Middle East/Africa First Quarter 2012 Economic Review
Thomas White International
April 20, 2012
IMF expects MEA region’s growth to lag behind world economic growth
While the Middle East and Africa (MEA) region continues to weigh the impact of the tumultuous Arab Spring uprisings, the area is facing against another challenge yet again. In addition to the existing domestic instability, a strained external environment (the Euro debt crisis) is proving to be a major threat to the region’s trade, tourism, remittances and other exports receipts. According to the World Bank’s Global Economic Prospects report, the economic recovery seen in Morocco, Jordan and Tunisia in late 2011 is likely to stall in 2012. What’s more, Morocco, one of the largest importers of wheat, continues to battle ballooning imports bills. As for Jordan, disrupted gas supplies have exacerbated the Hashemite Kingdom’s energy bills. Jordan imports around 95% of its energy needs.
Elsewhere, the possibility of downside risks from the ongoing disruptions in Syria spilling over to its neighboring countries looms large. According to a senior World Bank official, investments have been held off in countries including Tunisia, Libya and Egypt as they continue to mend their economies after the ouster of their dictators. Egypt remains beleaguered by political uncertainty while its key industries continue to grapple with poor demand. Adding to the woes has also been quickly waning foreign reserves, which are a critical component of the economy.
Decelerating global growth mainly due to the ongoing sovereign debt crisis in the Euro region has dented the trade environment in South Africa and Israel. Wide budget and trade deficits, a high unemployment rate, and the threat of strikes remain South Africa’s foremost concerns. On the other hand, Israel remains upbeat about its growth prospects in the year 2012 thanks to positive domestic economic indicators.
According to the International Monetary Fund (IMF), growth in the Middle East and North Africa (MENA) region is projected to be 3.2% in 2012 before accelerating to 3.6% in 2013, lagging behind both global as well as emerging markets growth expectations. While the emerging economies are anticipated to expand 5.4% in 2012, the world economy is expected to grow 3.3%, according to the IMF. The IMF has cut South Africa’s growth estimates to 2.5% from an earlier projection of 3.6% against the backdrop of fragilities in the Euro region.
At a Glance
- South Africa: To aid economic recovery, the South African Reserve Bank held steady its key repo rate at 5.5%, despite the expectation that inflation will remain above its target range of 3%-6% in 2012.
- Israel: In light of favorable economic indicators, the Bank of Israel revised its 2012 growth estimates to 3.1% from an earlier projection of 2.8%.
- Egypt: Given the ongoing political uncertainty and continued financial strain, Egypt’s GDP is expected to expand 1.6% in 2012, as noted by a Reuters report.
- Morocco: The finance ministry expects Morocco’s GDP to expand 3%-4% in 2012 compared to an estimate of 4.2% mentioned in the budget, mainly due to repercussions of the Euro debt crisis.
- Jordan: While the energy crisis remains a concern, economic and political reforms chalked out for the year are expected to improve Jordan’s growth prospects in 2012.
South Africa: Weak demand to stem 2012 growth
According to the SA Chamber of Commerce and Industry (SACCI) trade activity index (TAI), trade activity gained more momentum in February after a slow start in January 2012. The TAI rose to 57 points in February, mirroring a gain of 9 points due to an all-round improvement in index components comprising sales volumes, inventory levels, new orders, supplier deliveries, and employment. The trade environment had suffered considerable setbacks in the final quarter of 2011 before recovering to 48 points on the TAI in January 2012.
What’s more, the SACCI’s business confidence index (BCI) gained 2.4 index points to 99.5 in February, the best since June 2011. Business confidence this year is expected to be buoyed further by measures outlined in the National Budget for 2012 such as additional allocations for industrial and economic development, initiatives to enhance employment and a boost to infrastructure spending. Yet, the SACCI has expressed concerns over the impact of protest activities and rising oil prices, which could mar business optimism.
