In late 2015, Saudi Arabia announced a record budget deficit of $98 billion, its second deficit year in a row. In a rough start to 2016, the Saudi Arabian government raised the price of gasoline by almost 50%. Saudi Arabia’s deputy crown prince, Muhammad bin Salman, said in an interview that the Kingdom was mulling an IPO for the state-owned oil company, Saudi Aramco. Those indicators, more than anything else, highlight the harsh reality facing the Middle East and North Africa (MENA) region’s largest economy. Saudi Arabia, however, is hardly alone.
From Oman to Algeria, the MENA region is being hammered by low oil prices, which fell below $28 a barrel on January 18, a drop of more than 60% since June 2014, according to media reports. Some countries have been hurt particularly hard. In Libya, for example, the World Bank estimates that the fiscal deficit is more than 55% of GDP and the current account deficit is about 70% of GDP. In Saudi Arabia, central bank reserves have plunged from $732 billion to $623 billion in less than 12 months. Some 75% of the Saudi government’s budget comes from oil. Given the deficit, the International Monetary Fund (IMF) notes that Saudi Arabia needs to sell oil at around $106 a barrel to balance its budget.
A recent report by the IMF states that if the price of oil continues to plummet, most oil-producing countries in the MENA region may potentially lose some $300 billion in revenues in 2016 alone. With prices at historic lows, oil industry executives do not expect oil to return to the $100 a barrel price range anytime in the near future.
Little wonder that, according to the World Bank, economic growth in the MENA region is stagnating. The economies of the oil-reliant six-member Gulf Cooperation Council (GCC) countries — Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates — saw an estimated 3% growth in 2015, down from an average 4.5% over the past decade. According to experts, the oil-export-driven GCC will continue to suffer the effects of lower oil prices; the IMF forecasts a drop in growth to 2.75% in 2016. A recent survey of financial analysts in Bahrain, Kuwait and the United Arab Emirates echoes those sentiments. More than 80% of analysts expect the low oil prices to further impact the GCC economies. In the face of growing deficits, countries like Oman, Egypt, Morocco, Tunisia and Algeria are scaling back subsidies on fuel and food and curtailing public investment projects.
“We expect growth to continue to face headwinds and despite gradual fiscal consolidation, the scale of the oil price collapse is such that many economies are facing significant deficits.”–Giyas Gökkent All over the GCC, says Gökkent, subsidies are being slashed and non-oil revenue measures are being considered. “More subsidy cuts and price hikes are expected to come in the next couple of years,” he notes. “A GCC-wide value-added tax (VAT) of 5% is likely to be introduced in 2018, which could yield the equivalent of 1% of GDP in fiscal revenue.” “A fair number of jobs in these countries don’t require much training or skill, but at the moment, they are being done by low-paid, poorly treated expats.”–Peter Cappelli
According to Schroeder, “the drop in oil prices has been disruptive to major oil producers and yet we have just seen a very interesting new, relatively transparent and hard-nosed budget out of Saudi Arabia. Great transitions cause great uncertainty, but it’s important to consider the full picture and the potential as well as the challenges.” In addition to low oil prices and high youth unemployment, the MENA region faces the risk of the impact of terrorism. “Terror threats are very real and serious and have had an impact on countries like Egypt,” he adds.
Banking on Entrepreneurship
Experts in the MENA region point out that the growth of entrepreneurial start-ups offers a silver lining. Schroeder notes that he just “attended a gathering of 5,000 young people with enormous energy around tech-enabled start-ups.” Fadi Ghandour, co-founder and vice chairman of global logistics and transportation company, Aramex, agrees. “For me, 2015 was the year of the beginning of the rise of the digital economy and the emergence of e-commerce as a force to be reckoned with,” he says. “There are more digital start-ups than ever, more funding than ever, more VC funds than ever and many more growth-stage companies than ever,” Ghandour is among the region’s best-known entrepreneurs and a mentor for many young Arabs. “This is the year when Uber earmarked $250 million to invest in MENA, and Careem [a taxi-hailing service that competes with Uber] raised $60 million, and Souq.com [the Arab world’s largest e-commerce service] became a ‘unicorn’ — the first in the region,” he notes.
Ghandour, who is also chairman of Wamda Capital, a venture capital fund that invests in MENA companies, adds that “while other sectors struggled and countries had to manage political turmoil, lower oil prices and budget deficits, the region’s start-up scene was moving in the opposite direction. I think 2016 will be more of the same. But my view of the lower prices of oil means regional GCC economies are taking economic reform more seriously and facing the economic challenges in a sober and realistic manner.”
Mekki, too, is optimistic about 2016, despite the challenges ahead since AstroLabs is seeing “truly innovative technology start-ups applying to be part of the tech hub from all over the region at an accelerating pace. Although the tech sector is still relatively small, its growth has been exponential in the last few years, and I see this trend continuing into 2016,” he says.
“Great transitions cause great uncertainty, but it’s important to consider the full picture and the potential as well as the challenges.”–Christopher Schroeder
Post-Sanctions Growth in Iran
Another regional country that could potentially do better in 2016 is Iran. Oil exports from the second-largest economy in the region after Saudi Arabia are expected to increase as years of economic and financial sanctions against its nuclear program are lifted, as was announced in mid-January. News reports quote Iranian officials saying that the second–largest OPEC producer and exporter would increase its output from the current one million to 2.5 million barrels of oil a day. The Iranian stock index rose with the announcement. The global markets went in the opposite direction, with the Saudi and Qatar markets faring the worst.
Though U.S. companies will still have some restrictions in dealing with Iran, the Iranian economy will regain access to more than $100 billion in frozen assets and stands to gain significantly from the easing of banking, trade, shipping, insurance and energy embargoes. The Iranian economy shrunk by more than 6.5% in 2012, but it could grow nearly 6% in 2016-2017, according to analysts from the Institute of International Finance. With a population of some 80 million, oil revenues dominate Iran’s $400-plus billion economy. It may now see a trade and investment boom, starting with a proposed order of more than 100 aircraft from Europe’s Airbus. Iranian officials say they expect to attract as much as $50 billion in foreign direct investment over the next five years. Analysts are already predicting that with growth rates of 6% to 8%, Iran could well be the best-performing market in the region for years to come.