Feature Story Template- In MENA, countries are dealing with the impact of the global financial crisis through a variety of mechanisms and policy responses.
- Since January 2009, senior World Bank management has participated in a number of regional events including most recently the Arab Summit for Social and Economic Development that was held in Kuwait.
February 2009 - In this interview, Auguste Kouame, Acting Chief Economist for the MENA region shares his views following recent trips to Egypt, Kuwait, Lebanon, Morocco and Tunisia.  What does the global financial crisis mean for Arab stock markets?
The impact of the global financial crisis on Arab stock markets varies significantly from one country to another. Early impact was visible in countries with strong links to global financial markets. On average, regional stock indices have fallen by about 50%. Stock indices in Gulf Cooperation Council (GCC) countries saw declines of between 30-60% in the last quarter of 2008. In response, GCC countries announced various measures and rescue mechanisms to maintain liquidity and support their stock markets. In non-GCC countries, stock markets also experienced declines. But some indices – including Lebanon and Tunisia – were fairly resilient. Have Sovereign Funds and the Banking sector been adversely impacted by the global economic downturn in recent months? Sovereign funds have taken some losses on their investments in global financial institutions. Some early estimates by the Council on Foreign Relations suggest that sovereign funds with a high allocation into equities, emerging market and private equity may have lost as much as 40% in portfolio value between December 2007 and December 2008. On the other hand, sovereign funds with a failry conservative portfolio experiences smaller declines in portfolio value. However sovereign funds continue to have significant reserves. Across the Arab World, the banking sector has so far been little affected, mainly because of limited integration into global financial markets. However, many banks are being cautious in their lending decisions, and some countries are experiencing credit dry out. To what extent has the access of Arab economies to external financing been influenced? The global financial crisis had immediate impact on access to external financing worldwide. Borrowing spreads increased for emerging market sovereign and corporate borrowers. Arab countries were no exceptions to this. However, Arab countries have been far less severely affected by the credit crunch. With generally good balance of payments positions coming into the crisis or with alternative sources of financing for their large current account deficits, such as remittances, Foreign Direct Investment (FDI) or foreign aid, Arab countries were able to avoid going to the market in the latter part of 2008. What is the potential impact so far on the real economy in the Arab world? As discussed earlier, overall, most Arab countries have not been highly vulnerable to the financial impact of the crisis so far. However, the impact on the real economy is still unfolding, and can be significant in many countries. Governments with fiscal space going into the crisis will be in a stronger position to respond to the impact of the crisis on the real economy and households. However, going into the crisis, many Arab countries were running a fiscal deficit. Most Arab countries are already experiencing decline in export growth as a result of global economic downturn and/or lower oil prices. However, the economic impact of global slowdown will vary, depending upon initial fiscal and external account positions, as well as the degree of economic integration with highly impacted regions. How would you describe the picture across the region in terms of transmission of the global financial crisis? Countries across the region can be grouped in four categories for the sake of discussing the potential channels of transmission of the crisis to the real economy. First, there are the GCC oil exporters with large financial capacity and small populations. This group is in the best position to absorb the economic shocks. They entered the crisis in exceptionally strong positions. This gives them a significant cushion against the global downturn. The greatest impact of the global economic crisis will come in the form of lower oil prices, which remains the single most important determinant of economic performance. Steadily declining oil prices would force them to draw down reserves and cut down on investments. Significantly lower oil prices could cause a reversal of economic performance as has been the case in past oil shocks. Initial impact will be seen on public finances and employment for foreign workers. But this is a distant scenario. Second, there are the oil exporters with large populations and social needs but with less financial surpluses than GCC countries. Although oil exporters with significant oil revenues, these countries have large populations and large social commitments, which makes it difficult to adjust expenditures in a downturn. These countries entered the global financial crisis with weaker fiscal and external positions than GCC oil exporting countries. In this group, the crisis is likely to precipitate a decline in the trade surplus. Fiscal challenges are likely, as governments struggle to meet long-term social challenges such as unemployment. Households and jobs may be affected through reduced social and infrastructure spending Third, there are the non-oil exporting countries with strong linkages with GCC countries through remittances, FDI and tourism, or with strong dependency on foreign aid, or both. These countries entered the crisis in the weakest position, both in terms of fiscal and external balances. Rapidly descending oil prices or sustained low oil prices make these countries very vulnerable to declines in remittances and FDI from the GCC. The persistence of the global economic crisis will also make them vulnerable to a decline in foreign aid. Household and government budgets are likely to be impacted simultaneously. Social pressures are likely to emerge, with shrinking fiscal space and weakening safety nets, and with the return of migrant workers Fourth, there are the diversified countries with strong linkages with Europe in trade and tourism. They will feel the greatest economic impact through the depressed European demand for imports and tourism spending and will also receive less FDI from Europe. This Euro Zone effect will add to other relatively less important channels through which these countries might be impacted. These impacts will be directly felt in the SMEs sector, on employment and household income; public finances and the domestic banking sector will be impacted in a second round   What are some policy responses that MENA countries have initiated in the past few months? Most governments are taking action to address the vulnerabilities identified in their economies. For example, GCC countries intervened early to support their banking systems and stock markets. They did so by easing monetary policy, securing the banking system’s liabilities (including through deposit guarantees), and by injecting fresh capital where necessary. Saudi Arabia, for example, has announced an investment spending plan and provided capital to Saudi Credit Bank to secure credits to low income households. Kuwait is discussing a stabilization package. Egypt has announced a fiscal stimulus package geared toward job-creating infrastructure investment. In Jordan, guaranteed deposits in domestic banks were made and a fiscal stimulus package was announced. Tunisia measures to support domestic SMEs and employment were announced. What else can be done to mitigate a potential employment crisis in Arab countries? First, the global financial crisis may actually be an opportunity for restructuring poorly targeted safety net programs in order to free up resources for the poor as well as those who are deeply affected by the crisis. Second, as countries put in place stimulus packages, attention should be paid to addressing constraints and bottlenecks to long term growth. Investment in removing such bottlenecks can help create jobs and boost consumption in the sort term while enhancing potential growth in the post crisis era. Third, attention should also be paid to coordinating fiscal stimuli across countries so that stimuli can be mutually reinforcing. What is the World Bank Group doing to help? The World Bank Group is responding on a number of fronts. IBRD lending has been expanded 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 will be frontloaded if needed by low income countries affected by the crisis. IFC has also scaled up its trade finance program to help developing country exporters get access to trade credit; it has scaled up its Technical Assistance and Advisory services to private investors; and it has created 3 new facilities to help private sector in developing countries in these difficult times: Bank recapitalization facility, Infrastructure facility, and Microfinance facility. MIGA will also use its guarantee facility to help secure FDI to our client countries. In addition to financing, the World Bank group will remain close to our clients to gain a good understanding of the crisis’ implications for each country. The World Bank’s knowledge resources are being mobilized to support our client countries in their efforts to review scenarios and policy options, design policy responses, and implement reforms in these critical times. Contact: Dina Elnaggar, Senior Communications Officer, MNA External Affairs
Updated as of February 13, 2009 Â |
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