices – are hurting large segments of the poor around the world."

Developing country growth in recent years has been powered in part by expanding capital flows, including by foreign banks that have expanded their presence in developing countries through acquisitions and the establishment of local affiliates. As of end-June 2007, foreign claims on developing country residents held by major international banks stood at $3.1trn, up from $1.1trn at the end of 2002.

Gross remittance inflows up 9%

Gross remittance inflows to recipient countries in the Mena increased nine per cent in 2007 to $28.5 billion (Dh104bn). This increase comes on the heels of an 11 per cent jump during 2006, the World Bank report said.

Morocco has maintained its first place in "league standings", with remittances advancing 25 per cent to $6.7bn in 2007, in part reflecting the continuation of stronger economic activity in the euro area. Egypt stands as the second-largest recipient, with remittances amounting to $6.3bn in 2007, also up 25 per cent over 2006 levels, it said.

Middle Eastern countries boosted remittances to Bangladesh by 19 per cent and to Pakistan by 17 per cent in 2007. It also contributed to South Asia and the Middle East and North Africa having the highest share of remittance receipts relative to their GDP. In the Philippines, remittances rose by 14 per cent year over year during the first 11 months of 2007. Remittances to India rose by 30 per cent in the first half of the year.