The South African Reserve Bank held steady its key repo rate at 5.5% to aid economic recovery. The central bank expects inflation to remain above its target range of 3%-6% in 2012, peaking to a high of 6.6% in the second quarter before falling within the target limit in the initial quarter of 2013. According to Statistics South Africa (Stats SA), inflation slowed to 6.1% (year-on-year) in February from 6.3% in January. Yet, according to a Bloomberg report, inflation is likely to remain at elevated levels due to increasing food, fuel and administrative costs.
The FNB/Bureau for Economic Research (BER) consumer confidence index (CCI) remained unchanged at +5 index points in the initial quarter of 2012 from the final quarter of 2011. The report also noted that consumer purchasing power is likely to be constrained in the coming months due to rising inflation. Standard Bank anticipates household consumption expenditure to drop to 3.5% in 2012 versus a 5.0% rise earlier in 2011.
Elsewhere, a cut in the budget deficit target for the current fiscal year through March 2013 announced by the finance minister Pravin Gordhan is expected to ease investors’ concerns over South Africa’s accelerating debt. The finance minister expects the budget deficit to decrease to 4.6% of the GDP versus an earlier estimate of 5.2%. Reduced spending on wages and a rise in taxes are expected to keep the deficit in check. Further, the government is also keen on boosting infrastructure spending to enhance economic growth and create employment.
The unemployment rate eased to 23.9% in the fourth quarter of 2011 from 25% in the third quarter, as noted by Stats SA’s Labor Force Survey. Jobs were added in the trade, social services, manufacturing sectors. Yet, the report noted that the current economic growth remains grossly insufficient to reduce unemployment, as an economic expansion of 7% is needed to make a significant impact. Africa's largest economy has lost around a million jobs as it slipped into its first recession in almost twenty years in 2009.
Meanwhile, a widening trade deficit also remains a concern. Data released by the South African Revenue Service, showed that South Africa recorded a trade deficit of $1.8 billion in January, the highest in three years, as a surge in machinery imports completely dwarfed anemic exports. According to the National Treasury, the current account deficit is expected to widen to 4.3% in 2012 from an earlier estimate of 3.3% in 2011. Exports are likely to remain subdued as the debt crisis in Europe, a region that purchases over 30% of South Africa’s manufactured goods, continues to dampen demand.
South Africa ended the year 2011 on a rather encouraging note as the nation’s fourth quarter GDP growth beat analysts’ forecast. According to Stats SA, the sub-Saharan country’s GDP accelerated to 3.2% (quarter-on-quarter) in the final quarter of 2011, exceeding the growth estimate of 3.1% polled by Reuters economists. While weaker global demand continued to weigh on the primary sector’s lackluster performance, economic growth was enhanced by improved performances in the manufacturing and tertiary sectors, in particular.
Meanwhile, in the equities market, South Africa’s stock exchange (Johannesburg Stock Exchange (JSE) turned out to be one of the better performers, as noted by Moneyweb, South Africa’s leading online source of investment information. In Moneyweb’s early January report, the JSE’s benchmark index returns of -0.59% in 2011 compared with investors’ losses of -52.9% on the Athens stock exchange and -18.3% on the Eurostox 50. Nicky Newton-King, the new CEO of the Johannesburg exchange, commented that the JSE is looking to provide increased access to African companies and other products as a springboard to new investments.
Still, Nedbank economists are wary of the economy’s vulnerability due to uneven growth. While the consumer economy has picked up a bit of momentum, the production side continues to trudge along. According to Stats SA’s data, there was a marked slowdown in January retail trade sales, which grew 3.9% (year-on-year) versus an anticipated increase of 7.5%. A slower growth in retail sales is expected to continue in the coming months due to the higher prices of food and petrol, and a high household debt to disposable income ratio of around 75%.
What’s more, the manufacturers are likely to face headwinds in the form of weaker global and domestic demand. With this, South Africa’s finance minister Pravin Gordhan has trimmed the economy’s GDP growth to 2.7% in 2012, compared to an earlier projection of 3.4%.
