As the global economy steadies, what are this region’s prospects?

In many ways the outlook for the Mena region depends on one's perspective

Illustration by Pep Montserrat for The National
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This year looks likely to be a period of normalisation for the world economy. It will be the first time since the onset of the financial crisis that extraordinary stimulus measures will begin to be unwound, starting in the United States as its quantitative easing is reduced.

But what can normalisation mean for the Middle East and North Africa (Mena) in 2014?

With the continuing distractions of conflict in Syria, residual political uncertainty in Egypt and parts of North Africa, as well as questions over the recent nuclear deal between the US and Iran, what is the potential for the region to move forward and benefit from the thawing of economic conditions being experienced elsewhere?

The starting point may actually be more encouraging than the headlines might suggest.

There are signs that regional economies are doing much better than might be imagined. Of course, the GCC has been growing strongly for a number of years now, buoyed by increasing oil output and government spending.

Upward revisions to growth forecasts have once again become common, such that 2014 looks likely to be a very strong year of growth after an already strong 2013.

However, most of the questions do not revolve around the GCC, but relate to the more politically challenged Mena members of the Levant and North Africa. Here, the outlook is more nuanced; encouraging in some respects, but with big issues still to be resolved.

For instance, growth does appear to be picking up at last, but it is coming off a very low base. Improvements to current accounts and other external imbalances are also very welcome, but these have been largely for the wrong reasons, on the back of weaker imports rather than any material improvement in competitiveness. Budget deficits are also widening and the regional political environment is still far from stable.

Within the wider region, divergent trends are also discernible, such that blanket judgements about the region are not always appropriate. Some countries have taken the rise in budget deficits as an opportunity to finally push ahead with reforms that have long been needed, while others are promoting growth at the expense of near-term fiscal consolidation.

Assisted in part by agreements with the International Monetary Fund, Tunisia and Jordan have made progress at raising domestic energy prices, which should go some way to reducing state subsidy bills. Morocco also recently announced efforts to rein in its budget deficit. That policymakers in some countries are willing to push ahead with unpopular subsidy reforms, at a time of weak economic activity and high unemployment, demonstrates how external assistance programmes, such as those from the IMF, can be used positively to anchor government policies during otherwise difficult periods.

In contrast, Egyptian authorities have responded to the recent inflow of GCC aid by loosening fiscal and monetary policy. Since July, the central bank has slashed interest rates, while the interim government is set to implement a fiscal package worth US$4.3 billion (Dh11bn).

Even in Lebanon, which lacked a functioning government for most of last year, the central bank has decided to pursue another stimulus package this year, on top of one introduced last year, which appears to be aimed primarily at facilitating new housing loans.

With a relatively large amount of pent-up demand, such stimulus efforts are likely to bear fruit, spurring economic growth in early 2014.

Indeed, economic stabilisation was already beginning to take hold during the latter period of last year. Standard and Poor’s raised Egypt’s credit rating in early November in part as a reflection of the economic progress that has been made – the first time that Egypt has had its credit rating raised since ratings for its sovereign bonds were first initiated more than 15 years ago. However, such stimulus measures may also exacerbate existing fiscal vulnerabilities, and lead to the need for more painful adjustments in the future.

Hence, how the political situation evolves will be of critical importance to Egypt. The starting point will be the referendum on constitutional reforms due this month, to be followed by parliamentary and presidential elections this year. The establishment of a stable government will go a long way towards securing a foundation for long-term structural reforms, over issues such as energy subsidies that could enhance private investment and lure more external financing. However, given the slow pace of political change, it may take time for such reform momentum to take hold.

Politics, of course, remains the rogue factor in so much of the region’s outlook. In recent years we have become accustomed to these being largely negative forces. But for once, there might be grounds for optimism that political change could actually be a force for good.

Certainly, a thawing of relations between the West and Iran could begin to herald the beginning of a broader realignment of interests in favour of promoting regional stability and pursuing prosperity.

Much still remains to be done to cement the recent progress, however, not least with Syria still presenting risks to many of its neighbours. While its conflict continues, global perceptions about the region will continue to be affected by fears about security. As much as some countries are keen to pursue economic reforms and growth-orientated policies, investors will still keep an eye on the risks associated with Syria’s conflict spilling over its borders.

In many ways the outlook for 2014 in Mena countries depends on one’s perspective. Improving growth might be taken at one level to suggest that the region is on its way to recovery. However, the continued presence of significant imbalances, particularly fiscal ones, combined with notable political challenges suggest that a return to pre-crisis levels of investment or consumption are probably still some way off.

While the world economy moves towards normalisation this year, the outlook for Mena is mixed. Overall, growth is beginning to take shape across the region, which is encouraging. But as ever, there are differences in the pace of that growth between the oil-rich GCC and the rest. And even between the Mena countries there are contrasting trends.

Many may simply be heading towards a “new normal” of relatively low growth and elevated unemployment. Others meanwhile are being bold, seizing the opportunity provided by external assistance programmes and global recovery to introduce much needed reforms. These stand the chance of raising growth rates, thus allowing regional economies to participate and benefit from the global recovery that is underway, with the proviso that the political environment becomes more benign.

Tim Fox is the chief economist and head of research at Emirates NBD