Feature Story Template- GDP for the MENA region is projected to slow to 3.9 percent in 2009, and a quick resolution of the financial crisis in high income countries could produce an increase in GDP to 5.2 percent in 2010.
- The region witnessed a sharp rise in consumer price inflation as a result of the surge in global prices for food and feed grains, together with and increase demand in several economies.
- The world is becoming more urban, and decisions are increasingly being decentralized to cities and municipalities.
December 2008 - Developments in global commodity markets over the last three years, notably in 2008, have had an impact on the Middle East and North Africa (MENA) region, and resulted in substantial up and down shifts in terms of trade, current account positions, and external financing requirements. While these shifts occurred at a time when the external environment for growth and for international finance deteriorated, GDP held up well through 2008 and the pace of GDP growth for the developing countries of the region was unchanged in 2008 from the strong 5.8 percent registered in 2007. The outlook for the coming year is not as promising, however, as the global downturn and financial crisis will exact a toll on growth in MENA, and the region’s GDP is projected to slow to 3.9 percent in 2009. As world oil demand falls sharply, any decisions by the region’s oil exporters to curtail output to set a “floor” under oil prices—will play a large role in shaping growth profiles. Recovery in 2010, predicated upon a quick resolution of the financial crisis in high income countries and a moderate revival of OECD growth, would see GDP pick-up to 5.2 percent, led by a return to 5.7 percent growth among the diversified economies. Effects of commodity price changes in MENA The region has undergone tortuous change linked to global commodity prices in recent years— from gradual increases to a surge in crude oil, food (especially grains), and raw materials prices from 2005 through mid-2008—to a sudden and forceful unwinding of the bubble during the second half of 2008. On the upside of the commodity run, the developing oil exporters— Algeria, the Arab Republic of Egypt (though a more diversified economy), the Islamic Republic of Iran, the Syrian Arab Republic, and the Republic of Yemen—accumulated $82 billion in additional revenues over 2003–07, with receipts totaling $130 billion in the latter year. While the first half of 2008 saw oil revenues jump another 50 percent to nearly $200 billion, effects of the financial crisis and expectations of much lower global growth have caused oil prices to plunge from peaks of nearly $150/bbl in early July to near $65/bbl by end-October 2008. As a result, regional oil exporters are now experiencing a substantial downshift in hydrocarbon receipts, terms of trade, and current account surplus positions that will manifest itself more clearly in 2009 Recovery for the region in 2010 hinges on a pickup in exports and a moderate upturn in investment. But it depends primarily on a 1.8 percentage point increase in household outlays to lift the annual rate to 6 percent, as the earlier run-up in commodity prices and consumer price inflation moderates, giving way to gradual stabilization and to a revival in consumer purchasing power. The region’s overall current account surplus position should continue to narrow to some 4 percent of GDP, providing a new set of “initial conditions” from which developments into the next decade are likely to spring. Effects of financial crisis increasing vulnerable in some countries To date, the direct effects of the financial crisis experienced by most developing economies in the region have been relatively mild, as banks and investment companies in the Middle East and North Africa were not large holders of subprime mortgage-backed securities. But indirect effects are increasingly becoming evident, with spreads on sovereign debt increasing and equity markets witnessing sharp declines. Gross capital flows to countries in the region have also declined, and may be expected to weaken further. A jump in bank borrowing from $4 billion to $14 billion over the year to August 2008 offset a falloff of some two-thirds in bond and equity issuance in the period, but outright decline in capital inflows is likely as we move into 2009. The surge in global prices for food and feed grains (more-than 50 percent during the first half of 2008) and the ramp-up in crude oil prices to average a 42 percent increase for the year, together with overheating of domestic demand in several economies (notably Egypt, the Islamic Republic of Iran, and a number of GCC countries), led to a sharp rise in consumer price inflation across the MENA region. Inflation remains a key challenge for the region. Although extensive reliance on fuel and food subsidies helps limit inflationary pressures, it comes at a very high fiscal cost. Not only do such steps reduce fiscal space to address other priorities, they tend to be inefficient mechanisms for alleviating poverty. Similarly, countries that responded to high food prices by increasing wages of select groups to help mitigate the worst of the impact on living standards are now having to deal with increased inflationary effects. |
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