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Middle East/Africa: Regional Economic Review 4Q 2012

January 18th, 2013

by Team

of Thomas White International

Continued Political Turmoil Dents Economic Recovery

According to the International Monetary Fund’s (IMF) Regional Economic Outlook report, countries in the Middle East and North Africa (MENA) region are expected to grow at different rates. Oil exporting nations are cashing in on high energy prices and production, and are projected to expand 6.6 percent in 2012 before tempering in 2013. On the other hand, oil importers such as Jordan, Morocco and Tunisia among others are expected to clock growth just over 2 percent as the slowdown in the world economy and political tensions continue to hinder expansion for some of these countries in transition.

Recently, Egypt’s economic recovery suffered a setback when certain political moves made by the newly elected President fueled massive protests and demonstrations, reminiscent of the uprisings back in 2011. Elsewhere, Morocco is grappling with falling foreign currency reserves and a high unemployment rate. However, with the effects of the subsidy reforms kicking in, the Kingdom anticipates improved growth in 2013.

Meanwhile, Jordan is caught in a wave of widespread protests calling for speedy reforms and even ending the King’s rule. The country is also facing an acute water shortage and the economy has been weighed down by widening fuel import bills. Despite losing a bit of growth momentum due to the impact of a global slowdown, Israel is positive about its growth in the current year.

According to the IMF report, economic growth in sub-Saharan Africa has remained positive despite slower growth worldwide. Still, expansion in the region is significantly varied with low-income countries registering better growth and middle-income countries like South Africa, which trail the global market, showing slower growth. Widespread labor strikes in the mining sector have severely dented production and hindered South Africa’s economic expansion. Although sub-Saharan Africa is projected to grow 5.25 percent in 2013, South Africa’s growth is expected to remain sluggish.

At a Glance

  • South Africa: Growth in 2013 is expected to remain subdued due to the impact of mining strikes, a widening budget gap and a continuing high unemployment rate.
  • Israel: The Bank of Israel lowered its key interest rate for January 2013 to 1.75 percent from 2 percent to control inflation and support growth and achieve financial stability.
  • Egypt: Egypt’s economic situation worsened, depleting foreign currency reserves, as the country struggles to stabilize amid political tensions.
  • Morocco: Given the difficult environment, the IMF expects GDP growth in 2012 to slow to 3 percent, although non-agricultural expansion is likely to be higher at 4.5 percent.
  • Jordan: In addition to financial woes, the country is witnessing political unrest as the government’s decision to cancel fuel subsidies and hike prices has resulted in nationwide protests, an Arab news agency noted.

South Africa: Pressure Mounts on Economy

The South African economy continued to trudge along, growing at its slowest pace since the recession in 2009, Bloomberg reports. The economy was severely impacted by violent mining strikes that gripped the nation a few months ago and consequent wage settlements that further exacerbated a weakening in the economy. Strikes at the country’s gold and platinum mines slashed mining output by over $1.1 billion in 2012, and are also expected to cut 50 basis points off economic growth, as noted by the National Treasury. In addition to the mining crisis, the Bloomberg report also mentioned a slump in the overall economic momentum of the African continent’s largest economy.

In addition to slower growth, a widening budget deficit remains a concern. The finance minister stressed that the increase in the budget deficit was due to a subdued economic growth and not higher government spending. A Reuters report noted offshore investors’ concern over a possible rise in government spending needed to calm social tensions. However, the finance minister assured that there would not be any additions to the existing levels of spending. In line with a Reuters’ poll of economists, the Treasury has forecast a slightly higher budget deficit for 2012-2013 at 4.8 percent of GDP compared to an earlier estimate of 4.6 percent. Lower than anticipated tax revenues collection due to a weak economy has in turn led to a higher-than-expected budget deficit.

