Growth in both of these regions continues to benefit from very strong global commodity prices, including oil. The oil-exporting countries (Saudi Arabia, Kuwait, the smaller Gulf states, Algeria, Angola, and Nigeria) continue to grow strongly, notwithstanding occasional supply disruptions in Nigeria; and real GDP growth rates in the range of 5-6 per cent appear likely to continue at least through 2007.
The Iranian economy is also expanding reasonably rapidly, aided by high oil export revenues; but growth prospects are somewhat clouded by the possibility of wider economic sanctions that might be imposed in response to Iran’s continued nuclear development programme.
The non-oil exporting economies in these regions (most notably Egypt and South Africa) are also growing strongly this year and may reasonably be expected to continue with similar performance in 2007. In Africa, the strong economic performance of the past few years (and prospects for the future) has been significantly aided by the relative absence of armed conflicts, despite continuing difficulties in Somalia, Sudan, the Congo, and Cote d’Ivoire, and the mess in
Zimbabwe. In the Middle East, the economy of Lebanon was clearly devastated by the August war, and growth this year in the significant-sized Israeli economy also felt a sharp but brief setback.
In Iraq, escalating sectarian violence is undoubtedly an important impediment to more rapid economic recovery, although there are some indications that economic activity is rising in more peaceful regions of the country. On balance, if growth in the rest of the world economy is slowing by about one percentage point between 2006 and 2007, it is reasonable to expect that this slowdown will be reflected in somewhat less buoyant global commodity markets and more generally in a modest negative spillover to growth in Middle East and Africa.
Meanwhile, the economies of the Gulf region are expected to continue on their strong economic growth path despite last year’s sizeable drop in share prices and the rise in short-term interest rates. The surge in oil revenues gives the GCC countries the means to increase fiscal expenditures, undertake mega infrastructure projects and invest in various industries. The government sponsored projects will provide a stimulus for private sector to grow.
After growing at 6.8 per cent in 2005, and an estimated six per cent in 2006, real GDP growth for the region is forecast to grow at a healthy five per cent in 2007. The UAE is believed to have recorded the highest real GDP growth in 2006 of 10.2 per cent, followed by Qatar 7.5, Kuwait 6.5, Saudi Arabia 6.2, Bahrain six and Oman five per cent.
Qatar
Qatar is to lead in terms of real GDP growth in 2007 rising by 8.6 per cent as it has boosted its natural gas production by 42 per cent on top of the 8.9 per cent increase in 2006. UAE will follow with real GDP growth of 7.2 , Oman 5.9, Bahrain five, Saudi Arabia 4.2 and Kuwait 4.1 per cent. The lower growth rates projected for 2007 compared to 2006 is mainly due to the slight decline in crude oil production expected this year.
The region’s stock markets are not far away from reaching a trough. However, the markets are expected to stay thereafter in a trading range to establish a solid base. The positive outlook of the GCC economies will be affected only marginally by the sharp slide in share prices. The decline in the “wealth effect” of shareholders in the region will have some impact on overall consumption expenditures, but this will be more than compensated for by the expansionary fiscal policies followed by the governments in the region.
The region’s infrastructure such as roads, sewages and water networks badly suffered in the past decade and needs overhauling. Over $1,000 billion has been announced in infrastructure and real estate projects in the GCC, with more than half of these projects already underway, translating into one of the largest construction booms in the world. There are also plans to spend more on education and health care and on schemes to encourage private sector employment. The oil producing countries of the region are also spending billion to boost their oil production and refining capacity to meet future world demand.
Inflation in most of the GCC countries is expected to retreat in 2007 as supply bottlenecks ease, especially in housing markets of the UAE and Qatar. The average inflation rate of the six Gulf countries was as low as 0.8 per cent in 2002 before rising to four per cent in 2006. The rate is projected to edge slightly lower to 3.6 per cent in 2007. A breakdown of the aggregate figure shows the UAE had the highest inflation rate in the GCC in 2006 at 9.9 per cent, due to rising rents, which has a weighting of 30 per cent in the consumer price index.
Inflation in the UAE is expected to drop to seven per cent in 2007. Saudi Arabia’s inflation rate is likely to remain unchanged at the 2006 level of 1.8 per cent. In Kuwait, which revalued its currency in 2006 to contain imported inflation, price growth will fall to 2.7 in 2007 from 4.2 per cent in 2006. Qatar’s inflation is likely to drop from 8-6 per cent in 2007. Oman’s inflation will slip to 2.5 in 2007 from 3.1 per cent in 2006 while Bahrain’s inflation is expected at 2.7 from 3.1 per cent last year.