Israel: Bank of Israel raises 2012 growth forecast
The Bank of Israel left its key interest rate unchanged at 2.5% for the month of April 2012. This is the second consecutive month that the rate has been held steady after a 25 basis-point cut earlier in January. The central bank has thus far slashed its key benchmark interest rate by 75 basis points since September 2011. According to the bank’s monetary council, the future path of the interest rate will be determined by Israel’s economic growth, the inflation environment, exchange rate movements of the shekel, and monetary policies of other major central banks.
Israel’s inflation clocked in at 1.7% in February 2012, the slowest in around four years, as noted by the Central Bureau of Statistics (CBS). This was due to a moderate economic growth and the effect of protests against high prices that gripped the nation earlier in 2011. The inflation rate met Bloomberg’s economists’ survey estimates. Prices remained unaltered for a third month in a row in February. According to the CBS, a fall in the price of internet services and automobiles offset increases in the cost of gasoline and fresh fruit. However, electricity costs in Israel are on a rise due to the use of more expensive alternative fuels following interrupted gas supplies from Egypt. This, in addition to higher global fuel prices, is expected to accelerate inflation in the coming months, as noted by Bank Hapoalim’s economics department. A CBS report noted that the prices of electricity and gasoline had risen 13% and 7.3%, respectively, by the end of 2011.
Still, Israel’s widening trade deficit remains a concern. A CBS report revealed that the trade deficit increased to $2.4 billion in February from $2.2 in January due to weaker global demand. The trade deficit stood at $866.2 million in the comparable period a year ago. According to a report by an Israeli business daily, the export-import ratio fell to 59% in February, from 74% in 2011 and 83% in 2010.
Elsewhere, the Purchasing Managers Index (PMI) measured by Bank Hapoalim and the Israeli Purchasing and Logistics Managers Association, continued to trend below 50 points for a fourth consecutive month in February. Yet encouragingly, the PMI had risen by 8.2 percentage points from the January index level to 44.5. According to Bank Hapoalim’s economists, production increases in high-tech industries have largely been offset by stagnation in other sectors. This has resulted in index levels below 50 points, which indicates the divide between activity expansion and contraction.
Encouragingly, Israel’s tourism industry witnessed a record level of tourists’ arrivals in the month of February. According to the Ministry of Tourism, there were 232,000 visitor arrivals, which was 6% higher than in February 2011, and 4% higher compared to February 2010, which held the previous record. However, the impact of tensions along the Gaza border on the industry in the coming months remains to be seen.
What’s more, Bank Hapoalim’s and TNS Teleseker’s Israeli Consumer Confidence Index (CCI) improved 0.6 points to 130.6 in February. The CCI stood at 129.2 points in the comparable period a year ago. The report noted that the CCI has been relatively stable at fairly high levels thanks to favorable labor market conditions. Notably, a CBS report noted that Israel’s unemployment rate had fallen to a historic low of 5.4% in the final quarter of 2011 from 5.6% in the preceding quarter. The unemployment rate for the year 2011 was 5.6% versus 6.6% in 2010.
Israel ended 2011 registering a GDP growth of 4.7%, according to a CBS report. Exports, which account for over 40% of economic activity, rose 4.9%, while imports were higher at 10.6%. Government debt at the end of 2011 amounted to $169.9 billion compared to $163.2 billion in 2010, as noted by the Ministry of Finance. The nominal growth was mainly due to an increase in inflation and positive net funding. Yet encouragingly, government debt as a percentage of GDP reduced to 73.3% from 74.9% in 2010, as noted by a CBS report.
The Bank of Israel revised its 2012 growth estimates to 3.1% from an earlier projection of 2.8%, in light of favorable economic indicators including business trend expectations, imports and services exports. The Bank also expects the inflation rate to average around 2.6% in the next four quarters, well within the target range of 1%-3%.
