The Middle East and North Africa (MENA) region continues to grapple with instability in the aftermath of the Arab Spring uprisings. The draining of public finances, elevated levels of inflation and high rates of unemployment seem to paint an unfavorable picture for the region in the short term, Nedbank economists have noted. According to the International Monetary Fund’s (IMF) World Economic Outlook report, inflation in the region is expected to average around 7% in 2011 and 10% in 2012. In addition, the report noted the adverse impact of weaker growth in the United States and Europe on commodity prices, foreign investments and economic activity.

The IMF expects the oil-exporting economies to expand 5% this year and slip to around 4% growth in 2012 due to continued economic uncertainty. On the other hand, economic growth of the oil-importing nations, particularly the ones hit by social unrest, is likely to remain subdued in the near term. The IMF has forecasted an average growth of 1.4% in 2011 and 2.6% in 2012 for the oil importers. And encouragingly, the report has slightly raised its growth outlook from 1.0% to 1.2% in 2011 and 1.8% in 2012 for Egypt – the most populous Arab nation.

Yet, a surge in public spending that is straining fiscal positions remains a worrying issue for a few MENA countries such as Jordan and Morocco. Elsewhere, South Africa’s economic growth slumped in second quarter of 2011, mainly due to declines in the production outputs of the country’s primary and secondary sectors. Although the economic activity remains fairly stable, Israel continues to battle widening trade deficits. The Israeli government is also looking to enhance market competition on its home turf.

With the political destinies of the strife-hit nations uncertain, the greatest challenge for these nations lies in formulating sustainable economic policies, according to the IMF. The institution has also expressed its concern about further political crises exacerbating the vulnerable MENA economy. The IMF has cut the MENA region’s economic growth for 2011 to 4% from an earlier estimate of 4.2%. It has also lowered its estimates for 2012 to 3.6% from a previous forecast of 4.4%.

South Africa: GDP growth drops sharply in Q2 2011

After expanding at an impressive annualized rate (revised) of 4.5% in the initial quarter of 2011, South Africa’s GDP growth slowed substantially to 1.3% in the second quarter of 2011, as noted by Statistics South Africa. What’s more, the GDP expansion failed to meet a consensus growth estimate of 1.6% by Reuters and other agencies. The deceleration was primarily due to declines in the primary and secondary sectors of the economy, which offset the value added by the tertiary sectors, according to the South African Reserve Bank (SARB) bulletin.

According to the SARB report, production output in the agriculture and mining (primary) sectors continued to contract by 7.8% and 4.2%, respectively, in the second quarter compared to declines of 3.7% and 4.0%, respectively, in the first quarter. In the wake of a global economic slowdown, output in the manufacturing (secondary) sector fell 7.0% due to a strong rand and lower exports, compared to a strong growth of 14.5% in the first quarter. In the case of the tertiary sector, the largest contribution to economic expansion came from a 5.7% growth in general government services. However, the report noted that this growth was largely to due a spurt in temporary employment to aid the April elections. Another notable sector that added to the growth was finance, real estate and business services.

The central bank report also noted a fall in domestic expenditure, which mirrored the deceleration of economic growth in the second quarter. The economy’s spending growth plummeted to 1.3% in the second quarter from 7.9% in the first quarter due to reduced government spending and slower consumer household spending. The key reason for a fall in government spending was the lack of acquisition of armaments through the nation’s defense procurement program.

In the case of consumer spending, household disposable incomes were weighed down by inflationary pressures. As noted by the central bank report, while an increase in household disposable income eased to 4.1%, household consumption lost pace, falling to 3.8% in the second quarter. In contrast, household disposable income and consumer consumption expenditures stood at 5.4% and 5.2%, respectively, in the first quarter. What’s more, a consumer confidence index (CCI) compiled by First National Bank and the Bureau for Economic Research slumped to 4 from 11 in the second quarter, echoing the lack of appetite to spend.

Another worrying issue is a continued rise in household debt, albeit at a slower pace. According to the Reserve Bank, the ratio of household debt to disposable income eased to 75.9 % in the second quarter from 76.8 % in the first quarter of 2011, reflecting consumer concern over incurring additional debt. And, according to the South African Chamber of Commerce and Industry (SACCI), the business confidence index (BCI) continued its downward trend, declining to 98.6 points in August. The BCI had dipped 4.7 points below the August 2010 level, the largest year-on-year fall since the 5.2 points slump in September 2009. The SACCI noted that the weaker economic landscape coupled with inflation and the rand’s exchange rate has taken a toll on business confidence.

