Leadership and Change

The Middle East and North Africa: A Region Gathering Strength

The Middle East and North Africa (MENA) region is generally rebounding from the surprisingly sharp tailspin that rocked the oil-rich area during the global 2009 recession. Boosted by rising oil prices, improving capital markets and gradual growth in lending, governments across the region are pursuing aggressive spending plans and actively courting international investments to spur job creation.

These gains point the way to a continued economic comeback for many MENA countries, yet some wounds have been slow to heal. The overall region has been experiencing a "two-speed recovery," says Fadi Arbid, chief executive officer of Amwal AlKhaleej, a leading Middle East-focused private equity and alternative investment firm and the first to be headquartered in Saudi Arabia. "On one hand, the real economy is growing nicely," says Arbid. "Oil prices are at a comfortable level for most Gulf governments, and public sector spending is booming. On the other hand, the capital markets and investor confidence are still struggling, albeit slowly regaining strength. We still haven't fully recovered. Investors are still very nervous and rattled. Overall, people are more optimistic now than they were a year ago, and we're finally seeing some investment flows, but nowhere near what we should be seeing, given the strong economic fundamentals."

At the same time, the economic impact of the political turmoil that has swept across the region from Libya to Bahrain remains highly uncertain. "I don't think it is possible to think through the future of the economies" in the wake of the turmoil, says Howard Pack, professor of business and public policy at Wharton. "One still has no idea if the political system [in Egypt and elsewhere] will be authoritarian, democratic, or something in between, and the range of economic policies they will follow may not be predictable from the political system. Think of Eastern Europe after 1989 -- lots of things took a decade or more to settle down, and some still haven't."

In this article, experts from Wharton, Amwal AlKhaleej and other regional analysts assess the outlook for the area and to what extent it was vulnerable to the global financial crisis.

Only Some Shelter from the Storm

The region initially looked sheltered from the credit crunch that enveloped the developed world in mid-2007. MENA countries appeared to be inoculated against the crisis by soaring oil prices, heavy government spending, domestic economic reforms and financial systems that were for the most part relatively disconnected from the global economy.

But the financial storm that pounded the world after Lehman Brothers imploded in September 2008 dispelled any hope that the hydrocarbon-rich MENA region would prove fully immune. "People probably underestimated the challenges coming out of this crisis," says N. Bulent Gultekin, professor of finance at Wharton and a former central bank governor of Turkey. "This has been a worldwide recession, and it's not easy to recover from something like that. But the Middle East region is essentially still okay. The oil producing countries still have a constant source of income, and the other [Middle East] countries have still been less affected than many others."

However, the recession damage was heavy. Oil prices plunged below the budgeted break-even points of most hydrocarbon exporters, and non-performing loans started to proliferate in certain countries in the region, weakening the outlook for the banking sector and causing lending to freeze. Equity markets, particularly those in more "internationalized" countries such as Egypt and the United Arab Emirates (UAE), fell significantly farther than counterparts in emerging and developed markets. The Saudi market also fell as sharply as those in Egypt and the UAE.

Despite their abundant hydrocarbon wealth, the Arab Gulf states -- which along with Egypt remain the main economic drivers of the MENA region -- were among the poorer performers in the immediate aftermath of the global financial crisis. The six main Gulf countries -- Saudi Arabia, Bahrain, United Arab Emirates, Oman, Qatar and Kuwait -- known collectively as the Gulf Cooperation Council (GCC), a loose regional bloc, saw economic growth slow from 7% in 2008 to just 0.4% in 2009, according to the International Monetary Fund (IMF). As recently as October 2008, when the global financial system was engulfed in post-Lehman panic, the IMF had forecast that the Gulf's economy would expand a brisk 6.6 % in 2009.

The MENA region as a whole suffered a similar setback. The IMF reports that real Gross Domestic Product (GDP) growth for the region fell from 5.0% in 2008 to 2.0% in 2009, compared with an average annual growth rate of nearly 6% between 2003 and 2007.

The psychological impact of the unexpectedly painful downturn has perhaps been even more pronounced than the headlined economic growth figures indicate, Wharton and Amwal AlKhaleej experts say. "Initially many thought the region would be isolated, secluded and sheltered from the financial crisis, so it was a big shock to many when it became apparent that we weren't," says Arbid.

Growth Picks Up Again

Now trends that battered the region during the downturn are reversing themselves. A resurgent Asia and worries over the region's political stability helped the price of oil recover to more than US$100 a barrel by February 2011, bolstering government budgets in the Gulf in particular. The price of benchmark Brent crude spiked above US$120 in April. Stock markets continue to recover but still face jitters over the political turmoil, while bank loans are becoming more available. 

The long-term picture still is bright. The region's population remains exceptionally young, which could lead to a significant "demographic dividend" in the form of a rapidly growing and highly productive labor force if enough private sector jobs are created. And foreign investor confidence in the region picked up following a marked dip in foreign direct investments over the past two years.  More generally, the latest GDP projections by the International Monetary Fund (IMF) released in April 2011 show annual economic growth rising from 3.8% in 2010 to 4.1% in 2012. While the recent wave of unrest will depress investments this year, the level is expected to resume rising once the political outlook becomes clearer.

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