Meanwhile, the finance minister has said that various government departments would rework the usage of available funds worth $4.6 billion while the Treasury would draw on its reserves without having the government increase its spending over the next three years. The Treasury expects 2012 tax revenue collection to be $600 million less than an earlier estimated value. Adding to this, mineral and petroleum royalties are expected to decline due to a fall in commodity prices and the mining strikes. The Treasury anticipates that the 2013-2014 budget gap will be 4.5 percent of GDP before lowering to 3.1 percent in 2015-2016.

Still, government debt is expected to increase from 35.7 percent of GDP in 2012 to 39.2 percent of GDP in 2015-2016, before declining going forward. The finance minister aims to stem the growth of debt by reining in government spending and improving revenue collection. According to the central bank, the rise in spending is showing signs of a slowdown with lower inventory accumulation particularly in the strike-crippled mining companies. Producers had to fall back on inventories to satisfy demand in the light of disrupted production due to labor strikes. Elsewhere, weaker growth in household spending and higher debt levels were offset by an equivalent growth in disposable income, thereby steadying the household debt-to-income ratio at 76 percent, as noted by the South African Reserve Bank (SARB).

Encouragingly, official data showed that the current account gap narrowed considerably in November 2012 from record levels in the earlier month. The deficit narrowed over 60 percent from its October levels, when metal exports plummeted and widened the trade gap. An increase in the export of precious and semi-precious stones and metals, in particular, bridged the trade gap. Adding to this, a decrease in the import of machinery and electrical appliances, aircraft, vehicles, vessels, and mineral products helped reduce the current account deficit, as noted by official data.

Elsewhere, the SARB has left its benchmark interest rate unchanged at 5 percent since July 2012 as a weaker currency and higher food and fuel prices increased inflation. That said, inflation has remained within the reserve bank target range of 3 percent-6 percent for the last six months, as reported by Bloomberg. Encouragingly, the reserve bank noted a higher rate of growth in credit in the month of November 2012. Credit extension to the private sector (PSCE), total loans and advances, together with total domestic credit extension, all recorded higher growth. Further, the SARB also reported an increase in its international liquidity position.

Still, Statistics South Africa (Stats SA) noted that the unemployment rate remains stubbornly high at 25.5 percent, with domestic households and the mining sector experiencing increased job loss mainly due to labor strikes. The finance minister opined that 7 percent GDP growth was needed to control the jobless rate. Elsewhere, the consumer confidence index, measured by the First National Bank (FNB)/Bureau for Economic Research (BER), fell to a three-and-a-half-year low in the final quarter of 2012, as consumers’ outlook for the national economy and their own financial prospects deteriorated.

The SARB has trimmed South Africa’s 2013 GDP growth to 2.9 percent from an earlier projection of 3.4 percent.

Israel: Positive Growth Outlook for 2013

According to the Central Bureau of Statistics (CBS) Israel’s economy ended 2012 clocking in 3.3 percent GDP growth, one of the lowest rates in the last decade. This compares with 4.6 percent growth in 2011 and 5.0 percent in 2010. The CBS report noted that the slowdown in expansion was mainly due to a sharp fall in exports and weakness in the business sector, investments and private consumption. Still, Israel’s growth rate was over double the 1.4 percent average growth of countries in the Organization for Economic Co-operation and Development (OECD) countries. Israel’s per capita growth was also one of the highest among the OECD member countries. However, its GDP growth lagged behind those of developing countries such as India and China, as noted by the CBS.

The finance ministry reported that the budget deficit had jumped to 4.2 percent of the GDP in the twelve months ending November 2012, exceeding the target of 3.4 percent set by the cabinet. The deficit increase was mainly due to lower than expected tax revenues, particularly from indirect taxes and increased defense-related spending. In November alone, defense spending amounted to nearly $210 million as the Israel Defense Forces launched Operation Pillar of Defense in the Gaza Strip. The Knesset Finance Committee approved a budget cut for its ministries totaling $199.8 million. The finance ministry intends to use the funds made available by the cut to check illegal immigration from Sinai, and prepare for future contingencies.