A SARB report noted that South Africa’s current account deficit widened to 3.3% of GDP in the second quarter from 3.1%, while Nedbank economists forecasted 3.2%. According to the central bank, a higher rate of imports and a slight rise in the current transfer account reduced the trade surplus in the initial half of 2011. Yet, encouragingly, a rise in foreign portfolio investments – used for funding the current account deficit--allayed fears of a waning investor appetite. The institution noted $4.74 billion worth of foreign investment in stocks and bonds in the second quarter versus $2.7 billion in the first quarter. Foreign direct investments stood at $1.6 billion in the second quarter, noted as an improvement by the central bank.

However, given the current unfavorable economic environment, South Africa’s subdued growth is expected to continue in the coming quarters. Nedbank economists have also expressed concerns over job creation in the present environment.

Israel: Economic activity remains fairly stable

Israel’s consumer price index (CPI) climbed 0.5% in August following a marginal dip in the month of July, according to a Central Bureau of Statistics (CBS) report. Key sectors that witnessed a rise in price were electricity for private consumption, fruit and vegetables, and transportation, which all offset a price decline in the clothing and footwear and communication sectors. Israel’s inflation has risen 3.4% over the last twelve months beginning in August 2010.

The CBS report also noted that price escalation in the housing sector has also added to inflationary pressures. What’s more, the ongoing tension along the Israeli-Egyptian border including terrorist attacks on a natural gas pipeline, which has disrupted Israel’s natural gas supply, has in turn driven the nation to dependency on another type of fuel for power generation called Mazut, a heavy, low quality fuel oil. Given that this variety of fuel is more expensive than natural gas, electricity prices have risen in recent months. The Bank of Israel has left its interest rates unchanged at 3.25% for the month of September. Nonetheless, the institution is keeping a close watch on Israel’s inflation and is not expected to alter the basic rates in the near future, according to economists of an Israeli economic and market analysis research portal.

Israel’s widening trade deficit remains a concern. According to the CBS, the country’s trade deficit jumped 14% to $1.8 billion in August – the highest month-on-month increase in years. While imports totaled $6.0 billion, exports dropped 6.7% to $4.2 billion. A rise in the import of consumer products, food and beverages and vehicles resulted in higher overall imports. The trade deficit over the January-August 2011 period stood at $14.7 billion compared to a total of $7.9 billion in 2010, according to the CBS report.

Encouragingly, the unemployment rate fell to an all-time low of 5.5% in second quarter of 2011from 6.0% in the first quarter, according to the CBS. The jobless rate among people in the 25-64 age group dipped to 4.6% in the second quarter from 5.2% in the prior quarter. While the unemployment rate among the men dropped to 4.6% from 5.5%, the jobless rate among women tumbled to 4.5% from 5.0%. Elsewhere, the consumer confidence index (CCI) compiled by Bank Hapoalim’s and TNS Teleseker held steady in August. While the expectations index held up, the present situation index as well as the shopping climate deteriorated on the back of economic uncertainty and a decline in the security market, according to Bank Hapoalim economists. According to a Bloomberg report, Israel’s benchmark TA-25 stock index had fallen around 15% since the beginning of 2011. Still, the Bank Hapoalim report noted a rise in the employment situation index thanks to a favorable labor market environment.

In an effort to boost Israel’s competitive edge, the government announced a plan to split big business corporations in the country. Recommendations by the committee appointed by the Prime Minister Benjamin Netanyahu and finance minister Yuval Steinitz outline the sale of financial assets or other” real” assets of some of the nation’s leading conglomerates within a span of four years. According to the Finance Ministry, Israel is one of the most concentrated corporate powers in the developed world, with around 41% of the market value of domestic public companies in the hands of the country’s ten largest conglomerates. The panel also mentions granting more powers to minority shareholders and strengthening the Anti-Trust Authority with a view to avoid concentration and bring about more competition in the market.

In the wake of Israel’s rising cost of living, these business groups have been partly held responsible for the spike in basic foods prices. Israel has been witnessing a spate of protests against increasing prices in the recent months. The committee’s final report is expected to be presented to the cabinet in about three months and would require parliamentary approval to modify Israel’s regulatory laws.

Egypt: Main focus on economic revival

Egypt’s economy expanded at a slower-than-expected rate of 1.8% in the financial year ending June 2011, according to the Planning Ministry. Egypt’s financial year period is from July 1 to June 30. The government has forecasted 2.6% economic growth for 2010-2011. According to the Planning Ministry’s report, the Egyptian economy was moving at a favorable pace until it was hit by the political uprising that began on January 25. The economy almost came to a grinding halt under the impact of the upheaval, contracting by 4.2% in the initial quarter of 2011 before edging up 0.4% in the succeeding quarter.

