The Arab World’s Toppled Regime Crush

The IIF in its annual survey placed the Mideast region at a “historic turning point” with economic and political transitions often working at cross-purposes and at different speeds. The group subdivides into GCC and non-Gulf oil exporters and importers including Egypt, Jordan, Morocco and Tunisia considered most at risk from prevailing cost and debt burdens absent urgent competitive reforms. On average they will experience slight recession this year as tourism and domestic and foreign investment plummet and nonperforming loan numbers mount. Their fixed-income and equity performance has suffered greatest, and the 4 percent GDP growth projected for 2012 is contingent on fading unrest. The Gulf countries are at the opposite end of the spectrum, with only Bahrain so far hit in output and financial market terms, although the likely oil and public spending-aided trajectory spans lackluster expansion in the UAE and Kuwait to a 6.5 percent and almost 20 percent pace respectively in Saudi Arabia and Qatar. Private credit activity will be positive even in Dubai as it benefits from fund diversion elsewhere and a final DW debt rescheduling although other government-linked companies are still in negotiations. With the hydrocarbon price premium of recent months the Council members’ current account surplus will increase $100 billion to near $300 billion as overall foreign assets including in sovereign wealth pools reach $1.7 trillion. Fiscal balances will be in the black at over 13 percent of GDP, while inflation will surpass 5 percent on generally rising commodity values. The petroleum buying countries in contrast will see large budget and balance of payments deficits which may require resort to bilateral and multilateral soft lending, with Egypt and Tunisia now in discussions over IMF and World Bank support. While CDS spreads have come in from peaks, the equity universe has taken sharp losses with foreign investors exiting en masse. However, forward exchange rates continue to reflect an intact dollar peg, although broader monetary union has been indefinitely shelved with the added geopolitical crisis.

The Arab geography has governance, unemployment, wealth distribution and business climate indicators lagging other developing market destinations, the survey comments. Private investment is below 15 percent of GDP with government dominance “undermining productive activity” such as manufacturing and services. Bahrain will see “no early resolution” as both onshore and offshore banking and the hospitality industry endure blows bringing economic growth to a decades-low. Egypt’s risks are “downside skewed” as the public debt/output ratio touches 75 percent and a second wave of social disruption may loom with a washout in tangible democratic and living standard improvements until next year.  

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