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Q&A on the Global Financial Crisis and MENA

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  • Although financial systems in MENA countries have not been highly vulnerable to the crisis so far due to their limited integration with global financial institutions, the impact of the global recession on the real economy can be significant in many MENA countries.
  • It is expected that the crisis will cause an increase in poverty in MENA. With a significant number of people living above or close to the poverty line, the sensitivity of poverty to external shocks is high.
  • The World Bank’s knowledge resources are being mobilized to support our client countries in their efforts to monitor economic and social development, review scenarios and policy options, design policy responses, and implement reforms in these critical times.

April 23, 2009 - In this interview, Auguste Kouame, Acting Chief Economist for the MENA Region answers questions about the impact of the Global Financial Crisis on the Region.

What has been the impact so far on the real economy in MENA?

Although financial systems in MENA countries have not been highly vulnerable to the crisis so far due to their limited integration with global financial institutions, the impact of the global recession on the real economy can be significant in many MENA countries.  In fact early signs point to declines in growth rates in the fourth quarter of 2008 in many countries, and growth projections for 2009 are lower than 2008 levels in all MENA countries with the exception of Qatar and Yemen were 2009 GDP growth will be powered by expanded capacity in the production of liquefied natural gas.  As a whole, the MENA region is projected to grow at 3.3% in 2009 down from 5.5% in 2008.  This is a significant mark down. However, MENA is expected to be less impacted by the global recession than most other developing regions, notably Eastern Europe & Central Asia, and East Asia & Pacific.

The impact of the crisis goes beyond economic aggregates. In some countries, households and workers are being impacted directly. For example, Egypt’s quarterly growth fell to 4.1% in Dec 08 (compared to 7.7% previous year) and job creation fell by 30% (unemployment rose to 8.8%).  Due largely to the cancellation of several construction projects in Dubai and the resulting job loss, it was reported that in March several hundreds of migrant workers left the emirate daily.   

How would you describe the picture across the region in terms of the impact of the global financial crisis?

The economic impact of global slowdown varies depending on the degree of economic integration with highly impacted regions and commodities.  And countries ability to react will depend upon initial fiscal and external account positions, public indebtedness, and institutional capacity to implement sound macroeconomic and structural policies.  Countries across the region can be grouped in four categories for the sake of discussing. 

First, there are the GCC oil exporters with large financial capacity and relatively small populations – Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and United Arab Emirates. This group is in the best position to absorb the economic shocks. They entered the crisis in exceptionally strong position. This gave them a significant cushion against the initial impact of the global financial crisis. Although their stock markets were hard hit in the second half of 2008, their governments were able to respond by relaxing monetary policy, by providing capital, and guaranteeing deposits in national financial institutions.

However, because of the sharp decline in oil prices since mid-2008, GCC countries will experience a significantly lower economic growth in 2009 than the previous year, with the exception of Qatar whose GDP is projected to grow at an outstanding 29% in real terms with the coming on stream of major LNG plants.  In a few GCC such as Saudi Arabia, Kuwait and the UAE, growth is likely to be near or below zero. 

The impact on the real economy has been the strongest perhaps in Dubai where the financial crisis has coincided with the busting of the real estate bubble and sharp contractions in the construction sector and financial services.  However, Abu Dhabi has come to Dubai’s rescue with a $10 billion issuance and plans to raise another $10 billion if necessary.  In fact, with their significant financial reserves, GCC countries are likely to ride the storm comfortably if oil prices stay around current level of $50 ppb throughout 2009.  However, steadily declining oil prices could force them to draw down reserves and cut down on investments.  In such as scenario, the financing of emergency rescue plans, the financing of fiscal stimulus packages, could combine with lower oil revenues intake to cause serious fiscal pressures.

Second, there are the oil exporters with larger populations relative to their oil wealth, than GCC countries – Algeria, Iraq, Iran, Libya, and Syria. Although oil exporters with significant oil revenues, oil provides countries in this group with less wealth per capita.  Moreover, these oil exporters with comparatively large populations entered the global financial crisis with weaker fiscal and external positions than GCC countries, and their fiscal and current account surpluses are expected to see a sharp decline in 2009 as fiscal revenues and trade surplus contract with lower oil prices.  As governments struggle to meet long-term social commitments such as subsidies and income support programs, countries with sufficient reserves are drawing them down (e.g. Algeria), and countries with limited reserves are implementing fiscal contraction measures (e.g. Iran).  Economic growth is projected to decline though not as markedly as in GCC countries. 

Third, there are the non-oil exporting countries with strong economic linkages with GCC through remittances, FDI and tourism, or with strong dependency on foreign aid, or both. This group includes Jordan, Lebanon, Yemen and Djibouti.  Lebanon and Jordan entered the crisis in weak positions in terms of fiscal and external balances.    With stock market contraction and lower oil prices ushering in reduced personal wealth in the GCC as well as and reduced employment opportunities for migrant workers, GCC countries are sending out less remittances and FDI.  Reduced remittances and FDI, combined with the possibility of fewer tourists from GCC countries (and other countries), will weigh heavily on external balances in Lebanon and Jordan in 2009 and make it difficult to finance their deficits while the return of migrant workers could represent a challenge from the employment and social policy point of view.  In Yemen, the coming on stream of LNG plants will support a strong external position and economic activity. In Djibouti, the operation of new port facility by Dubai World and spending by foreign military bases will provide a cushion.  However, both Yemen and Djibouti face a challenge in securing foreign aid given the pro-cyclicality of aid and the deteriorated financial situation in source countries.  Like in other MENA countries, household in Yemen and Djibouti were hit hard by the food crisis in 2008; and although food prices have declined, they remain high by historical standards and will continue put pressure on household budgets as well as on import bills.