Meanwhile, treasury officials anticipate the budget gap to reach $5.2 billion after the elections, scheduled to be held on January 22, 2013. The date of these elections was moved up from October as the Prime Minister failed to a find a majority to approve the 2013 budget and opted for elections. In the absence of an approved state budget for 2013, the government is operating on an austerity budget within the fiscal framework of 2012 budget figures. The finance ministry expects the deficit gap to widen further in 2013 as the country is poised to still fall short of revenues despite an increase in the value-added tax and taxes on cigarettes and alcoholic beverages over the last few months.

Elsewhere, Bank Hapoalim and the Israeli Purchasing and Logistics Managers Association’s Purchasing Managers Index (PMI) continued its downward trend for the sixth consecutive month in November 2012. Although there was a slight uptick, the index remained below 50 points, which marks the distinction between expansion and contraction. Bank Hapoalim economists noted a fall in exports in several sectors in addition to a continued decline in the non-high-tech industrial production. They further opined that the slump in the manufacturing sector would persist in 2013 as output hinges on global economic growth, which is likely to remain subdued in the near future.

Encouragingly, Bank Hapoalim’s and TNS Teleseker’s Israeli Consumer Confidence Index for November 2012 showed an upturn after four months of decline. Bank Hapoalim economists pointed out that the end of the Pillar of Defense operation in Gaza might have helped restore calm and buoyed customer sentiment. However, they also noted a slowdown in demand for private consumption and pointed out that the downtrend in the index might not end just yet.

The Bank of Israel decided to lower its key interest rate for January 2013 to 1.75 percent from 2 percent in December 2012, a move to control the inflation rate within the set target range of 1 percent-3 percent over the next twelve months and support growth and financial stability. While the bank noted that there was negligible inflation pressure at present, weak growth, a strengthening currency and the impact of moderating global economic activity on the local economy drove the decision to lower the interest rate.

On an optimistic note, the finance ministry expects the GDP to expand by 3.5 percent in 2013, due to the start up of natural gas production. The ministry expects gas production to account for 0.8 percent of the GDP in 2013 and 1 percent in 2014.

Egypt: Economic Struggle Deepens

The iconic Tahrir Square was haunted yet again by a series of violent protests. Dissenters opposed the President granting himself additional powers beyond court review and a hurried vote to approve a draft constitution by the leaders of the Islamist-led assembly, the New York Times reported. In the wake of massive demonstrations, President Mohamed Morsi tried to tone down his proclamation of power and the contentious constitution was put to referendum. After two rounds of voting on December 15th and 22nd, the constitution won 64 percent of the vote amid a low turnout and widespread discontent.

Meanwhile, the path ahead for Egypt’s economy remains challenging. Dwindling foreign currency reserves have exacerbated the deepening economic crisis. According to the Central Bank of Egypt (CBE), foreign currency reserves fell by $21 million and net international reserves totaled $15.014 billion at the end of December 2012. The present level of reserves covers only three months’ worth of import requirements. The CBE announced a new monetary exchange regulation, which involves periodical auctioning of foreign currency to local banks to conserve foreign reserves. In the fourth and latest auction, the central bank sold $75 million to the local banks with a maximum of $11 million per bank.

This new currency regime also called for steady devaluation of the Egyptian Pound, which lost over 3 percent of its value against the US dollar since the beginning of the auctions. Yet, the currency is expected to gain some lost ground in the coming weeks, a Middle-East online news portal noted. According to Reuters, with the new regulation the central bank capped the daily withdrawal of foreign currency by corporates at $30,000 and limited the amount of US dollars that can be held by banks. In addition, the central bank intends to charge a 1 percent-2 percent administrative fee on individuals purchasing foreign currencies.

Tourism is one of the key sources of foreign currencies. According to the official statistical agency Central Agency for Public Mobilization and Statistics (CAPMAS), the tourism sector recorded an 8.3 percent drop in tourist footfalls in November 2012 compared to the month before. Yet encouragingly, there was an 8.3 percent rise in the number of tourists on an annual basis with visitors from Eastern Europe, Western Europe and the Middle East. In the long term, the government intends to attract 30 million tourists and generate revenues worth $25 billion by 2020, Reuters notes. The tourism minister is also exploring tax breaks for investments in the tourism sector and is keen on restoring air routes that were closed due to travel warnings issued by different governments during the political upheaval.

