After Black Wednesday, which Arab economies are most at risk?

Arab countries, with few exceptions, are likely to face severe losses.
Saturday 31/08/2019

CAIRO - After Western speculators and investors, fearing a global economic crisis, sold stock en masse August 14, numerous Arab stock markets followed suit, leading to what has become known as “Red Thursday,” in reference to the drop in indicators at seven of 13 Arab stock exchanges the week of August 15, the day after the “Black Wednesday.”

“Black Wednesday,” an expression referring to the economic fallout August 14, was driven by an announcement by the National Bureau of Statistics of China that the country’s industrial growth rate had fallen to 4.8% in July, the lowest in 17 years.

The same day, Carsten Brzeski, chief economist at Germany’s largest bank ING Group, said Germany’s economic growth had slowed from 0.4% in the first quarter of 2019 to 0.1% in the second, the lowest quarterly growth in the history of the world’s fourth largest economy.

With predictions that an economic recession could hit some of the world’s largest economies, including the United States, the United Kingdom, Brazil and Italy in the backdrop, there was fear that a global economic crisis similar to the one that began in 2008 could be in store.

Arab economists and businessmen, notably Egyptian billionaire Naguib Sawiris, called for precautionary measures, such as cutting interest rates on deposits and loans. However, it is unclear whether the measures would be enough to help Arab economies, especially those most dependent on oil sales, weather the storm, economists said.

Ibrahim Mostafa, an economic researcher at the Sadat Academy for Management Sciences, said oil-exports-dependent countries are likely to be hit hard by the crisis.

“The recession might be driven by a trade war between the United States and China, the two largest importers of oil,” Mostafa said. “As a result, the average price (of oil) per barrel is expected to see a severe drop, with the decline of the two countries’ financial abilities to keep importing at the current prices.”

Since 2018, the United States and China have increased tariffs and bilateral trade restrictions against each other, amounting to what some have characterised as a “trade war.”

In 2008, Arab countries hit hardest by the global economic crisis were oil exporters as well. Statistics from TradeMap, a global trade tracking site, and the World Bank indicate that the six Arab countries most affected by the crisis drew 24%-62% of their GDPs from oil exports.

Mosaad Aly, an economics professor at Mansoura University, said countries most at risk of economic hardship derive their GDPs mainly from exports and foreign investments, whether direct, from the stock market or from real estate purchases. Conversely, those least likely to be affected have GDPs that “are generated mainly from local consumption and domestic investment,” he said.

The United Arab Emirates, while being among the least oil-dependent of Gulf countries, could be adversely affected as well, he added, because of its high level of “real estate sales to foreigners, foreign investments in the stock exchange and the passing of international trade through its ports.”

“These activities are shrinking in light of investors’ hesitation, as their liquidity decreases and deteriorated international trade during crises,” he said.

Aly said countries suffering from civil strife and unrest, such as Sudan, Algeria, Libya, Syria and Yemen, were likely to suffer the most. The United Arab Emirates, while being among the least oil-dependent of Gulf states, could be adversely affected as well, he added, due to its high level of “real estate sales to foreigners, foreign investments in the stock exchange and the passing of international trade through its ports.”

“These activities are shrinking in light of investors’ hesitation, as their liquidity decreases, and deteriorated international trade during crises,” he said.

In 2008-09, countries going through civil unrest, such as Mauritania, Comoros and Sudan, predictably saw a decline in the growth rate.

Unlike other oil-dependent economics, Qatar, Oman and Algeria effectively weathered the economic crisis in 2008-09, because, Mostafa said, of their role as key natural gas exporters to the United States and Europe.

“In spite of the direct proportion between oil and gas prices, the later seemed to be more strategic for many countries, being a source for 23% of electrical power generation around the world, so it is likely to be exported upon pre-priced contracts that aren’t affected by the crisis fluctuations,” he said.

This analysis means that Arab countries, with few exceptions, are likely to face severe losses from the expected economic crisis, especially those that are highly oil-dependent, sensitive to external economic instability or facing local political, security or economic crises.

Exceptions are Oman, which is a key regional natural gas exporter; Egypt, which is a largely locally driven economy that aspires to be a key gas exporter; and Jordan, Tunisia and Morocco, which also have locally driven economies.

Despite being the greatest regional natural gas exporter, Qatar, whose economic growth rate declined 33% from 2016-18, was expected to continue a downward trajectory as it remains isolated politically and economically by Saudi Arabia, the United Arab Emirates, Bahrain and Egypt.

18