MENA’s Macroeconomic Outlook
MENA countries’ financial sectors tend to be small and are relatively less integrated into the EU and global financial markets than other regions’ financial sectors. Indeed, a sizable share of capital flows in MENA countries is intra-regional, suggesting that the MENA economies have a buffer insulating them, to some degree, from turmoil in global markets (World Bank, 2011d). Within the MENA region, the GCC countries are the most integrated into global financial markets, and therefore a global downturn and financial turmoil in Europe could have a negative impact on financial markets and growth in the GCC economies. The GCC countries also face wealth effects through sovereign wealth funds. Nonetheless, compared with Asia, their funds are relatively diversified, with roughly one third each in the US, the EU, and emerging markets. 4 There has been little transmission of the sharp correction following the S&P 500 downgrade to MENA stock markets (Figure 2.8 and Figure 2.9). This could be due to a lagged response, but it could also reflect several other factors. MENA countries’ stock markets are not well integrated into global financial markets. The stock markets in Dubai, Abu Dhabi and Qatar do not have emerging market status in the MSCI indices. Such a status will allow them to attract index funds. A decision has been made to upgrade their status but it was deferred to allow a 6-month evaluation of recent settlement infrastructure changes. Analysts believe that the Emirati markets have a reasonable chance of receiving the upgrade at the end of the 6-month period. In developing MENA, for example in Tunisia, strong demand for equities from domestic investors supported the market during the global financial crisis of 2008-09 (World Bank, 2011a). As a result there was a relatively weak correlation between Tunisia’s and global stock market indexes during this period (Figure 2.8). Good fundamentals also matter. In general, low debt and small fiscal imbalances are central to reducing contagion. Research shows that after controlling for direct linkages through trade and ownership, contagion is highest in countries with weak economic fundamentals, poor policies and bad institutions (Bekaert et al. 2011). This could bode ill for countries with weak and worsening fiscal deficits. By contrast, the resource-rich GCC economies have ample fiscal space and have pursued sound economic policies, as well as policies to deal with the effects of the global financial crisis in 2008-2009. The United Arab Emirates, which experienced some of the most complex manifestations of the global financial crisis among the GCC countries, has managed to address some of the contentious issues associated with the crisis with relative speed. The Dubai World (DW) debt restructuring was completed relatively quickly by GCC standards although broader Dubai Inc. restructuring remains work in progress. Entities in the United Arab Emirates are gradually returning to the bond and syndicated loan markets after difficult conditions in 2010. Government support has been critical in aiding progress.
4
Monitor, July 7, 2011. Geographical broad distributions are available for the Abu Dhabi Investment Authority, the Kuwait Investment Authority, the Libyan Investment Authority, and the Mubadala Development Company of the United Arab Emirates.
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