Chaired by: Daniela Gressani, World Bank Vice President MENA Region; Ritva Reinikka, Director Social and Economic Department, MENA Region; Farrukh Iqbal, World Bank Sector Manager Economic Development, MENA Region October 10, 2008 MR. STEELE: Good afternoon, everybody. Welcome to this Press Briefing to Launch the Middle East North Africa Economic Developments and Prospects Report. I am David Steele. I am the External Relations Manager for the Middle East North Africa Region. We’ll begin with introductory remarks by Ms. Gressani, the Regional Vice President for the Middle East North Africa Region of the World Bank, and she will be followed by Ms. Reinikka, who is Director of the Social and Economic Department of the Middle East North Africa Region, after which we will be happy to take your questions. Daniella, please. MS. GRESSANI: Thank you very much. First of all, welcome to this briefing. We understand you are all very busy, and there are a lot of competing events this afternoon, and I am very grateful that you found the time to join us. As my colleague said, we are here to launch the 2008 Economic Developments and Prospects Report from the Middle East and North Africa Region. This is an annual report for us, and it is an occasion to review recent macroeconomic and structural developments in the Region. This year, as a special topic of this report, we have looked in depth at intraregional integration. We think this is a very important dimension of development in the Region, and not just in terms of trade in goods and services, but also, because of reinvestment flows being very important in the Region, because of migration within the Region and also between the Region and the rest of the world being very important. Taking a look at this development allows us, we believe, to understand better the multiple interlinkages that characterize the Region and to determine also prospects for the future. Of course, as we speak, our analysis is becoming obsolete given how quickly the financial crisis has been unfolding. It had obviously not been forecast or analyzed at the time when our report went to press; but to the extent we can, we would be very happy to answer your questions, however tentatively, on how the ongoing financial development affects the Region. But let me turn, please, to my colleague Ritva Reinikka, who will highlight the main findings. MS. REINIKKA: Thank you very much, Daniella, and good afternoon, everyone. Thank you very much for coming. What I’m going to do is just to give you a few highlights from the report, talk about the growth developments in the MENA Region, a little bit, just a few sound bites, on the regional integration issue and structural reforms that we look at in this report, and then really talk about the financial crisis, what we know now and our very, very first preliminary analysis on the ways that it can impact the MENA Region. But just about economic growth until these days or last week, and of course, over the last few years, economic growth has accelerated in the MENA Region, in North Africa and the Middle East, and that has of course been very welcome. The average growth rate last year, in 2007, was 5.7 percent, and the growth happened both in oil countries as well as in non-oil countries. So, in a way, what we can see is that it is not just the oil boom that has generated the growth but also the reforms that have been implemented particularly in the non-oil countries. We do have a forecast for growth figures in this report, but as Daniella said, due to the financial crisis, we have pretty much, as we speak, lowered our growth forecast for the developing countries--all developing countries--and we are right now talking about4 percent. And as I guess our President, Mr. Zoellick, said yesterday, even if you have just deceleration, considerable deceleration, it may feel immediately like a recession. So we are not as optimistic today as we were when this report went to the print shop. About the past growth--and it is really important still to think about it, because it is the same elements that need to drive the future growth, even if it is reduced overall--I think one of the key elements that we find when we analyze it is that in the early part of this decade, the MENA growth was driven by private consumption, but really, the good news since 2004 has been that the main driver has been investment, and that is a very important thing to keep in mind, and also, it is that investment, private investment in particular, that the countries should keep guarding for, because it is really very fundamental to growth and a more dynamic private sector. But one thing about the growth performance of the MENA Region is that even if it has increased considerably, and there is a clear growth spurt that has lasted for several years, it is still below the growth of other developing regions. So, what we really recommend and discuss in the report is that the Region will really need to continue structural reforms and enhance the competitiveness of the private sector. Just a few key facts about regional integration. The analysis in the report is actually quite thorough; it looks at trade, investment, tourism, like services trade, it looks at migration, in particular remittances, as well as, then, infrastructure integration through power pools and transport systems and gas and so forth. So there is a lot of information there. I’m not going to go into any of those details, but just to give you a few highlights of that. First of all, integration in MENA countries through trade increased, but it is still below the potential. In the trade area, we now have many indices, and we can benchmark against other countries and other developing regions, and it is clear that MENA countries are below the potential, so there is much that can be done to enhance trade. Also, integration is increasing through other challenges--as I mentioned, migration, tourism, investment, and capital flows--and obviously, when we do our analysis of the financial crisis that we are living right now, it is those areas that we need to look at, and the countries need to look at how they are likely to be affected. Just to give you a few numbers, the Region’s share of trade, international global trade, is 5 percent, while remittances--and this gives you an idea that the Region is really integrated through labor movement