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Abstract Thoughts
CRISIS, FINANCE AND GROWTH
Excerpts from “Global Economic Prospects 2010”
Published by the World Bank on January 21
Analysis by Tamer Hafez
In the foreword to the “Global Economic Prospects 2010” report, Justin Yifu Lin, the World Bank’s chief economist and senior vice president, writes that a recovery from the 2008 global recession is under way, while adding a cautionary note that much uncertainty remains amid volatile conditions. He cites some positive numbers regarding trade, industrial production, financial markets and foreign investment in developing countries. Nonetheless, Lin does not gloss over the severity of the downturn.
“The depth of the recession has left the global economy seriously wounded. Even as profitability returns to many of the firms that were at the heart of the crisis, industrial production and trade levels have yet to regain their pre-crisis levels, and unemployment has reached double digits in many countries and continues to rise.”
Lin pays particular attention to the human cost of the crisis, which is unlikely to be mitigated in a meaningful way anytime soon. The fragile recovery that many economists forecast for this year won’t be felt by those who have been marginalized and that could translate into the need for humanitarian assistance from non-official sources.
“For 2010, the number of people living on $1.25 per day or less is still expected to increase by some 64 million as compared with a no-crisis scenario. The recession has cut sharply into the revenues of governments in poor countries. Unless donors step in to fill the gap, authorities in these countries may be forced to cut back on social and humanitarian assistance precisely when it is most required.”
The report divides global economies into six regions: East Asia and Pacific; Europe and Central Asia; Latin America and Caribbean; Middle East and North Africa; South Asia; and sub-Saharan Africa. For each region there is an analysis of developments and risks, and a forecast for the medium term.
“Conditions at the outset of the financial crisis were less than propitious for the Middle East and North Africa. The ‘food-fuel’ crisis of 2007-08 was a challenge for the region, which is the world’s largest net exporter of oil and largest net importer of food. Oil exporters were less adversely affected, but food import bills rose sharply. Hardest hit were countries in the Maghreb, as well as Jordan and Lebanon, which are large importers of both food and fuel, and the Arab Republic of Egypt (high food-import dependence). The policy environment had to shift quickly from mitigating the effects of higher commodity prices to shoring up banking systems and applying fiscal stimulus to bolster domestic demand.”
For the Middle East and North Africa (MENA) region, the report divides the countries into oil exporters (Algeria, Iran, Syria and Yemen), diversified economies (Tunisia, Morocco, Egypt, Jordan and Lebanon) and Gulf Cooperation Council countries. Because of the groups’ economic differences, the effects of the 2008 crisis varied, and so will the speed and sustainability of recovery.
“Over the course of 2009, net terms-of-trade movements for the developing oil exporters (Algeria, Islamic Republic of Iran, Syrian Arab Republic and Republic of Yemen) and the Gulf Cooperation Council (GCC) were favorable, as oil prices increased and food prices declined. But high oil prices have been maintained at the expense of much reduced output. Because of falling oil production, key GCC oil exporters suffered modest GDP declines during the year, only partially offset by fiscal stimulus programs and more buoyant non-oil sectors. Developing oil exporters, in contrast, saw a marked downturn in oil sectors of their economies, but stimulus measures and stronger non-oil developments helped to maintain positive overall growth. For the more diversified economies (Egypt, Jordan, Lebanon, Morocco and Tunisia) steep declines in external demand (notably from the dominant Euro Area) had a negative effect on merchandise exports, compounded by falling tourism volumes, lower worker remittances and declining FDI inflows, notably those from the GCC economies.”
GCC oil revenues fell from $755 billion in 2008 to $485 billion in 2009, while oil prices during that period dropped from $150 per barrel to between $65 and $80. Meanwhile, members of the Organization of the Petroleum Exporting Countries (OPEC) cut production by 10 percent (11 percent in the GCC) to stabilize prices. Estimated GDP growth during 2009 for MENA was 2.9 percent, compared to 4.3 percent in 2008, according to the report. GCC countries on the other hand saw their economies contract by an average of 0.6 percent in 2009 after an average growth of 4.3 percent in 2008. Oil exporters saw average GDP growth decline to 1.6 percent in 2009 compared with 2.9 percent growth in 2008. Diversified economies suffered an average drop of 2 percent in GDP growth from an average of 6.6 percent in 2008.
“Growth in Egypt slowed to 4.7 percent in FY09, from 7 percent during the three previous years. The slowdown was driven by lower external demand with exports of goods and services declining by 25 percent; growth was negative in economic sectors with a strong exposure to external markets such as the Suez Canal (down by 7.2 percent, compared with 18 percent growth in FY08) and hotels, restaurants and related activities linked to tourism (down by 1.3 percent in real terms compared with 30 percent growth). Declining fixed investment (down 10 percent compared with 14.8 percent growth the previous year) has moved in tandem with increases in unemployment, which rose to 9.4 percent from 8.4 percent a year earlier.”
While the authors are generally hopeful regarding how the region will recover, they worry that variations in how quickly the three classifications of countries will be able to turn around their economies could cause unforeseen problems.
“Following the tortuous conditions of 2009, prospects for both the developing and high-income economies of the Middle East and North Africa should improve through 2011. Growth is projected to increase to 4.4 percent by that year, the same pace registered on average between 1995 and 2005. Though domestic absorption will be a continuing source of strength, the forecast for regional recovery is premised on a revival in global oil demand and a rebound in key export markets. Despite the gradual withdrawal of fiscal stimulus measures, moderate advances in consumer and capital spending are expected to underpin the strengthening of growth.”
The report predicts oil prices will stabilize at $75 per barrel and that GDP for the region will grow 3.2 percent this year and 4.1 percent in 2011. Oil-exporting countries, which will benefit from a current account surplus, are expected to average GDP growth of 3.1 percent and 3.7 percent, respectively, in 2010 and 2011, the report claims. For diversified economies, recovery will rely on growth of domestic demand.
While there is talk in the MENA region of the potential for growth and advantages of being an emerging market, economic progress can be jeopardized by political standoffs and calls for reform.
“The broadly favorable outlook for the Middle East and North Africa over 2010-11 remains subject to substantial downside risks, which would pose additional challenges to policy makers already grappling with the current crisis. A deeper and more protracted global recession cannot be ruled out. Within the region, political tensions remain a constant, tending to restrain international capital flows that might otherwise contribute to a deepening of capital markets and private investment. Further, needed reform efforts, some initiated during the crisis period, could receive less attention and commitment once economic conditions start to normalize.”
Dubai will play a key role in restoring investor confidence in the region; diversified and oil-exporting economies alike will depend on the strength of economies in the United States and the Euro zone.
“The recent difficulties of Dubai World holding company – an entity of the Government of Dubai, United Arab Emirates – in asking its creditors for a six-month standstill on all scheduled debt payments, indicates that financial institutions in the region were not entirely unaffected by the global financial crisis. Given the very high investment levels of the past several years, as well as asset inflation... there may be additional large scale financial losses that have yet to be realized... The financial problems facing Dubai, along with previous defaults by two large Saudi private companies, will continue to raise concern amidst the need for comprehensive corporate governance and debt restructuring reforms in the region.”
While propounding a positive outlook, the report emphasizes that recovery does not mean re-creation of the global economic landscape before the fall. Successful economies will only be possible if individual countries are responsible for creating the stable environments that will be attractive to both domestic and foreign investors.
This report is available online at www.worldbank.org
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