Encouragingly, Egypt’s budget deficit narrowed to $4.99 billion in the April-June quarter from $5.29 billion in the prior quarter, according to the Planning Ministry. The government’s budget deficit estimates for 2011-2012 remain at 8.6% of the gross domestic product. Elsewhere, foreign reserves continued to slip, but at a slower pace since the uprising. Egypt’s central bank noted a slip in net foreign reserves to $25.01 billion in August from $25.71 billion in July. Net foreign reserves stood at $35.53 billion in August 2010.

Tourism revenues, which had taken a beating during the uprising, are showing signs of recovery, according to the Planning Ministry. Revenues from the tourism sector were $10.6 billion in 2010-2011 versus $11.6 billion in 2009-2010. The minister of tourism anticipates tourist arrivals to reach 30 million in the next five years, on the back of investments in the Red Sea and the Mediterranean. The tourism minister hopes to get the sector back on its feet by launching new advertising campaigns and organizing a variety of tourism events.

Suez Canal revenue income, a critical source of Egypt’s foreign exchange revenues, increased by an impressive 11.3% over 2010-2011 and stood at $5.54 billion by the end of June, according to the Suez Canal Authority. A rise in these revenues, considered as an indicator of international trade activity, mirrored an overall improvement in international trade in 2010-2011 after a slump in 2009. What’s more, inflation continued to decline to 8.5% in August from 11.8% in June, according to the Central Agency for Public Mobilization and Statistics (CAPMAS). Food prices, which triggered the historical revolt, increased at a slower annualized rate of 12.2% in August compared to 19.0% earlier in June. Further, a consumer confidence index compiled by the Information and Decision Support Center showed a month-on-month increase of 7.4% in August, thanks to a rises in basic indices such as family income and confidence in economic policies.

Still, there is continued uncertainty surrounding Egypt’s economic and political course in the absence of a civilian government. The business community has expressed concern over the lack of new economic reform plans or policies, fearing that this indecision could hinder future investments, delay projects and thereby stymie growth. According to the American Trade Commission in Egypt, the U.S. and Egypt are keen on encouraging cooperation between Egyptian and American companies to improve Egypt’s economic activity.

Meanwhile, the International Financial Corporation (IFC) and the State Secretariat for Economic Affairs (SECO), Switzerland, are helping Egypt alleviate regulatory bottlenecks in the business environment and improve job growth. The Saudi-Egyptian Business Council (SEBC) announced the establishment of the Saudi-Egyptian Bank, an effort to promote economic integration between the two regions. The Planning Ministry forecasts economic growth of 3%-3.5% in 2011-2012.

Morocco: A threat to public finances

Morocco witnessed a surge in government spending, driven by hikes in state employee wages and the rolling out of food and energy subsidies, moves used to control street protests from transforming into a widespread revolt. But this has drained over half of the public investment funds in 2011, seen as a key factor in helping the oil-importing economy grow over the past few years. Morocco doled out subsides worth $5.7 billion compared to a budgeted sum of $2.04 billion. Public sector wages including salary hikes were increased 11% to $11.4 billion earlier in 2011.

To alleviate the strain on public funds and balance the coming year’s budget, the Prime Minister is keen on cutting back public spending, according to a Moroccan news and information website. According to Moroccan economists, the government’s efforts to pump up stagnating government revenues include looking into other avenues such as a wealth tax. Earlier in August, the government had planned to sell 7% of its 30% holding in Morocco’s telecom major Maroc Telecom to satisfy the increased spending on subsidies. However, in the wake of stiff resistance from the opposition parties, this plan was abandoned for the second time in a row. The central bank has revised its budget deficit estimates for 2011 to 5% of GDP from an earlier forecast of 4.5%-5% due to increased spending. The institution is looking to narrow its budget deficit to 4% of GDP in 2012.

Yet, according to a Reuters report, an international financial institution mentioned that Morocco might need external funding aid in 2012, which is anticipated to come from the French Development Agency or other Western nations. It is also likely that it may receive funds from a multi-billion dollar aid package announced by the G8 nations to help countries impacted by the Arab Spring. The Gulf Cooperation Council (GCC) has also offered to fund a five-year development aid program. The kingdoms of Morocco and Jordan have been proposed for membership in the GCC bloc.

Meanwhile, inflation showed no signs of slowing down, rising to a year-high of 2.2% in August according to official data. Inflation continued to stay above the central bank’s annual estimate of 1.4% for a second month in a row due to higher food prices and education costs. According to the High Planning Commission (HCP), consumer food prices increased 4% year-on-year in August compared to a 0.6% rise in June. Double-digit growth in demand for private education drove education costs up at an annualized rate of 4.6%. The HCP report noted that public education in Morocco was viewed upon as an inefficient system. Although the central bank has forecasted an inflation rate of 2.1% for 2012, it is wary of the impact of the continued depletion of public finances.