Egypt: Subdued growth expected in fiscal year 2012-2013
One year on and Egypt’s transition to democracy continues along a rocky path. Following the parliamentary election held in 2011, the people of Egypt eagerly await the drafting of a new constitution and presidential elections. However, these processes are riddled with problems. There are grave disagreements surrounding the election of members into the constituent assembly, which would be responsible for drafting the new constitution. For the presidential elections, set for May 23-24, support for any particular candidate is still unclear. While the power struggle remains between the military, the Islamists and the protestors who started the uprisings, the ruling military Supreme Council of the Armed Forces (SCAF) is seen to have strongest hold, as noted by a Middle East daily. According to the daily, it is believed that generals of the SCAF are likely to support a candidate who would be military-friendly or from a military background. What’s more, the ruling military council has vowed to cede its powers to the civilian rule by June-end.
Still, Egypt’s frail economic condition remains a grave concern. The country’s budget deficit estimates for the year ending in June 2012 have been raised to $24 billion (around 8.7% of the GDP) from an earlier projection of $21.4 billion, due to election expenses and social spending, as noted by a Middle East and North Africa (MENA) news agency report. What’s more, around 80% of Egypt’s foreign currency reserves have been eroded in the course of the current transitional period, according to the finance minister. The central bank data showed that foreign currency reserves had fallen to $15.5 billion by February-end from $36 billion at the start of 2012, which is likely to cover three months of import needs.
In a bid to save the economy from collapsing, the government is seeking a $3.2 billion loan from the IMF, according to a Reuters report. In addition, the housing ministry is expected to launch a plan where plots of land in several satellite cities near Cairo would be up for sale to Egyptians living abroad. The government expects to raise $15 billion through this scheme over the next four years. What’s more, the government is also looking into raise foreign currency by selling certificates of deposits to Egyptians living abroad in addition to offering Islamic sukuk bonds to foreign investors, as noted by a Reuters report.
Meanwhile, Suez Canal revenues, a vital source of foreign currency dipped to $381.4 million in February from $388.7 million in the comparable period a year ago, as noted by the Egyptian Information Portal. The Suez Canal Authority reported a 1.8% drop in vessel traffic, and also a fall in passenger ship traffic due to pirate attacks in the Gulf of Aden, hurting the cruise industry. Revenues from the Suez Canal were higher in January 2012 at $445.8 million.
The tourism minister expects renewed growth of the tourism industry in 2012 following a troubled 2011, which saw a 30% drop in revenues to $9 billion from 2010 levels. Tourism is a critical component of Egyptian economy, which accounted for 7.3% of the GDP last year, as noted by the World Tourism and Travel Council (WTTC). Further, the sector’s total contribution including its indirect impact on other sectors constitutes around 15.8% of the GDP, according to the WTTC. The tourism ministry is focused on assuring its visitors that the country is safe and secure and tourist-friendly policies are expected to be maintained by any new government regimes.
The Egyptian economy inched up by an annualized 0.4% in the final quarter of 2011, mirroring a slight improvement after the impact of the historical uprising, according to the parliament’s economic committee. An Egyptian daily newspaper reported that GDP growth is expected to be 2% for the financial year 2011-2012 ending in June. Yet the news daily also noted that this growth rate will be insufficient to curb the unemployment rate, which rose 0.5% to 12.4% in the last quarter of 2011.
According to a Reuters poll, growth in the coming year is expected to remain lackluster due to the ongoing political saga in addition to soft global demand. Polling also forecasts that Egypt’s GDP expansion for the year 2012-2013 starting July 1 will touch 1.6% and improve to 4% in the following year.
Meanwhile, the Egyptian pound is projected to remain under pressure, according to a Gulf news daily report. The currency is expected to depreciate to 6.30 pounds to the U.S. dollar in 2012-2013 and 6.75 pounds in 2013-2014. With this, the report goes on to forecast a surge in inflation, increasing to 10% in the 2012-2014 time period. According to official statistics agency data, inflation rose to 9.2% in February from 8.6% in January 2012.