Fourth, there are the diversified countries with strong trade and tourism linkages with Europe and OECD – Morocco, Tunisia and Egypt.  This group of countries felt the impact of the crisis on their real economy as early as the last quarter of 2008 as recession spread across Europe and other export markets.  Export growth is projected to remain low throughout 2009 in all three countries.  This is affecting jobs in export-oriented SMEs. Tourism activity was sharply reduced in January in Egypt and is expected to remain depressed throughout 2009.  Public finances are being impacted and it is not clear whether governments will be in a position to issue sovereign bonds given that spreads remain high (although they have declined markedly from their peaks in late 2008).  Governments are likely to increase their reliance on domestic borrowing and external borrowing from public sources.  Countries in this group can build on their good track record of sound macroeconomic policies and structural reforms to mobilize external and domestic financing needed to implement countercyclical policies.  As the crisis persists and affects the financial position of export-oriented SMEs and eventually other domestic firms, there is a risk that the balance sheets of domestic bank might weaken (due to emergence of non-performing loans or shrinking of loan portfolios). 

What does the global financial crisis mean for MENA stock markets?

The impact of the global financial crisis on MENA stock markets varied 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 lost as much as 40% in portfolio value between December 2007 and December 2008.  However sovereign funds continue to have significant reserves.

With the exception of a Kuwaiti bank that suffered significant losses due to trading in currency derivatives in late 2008, the banking sector across MENA has so far been little affected, mainly because of limited integration with global financial institutions.  However, many banks are being cautious in their lending decisions, and this is causing a credit dry out in some countries.

To what extent has the access of MENA economies to external financing been affected?

The global financial crisis had immediate impact on access to external financing worldwide. Borrowing spreads increased for emerging market sovereign and corporate borrowers. However, MENA countries have been less severely affected by the credit crunch than other developing regions. 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, MENA countries have been able to avoid going to the market for new issuance since mid-2008.  However, it is not clear whether MENA countries will be able to access the sovereign bonds markets in 2009 given the global credit squeeze and still high spreads. 

Has the current financial crisis worsened poverty in MENA?

Data is not available yet to assess the impact of the crisis on poverty.  However, it is expected that the crisis will cause an increase in poverty in MENA. With a significant number of people living above but close to the poverty line, the sensitivity of poverty to external shocks is high.  Overall, less than 5% of MENA’s population lives on less than $1.25 a day but some 19% of the regional population lives on less than $2 a day.  Moreover a considerable share of the population hovers just above the poverty line: in 2005, close to one fifth of Egyptians and Moroccans had per capita daily consumption falling into a narrow band between $2 and $2.50. This is as many as those who were under the $2 poverty line in these countries.  About 15% of Yemen and Djibouti populations are in the same 0.50 cents a day band.  With such deep clustering of large proportions around the poverty line, even a moderate shock represents a serious risk to wider-scale poverty in many countries of the MENA region.  

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 a substantial investment spending plan and provided capital to Saudi Credit Bank to secure credits to low income households. Among G-20 countries, Saudi Arabia’s fiscal stimulus package is the largest as a share of GDP.  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 has announced measures to support domestic SMEs and employment.

What else can be done to mitigate the impact of the global recession on MENA?

However, more needs to be done.  First, the global financial crisis may actually be an opportunity for restructuring poorly targeted safety net programs and other social programs in order to free up resources for the poor as well as those who are deeply affected by the crisis. Countries should favor projects that can act as automatic stabilizers such as means-tested social benefit programs whose extension will occur naturally and should be financed during downturns as more people fall below the eligibility threshold, and this will reverse as the economy recovers.  Similarly, public work programs with below market wages can act as automatic stabilizers.  To be prudent however, countries may want to consider taking pro-active safeguards fiscal measures to increase revenues or reduce expenditures in order to reduce the non-discretionary deficit, if economic recovery does not occur as fast or as robustly as expected.  Also, public infrastructure projects that generate revenues (e.g. through cost-recovery) can help ease risk of debt accumulation (and limit the effect of the Ricardian equivalence). However, conditional cash transfers are not appealing.  Labor market interventions to support employment and earnings (e.g. payroll tax holidays and wage subsidies) may be appropriate when crisis is short-lived but may not be fiscally sustainable in the long term (for one thing, they don’t work as automatic stabilizers during upturn).  They may also be difficult to remove in the upturn due to risk of capture.

Also, 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 short term while enhancing potential growth in the post crisis era. Finally, attention should be paid to coordinating fiscal stimuli across MENA 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 monitor economic and social development, review scenarios and policy options, design policy responses, and implement reforms in these critical times.  We will continue to play a major role in knowledge creation and sharing by raising the effectiveness of our analytic, advisory, and capacity enhancing services and strengthening our adaptation and learning.

We are also increasing our reaction time and lead time in loan preparation and operational services.  Will continue to play a major role in donor coordination, resource mobilization and aid effectiveness particularly in our fragile and conflict affected countries, and scale up cooperation with Arab and Islamic development partners under the Arab World Initiative.  We will support regional projects and work on emerging global challenges, and improve our results measurement and enhance outreach efforts to make our work is better known and better leveraged.