'Tough year ahead for Mena non-oil exporters'
Dubai, March 17, 2013
The growth dynamics of the Mena region is divergent as on one hand the oil exporters benefit from strong fuel prices and strong government backing, while the non-oil exporters face a more challenging fiscal reality this year, said Standard Chartered bank in its recent review on Mena growth.
Countries which have financial and physical resources and are backed by governments willing and able to implement spending and investment plans are outperforming the others in 2013. The UAE and Saudi Arabia are clear leaders in this regard, it stated.
Others in Mena region still have a long road ahead as attracting inward investment will be a major challenge in the long run, but in order for this to happen, reforms of existing fiscal, subsidy and legal systems need to be undertaken, said the report.
For the rest of the year we see three main themes emerging. First, fiscal policy is important. Most oil exporters are expanding fiscal policy, backed by strong oil receipts and rising reserves. Non-oil-producing countries face fiscal constraint and the heavy burden of inefficient subsidies amid rising social pressures.
Second, inflationary pressures remain moderate in non-oil exporters, yet imported inflation, especially from energy and food prices, might begin to bite. For oil exporters, with government spending activity hitting all-time records in 2013, inflationary pressure may begin to pick up, especially as housing components begin to rebound.
Third, regional financial co-operation is on the rise; we see more financial support between surplus and non-surplus economies. This is positive near-term, but is unsustainable.
The fiscal disparity in the region is best highlighted when comparing conditions in Saudi Arabia and Egypt, said the Stanchart report.
Saudi Arabia's strong spending trends show no signs of abating; planned spending is up again in 2013, underpinned by high oil prices and a record surplus for 2012.
Saudi's government expenditure in 2012 was $227 billion, $43 billion higher than forecast, yet high oil prices for 2012 meant Saudi Arabia recorded a $103 billion surplus. The Kingdom's 2013 budget has planned expenditure of $219 billion, which was likely to reach $240 billion.
According to Stanchart, Saudi was heading towards a budget surplus of $70 billion.
In Egypt, however, the H1-FY13 (July-December 2012) deficit grew to EGP 119 billion from EGP 88 billion in H1-FY12, due to a 50 per cent rise in spending on subsidies, grants and social benefits.
The progress on necessary subsidy reform is slow amid an uncertain political environment and prolonged discussions with the IMF. A balance of payments deficit, falling reserves and a consequently weaker currency heighten the need to secure IMF funding.
Part of this can be attributed to social pressures; however, the fall in the Egyptian pound is also raising the country's import bill.
In addition, slow progress on an IMF loan and an undecided date for parliamentary elections will likely push back subsidy reform into FY14. This is likely to keep fiscal conditions challenging.
According to Stanchart, the inflation is selectively picking up across the region. Inter-regional fiscal co-operation is growing.
On the UAE scenario, the Stanchart report said the Emirati economy started 2013 in good shape. First, the government spending out of Abu Dhabi was strong, with the emirate outlining strong medium-term spending plans.
Second, Dubai's economy is firmly on track, with the core trade and services sectors well placed to benefit from strong regional trade currents, underpinned by high levels of GCC government spending in 2013.
Third, while credit growth has remained muted over the last four years, the non-oil recovery in Dubai and higher levels of spending in Abu Dhabi should support a moderate pick-up in credit growth as confidence levels and local banks loan-to-deposit ratios improve, said the report.
Abu Dhabi has started investing in its own economy once again, while Dubai's non-oil economy has started outperforming, underpinned by regional trade flows and its safe-haven status, said the stanchart report.
Also credit growth in Dubai should begin to improve following more than four years of very tight conditions, it added.
In Qatar, projects related to FIFA 2022 are beginning to come online. In the first quarter of 2013 we have seen positive signs related to Qatar's spending commitments for FIFA 2022.
In addition, so far this year the government has awarded a number of projects related to the country's decade-long infrastructure commitments. Some of these projects should break ground by the second half of 2013.
Between now and 2022, Qatar is set to spend almost $115 billion on infrastructure projects and FIFA 2022, said the Stanchart in its report.
However, inflation may be a concern for Qatar, especially as spending outlays materialise this year. The LNG sector is back in focus, with policy makers addressing long-term challenges.
According to Stanchart, Qatar will face numerous challenges in the run-up to FIFA 2022. Logistical challenges will be one, as the country will need to source significant amounts of goods (primarily building materials) and construction equipment to support the upcoming building boom. This is likely to translate into inflationary pressure in certain sectors of the economy.
"We expect the prices of building materials and certain raw materials to begin to rise; domestic transport and logistics costs are also likely to feel the pressure," it added.
On Kuwait, the report said the country was likely to post strong fiscal and external surpluses in FY13 (ending 31 March 2013) on the back of high oil prices.
"Oil revenue is well-placed to support investment and the start of the year has seen official announcements on planned spending amounts. However, ongoing tensions between parliament and the cabinet may detract from this. Kuwait looks unlikely to reduce its dependence on oil in the short to medium term and will see lower levels of foreign direct investment (FDI) than its peers, as a result."
"We look for growth of 3 and 3.5 per cent in FY13 and FY14, respectively, it added.
On Oman, the Stanchart report said the Sultanate's economic outlook in 2013 was positive, with increased government spending on the back of high oil prices and a supportive oil-demand outlook.
"Spending will be directed at infrastructure, further developing the oil and gas sectors and job creation. The year will also be marked by a continued focus on job creation for Omani nationals in both the public and private sectors. Higher government spending and strong domestic demand, via job creation and wage hikes, will help maintain double-digit credit growth," it stated.
About Bahrain, the report said the Kingdom had performed strongly over the course of 2012 as investors drew comfort from the easing of social unrest in the country following a turbulent period in 2011 and from strong political and financial support provided by the GCC.
These factors, together with the risk-on tone in markets mode drove Bahrain 5Y CDS 193bps tighter during the year. On the back of renewed optimism, Bahrain was able to tap the international debt market in June 2012, raising $1.5 billion in 10Y bonds.
The country also saw positive momentum on its credit rating, with S&P recently revising its outlook on Bahrain's BBB rating from negative to stable, the report stated.
"From a fundamental point of view, we remain cautious on Bahrain. The breakeven oil price for the budget, which was already very high, has increased further as a result of additional government expenditure, contributing to ongoing structural fiscal deficits."
"We are also concerned about the long-term impact of political uncertainty on the real economy and Bahrain's ability to attract new business. That said, we acknowledge that support for Bahrain from the GCC, particularly from Saudi Arabia, provides a strong backstop for the credit," said the review.-TradeArabia News Service