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01 October 2023

Mena poised to buck the downturn

By Nitin Nambiar


Global growth is expected to moderate further this year due to the increased cost of capital for financial institutions. GDP in the Middle East and North Africa region, however, will buck this trend to rise 5.4 per cent, a World Bank report on world economic prospects has forecast.

The world economy will grow 3.3 per cent, down from an estimated 3.6 per cent pace last year and 3.9 per cent in 2006, the bank said. Weak domestic demand is expected to keep United States’ GDP growth below 1.9 per cent in 2008, while growth in Europe and Japan should continue to ease under the additional weight of appreciating currencies.

“Real GDP growth in the UAE is likely to be higher than the average forecast for the Mena region at about nine per cent. Within the GCC, Qatar is likely to log the highest GDP growth this year at about 9.8 per cent. The growth forecast for Saudi Arabia, Kuwait and Oman is around the five per cent mark,” Monica Malik, EFG-Hermes senior economist, said in concurrence with the World Bank report.

Investment bank EFG-Hermes said the GCC outlook remains strong for 2008. “Economic fundamentals are forecast to improve as oil price and production levels rise. Non-hydrocarbon growth, driven by investment, will remain strong,” it said in a report this week.

“The growth rates in the UAE, Qatar and Saudi Arabia are likely to be much higher than the average for the Mena region,” said John Eldredge, economist at Emirates Bank International. “Given the high level of internal investments coming back into the UAE and the increasing number of foreign businesses setting up shop here means that the region will continue to witness an increase in FDI [foreign direct investment] inflow going further into 2008.”

Continued growth in hydrocarbon receipts among the Mena region’s developing and high-income oil exporters is a key factor supporting growth. “Oil exporters registered growth of 4.5 per cent for the year, up from four per cent in 2006,” the World Bank report said.

Among the high-income oil exporters – the UAE, Bahrain, Kuwait, Qatar and Saudi Arabia – oil-related revenues rose 13 per cent to $382 billion (Dh1.4bn), according to World Bank data. The bank said the revenues were sufficient to fund ongoing infrastructure and social programmes while adding to massive reserve levels.

Malik agrees that oil prices remain the key driver for growth in the GCC. “Higher oil prices and increased oil production coupled with improved investment programmes and strong private consumption remain the key drivers for growth,” she said.

The World Bank report said a number of factors are likely to shape the growth profile for the Mena region. “A softening of the OECD [Organisation for Economic Co-operation and Development] demand is anticipated for 2008, although it may be accompanied by additional firming of global oil prices tied to continued robust demand in emerging markets. This should benefit the oil exporters for a time, and support regional growth of 5.4 per cent. As the global environment improves by 2009, the Mena region should be able to maintain the broader pace of growth established in 2008 for several more years.”

The bank said global markets for non-oil commodities, manufactured goods and tourism services may suffer a more pronounced slowdown linked to the ripple effects of financial difficulties present in the United States and the euro zone.

The report said in the event of continued slowdown across the OECD due to the credit crunch, demand for crude oil and refined petroleum products could decline and lead to a sharp fall in oil prices thereby affecting revenues and growth in oil exporting countries.

But Eldredge said the price-drop was unlikely to be drastic. “The outlook on oil is unlikely to be bullish. You will see a drop in prices as demand for crude wanes in the wake of a global slowdown. However, prices should settle around the $80 mark.”

The World Bank forecast that a barrel of oil could cost $84.10 on average this year. The bank predicts prices could fall by 6.8 per cent to $78.40 a barrel in 2009.

Inflation continued to be the major concern as Mena showed an uptick in inflation last year, triggered by the expenditure of burgeoning oil revenues in the region.

The report said inflation in the Mena region continued to be “volatile”. Inflation remains one of the biggest challenges to growth in the Gulf region. “Shortages and supply bottlenecks are the key issues driving inflation. But while these shortages might slow the implementation of projects, they are unlikely to impact the growth story this year,” Malik said.

Emerging markets take lead

The region’s equity market appears to have suffered little in the way of direct effects from the financial turbulence of mid-2007. “Regional equity markets slumped only briefly during the bout of global volatility. Indeed, stock exchanges in the Gulf states have outperformed the Morgan Stanley emerging market average through the final months of 2007,” the World Bank report said.

Five of the Gulf Co-operation Council (GCC) indices have outperformed Western markets in terms of index growth in 2007, finding places among the top 10 emerging stock exchanges in the world. Oman’s Muscat Securities Market tops the list of GCC indices, rising 60.11 per cent, followed closely by Abu Dhabi Securities Market (ADSM), which gained 52.72 per cent.

“The outlook for regional equity markets is good. The year should see an increase in both the size and number of the IPOs. The region should see increased foreign investment in its markets this year,” Mohammed Ali Yasin, Managing Director, Emirates Securities, said.

FDI hits record despite crunch

Foreign direct investment worldwide surged to a record $1.5 trillion (Dh5.4trn) last year, surpassing the peak of $1.4trn in 2000, according to preliminary United Nations figures.

The UN Conference on Trade and Development said in its report released on Tuesday that financial turmoil in the second half of last year had not hit overall FDI flows, although the outlook for 2008 was more uncertain. The United States was the largest recipient of foreign inward investment last year attracting an estimated $193bn as companies and investors snapped up cheap American assets.

The United Kingdom was the second biggest host to new foreign investment with FDI inflows of $171bn, followed by France at $123bn. Among the developing countries, China was the biggest recipient with $69bn, while Hong Kong received $54bn in FDI.