Middle Eastern and North African countries that are in turmoil have seen their ratings downgraded, stock markets plunge and foreign investors turn cautious
The jasmine or Arab revolution started with the sad story of a poor fruit seller who, like many of his young compatriots, did not have numerous work options. Besides the concern for population safety and democracy, the international community is also worried that upheavals might affect oil production.
The world’s oil supply has been cut by 850,000 to one million barrels a day since the beginning of the crisis. Libya, the world’s 17th largest oil producer (with two per cent of world production), is no longer the only concern. North African countries produce five per cent of the world’s oil while the Middle East produces 30 per cent. If Saudi Arabia, the world’s third largest oil producer, should face revolution, it will turn into a new oil crisis. In addition, Iran — the world’s ninth largest oil producer — faces turbulence, which might trigger political instability in the region.
The price of Brent crude jumped 20 per cent during the latest week, reaching $120 a barrel and approaching its earlier peak of $147 per barrel. In order to calm the markets, Saudi Arabia and other OPEC countries announced they would be able to compensate for any decreased oil production. Saudi Arabia has significant spare production capacity, estimated at 2.5-3 million barrels/day. Over the last few days, the kingdom pumped up an additional 600,000 barrels/day. In addition, the International Energy Agency stated that it is ready to release emergency stockpiles if needed. Despite these announcements, oil shortage speculation remains a significant concern.
In addition to concern over oil and gas production, Middle Eastern and North African (MENA) economies will suffer from the uncertainty caused by upheavals. Investment bank EFG-Hermes revised its 2011 forecast for the MENA’s real GDP growth to 3.6 per cent from its earlier forecast of 5.4 per cent. Growth forecasts for Oman, Saudi Arabia, Egypt and Bahrain have been downgraded. In addition, sovereign debts face an interest rate rise, as rating agencies downgrade or change their outlook to negative. Fitch, Standard & Poor’s and Moody’s downgraded Tunisia’s and Egypt’s long-term debt rating. Jordan and Bahrain’s ratings have a negative outlook. Before protests erupted in Bahrain, the interest payment on five-year government debt ($10 billion) had already increased two-fold. Saudi Arabian five-year credit default swaps rose by seven basis points (or bps) and the Bahraini 5-year CDS by 12 bps. Insurance costs also increased for most MENA countries.
While foreign direct investors are more cautious, Gulf stock markets plunged last week. This week’s rally is not supported by facts and will be temporary. Over the last two months, MENA stock markets lost between 15 and 25 per cent. In Egypt, the EGX has even been closed since January 27 and its re-opening keeps getting postponed. The Kuwait stock market plunged to its lowest level since 2004 and Dubai’s index is at a seven-year low. “Stock markets reflect investors’ concern. They wonder if Saudi Arabia will be able to contain the unrest,” said Saud Masud, CEO at SM Advisory Group, a consultancy firm focusing on MENASA markets.
Each country touched by the turmoil has seen its economy sliding. However, the impact will be less significant for oil-rich states because the crude oil price is again above $100-a-barrel. As long as these countries are able to supply the international market, they will not feel a slowdown. On the contrary, export revenues will increase. Big oil-exporting nations such as Iran, Saudi Arabia, Qatar, the UAE and Kuwait have an economic cushion. Even Libya, where oil brings in 95 per cent of export revenues, is part of the group.
More From This Section
In countries where oil is only a minor part of the GDP, the turmoil will hurt the economy. The diversified economies that rely on services, tourism, industry and foreign direct investment are more vulnerable. This group includes Egypt, Tunisia, Morocco, Algeria, Jordan and Syria. Egypt has already suffered a fall in tourism, a $13 billion sector. EFG-Hermes expects a 3 per cent economic contraction in 2011 in Egypt. In general, North African countries have important industrial sectors, such as textiles. The factories employ millions of workers and will be heavily affected by the turmoil, as demand will decrease. “‘Keep diversifying’ is the key. But Egypt, like Tunisia, needs to have a stable government to take action to sustain development,” Masud said.
“Both types of economies have high unemployment and an important youth population share. The big challenge is to create jobs and appropriate education. Therefore, they need to diversify their economies. Petrochemical and aluminum industries do not require a lot of workers, while services and finance do not always give jobs to locals,” said Eckart Woertz, visiting Fellow, Princeton University. “The two groups of countries have opposite needs: North Africa has an important population, a relatively high economic diversification, but low productivity. The oil-rich countries rely on very productive expat knowledge but need to diversify,” added Masud.
In between those two groups are Bahrain and Oman. The Bahraini economy is based on oil processing. The kingdom has a significant petrochemical and aluminum industry, which relies on accessible and cheap oil from neighbouring countries. Last week, Bahrain announced an indefinite postponement of the Bahraini Formula 1 Grand Prix, which normally opens the F1 season. “The postponement of the race is not a major economic issue, it is more a psychological one,” said Eckart Woertz. The Sultanate of Oman also has limited oil production.
Its GDP consists mainly of industrial and logistical activities. Unrest around the port of Sohar is negative for the reputation of the sultanate. Luckily, its geographical position, in front of the Strait of Ormuz, will help the sultanate keep up its logistical activities when shipping insurance premiums recently rose by 20 per cent. Oman’s final concern is its tourism sector. The sultanate has launched an aggressive marketing campaign over the last two years to boost its tourism sector from 2.8 per cent of GDP to five per cent, but current events will hold back this effort. The Gulf Cooperation Council (GCC) announced on Thursday a $20 billion aid package to support Bahrain and Oman. It will be injected in projects over the next 10 years.
Although there is unrest in the MENA area, risk management companies are positive about the region. “The business sector is not targeted by the protestors. The upheavals are focused on politics and unemployment; they will not destroy the job providers. In the mid-term, when governments will be able to take action, it will be interesting to invest again in the MENA,” concluded Julien Barnes-Dacey, head of the MENA desk at Control Risks.