Oil prices: Oil prices have risen from an average of $35 a barrel in 2004 to $53 a barrel in 2005 and an average of $65 in 2006, an increase of more than 22 percent on 2005 level. Total oil revenues are estimated to have reached $400 billion for the six Gulf countries in 2006, up from $320 billion in 2005. External current account surpluses are estimated at $170 billion in 2006, up six per cent on the year before and accounting for 28 per cent of GDP, compared to 13 per cent of GDP in 2003.
Nominal GDP growth rates are expected to surge this year supported by expansionary fiscal policy and an active private sector. After growing at the average rate of 25.7 per cent to $597 billion in 2006, this year’s nominal GDP for the six Gulf states could exceed $700 billion. Saudi Arabia, which saw its nominal GDP grow to $347 billion in 2006 and it is forecast to hit $380 billion in 2007. The Kingdom used part of its oil surplus to reduce its huge domestic debt, while other Gulf countries used the surplus to increase their foreign asset accumulation.
Saudi government debt dropped from 46.5 per cent in 2005, 28 per cent in 2006 and is forecast to decline further to 24 per cent of GDP in 2007. Recent estimates put Saudi Arabia foreign assets at $250 billion, Kuwait’s foreign assets are believed to have grown to well over $200 billion recently, while UAE’s foreign assets are estimated at more than $500 billion.
Unlike in the 1970s, when the oil windfalls were largely recycled into US Treasuries and the western banking system, there are indications that GCC governments and companies are investing in other Arab countries — primarily into projects, private equity, real estate and capital markets in Egypt, Jordan, Lebanon, Morocco and Tunisia, underpinning economic growth and job creation in these countries. Arab economies are surging on higher oil prices, which quadrupled in the four years to July, 2006, and more domestic and foreign investment as governments sell off their assets and ease restrictions on private business.
A latest economic report by the Standard Chartered Bank shows that Middle East economies will grow by an average 9.6 per cent this year in nominal terms, compared with 16.9 per cent last year. According to the bank, all the economies of the Gulf will continue to grow in 2007, though at a slower rate as oil prices fall from last year’s record high and OPEC mandated oil production cuts take effect. At the same time, HSBC in its report said that the region’s governments are likely to push forward the reform process in order to create jobs and wealth for their rapidly growing populations.
Iraq
IRAQ’s economy is doing remarkably well. Real estate is booming. Construction, retail and wholesale trade sectors are healthy, too, according to a report by Global Insight in London. The US Chamber of Commerce reports 34,000 registered companies in Iraq, up from 8,000 three years ago. Sales of secondhand cars, televisions and mobile phones have all risen sharply. Estimates vary, but one from Global Insight puts GDP growth at 17 per cent in 2005 and projects 13 per cent for 2006. The World Bank has it lower: at four per cent this year. But, given all the attention paid to deteriorating security, the startling fact is that Iraq is growing at all.
However, many economists are of the opinion that Iraq is a crippled nation growing on the financial equivalent of steroids, with money pouring in from abroad. National oil revenues and foreign grants look set to total $41 billion this year, according to the IMF. Unemployment runs between 30--50 per cent. Many former state industries have all but ceased to function. As for all that money flowing in, much of it has gone to things that do little to advance the country's future.
Iraq really needs hospitals, highways and power-generating plants. Real-estate prices have risen several hundred percent, suggesting that Iraqis are more optimistic about the future than most Americans are. A government often accused of being no government at all has somehow managed to take its first steps to liberalise the highly centralised economy of the Saddam era. Iraq has a debt-relief deal with the IMF that requires Baghdad to end subsidies and open up its gas-import market. Earlier this year the government made the first hesitant steps, axing fuel subsidies—and sending prices from a few cents a litre to around 14.
Iraq still lacks a functioning banking system. Though there's an increasing awareness of Iraq as a potential emerging market, foreign investors won't make serious commitments until they are assured a measure of stability. Real progress won't be seen until the security situation clears up. Local moneymen are scarcely more bullish on the long term. In Iraq's nascent bond market, buyers have so far been willing to invest in local-currency Treasury bills with terms up to six months.