Morocco: Finance ministry lower 2012 growth estimates
To aid a sluggish economy, Morocco’s central bank, for the first time in three years, cut its key interest rate, trimming it down by 25 basis points to 3.00% in March. The central bank governor noted that a steep drop in agricultural produce and the impact of the Euro-zone debt crisis has dented economic activity. In addition, soaring energy costs and rising wheat imports resulted in a 27.6% surge in the country’s trade deficit in February, as noted by a central bank report. The North African country’s trade deficit stood at $4.5 billion versus $3.1 billion in the comparable period a year ago. According to the central bank, a worsening of the trade balance has been mainly due to a 16% rise in imports, which dwarfed a 4.6% increase in exports.
A widening current account deficit, in part due to a surge in trade deficits, remains a concern. According to government ministers, Morocco might dip its toes into the international bond market in 2012, considering its wide current account deficit had increased to 6.5% of the GDP in 2011 versus 4.3% in 2010. What’s more, the debt/GDP ratio increased to 52.9% in 2011 from 50.3% in 2010. Yet, according to the finance minister, the current account deficit could be financed either internally or with the help of the European Union, the World Bank and the African Development Bank.
A Reuters report also noted concerns about the wide trade deficit denting the nation’s foreign currency reserves, given that Morocco’s currency is not fully convertible. Foreign currency reserves, which stood at around $20 billion by 2011-end and the lowest since 2001, are capable of covering just over five months of imports requirement.
Meanwhile, unfavorable weather conditions have taken a toll on the nation’s key agricultural sector. According to the central bank governor, the cereal harvest in 2012 is expected to be only 3.8 million tons, a 55% drop from the 2011 level. This could lead to a surge in cereal imports, and in turn widen the country’s balance of payments. Agriculture accounts for 14% of the country’s output and employs 40% of Morocco’s workforce of 11 million, as noted by a Reuters report. Encouragingly though, exports of phosphate products jumped 29% to $250.9 million, as noted by a central bank report.
Trade, tourism receipts, migrant remittances and foreign investments are vital cogs of the Moroccan economy, which relies heavily on the Euro-zone to keep the nation’s economic engine humming. Trade figures have started to mirror the impact of slowing growth in Europe, which accounts for around 60% of Morocco’s export revenues, as noted by a Reuters report. According to the report, European Union (EU) imports of Moroccan goods grew 7.8% in 2011, slowing from 19.8% growth in 2010. In other news, the tourism department has expressed concerns over slowing tourist numbers in Marrakech particularly from Italy, Spain and France, that could spell a difficult year ahead. While Europe provides over 80% of tourist footfalls, France alone accounts for around 50% of foreign tourism, as noted by a Moroccan financial daily. Against the backdrop of Arab Spring uprisings, Morocco’s tourism sector, which accounts for around 10% of the GDP, grew 1% in 2011, as noted by the tourism department.
Increased government spending has thus far has cushioned Morocco’s economy from the repercussions of the Arab Spring turmoil and European sovereign debt crisis. Yet, migrant remittances are extremely vital to the economy as indefinite government spending is not sustainable. According to a Reuters report, remittances to the tune of $7 billion in 2011 brought in more hard currency than that of phosphate exports, which is the top export revenue generator. The report noted that, given the European economic slowdown, migrants based in France, Spain and Italy, in particular are the most vulnerable. Migrant remittances for the period January 2012-February 2012 stood at $1.06 billion versus $988.2 million a year ago.
Meanwhile, the newly elected Moroccan government is keen on reining in the budget deficit to 5% of GDP in 2012, as noted by a Reuters report. The state’s budget deficit jumped to 6.1% of GDP in 2011, on the back of higher public spending for wages and subsidies to maintain stability amidst the Arab Spring regional turmoil. Adding to the pressure has been the slowdown in the European region that has taken a bite out of the government’s taxes and customs revenues, as well as the foreign currency reserves, according to the report. The government is also looking to revamp the compensation system (subsidies) by capping the expenditure to 3% of GDP in 2012.
