The problem of trust in Middle Eastern economies

AHMET AKYILDIZ
Published 04.03.2019 01:13

The Middle East, which tries to survive via oil exports and the assembly industry, is in trouble due to high budget deficits and rising unemployment. The 2018 end-of-year figures for the United Arab Emirates (UAE), Saudi Arabia and Kuwait, all experiencing problems in banking profitability in the last four years, conjure up a pessimistic picture for 2019. Let's take a look at the reasons for this and what we may encounter at the end of the year.

The strong dollar strategy implemented by the U.S. Federal Reserve in March and September 2018 pioneered banking profitability decline in the Middle East. By revising 2019 growth figures, we ratified the damage to oil exporting countries caused by the increase in interest rates and fluctuations in the commodity market. Undoubtedly, the Organization of the Petroleum Exporting Countries (OPEC) countries, which have lost their cost advantage due to the strong dollar, will continue to experience these pressures until mid-2019.

In addition, with tensions in Syria growing every passing day and Iran experiencing new problems in its import-export balance due to growing pressure on Tehran, Middle Eastern countries have become more vulnerable to systematic risks. There are hard days ahead for the people of the Middle East, who have begun to feel the increasing inflationary pressure with extra protective customs costs that came with economic embargoes and rising producer costs brought on by political tensions between Saudi Arabia and Iran. It is extremely difficult to establish a stable investment environment, especially when military defense spending has reached tens of billions of dollars. War clouds hovering over the region, which is experiencing difficulties attracting foreign investors, continue to affect credit ratings negatively.

When we examine growth figures, we see that the region has slowly begun to catch up with the world average. To achieve desired growth targets, the region, which has not managed to exceed the global average even in four-year projections, has to focus on qualified exports and controlled progress in public spending. Despite the fact that we won't see the impact of the increase in research and development (R&D) expenditures in the short term, there is no doubt that there will be absolute improvement in the long term.

The impact of the Saudi Arabia-based economic contraction on neighboring countries, in particular, is reflected in global reports. When we examine the IMF's 2018 regional economic outlook report for Middle Eastern and Asian economies, we see that the international body underlines that Saudi Arabia, which has a petroleum-based economy, will continue to experience bad days economy-wise. The Ministry of Finance of Saudi Arabia had said it accepted investors' requests for issuing bonds in the local currency and had decided to issue $866.6 million worth of bonds in 2018. The statement estimated that the $621.3 million portion of the bonds would be paid in 2023, the $96 million second tranche would be paid in 2025 and the third tranche of $149.3 million would be paid in 2028, while public debt would increase 17.7 percent in 2019 compared to 2018 and public debt would reach $153.6 billion by the end of 2018 and should reach $180.8 billion in 2019.

The biggest problems facing the economy of the region, which has experienced similar situations in the last three years, is that the idea of oil-based growth blindly continues because of the shortage of qualified labor and the lack of diversified heavy industry. With the effect of the contraction in domestic demand amid a low growth trend, the climb in unemployment rates is one of Egypt's biggest headaches. Since Cairo really took its time on the issue, while planning to switch to an investment economy model like Saudi Arabia, is perhaps its biggest handicap. It seems necessary to determine a qualified public finance strategy especially because a similar situation was noted in MENAP (Middle East-North Africa-Afghanistan-Pakistan) reports. Problems such as the increase in private sector debt in Egypt, Jordan, Kuwait and Saudi Arabia, the "fragile four," and the regular structuring of debts will be the financial risks causing the most pressure in the next two years. Youth unemployment in the region, caught in a negative trend in the factory production index due to the slowdown in economic activities, is currently at the 18-24 percent band. The region, where the average unemployment rate is around 17 percent, must urgently switch to Keynesian policies and engage in public-private partnerships.

We need to underline that in JP Morgan's September 2018 reports [Global Diversified Emerging Market Bond Index (EMBI-GD)], and other reports including similar statements, Bahrain, Kuwait and the UAE especially have negative outlooks when it comes to bond indexes. Likewise, in a period when the importance of curbing Jordan, Lebanon and Tunisia's public debt is emphasized, we will all be watching what sort of a road map will be followed.

Economic activities in Yemen have almost come to a halt due to the ongoing civil war, neighboring countries have made harsh statements in a period when Libya has perhaps reached political balance for the first time since 2011, and the tense political environment caused by Israel exerting pressure on Lebanon show us that it is impossible for that economy to flourish in 2019 too. There is no other region on Earth where sectarian, cultural and political divisions run so deep. We will be better off looking at maps drawn after World War II rather than the current political climate to understand the reason for such divisions in a very small area. Economic growth is out of the question in an environment where there is no political or common sense unity. Even China, despite its economic size, has not run afoul of any production-based country in Asia for the last 20 years. The people of the Middle East need analytical policies, not oil.

* Ph.D. researcher in the Private Company Economic Research Department MENA at Swiss Business School

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