perhaps more than trade--remittances are 10 percent of the world remittances, and remittances paid by the MENA countries are 16 percent; so MENA has a large share of that integration in the world. I’m not going to talk more about the structural reform. We have a standard set of indices we use--just to say that our positive news, and just to highlight, no more than that, is that the business climate has improved--you are familiar with the Doing Business that we put out every year. Some countries--Egypt and Saudi Arabia--have really been on top of that. Egypt, as a reformer, still has a lot more to do, and Saudi Arabia has made major inroads in reforming its business climate. And I’m going to just talk a little bit about the financial crisis and how we see it and where we are in understanding it. I think we all, here and everywhere, are just trying to understand what is happening both in the developed countries as well as in the developing world. First of all, just to say that in the context that the MENA countries have been affected by the food price crisis, already starting to show the first signs a year ago and then earlier this year. MENA is a very important actor or player in this market, because it is about one-quarter of the world’s grain trade. So really, one-quarter of the markets for wheat and rice and other grains, MENA is really participating, so it is a major purchaser, and that is why it has been vulnerable to those prices. Prices have eased now, but there are several of the poorer countries that continue to be vulnerable, and obviously, this issue remains, and once we have gone through this crisis and have been able to see a number of areas where reforms can help countries to improve the situation in the future. So we are already--obviously, then, there is the fuel crisis which has brought great wealth to some, and for other countries, that has been a major issue as well, and now, already the first signs of the financial crisis were a year ago, but we are now absolutely in the midst of it, and we expect that it will affect all developing regions, and MENA is not an exception. However, at this point in time, MENA appears to be less vulnerable than other developing regions--say, Eastern Europe or Latin America, countries like Russia or Brazil--but we do expect that this will have an impact on the Region three different channels. The direct impact through exposure to foreign banks is limited, and it is only limited to those countries that are integrated in the financial markets globally, so that is one potential channel, and it is much more important in many other Regions than in the MENA Region. The second one is really vulnerability of external financing, both governments as well as the private sector, and emerging markets, the bond market, for instance, is pretty much dried up completely right now; it is not functioning. But MENA countries are not big takers of those bonds or--it is a limited impact. But if the crisis continues to worsen, more governments and investors in MENA may face difficulty meeting their external financing in 2009. So it is a potential channel for that, but currently, MENA is not feeling that pinch yet, and it will be limited given that the exposure is limited. But the main expect that we expect to come and vulnerability lies in the real sector and real economic activities, and that could potentially be very serious. It can affect MENA countries in the coming year, and depending on the severity of the crisis in the coming years, through significant impact on, of course, exports, foreign direct investment, as we have seen quite a lot of that, from the Region and also from outside, remittances--they will not disappear, but they may become less because people are not earning as well; the real estate sector, as I mentioned; overall economic growth--growth creates jobs in most cases, and that will be tough for the Region that is already suffering from fairly high unemployment; and then, on poor people. We read all the newspapers--maybe you write those things there--and it is really usually the poor who are least hedged to tackle--to be able to look after themselves or hedge against these shocks. So it really is going to be a very serious issue for us, and we will be working a lot with the countries on these impacts. So, really--this is just to give you some highlights--this is where we are right now in assessing the vulnerabilities that the MENA Region has. And just to close, one final thing is that overall, we have seen that countries, even without oil and even facing the high fuel prices and food prices, have been able to grow. They have grown because they have reformed; they have taken many bold economic reforms. And the fear definitely is that the crisis, particularly the financial crisis we are seeing, can slow down progress in economic reform, and that will be very unfortunate, because it is necessary for growth now and in the future. Thank you very much. MR. STEELE: Thank you very much, Ritva. Now, we will be happy to take any questions that you may have--and please announce your affiliation when you ask a question. Ma’am, please. QUESTION: Rigan Rodrigues [ph.] from Reuters. I believe you mentioned that not all countries’ wealth has increased as a direct result of higher oil prices. Oil prices have been falling tremendously in the last two or three months. I wonder what is going to be the impact going forward, if you have analyzed that, and perhaps if you even have a forecast of where you see oil prices going. MR. STEELE: Shall we take them one at a time, or do you want to-- MS. REINIKKA: Maybe I’ll start, and then I’ll call upon Farrukh, my colleague, also. Of course, the oil prices have been very high, and there has been a lot of wealth coming from that to the oil-producing countries, but I guess my point was also that it is the other countries as well that have been able to grow. We do have--it is not we who do it--but at the World Bank, we do have a forecast, and I think the forecast--we just heard today our main forecaster talk about it to the Arab Governors--I think right now, $75 per barrel was their forecast. But also, that forecast is obviously--things are changing, the growth forecast iterates and so forth. But a couple of weeks ago, we had a very clear--all the people who work on commodities had a fairly strong view that it will