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02 May 2014

Economic outlook unlike the rest

Simon Williams

by Simon Williams

Regional Chief Economist, HSBC

Economic outlook unlike the rest

Oil exports have helped the Gulf states maintain resilient public finances

Much continues to trouble us as we look at the prospects for the Middle East and North Africa. For all their talk of diversification, the region’s commodity-rich economies have never been more energy intensive or more dependent on oil prices remaining high. For the region’s commodity-poor, the challenges are more apparent still, particularly where the aftershocks of the Arab Spring mean economic weakness is combined with political discord.

Yet despite these shortcomings, we see some scope for the region to outperform. Most obviously, the Gulf oil exporters’ structural strengths differentiate them from more troubled emerging markets. Resilient public finances have left them far less exposed to volatility in the financial markets and the region’s dollar-pegs now offer reassuring predictability. The Gulf economies can maintain momentum while higher profile emerging markets lose steam.

We also see grounds for selective optimism in the beleaguered economies of North Africa and the Eastern Mediterranean, despite the obstacles they face.

The Gulf economies can maintain momentum while higher profile emerging markets lose steam

The costs of the Arab Spring have been extraordinarily high: even in 2015 we expect those economies to be stabilising, not normalising. Political uncertainties will remain, but the revolutions were more than three years ago and the risks they pose are understood – a marked contrast with fresh political uncertainties clouding the outlook for some of their peers. Moreover, these states are now addressing their challenges, with their economies beginning to adjust.

The process is imperfect and could yet unravel but new, permanent, post-revolution political orders are starting to coalesce. Compare that with last year, when they lacked authority and proved vulnerable to fresh political upheaval.

The scale of these economies’ losses and their weak policy tools will probably keep expansion below the region’s pre-revolution pace, leaving gains vulnerable to reverse. However, three years of underachievement and the spare capacity created allows activity to rebound.

This article was first published on 15 April 2014.

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