Sluggish global economy will add to MENA’s woes in 2016
Washington - Low oil and commodity prices combined with decreasing demand from China will contribute to a less-than-stellar outlook for the world economy in 2016. The migration crisis in Europe and the inevitability of rising interest rates in the United States may also undermine economic growth in many markets.
“The 2016 forecasts are pretty bleak overall because you have contraction in global trade in part due to less demand in China and you have a continuing drop in the prices of commodities including oil,” Flavius Mihaies, a political economist at the World Bank, told The Arab Weekly.
Global growth in 2015 fell short of expectations, according to International Monetary Fund (IMF) data. This slower than expected growth might contribute to lower numbers in 2016.
The US market expects an interest rate hike, possibly before the new year, according to data from Bloomberg. Interest rates have been pegged to near 0% since December 2008, as the Federal Reserve tried to stimulate the US economy. The Fed has not raised rates since June 2006.
While many US economists say a rate hike is well overdue, an IMF report warned against an uptick in rates, arguing that such a move would not be beneficial to the US economy at this time of slower global growth. A rate hike will further strangle growth in many emerging markets. Europe, in particular, will face unexpected challenges due to the migration crisis. Mihaies said that the terror attacks in Paris in November may have put the continent on a path of having to choose between fiscal responsibility and beefing up security while managing the migration crisis.
“After the attacks in Paris, [French President François] Hollande is choosing a security pact over a stability pact, emphasising security spending over keeping the budget under control,” said Mihaies.
“And this is now the big challenge for Europe. If you keep your finances under control, you will have less money to spend on immigrants and on fighting terrorism. On the other hand, if you want to spend more money on immigrants and security, you cannot meet the demands from Brussels to keep your budget under control. So it’s a very tough situation for Europe right now.”
Forecast for growth in the Middle East and North Africa (MENA) region correlates directly with oil prices, putting oil-producing countries such as Saudi Arabia and the United Arab Emirates at the highest disadvantage. This is particularly ironic because it is Saudi Arabia’s high production that is the main factor behind low oil prices.
Lower oil revenues will also translate into lower government subsidies in Gulf Cooperation Council (GCC) countries which have remained largely stable despite the unrest which has swept the region since “Arab spring” uprisings of 2011. GCC countries also will have less money available to help non-oil countries, such as Egypt and Jordan.
Algeria’s economy, which relies on natural gas exports, will also suffer from low prices.
Some non-oil producing countries in the MENA region, such as Morocco, will continue to grow, though such growth is forecast to be at 3% in 2016, down from an estimated 4.6% in 2015.
The Egyptian economy, which has traditionally relied on tourism with less dependence on oil prices, suffered a big blow in 2015 due to the effect of terrorism on the all-important sector. This may continue to plague Egypt in 2016.
Egypt also suffered from foreign exchange shortages in 2015, and the Central Bank has been unable to meet domestic demand for hard currency in conducting international trade transactions.
“But this will change in 2016, so Egypt is expected to grow,” said Mihaies, referring to a structural adjustment loan agreement that Egypt is likely to sign with the IMF.
Asian markets are tied mainly with China’s stabilising growth, long expected to taper off after stellar annual growth for the past decade. China is expected to grow less than 7%, down from an annualised 9% seen after the 2008 financial crisis. Asian economies will react in accordance to their trade relationship with China.
“You can put the Asian economies into two baskets: Winners and losers. Those that depend on China for their exports will slow down as China slows down. Other countries that are less dependent on China for exports are more diversified and somehow they will manage to attract investments, like remittances in the Philippines,” said Mihaies.
The ripple effects of China’s slower economy will be felt as far away as Brazil, one of its main trading partners, and may be worse than expected because China’s economy is not transparent and the current estimate of growth may thus already be inflated. Some China-dependent countries are trying to fill the gaps by seeking new opportunities in India but the fruits of these efforts remain far off.