Elsewhere, Suez Canal revenues, another source of foreign currency, dropped 8 percent in November 2012 after showing an uptick in the earlier months.

However, remittances surged 40 percent in 2012, bringing some cheer to an otherwise gloomy economy, noted an Egyptian daily. Egypt, at an estimated amount of $18 billion in remittances, ranks sixth on the list of recipients for remittances among developing countries, according to the World Bank Migration and Development Brief.

Meanwhile, the latest data from CAPMAS showed a continued upward trend in urban consumer inflation, driven mainly by an increase in prices of non-food items. Food prices dipped owing to a fall in international prices of cereals. Adding to the growing list of concerns is also a widening budget deficit, which is expected to jump by 50 percent to $31.5 billion in the coming fiscal year, as noted by a Middle-East online news portal. A negotiation regarding an IMF loan agreement worth $4.8 billion, which was previously stalled during the political turmoil, is expected to resume, as noted by the news portal. The loan facility is anticipated to bridge the financial deficit gap and support the flailing economy.

The government hopes to achieve a GDP growth of 4.5 percent in fiscal year 2013-2014.

Morocco: Reforms Expected to Improve the Economy

Recently, a team from the IMF visited Morocco to conduct the Article IV Consultation and the First Review under the Two-Year Precautionary and Liquidity Line (PLL). According to the IMF, Morocco’s strong economic policies as well as policy implementation were pivotal in achieving an impressive growth over the last decade. This helped the country qualify in August 2012 for a 24-month liquidity line arrangement under the PLL, amounting to around $6.2 billion and approved by the Executive Board of the IMF. The PLL is expected to help the Kingdom implement necessary structural reforms, as well as help the economy weather external shocks such as the Euro-zone crisis. This year, the travails in Europe along with unfavorable climatic conditions severely dented the country’s production.

Meanwhile, the country’s foreign currency reserves continue to be under pressure. According to the foreign exchange regulator, the trade deficit rose 11.8 percent in the January-November 2012 period from a year ago and the trade shortfall widened to $21.5 billion from $19.6 billion. Tourism and remittances, which are the largest sources of foreign currency, continued to decline. Tourism receipts fell 2.3 percent due to lower tourist arrivals from the Euro-zone, which is Morocco’s largest source of foreign visitors. Remittances from around 3 million Moroccans staying abroad also dropped 4 percent. Elsewhere, central bank data showed that an international bond issue in early December 2012 raised $1.5 billion, which helped to shore up foreign currency reserves. That said, the current level of reserves can cover only up to four or five months of import requirements.

Morocco’s unemployment rate remains stubbornly high, particularly among the youth, despite strong economic growth and decreasing poverty over the last decade. An IMF report noted the unemployment rate touched 9 percent and to tackle the issue emphasized the need to improve the literacy rate and provide equal access to education and infrastructure.

Vision 2020, to be implemented in 2013, is designed to address these issues, among others. The plan is designed to foster product diversification, promote and market tourist areas, and boost overall competitiveness. To help achieve the country’s Vision 2020 objectives, the ministry of tourism noted that the tourism budget has been hiked 33 percent to $98.5 million under the Financial Bill 2013. The ministry also commented that it is keen on doubling the capacity of tourist accommodation and the number of tourist arrivals at the border. It also intends to increase direct job creation and help the tourism sector revenues grow to $16.8 billion by 2020.

Thanks to the ongoing subsidy reforms, the country’s budget deficit is expected to decline to 5.6 percent in 2012 compared to 6.2 percent in 2011, as noted by the finance ministry. The budget deficit reached a record high in 2011 mainly due to rising international commodity prices and a high subsidies bill, particularly on food. To rein in spending on subsidies, the government hiked petrol prices by 20 percent earlier this year and announced handouts to aid weaker sections of the society, an Arab news agency report notes.