The finance ministry expects Morocco’s GDP to expand 3%-4% in 2012 versus an estimate of 4.2% mentioned in the budget. The downward revision comes after bad weather marred agricultural production and the Euro debt crisis dented Morocco’s tourism and export revenues. The central bank’s GDP estimates are lower at 2%-3%.
Jordan: Energy crisis continues to choke the economy
According to Jordan’s central bank report, tourism revenues, a critical component of the economy, showed a slight uptick in growth in the initial two months of 2012, despite a drop in visitors’ footfall. The report noted a small rise of 0.2% in revenues to $467.8 million, while the total number of visitors fell 6% to 919,859 from 980,359 in the comparable period a year ago. Among the major tourist sites, the Baptism Site witnessed a 38% slump in visitors followed by Petra at 26.8%. According to the tourism ministry, the Arab Spring uprisings in 2011 cost the sector $1 billion.
The European economic slowdown has considerably affected Jordan’s tourism sector as well. Looking ahead, though, the government is exploring new plans and programs that would boost the sector’s contribution. A number of special activities have been lined up for the year, with the revival of the Jerash festival, and the Petra celebration marking the 200th anniversary of the discovery of the antiquity. What’s more, the tourism board is planning to ramp up marketing activities in the emerging market countries, promoting medical, religious, wellness and educational tourism among other strategic goals. In a bid to regain its competitive edge in the area of medical tourism, which slumped during the regional turmoil, the Hashemite Kingdom is expected to host two major international health expos this year. Jordan is one of the most sought after medical tourism destinations in the MENA region, according to the World Bank.
Still, widening trade deficits remain a concern. The turn of the New Year saw Jordan’s trade deficit skyrocket 63% in January from a year ago, mainly due to ballooning imports. According to the Department of Statistics (DoS), imports escalated 32.9% to $1.91 billion as opposed to a 4.5% decline in exports to $618.29 million. The Kingdom’s key trading partners include member countries of the North American Free Trade Agreement (NAFTA) and Greater Arab Free Trade Agreement (GAFTA), as well as non-Arab Asian countries including China and European nations including Bulgaria.
Alongside, the energy crisis in Jordan showed no signs of abating, as the Kingdom heralded 2012 with a historically high $3.85 billion energy bill, as noted by official data. According to the DoS, imports of crude oil, oil derivatives and electricity surged 97% to $718.62 million in January. In addition to rising demand and the cost of fuel, Jordan is also facing a drop in the pipeline supply of natural gas from Egypt. Political upheaval in Egypt has resulted in frequent sabotage of the gas pipelines. According to Jordan’s Electricity Regulatory Commission (ERC), fuel shortages cost the country around $1.42 billion in 2011.
According to the finance minister, Jordan’s budget for the year 2012 has been estimated at $9.6 billion with a budget deficit of $1.5 billion. An increase in debt over the past three years has mainly been due to accelerating electricity, gas and other energy prices on the global market. What’s more, the government also announced a hike in the electricity tariff in the coming months to recover the losses incurred in 2011 due to sabotage on the gas pipelines.
To alleviate Jordan’s energy woes, the economic policy forum has suggested several solutions including diversification of the Kingdom’s imported fuel resources. Other recommendations include developing electricity generation plants using renewable energy, building wind and solar plants, and establishing storage stations to stockpile reserves to last over four to six months. Among other things, experts of the economic policy forum are keen on policies surrounding energy consumption, the removal of taxes and custom duties on energy-efficient devices, and the wider use of solar heaters.
Following a difficult 2011, economic and political reforms lined up for the year are expected to improve Jordan’s growth prospects in 2012. Still, Standard & Poor’s (S&P) expects the Hashemite Kingdom’s current account deficit to widen to 7.3% of GDP by 2012 end, albeit with a positive long term outlook. The International Monetary Fund (IMF) has pegged Jordan’s GDP growth at 2.9% for 2012.
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