One thing is certain about the Iraq war: It has cost a lot more than advertised. In fact, the tab grows by at least $200 million each and every day. In the months leading up to the launch of the war three years ago, few Bush administration officials were willing to comment publicly on the potential costs to the United States. After all, no cost would have been too high if the United States faced an imminent threat from an Iraq armed with weapons of mass destruction-- the war's stated justification.
Debate: In fact, the economic ramifications are rarely included in the debate over whether to go to war, although some economists argue it is quite possible and useful to assess potential costs and benefits. The University of Chicago economist Steven Davis and colleagues, who put the likely U.S. cost at $410 billion to $630 billion in 2003 dollars. Another economist puts the final figure at a staggering $1 trillion to $2 trillion, including $500 billion for the war and occupation and up to $300 billion in future health care costs for wounded troops. Additional costs include a negative impact from the rising cost of oil and added interest on the national debt.
The most comprehensive study of Iraqi debts, by the Center for Strategic and International Studies (CSIS), calculates Iraq's total debt to be $127 billion, of which $47 billion is accrued interest (based on 2001 World Bank figures). Iraq owes a further $199 billion in Gulf War compensation and $57 billion in pending contracts signed between the Saddam Hussein regime and foreign companies and governments. Iraq's overall financial burden, according to the CSIS figures, is $383 billion.
Based on these figures, Iraq's financial obligations are 14 times its estimated annual gross domestic product (GDP) of $27 billion--a staggering $16,000 per person. Measured by the debt-to-GDP ratio, Iraq's financial burden is over 25 times greater than Brazil's or Argentina's, making Iraq the developing world's most indebted nation. Iraq is at a crucial phase of economic governance, and if radical changes are not made immediately, then the country may deviate further from its previously anticipated high economic growth, rapid social development, and flourishing business environment.
Egypt
Economic growth accelerated to an estimated 6.8 per cent in fiscal year 2005/06. The Economist Intelligence Unit expects growth to slow gradually over the outlook period, to 6.6 in 2006/07 and to 5.8 per cent in 2007/08. J P Morgan study put growth rate at seven per cent in the current fiscal year 2006/2007 versus 6.8 per cent in the previous fiscal year 2005/2006. External performance remains strong despite the current account surplus falling to 1.6 of GDP in FY2005/06 from 3.1 per cent in the previous year.
The current account has been witnessing surplus for the last four consecutive years and is expected to continue this trend in the current year as well, thus enabling the government to adopt an aggressive reform policy approach. This figure masks the robust performance of exports, which increased by 33 per cent, with export growth accelerating to 52.5 per cent. Imports also increased strongly by 25.8 per cent driven by the buoyant demand in the economy.
Given that imports are over double the value of exports, this resulted in the trade deficit widening. Positively, imports of investment and intermediate goods represented 53.6 per cent of total imports, which bodes well for Egypt’s economic outlook. There were also strong performances in the invisible components of the current account, as tourism, remittances and Suez Canal earnings continued to increase.
Although tourism revenues grew by 12.5 per cent in FY 2006/07, the sector was negatively impacted by the terrorist attacks in April. Visitor numbers into Egypt fell by 5.5 per cent in July, the third consecutive monthly drop. However, we are forecasting a strong recovery in the tourism sector and expect the figures to start improving from August as the conflict in Lebanon resulted in many regional tourists changing their holiday plans to other regional countries, such as Egypt.
Reform: The progress on the reform front has raised and improved Egypt’s profile in international capital markets. Foreign direct investment and inward portfolio flows have risen sharply. FDI into Egypt increased by 56.4 per cent to $ 6.1 billion in FY 2005/06, equivalent to over 5.5 of GDP; this is up from under three per cent of GDP in FY 2003/04. Importantly, non-energy investments accounted for around 70 per cent of FDI, compared with just 33 per cent in FY 2004/05. Meanwhile, portfolio inflows increased to $ 2.8bn in FY 2005/06, up from $ 800 million.
The external sector remains a strong engine of economic expansion, although growth remains broad-based with expansion in private consumption and investments. Robust economic activity is resulting in a pickup in inflationary pressure. Inflationary pressure has been accelerating since June, with the year-on-year CPI increasing by over seven per cent. Along with the strong demand in the economy, other factors driving inflationary pressure are the outbreak of avian influenza which has been placing upward pressure on food prices and reduction in fuel subsidies.