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The Middle East Challenge in 2013

The Middle East Challenge in 2013

After the Arab Spring of 2011, is the Middle East now facing the winter of discontent? Many Arab nations are tasked with rebuilding infrastructure, revitalising industry and finding jobs for the growing mass of unemployed.

More winds of change are blowing through the Middle East and North Africa (MENA) going into 2013, bringing changes in how countries source revenue and how they spend their money to meet the evolving needs of their population.

Oil importing countries, particularly those experiencing transition, are in urgent need of growth-orientated reforms to rebuild industry sectors and encourage outside investment in economies hit hard by social and political upheaval. On the other side of the coin, the region’s wealthy oil exporters will continue to benefit from the strong oil price but will have to decide how best to spend the money to address rising youth unemployment and social tension.

While this double economy – the oil “haves” versus the “have-nots” - is expected to continue into 2013, the more optimistic analysts predict a gradual converging as the social and political situation stabilises, investment increases and new governments bring in policies to restore macroeconomic sustainability.

“In 2012 we’ve seen quite a massive gap in terms of GDP growth between the oil producing countries and the oil importing countries, but I think as we go into 2013 and the year after, we’re going to see the growth potential of a lot of oil importers come back on trend and, if you think of countries like Tunisia, it’s estimated that in a new environment, countries could actually grow on a much higher path than previously,” notes Philippe Dauba-Pantanacce, Standard Chartered Bank’s senior economist for the Middle East and North Africa (MENA) region.

No guarantee

While the potential is there, for change to take place, new governments will have to build up the institutions necessary to nurture financial and social confidence, Dauba-Pantanacce told INSEAD Knowledge at the sides of the school’s Global Business Leaders Conference in Abu Dhabi recently. “Opportunities for foreign investors I think are tremendous, both for a huge country like Egypt but also for a small country like Tunisia. I think we’ve passed a lot of steps in the transition but it’s difficult to say the road map will be completely clear.”

For now, says Dauba-Pantanacce, it’s a wait and see period as investors seek positive institutional and regulatory change in terms of competition laws and openness. And, with many Western investors still concerned about the geopolitical risk of the region, the non-oil producing countries will be looking to their Arab neighbours to invest in infrastructure and the ailing manufacturing, agricultural, retail and tourism sectors.

Oil is the key

Oil producers should certainly have the means to assist, with oil expected to remain above US$100 a barrel in the short to medium term. Most oil exporters have accumulated the reserves to address short-term price volatility but, as the IMF notes in its November Middle East economic outlook, increased spending by many exporting countries has increased their vulnerability to any price declines which could result from a further slowdown in global economic activity.

Unemployment is chronic

The greatest challenge facing governments across the region is unemployment, particularly youth unemployment.

Smaller, richer countries like Qatar and the United Arab Emirates have used oil revenues as a buffer against related unrest, increasing wages and spending to meet social demands. But for MENA’s non-oil producers, with falling budget revenues, deteriorating fiscal balances and average debt at more than 70 percent of GDP, spending their way out is not an option.

For Saudi Arabia, the world’s biggest oil exporter and one of the region’s most influential players, the problems of youth unemployment is “chronic”, according to Sami Mahroum, Director of INSEAD’s Innovation & Policy Initiative in Abu Dhabi.

With a population of 27 million and a jobless rate of 10.5 percent, Saudi Arabia’s rising poverty and aging leadership present mounting challenges.

Other challenges

For its Gulf neighbours, 2013 presents challenges in other areas. Kuwait and Bahrain are facing growing unrest from populations seeking government reforms while the U.A.E. and Qatar, which seemed to have spent their way out of internal strife, remain vulnerable to escalating tensions and possible conflict between the United States and Iran.

“If the U.S. attacks Iran there’s a real risk of an avenging attack by Iran,” says Mahroum “If a war starts those economies will really feel it.”

North of the Gulf, it’s the civil war in Syria which is presenting the biggest economic threat to Jordan and Lebanon, blocking their land route to trade with Europe.

Meanwhile for the North African nations where the Arab Spring began, the biggest challenges come from within. The new government in Egypt will have to act quickly to address employment, says Mahroum. “The labour market is not expanding, and with a growing number of university graduates the government is having to look at what type of jobs they are creating. But I expect things will calm down and be stable. People can’t afford to stay on the streets for too long.”

For Libya, with oil production recovering faster than expected following the overthrow of the Gaddafi regime, the country’s outlook depends on its ability to build modern institutions, repair infrastructure, and diversify the economy.

“Libya has a strong energy sector, not just oil and gas but solar too. It’s close to Europe and very fertile. It has a small population and needs lots of investment but I think we will see it become a magnet for foreign labour,” says Mahroum.

Change takes time

The future of Tunisia, where a seemingly smooth revolution shows signs of unravelling amid renewed clashes between pro and anti-government activists, is perhaps the most encouraging of all the economies in transition. “It’s a very homogenous country,” notes Mahroum. “It’s geographically and emotionally close to Europe, has good infrastructure and a highly educated workforce.”

Continued protest, he says is natural, but unlikely to make difference. Change, he says, will take time.

“In all these (post-revolutionary) countries it will take a decade for things to really settle down. We have to go through another election before people realise that leaders can serve their term and step aside, only then will they accept that change has happened.”


Sami Mahroum is Academic and Executive Director of INSEAD's Innovation and Policy Initiative, based at the school’s Abu Dhabi campus.

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