New developments such as political crises and surges in global oil and food prices, have affected the outlook for Middle East countries since an IMF report in 2010.
Following the global financial crisis, the Middle East and North Africa (Mena) region was witnessing a strong recovery supported by the rebound in oil prices. In October 2010 the IMF World Economic Outlook projected that these positive factors would contribute to an expected growth rate for the region as a whole of 4.1 per cent in 2010 and 5.1 per cent in 2011 while global activity was forecast to expand by 4.8 per cent in 2010 and 4.2 per cent in 2011.
However, two new developments have since affected the outlook of the region: the Arab political uprisings and the surge of global oil and food prices.
With the exception of Libya and Yemen, which have experienced profound political turmoil, for oil-exporting countries the rise of oil prices has led to higher growth and stronger fiscal and external balances, despite the increase in government spending. Projected real GDP growth is at 4.9 per cent in 2011 and 3.9 per cent for 2012. However, this overall trend masks the actual fiscal stance of many countries, as measured by the non-oil fiscal and primary balances.
For oil-importing countries the outlook is mixed. While Jordan, Mauritania and Morocco benefit from continued growth owing to high prices for phosphate and iron, the political turmoil in the affected countries translated in a sharp drop in growth rates, reflecting disruptions of economic activity during the protests, a decline in tourism receipts, and lower foreign direct investments.
Furthermore, in view of the rise of oil and food prices, inflationary pressures are expected to rise and current accounts to weaken. Fiscal pressures are likely to be high as governments are responding to political pressures and increased prices by expanding fuel and food subsidies, raising civil service wages and increasing pensions, as well as other forms of government spending. Accordingly, projected real GDP growth is at 1.4 per cent for 2011 and 2.6 per cent for 2012.
The World Economic Forum Global Competitiveness Report for 2011-2012 says: "Over the past year, the Mena region has been affected by a great deal of turbulence that will have an impact on national competitiveness and might further exacerbate the competitiveness gap between the Gulf economies and the rest of the region.
This trend is reflected in the 2011 Global Competitiveness Indicators' results, where most Gulf countries continue to move up in the rankings, while the competitiveness of many countries from North Africa and the Levant stagnates or deteriorates."
In a nutshell, Mena growth in 2011 was distressed by the disruption of activity, the reduction of investment, the fall of foreign direct investment (FDI) inflows coupled with capital flight and lowered tourism receipts.
At the same time, surging global commodity prices have pushed governments to respond by increasing spending, including those on wages, food and fuel subsidies, thus increasing the average fiscal deficit which is likely to exceed eight per cent of GDP in 2011.
Therefore, forecasts of economic activity for the Mena region have been revised downwards compared with previous projections. The latest projected growth for the region stands now at four per cent in 2011 and 3.6 per cent in 2012 — while the previously forecast level was at 5.1 per cent for 2011.
As widespread protests threatened the old order, rating agencies revised their sovereign ratings to account for the increased political risk. Last March, Fitch Ratings announced that "narrowly defined political risk, including regime legitimacy, stability and effectiveness, internal tensions and external threat, reduced the region's 11 Long Term Foreign Currency Issuer Default Ratings (IDRs) by an average of four notches even before recent downgrades".
Borrowing costs rise
In line with the deter-iorating investor confidence, Sovereign Credit Default Swap (CDS) spreads widened and countries' borrowing cost in international markets have, therefore, increased, which added an important financial burden.
Moreover, from the financial perspective, domestic banking sector balance sheets deteriorated, reflecting the downturn's adverse impact on the quality of loan portfolios as well as on regional stock markets.
According to Bankscope data, the aggregate size of the financial sector in 17 Mena countries was $1.915 trillion (Dh7 trillion) in 2010, with a large domination of banking intermediation of around 77 per cent. Fund managers investing in Mena have had difficult calls to make especially to protect the steadily built-up investor capital during the preceding years.
In the context of delayed political transition awaiting the outcomes of elections in some countries and prolonged conflicts in others, the main persisting downside risk in the medium term would be the inability to re-establish confidence and anchor investors' expectations.
The problem facing Tunisia, Egypt, Libya and other countries is that in today's environment of political, social and economic uncertainty, their financing needs to cover external current account deficits and public financing are growing, while at the same time their borrowing costs on the markets have increased drastically.
Restoring confidence at this stage is a must.
Financial assistance through foreign aid is often linked to austerity and grievances measures through country-specific programmes.
But what are the key success factors for such programmes? Previous IMF experiences show the most successful ones are those "that are home-grown and owned not just by the authorities, but by the people".
Accordingly, these measures should be implemented in view of their "suitability with national institutional capacities". Restoring confidence is greatly dependent on the outcomes on the political front. Will the uprisings lead to democracies, freedom and accountability or will they bring more chaos?
Even though oil-producing countries have benefited in the near-term and others have deteriorated fairly drastically, the future for all remains uncertain.
The writer is first vice-governor of the Banque du Liban.
This is an extract from a speech: "The Economic and Financial Impacts of the Arab Awakening", delivered at Harvard University.