Because of close trade ties, US foreign aid to the region, and American thirst for oil, S&P’s downgrade to the US credit rating a few weeks ago is surely a harbinger of doom for economies in the Middle East and North Africa, right? Not exactly.
After the S&P downgrade, stock markets fell across the MENA. Investors are understandably concerned about increased risk. However, FSG does not expect this to shift the regional risk profile significantly. The region should be less susceptible to economic shocks in the short term as many economies have already taken a beating due to revolutions, transitions, and ongoing political uncertainty associated with the Arab Awakening. One potential impact would be an uptick in inflation growth in the Gulf. This is because five of six GCC currencies are pegged to the US Dollar. If the US Federal Reserve decides to begin a third round of quantitative easing, then it would place upward pressure on the price of importing goods in the region.
What unfolds in Europe and Asia for the rest of the year is likely to have a more profound impact on the investment outlook for the Middle East and North Africa going into 2012. A deepening Euro zone crisis threatens countries with close trade ties to the EU. Morocco and potentially Egypt could see their currencies weakened, while Turkey could be squeezed by a slowdown in exports and foreign investment.
Hydrocarbon economies like Kuwait, Qatar, Saudi Arabia, and the UAE are fairly insulated because their respective budgets factor in oil prices averaging a range from $55 (Qatar) to $85 (Saudi Arabia) per barrel on the year. Oil has already averaged well over $100 per barrel and we are approaching the last quarter of 2011. Gulf oil exporters can draw on excess crude revenue to sustain aggressive public spending and economic diversification programs in 2012. Still, a European recession combined with a trade slowdown in Asia would represent a serious blow to oil demand and impact prices as a result. This could lead to a delay in public sector projects and place an increasing burden on the private sector to create more jobs locally.
Overall, FSG does not expect global instability to impact the Middle East and North Africa in the short term. However, a deepening euro zone crisis combined with a slowdown to Asian demand could prove to be a toxic cocktail for the region in the medium term. The silver lining in this type of double-whammy scenario would be reduced global demand for commodities and lower food and fuel prices in the region. This would be particularly important for countries impacted by the Arab Awakening as they look to rebuild their economies.
No related posts.