The Kingdom’s foreign currency reserves and its ability to cover import bills remain at risk due to a widening trade deficit. The trade deficit widened 22.6% to $14.9 billion over the January-August period mainly due to increased spending on energy imports, according to official data. Energy import bills surged 43% to $6.8 billion, with spending on crude oil totaling $1.2 billion. Wheat, maize and sugar imports jumped over 80% to $0.3 billion. Total imports climbed 20.7% to $2.5 billion, while total exports rose 19% to $2.0 billion. Yet, exports of phosphates continued their downward trend yielding 33.8% of export value at $2.2 billion compared to 44.4% earlier in June, noted by a Reuters report.

Yet encouragingly, tourism receipts and migrant remittances, which shoulder around 65% of the trade deficit, improved over the period mentioned above. While tourism receipts grew 6.4% to $1.97 billion, migrant remittances increased 7.7% $0.17 billion, as noted by the foreign exchange regulatory authority. Still, the current account deficit is expected to rise to 5.3% percent of GDP in 2011compared to 4.3% in 2010 on the back of higher trade deficits, according to the central bank.

Jordan: Battling a wide budget deficit

Jordan’s widening budget deficit remains a concern. According to the Finance Ministry, Jordan’s budget deficit ballooned 55% to $366.8 million in the initial half of 2011, compared to $235.9 million a year ago mainly on the back of high energy bills and social spending.

Jordan imports nearly all of its energy needs. The disruption in natural gas shipments due to repeated attacks on Egypt’s pipelines, since the political uprising, has forced the Kingdom’s power plants to rely on more expensive fuels for generating electricity. Jordan spent $2.4 billion to ship natural gas and oil products, $146.8 million on electricity, and a total of $19.5 million on power in the first half of 2011. With this, the bill for energy imports skyrocketed 74%, according to the Department of Statistics. On the social spending front, the cabinet approved another $824 million towards public sector pay hikes and higher subsidies on food and energy. This was in addition to an allocated spending plan of $8.98 billion.

Jordan has received grants from countries such as Saudi Arabia, the United States, the European Union, and Japan. The Finance Ministry hopes that these foreign grants will partially cover extra social spending and help rein in the budget deficit to 5.5% of the GDP in 2011. The budget deficit reached a high of 9% at the peak of the global financial crisis in 2009, which hurt domestic demand, migrant remittances and other sources of cash flows. The budget deficit narrowed to 5.3% of the GDP in 2010.

Mirroring its efforts in Morocco, the GCC has announced its support to fund a five-year developmental plan in Jordan as well. According to the Emirates Industrial bank (EIB), Jordan and Morocco’s membership in the GCC bloc could provide additional investments, a much needed shot in the arm. Additionally, the bank feels that this could improve the job market in both the countries, enhance migrant remittances, and expand bilateral trading activities. In an effort to bolster the ongoing democratic reforms, Jordan has also applied for membership in the European Bank for Reconstruction and Development (EBRD), according to the ministry of Planning and International Cooperation.

Tourism, a vital cog of the Jordanian economy is benefiting from tourist arrivals from the Gulf, in particular. According to the Department of Tourism, there has been a 26% rise in tourist arrivals over the January-August period from the GCC bloc thanks to Jordan’s promotional tourism campaigns. Although over 50% of the tourists were in transit, the Hashemite Kingdom is seeking to attract these tourists to Jordan. Tourist arrivals from Europe and the Americas slumped 17% to 400,000 and 13% to 125,000, respectively over the period mentioned. Yet encouragingly, the number of visitors from African countries increased 17% and tourist arrivals from Asia and the Pacific grew 8%, according to the tourism ministry.

Still, Jordan’s economy remains vulnerable as the unemployment rate continues to hover around 14% ,with over 70% of the jobless below the age of 30, according to a Jordanian media report. At a time when the budget deficit remains strained, Jordanian economists have expressed concern over a $1.2 billion drop in the foreign currency reserves, lower tourism revenues, and public debt accounting for over 65% of GDP. The International Monetary Fund expects Jordan’s economy to expand 2.5% in 2011 and 2.9% in 2012.

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Postcards from the Middle East & Africa

Middle East E-commerce and online retail are getting bigger by the day across the Middle East, thanks to growing internet usage and a young, tech-savvy, and fashion-conscious population. Read more Israel Israel has made rapid strides in life sciences and biotechnology beginning in the 1950s, thanks to the influx of skilled immigrants from Germany who made the country their home. Today, the country is known as the backyard of the global pharmaceuticals sector. Read more South Africa China and South Africa are now fellow members of the BRICS economic grouping. Though China has been accused of "plundering" the continent of its natural resources, Chinese investments have helped create jobs and develop infrastructure in many African economies. Read more

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