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27 Jan 2014

Changing seasons in the Middle East

Simon Williams

by Simon Williams

Economist, HSBC Middle East

This has been a decade of extremes for the Middle East and North Africa – extreme wealth for the Gulf but extreme instability for the Arab Spring nations and their neighbours. However, we think the drivers of economic performance will change for the second half of the decade.

The challenges will be pronounced as the Arab Spring states work through the enormous costs imposed by the 2011 revolutions. But with the support of allies overseas, and with more effective government in place, 2015 could be the year when the decline in fortunes slowly starts to reverse.

Both Egypt and Tunisia plan to have permanent elected parliaments, governments and presidents in place by the end of this year

For Egypt, we are less convinced than many of a 2014 turnaround, despite aid flows, a security crackdown and early indicators of better economic performance. Anti-regime protests, sporadic violence and a gaping divide in public opinion persist. However, 2015 offers hope. Both Egypt and Tunisia plan to have permanent elected parliaments, governments and presidents in place by the end of this year, paving the way for a normalisation of financial conditions, a resumption of economic activity and gradual recoveries.

It is far more difficult to construct a positive outlook for states such as Iraq and Syria, which have become entrenched in sectarian violence, or for those such as Lebanon whose fortunes have become hostage to events across their borders. But evidence of a thaw in relations between the West and Iran for the first time since the 1979 Iranian revolution offers some prospect for an easing of sectarian tensions.

But if recent years have been characterised by instability for Egypt and its neighbours, for the Gulf, they have been defined by abundance. However, the long-term consequences of dependence on finite resources are drawing ever closer. Bahrain and Algeria, the region’s two poorest oil states, have been recording fiscal shortfalls since 2009: now Saudi Arabia and Oman seem to be sounding more cautious notes in their 2014 budgets.

Expansionary spending policies implemented over recent years mean the other oil exporters will see surpluses shrink – if not turn to deficit – over the second half of the decade. Any drop in oil prices on the back of, say, an Iran deal would accelerate this process.

Accumulated savings and net creditor positions – as well as political motive to maintain current policies – will preclude a painful contraction in spending and growth. However, tightening at the margins for all but the wealthiest oil exporters, should cast the spotlight on to a private sector that we think is still not ready to take over as primary growth driver.

Without a rapid acceleration in reform, we suspect the private sector will struggle to fill the gap left by slowing public-spending growth and, as a consequence, the Gulf’s economic growth will slow.

This research was first published on 15 January 2014.

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