Growth Stalls in Arab World as Challenges from Europe Escalate

Published June 12th, 2012 - 01:08 GMT
Dents in the Arab economy, like these rusty oil cans
Dents in the Arab economy, like these rusty oil cans

All eyes have been focused on the latest travails in Europe to determine if European leaders can manage major structural reforms amidst political intransigence that blocks a favorable economic solution from taking hold.  Issuing more debt may drag out the present situation, but real GDP growth will inevitably be the only cure for the current malaise.  While Europe muddles through, however, their trading partners must readjust their plans for the future.  In the Arab world economic prosperity is tied to oil, trade linkages, and tourism, all of which have significant historical ties to Europe.

Social unrest has unfortunately pervaded the region, as widespread unemployment has cut a swath through the Middle East and North Africa.  Government transfers have maintained stability in some areas, but the challenge will be, as with Europe, to generate growth solutions that will discount the need for government intervention.  Unlike many trading partners to the north, the region has not slipped into recession.  In fact, the IMF in its latest forecast sees the area growing from 3.5% in 2011 to a level of 4.2% in 2012.

As with averages, these positive prospects are not equally divided across all Arab states. Disparities exist between oil exporters on the high side and the oil importing states that must struggle without the support of oil revenues. Social unrest has also impacted both tourism and capital flows, while the slowdown in the global economy is pushing oil prices per barrel well below the desired $100 level and above.  The IMF has estimated that a significant fall off in trade with Europe could also drop GDP forecasts by as much as 3%, the “largest spillover effect for any region outside Europe”.

For the two largest economies in the area, Saudi Arabia and the United Arab Emirates, oil exports continue to fuel growth prospects, but declines in the global price for a barrel of oil are causing operating deficits to appear on a national level.  If a global economic slowdown is more severe or the Iran situation gets out of control, both governments will be challenged to maintain economic and social stability, a prerequisite for investment capital inflows and tourism.  Currencies have long been pegged to IMF drawing rights in Dollars, such that choosing the right forex broker to profit from positive growth dynamics is not an option in either country.

For oil importers, the situation is more strained.  High unemployment, especially among the region’s youth, has seriously impacted public policy and led to social unrest.  Without oil revenues to buffet domestic budget concerns, austerity programs have not been met with much public acceptance.  Basic fundamental analysis suggests that stimulus is needed to encourage activity in the private sector and generate broad-based opportunities that can be accessed by all age groups in the oil importing nations.  Present fuel and food subsidies may need to be extended, but at some point, these subsidies must be targeted to reduce the strain on public finances.

In this modern era of globalization, it may be difficult to accept that national economies are so tied to what transpires well beyond national borders, but these interdependencies are the new reality and must be accommodated. The Middle East and North Africa region has generally been in positive growth mode for the past decade, but political uncertainty and social unrest are the two factors that may undermine future success. The primary challenge will be to diminish the impacts from these two forces. To do so would create a stable environment, capable of attracting foreign investment, while creating widespread job opportunities within the entire region.

Guest Article by Tom Cleveland from Forex Traders


The views expressed in this article are the author's own and do not necessarily reflect Al Bawaba's editorial policy.

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