Europe’s woes cast pall over Mideast economies
Cairo, Egypt David Rosenberg / The Med – Falling oil prices for Saudi Arabia, fewer tourists in Tunisia and Morocco and tighter credit in the United Arab Emirates.
These are just a few of examples of how Europe’s gathering economic storm is likely to send chill winds across the Middle East and North Africa (MENA) in the coming months.
The impact is already making itself felt even though Europe has not formally slid into a recession. The price of benchmark Brent crude has slipped as low as $95 a barrel this month – the lowest level since January 2011 – after averaging nearly $120 in the first quarter. Gulf stock markets lost 6.1 percent in May, extending a 3.2 percent drop in April, according to the Kuwait Financial Center (Markaz).
On Tuesday, the World Bank forecast that the pace of aggregate economic growth for the MENA region would slip from an already anemic 1 percent in 2011 to just 0.6 percent this year, citing persistent regional political turmoil as well as the global economic slowdown being sparked by Europe.
“Although a good deal of progress has been made to restore fiscal sustainability in Europe, the situation remains fragile,” the World Bank said. “The close economic and trade ties of the Middle East and North Africa with the euro area … has made the region particularly sensitive to a deepening of the crisis. The likelihood of crisis involving Greece and potential serious spillovers through banking systems, remains a palpable threat.”
This week has been a bad one for the eurozone, with eurozone countries agreeing to help prop up Spain’s banking sector with up to €100 billion ($125 billion) in loans But the move has failed to calm financial markets, and borrowing costs have moved higher in both Spain and Italy, whose governments may end up needing bailouts to meet their commitments.
Greek elections on Sunday could prove the next trauma, threatening to put Athens on the road out of the currency bloc and threatening its stability.
Europe’s woes couldn’t come at a worse time for the MENA economies. Months of Arab Spring political turbulence have deterred tourism and investment in Egypt, Lebanon and Jordan and paralyzed Syria. Even the politically quiescent Gulf is vulnerable as governments have used higher oil prices to fund wage hikes and subsidies to ensure peace.
Lower oil prices could put those programs into jeopardy. The International Monetary Fund estimates that Bahrain and Iraq need oil prices of about $100 a barrel to keep their state budgets in line with income. The United Arab Emirates is better off, with a breakeven of $80.
Saudi Arabia’s breakeven price has probably risen to $84 because of increased spending commitments by the government, Capital Economics said in a June 7 report. Petroleum prices are still well above that level, but Credit Suisse warned this week that a global slowdown originating in the eurozone could put the Gulf economies deeply into the red.
“Oil demand would deflate sharply following acute crises of confidence.” analysts Jan Stuart and Stefan Revielle said, forecasting that in the worst-case scenario Brent oil prices could fall to $50 a barrel.
The Organization of Petroleum Exporting Countries (OPEC) said on Tuesday the global oil supply and demand balance could ease further in the second half of the year due in part to a slowing global economy. Saudi Arabia, the cartel’s biggest producer, was already trimming its output. Production figures reported by OPEC and provided by the member countries show Saudi Arabia has trimmed its production.
Gulf banks and their borrowers, particularly those in the UAE, may also feel the pinch from Europe, as the continent’s financial crisis spreads from peripheral economies to core ones like France and Italy, the IMF said in a report last week. Although UAE banks are less exposed to global conditions than they were in 2008′s global real estate collapse, they remain vulnerable, it said.
Daniel Broby, chief investment officer at London-based Silk Invest, said the impact of the eurozone should not be overstated.
“We are going to see growth even if Europe is in recession. That said, the growth is not going to be as an impressive as we’ve seen in the GCC until now,” he told The Media Line. “If Europe is going into recession – and that’s an if – it will have impact on the oil price and that would in turn have an impact of the fiscal situation.”
The region likely to be the hardest hit by the eurozone is North Africa, which is geographically closest to Europe and has the closest economic links. Egypt, Morocco and Tunisia serve as a destination for sun- and antiquities-seeking tourists, but export labor, farm products and manufactured goods to the continent.
As much as 80 percent of goods exports from Morocco and Tunisia go to the eurozone, particularly to some of Europe’s most troubled economies, like Italy and Spain. More than 3 million Moroccans live and work in Europe, many of them sending home money to support families.
Morocco’s problems have been compounded by poor weather, which has cut into its harvests and presents a great economic challenge to the country right now than Europe, Silk Invest’s Broby noted.
Algeria is “among the most exposed economies” in North Africa to Europe. Oil and gas exports account for 20 percent of GDP, nearly all of which go to Europe, according to Capital Economics. Unlike most of its neighbors, however, Algeria can fall back on its hydrocarbon assets, whose accumulated profits give the government some $200 billion in foreign reserves to keep the economy afloat, it said.
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