Encouragingly, The Moroccan Agency for Investment Development’s latest report showed a 6 percent rise in foreign direct investments at the end of September 2012 compared to the same period, a year ago. According to the agency, this is the result of continued efforts to improve domestic business, upgrade infrastructure, develop human resources and promote productive investments.

According to the IMF, GDP growth in 2012 is expected to slow to 3 percent, although non-agricultural growth is likely to be higher at 4.5 percent. The IMF also noted that given the difficult environment, the economy would stay competitive by focusing on increasing the export market, diversifying products, attracting foreign investments, and spending on education and training. Further, the report also mentioned that a flexible exchange rate system would enhance competitiveness and better absorb the external shocks.

Jordan: Pro-Reform Protests Grip the Nation

The Hashemite Kingdom’s economic and political crisis has deepened and the call for reform is getting louder given the mounting poverty and unemployment. Most recently, the government’s decision to cancel fuel subsidies and hike the price of household gas by 53 percent and petrol by 12 percent sparked nationwide protests, as noted by an Arab news agency. The demonstrators also publicly called for ending the King’s rule, which is a punishable offense, signaling the failing support for the monarchy. Still, the Prime Minister has stood by the decision to raise fuel prices in an effort to bridge the country’s widening budget deficit, which totaled about $5 billion in 2012. He also noted that the government would subsidize fuel prices for low-income families to help them cope with the rise in prices. Jordan’s fuel bills have always remained a cause for concern, given that the Kingdom imports 95 percent of its energy needs.

Elsewhere, the Central Bank of Jordan (CBJ) raised its overnight rates by 75 basis points to 4 percent in a bid to strengthen the currency and salvage investor sentiment. The bank held other key rates steady, with the discount rate unchanged at 5 percent and the one-day repo rate at 4.75 percent. Presently, the nation is grappling with deteriorating economic conditions, civil unrest due to cancellation of fuel subsidies, and regional uncertainty.

Another problem plaguing the nation is its poor water resources, which have resulted in water shortages and disruptions. According to United Nations data, only 5 percent of Jordanian territory is arable while around 80 percent is desert. With Jordan receiving less than 40 days of rainfall on an average every year, the need to find additional water supplies is critical, a New York Times report noted. The influx of refugees from Syria has exacerbated the situation with refugee camps concentrated mostly in northern Jordan.

According to The New York Times report, Jordan is banking heavily on a major pipeline project, the Disi Water Conveyance Project, which would carry water from deep underground resources in Southern Jordan to the capital city of Amman. According to the project director, this project is expected to cost $1.2 billion and is scheduled to launch in 2013. Overshadowing the project are concerns that there are high levels of radioactivity in some of the wells feeding the Disi pipeline. Government officials, scientists and water experts, though, opined that with proper treatment the water would not pose a threat.

On a brighter note, the CBJ noted a 15.3 percent jump in tourism revenues to $3.2 billion by the end of November 2012 compared with the corresponding period a year ago. The report mentioned that the sector’s contribution to the GDP had decreased due to both regional turmoil and domestic unrest. According to official statistics, the year 2011 saw a 20 percent fall in tourism revenues. Tourism is the second source of income for Jordan following foreign assistance.

In addition to financial woes, the Kingdom continues to be embroiled in political unrest. King Abdullah dissolved the country’s parliament in a constitutional move ahead of general elections to be held on January 23, 2013. A Middle East online news portal reported that the opposition movement, The Muslim Brotherhood, has pledged to boycott the elections stating a failed move towards a constitutional monarchy with an elected Prime Minister. The news portal also mentioned that the King has sworn in a new government led by Prime Minister Abdullah Nsur to prepare for the upcoming elections. The onus now is on the prime minister to convince the Brotherhood to call off the boycott and participate in the elections.

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