come down but stay higher than what we have seen in the past. But I don’t know--that’s probably what we can say now. The situation is--let me just give an example to try to understand the oil figures. The reduction in oil demand in the U.S. has been as much as the whole consumption of India, right these last few months. So the demand has really eased, and depending on how the demand behaves in the future, that will have a big impact on oil price. MR. STEELE: Farrukh? MR. IQBAL: I would simply add that if you just look at the Region as a whole, the rise in oil prices in the last few years has been a substantial driver of regional growth even though the country-by-country experience has varied. Therefore, if the price of oil goes down substantially, then indeed, the average growth in the Region again as a whole will come down. In this report, we have also examined some of the linkages among the economies, and we found that trade linkages have increased in recent years and that remittances have again picked up--now I am referring only to the period between 2002 and 2007. So there have been all of these things which have essentially been based on the rising price of oil. If the price of oil goes back, then we would expect an unwinding of some of those impacts, and we don’t have a clear sense of exactly how far that will go, but that depends on the price of oil. QUESTION: [Inaudible; no microphone.] MS. GRESSANI: That’s the average for 2009 that is being talked about now, but again I would like to stress, as Ritva said, that this is a highly tentative forecast which--but it would be an average for 2009. MR. STEELE: The next question--yes, please. QUESTION: I have a question, please. You mentioned that growth in the MENA countries is over 5 percent, and I am talking in specific about Yemen. In Yemen, the growth was over 5 percent as well, whereas also, the poverty rate increased over 5 percent. So how could the poverty rate increase at the same time where the growth also increases? MR. STEELE: Farrukh? MR. IQBAL: We referred to 2007; the regional growth rate in 2007 was 5.7, regional average. For MENA in 2007, it is 3.1, not 5; in 2006, it is 3.2. So Yemen has actually been a relatively poor performer within the Region. And in the last few years, certainly compared to 2005, the growth rate in Yemen has actually come down. As a result, I am not surprised that we are seeing some things on the poverty side that suggest increasing poverty. But I am not familiar with the poverty numbers that you are quoting, so I would have to look into that as well--but your growth rate numbers do not match ours. QUESTION: But the poverty rates are increasing, so how could [inaudible]? MR. IQBAL: Well, you are taking it on a year-to-year basis. That’s not usually how we do it. There may be various other aspects that are going on. QUESTION: [Inaudible, no microphone.] MR. IQBAL: Okay. Again, as I said, I’m not familiar with the poverty numbers, but in general, if you are saying that the poverty numbers have been rising in the last five years, it could be due to the fact that the average growth rate in Yemen has been declining in the last few years. So we are matching a change with a change. The change in growth has been negative. The change in poverty accordingly has gone up. So that could be one of the reasons why. Now, having said that, it is also important to be very clear about the components of poverty change. We have found, for example, in many countries that average poverty has come down--Egypt is one example--but if you look at the bottom half of the group who is poor, you may actually see some distress rising. And in Egypt, the bottom 2 percent have seen their standard of living drop in the last three years even though on average poverty has come down. So it is useful also to examine the components of the poverty group. MR. STEELE: And Ritva Reinikka has some additional remarks. MR. REINIKKA: Just one thing to add on to what Farrukh said. I spoke a little bit about the food price crisis, not much, but Yemen is a real case-in-point where the food prices have, at least in the last year-and-a-half or last year, affected quite a lot. I think we have actually done quite thorough and detailed poverty work in Yemen, and we were able to use that and look at the impact of the food prices, and we estimate that there was a 6 percentage point increase in the poverty range because of the food prices, because poor people’s consumption baskets, as we call, them, or what they consume, food is a very big part of it, and a very large part also in Yemen is imported grains. So food prices--a longer period, unfortunately, I am also not familiar with all the details--I should probably know more of that--but in the last year, definitely, the food prices really hit the poverty situation, because it is such a big share of the consumption of poor people--in Yemen in particular. MR. STEELE: And it’s the same story for Djibouti as well. That has been very severely impacted in our Region and has also probably seen an increase in poverty in the last year because of the increase in food prices--which is the other poorest country in the Middle East and North Africa Region, together with Yemen. Are there any other questions? [Pause.] MS. REINIKKA: Maybe you don’t even want to know this, but I want to add that we have acted very decisively to assist Yemen also to alleviate the food crisis, or the price hit that the poor in particular have suffered, so we do have an operation from this Food Crisis Response Facility for Yemen which targets poor people, basically, the social safety net system, so we have tried to really respond to that. But it’s really a true example of how you can wipe out gains in poverty reduction that are difficult to get through an issue like food prices and their dependence on [inaudible.] MR. STEELE: Any further questions? Last chance. [Pause.] MR. STEELE: All right. Thank you very much for coming; most appreciated. And if you have any follow-up, I’m sure you can pigeonhole--I know that Daniella Gressani has to go immediately--but you can pigeonhole Ritva and Farrukh if you want further conversations; I’m sure they will be happy to talk privately with you if you need that. MS. REINIKKA: Yes. MR. STEELE: Thank you very much indeed for coming and thank you again.
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